Talent Management Column

Where are the Jobs?

There are lots of theories as to why unemployment has remained stubbornly high, even as companies are doing better. But this disconnect is hardly unprecedented and the solution clearly lies outside the realms of skills retraining and new-hire subsidies.

Monday, January 31, 2011
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The stock market has now blown past its pre-recession highs, the experts tell us that the economy has been out of recession for more than a year and yet unemployment in the United States still sits at 9.4 percent.

The fact that the financial markets have recovered nicely makes concerns about the labor market all the more acute: If the economy is doing so well, where are the jobs? Why haven't they come back -- is this the "new normal" where employers don't need as many workers?

As a parent of a child looking for work, I have a special interest in this topic.

The apparent paradox of a healthy stock market and a lousy job market led to a number of stories in the popular and business press attempting to explain the situation.

Some claim the problem is a skills mismatch: Employers want to hire but new skills are needed after the recession that employers can't find. Some claim the problem is with unemployment insurance: Workers are too picky and won't take jobs that are available. And then there is the hard-to-know assertion that something fundamental has changed about the economy and unemployment will stay high permanently.

The real explanation is not so novel and not so interesting.

It is worth noting that the situation we are facing now with businesses doing well and unemployment remaining stubbornly high is not new. The phrase "a jobless recovery" came about after the 1991 recession, as it took several years for jobs to come back despite growth in the economy.

After the 2000/2001 recession, pundits on the left blamed the Bush administration for the fact that it took years for employers to start hiring again, but in fact that experience is exactly what we have now.

The heart of the explanation can be ascertained with a couple of quick calculations. Productivity is typically measured by how much output we get per worker. It always grows coming out of a recession, the reason being that employers lay off people in the downturn and then give those who remain more work to do as business picks up.

Productivity did not grow in the first years of the recession -- not surprisingly as employers were cutting capacity -- but it rose a healthy 3.5 percent this past year, in part because business is picking up a bit. They get more work done with fewer people.

U.S. productivity is 6-percent higher in 2010 than it was in 2007 when the financial meltdown that started the recession began. The way to think about this is that a typical employer can now do 6 percent more business without hiring anyone new.

This also explains much of the stock-market improvement. Companies have cut capacity and found ways to make profits with fewer workers even though business is down. The stock market only reflects how company finances are doing, and they have improved a lot.

Some of that productivity is simply working people harder and will be difficult to sustain in the long run, which is why productivity growth tends to slow as the economy grows. But some of it is real and will persist.

To the extent there is any "new normal" in terms of the need for labor, post-recession productivity is what is behind it. But that is only a modest change.

Six-percent productivity growth would be an overall good thing except that the companies don't have 6-percent more business. The U.S. economy as measured by Gross Domestic Product is only 1 percent bigger than it was in 2007, so the average employer only has about 1 percent more demand for their output.

Given the productivity growth, employers actually need fewer workers now than they did in 2007, roughly 5 percent fewer.

And that wouldn't be so terrible except that the population and the workforce keep growing.

The U.S. population adds about 140,000 new individuals each month and is about 4 percent larger now than it was in 2007 -- 311,965,642 people as I write this.

The labor force per se counts only those who are employed or who are seeking work, so it is not equivalent to the population. But the labor force also shrinks when jobs are scarce because people stop looking.

So the growth in overall population may be a better measure of the change in people who want jobs if they are available.

Putting this together, here's what we get: Employers need roughly 5 percent fewer workers now than at the beginning of the recession, yet there are roughly 4 percent more people who may want jobs. The unemployment rate was already about 5 percent when the financial meltdown took place that led to the recession.

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So why isn't the unemployment rate 5 percent (from productivity gains) plus 4 percent (for population growth) plus 5 percent (for previous unemployment) or 14 percent?

Some people who want jobs stop looking and therefore don't count as unemployed. That's also why the unemployment rate, which measures the percentage of jobless actively looking for work, will remain stubbornly high: Those who gave up looking will come back in as the economy improves. And some employers still carry more workers than they need, perhaps anticipating a return of demand.

The only way jobs come back is for the economy to grow, which it's not doing very quickly.

The reason is a lack of demand for what the economy produces. Retraining won't solve that problem nor will subsidies to hire. (Would you hire workers you don't need just because they are cheaper?) And the "new normal" is only modestly different than before the recession.

So when will demand come back?

Banks are still nervous about lending, in part because of their own often precarious financial health. Consumers and businesses are perhaps especially nervous about spending: Can the financial meltdown happen again?

And political constraints prevent massive government spending that could make a dent in the shortfall of demand.

But most of the problem stems from the fact that the economy went down so far that it will take a long time to come back. That's perhaps depressing, and it's yet another reminder of the importance of making sure that financial crises of the kind we just experienced don't happen again.

Peter Cappelli is the George W. Taylor Professor of Management and director of the Center for Human Resources at The Wharton School. His latest book, with Bill Novelli, is Managing the Older Worker: How to Prepare for the New Organizational Order.

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