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Why Labor Statistics Are Obsolete

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We are at the beginning of a new phase of economic development that depends on technology and capital, not labor.

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Most of the people apologizing for or criticizing the latest dismal jobs report talk about an economy that is being left in the rearview mirror. If only we made stuff again. If only we did more of this and less of that, or vice versa. The cacophony is loud, noisy, and confusing. And most of it is wrong.

We hear constantly about the rate of job growth: 120,000 this month, 240,000 last month, and 275,000 the previous month. Throughout this recovery, we keep hearing that we need to start seeing more job growth because right now we're barely creating enough jobs to keep up with population growth.

While the economy is creating fewer jobs than it used to, it's actually part of a trend that is into its second decade (See chart). But you didn't hear anything about it before because it occurred during a time of positive social mood. What's clear is one thing: People are clamoring to go back to the past, but they can't. Besides, the rate of population growth is slowing as the country ages on one hand and birth rates decline on the other. This isn't the same country with the same demographics it had 20 years ago.



What has become clear to me over the past few years is that the economy has become more efficient in just about every sector while people were busy watching their home values rise like the Pets.com shares they had the decade before. That efficiency has benefits (more products at a lower cost), but it also has challenges. The McKinsey Global Institute came out with a new report that looks at the new world of work in advanced economies. The researchers talk about the increase in "interaction" jobs, where the nature of the work isn't building stuff or processing transactions, but solving problems. This chart shows this distinction clearly:



What does this mean? Well for starters, here's what Tyler Cowen said about manufacturing (emphasis, mine):
And now for the bad news: The new export-based prosperity may not translate into higher wages for everyone, or even most people, in the United States. Skilled laborers who work with smart machines or even hold advanced managerial jobs will continue to make big gains, as the numbers have been showing for some time. Capital will do well too, especially if it is geared toward export success. The class of elite labor will grow, and protest against the "one percent" will seem anachronistic. Expect something more like, "We are the ninety percent." That will still fall well short of the median, so significant segments of the American workforce are likely to continue suffering falling real wages, even in a time of rising export prowess.

As the number of American jobs in manufacturing has fallen dramatically, it is often forgotten that American manufacturing output has continued to rise, even during some slow times. In the past decade, the flow of goods coming from U.S. factories has gone up by a third as capital has increasingly become a greater share of input over labor. In this regard, the recent experience with Germany's export success is inspiring, but it is sobering, too. At the beginning of the last decade, Gerhard Schröder's Social Democrat government decided to reform labor markets and revamp Germany's export prowess. These policies succeeded beyond most expectations, but less well advertised is the fact that real wages in Germany's export sectors have been stagnant or declining, depending on which measures are used. This was part of what Germany needed to be competitive in foreign markets, and without the export growth a lot of these wages would have fallen anyway-or perhaps the jobs involved would never have existed, or would have moved to production platforms further east. In this sense, the German experience can still be spun as a success story for labor, but a comparable development in the United States may not be perceived as helping workers very much.

The percentage of jobs requiring more skills and more education has indeed been increasing. This chart from McKinsey makes that point when you look at the difference in how much education is attained by workers in OECD countries between 1995 and 2010:



So the labor market is becoming increasingly divided by education level. In fact, McKinsey estimates that by 2020 the US labor market will be short 1.5 million college-educated workers. For the long-term unemployed, the tough road ahead will only get tougher unless more resources are devoted to job training and re-educating workers. But that's a tough task.

A bit of an anecdote: When I was in high school in Maryland, many of the kids I knew talked about going to work at the Broening Highway plant. Some talked about going there after they graduated. Others didn't wait; they dropped out of high school and started working there as soon as they could. Just look at this chart from a McKinsey report on the auto industry in 2005. Making $20,000 a year as a high school dropout? It was easy money if you were a kid who hated school. The plant was closed in 2005 and bought by a property developer in 2006.



And you could repeat that story practically everywhere across the country. From auto plants to textile mills to any other sector that paid a relatively high wage back then, it was an easier out than staying in school and going on to college. But now, we know how that story ends: obsolescence. And if you sit still or get complacent in your work, you might as well roll out the red carpet for a pink slip because technology has no compassion for those who don't adapt. Adapt or die. After all, as Cowen said, "the factory has been reinvented as a quiet place." All of us need to think about how our workplaces are getting quieter and acquire new skills. Or else the silence in our old workplaces will be because we're not there.

So while the chasm between the skilled and educated versus the nonskilled labor pools continues to widen, companies have benefited greatly. Or so goes the meme, anyway. The fact is, it was always going to happen. Increased technology expenditures, a boomer work force that is retiring and echo generations with smaller population footprints all mean that the jobs of tomorrow won't be anything like the jobs of yesteryear, and the world of work is changing. It's time to take the nostalgia out of the labor market. Labor is not going to be the input into economic production it once was because we won't be producing the same products we once did.

And leave the nostalgia for Mad Men on Sunday nights or listening to baseball games on the radio.

Twitter: @japhychron
No positions in stocks mentioned.
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