Bloomberg News

Why More Retail Jobs Won’t Fix U.S. Unemployment: Edward Glaeser

December 07, 2011

Dec. 6 (Bloomberg) -- Last week’s jobs report delivered some good news: The unemployment rate dropped to 8.6 percent from 9 percent, and the decline was particularly notable among less educated Americans.

Trouble is, more than 40 percent of the job growth was attributable to a healthy expansion in retail trade, which underscores a larger economic problem. Although entrepreneurial innovation usually leads to significant job creation, the great retail entrepreneurs of the past 30 years -- from Amazon.com Inc. to Wal-Mart Stores Inc. -- have produced efficiency rather than economywide employment.

Forty years ago, two jokers put up a billboard “Will the last person leaving SEATTLE -- Turn out the lights.” Boeing Co., the region’s industrial giant, had been cutting jobs, and the city seemed about to become a Pacific outpost of the Rust Belt. But Seattle didn’t go the way of Detroit, largely because of a string of remarkable entrepreneurs, who gave us, among other things, Amazon, Costco Wholesale Corp., Microsoft Corp. and Starbucks Corp. Today, the city is a success story, with per capita personal income of more than $50,000 -- more than 20 percent above the national average -- and an unemployment rate below the national average.

As I discussed in a recent City Journal article, Seattle’s success builds on a potent cocktail of education and entrepreneurship that provides a model for American rebirth. More than 54 percent of Seattle’s adults have college degrees, about double the national average. The city’s skill base seems to have been part of its attraction for both Microsoft’s Bill Gates (a native son) and Amazon’s Jeff Bezos (a transplant).

Starbucks Model

Even Starbucks, which was founded by an English teacher, a history teacher and a writer, owes its existence to Seattle’s overeducated population. In the era when the high-end coffee chain was created, working-class guys were perfectly happy chugging down Chock full o’Nuts.

All four of these Seattle-based companies are models of U.S. entrepreneurship. They have helped shape modern American life, and their products sell around the globe. Yet Amazon and Costco may well have led to fewer, not more, jobs in the U.S.

Piecing together the full employment effects of any particular company is close to impossible. Even the seemingly simple task of estimating the impact of a new Wal-Mart store on local retail employment is terribly tricky. One study found that each Wal-Mart increases retail employment by 50 jobs. Another paper makes the competing argument that the giant retailer puts stores in areas that are growing naturally, and that better statistical techniques show that each new Wal-Mart decreases county level retail employment by 150 workers. The economywide impact of Amazon is far harder to determine because it has buyers and sellers everywhere.

But it isn’t hard to spot the larger trend in retail trade job creation. The attached figure shows the time path of job- creation rates for the economy as a whole and for retail trade in particular. The data comes from the Census Bureau’s Business Dynamics Database, which defines the job-creation rate as the employment growth at the establishment level divided by the average of old and new employment.

The lower line shows the job-creation rate for the economy as a whole, which dropped from about 20 percent in the late 1970s to 12 percent today. On average, the job-creation rate has declined by 1.4 percent per decade, which should scare anyone worried about our continuing ability to generate employment. The U.S. hasn’t been producing fewer jobs than it used to, at least until the recent recession, but the number of jobs created hasn’t increased with the overall size of the economy.

Service Economy

The top line shows the far steeper decline for retail trade. The 1970s and 1980s were a great growth period for this sector, as the U.S. moved from manufacturing to a service economy. When the economy roared back after the 1982 recession, the job-creation rate in retail trade boomed at more than 20 percent per year for each year from 1984 to 1988. The job- creation rate in retail has never again broken 20 percent, and the downward trend runs at 2.6 percentage points per decade.

I wouldn’t want to blame Amazon or Costco for this trend, and I am a big fan of both retailers. There is a lot to like about low prices and shopping over the Internet. But it shouldn’t surprise us that tremendous improvements in retail efficiency have been associated with diminished job growth in the e-tail sector.

Free markets have many virtues, and I have no sympathy for those who want to preserve old retail jobs by banning innovation. Preventing Wal-Mart from entering an urban neighborhood may protect a few local stores, but it is the poor who suffer most when they have to pay unduly high prices. The current crisis in the Mediterranean countries reminds us that governments that try to preserve old jobs by stifling new business models eventually produce stagnation and decay.

Our best hope is that private entrepreneurs will figure out ways to employ more Americans. The current 13.2 percent unemployment rate for workers without high school degrees represents a failure of entrepreneurial imagination. Every out- of-work American provides an opportunity for some businessperson to figure out how to turn that person’s wasted time into economic profit.

The entrepreneurs who created Starbucks, especially Chief Executive Officer Howard Schultz, figured out how to solve that problem. The company employs 149,000 people in its labor- intensive caffeine-delivery system. Its success as an employer represents a combination of product and process -- delivering what consumers want in a way that employs tens of thousands of baristas worldwide.

What will it take for the U.S. to produce the entrepreneurs who will create jobs for the millions who are still unemployed? The government can act in three areas: regulation, taxation and education.

Regulatory Barriers

Because budding entrepreneurs typically don’t earn much at first, regulations can be the biggest barrier facing startups. Some of these rules are national, but many more are local.

All should be re-examined. Detroit should be welcoming every new entrepreneur it can get, but the city’s rules make it hard to open even a food truck. The national government at least has embraced the principle of applying cost-benefit analysis to executive branch regulations, but state and local governments lack the resources to properly evaluate their rules.

The federal government could help by setting up an independent assessment agency, modeled on the Congressional Budget Office, that offers cost-benefit analysis to lower levels of government to help identify and prune unnecessary regulations.

We also want to make sure that our tax code doesn’t discourage companies from hiring new workers. I support the continuation of the payroll tax cut and the expansion of the earned income tax credit.

Finally, it makes sense to couple support for education with the development of entrepreneurship and knowledge that applies in the job market. We can provide more aid for adult education, as long as that aid is made contingent upon the acquisition of useful skills.

Despite the most recent numbers, the U.S. continues to have an employment problem. The main reason the unemployment rate dropped last week is that hundreds of thousands of people left the labor force. Entrepreneurship provides the best path to a healthier economy, and the government’s role in supporting entrepreneurs is to help train smart people, then get out of their way.

(Edward Glaeser, an economics professor at Harvard University, is a Bloomberg View columnist. He is the author of “Triumph of the City.” The opinions expressed are his own.)

--Editors: Max Berley, Stacey Shick

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To contact the writer of this article: Edward Glaeser at eglaeser@harvard.edu.

To contact the editor responsible for this article: Max Berley at mberley@bloomberg.net.


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