Markets & Finance

The Great American Jobs Machine Is Conking Out


January's payrolls decline underscores a troubling trend—the U.S. economy's ability to generate new jobs is fading fast

Like lava flowing from a volcano, creative destruction—the economic notion that old companies and industries have to be wiped out before new ones can be born, first popularized by economist Joseph Schumpeter—is scary but beautiful. In the New Economy of the late 1990s, this phenomenon turned the U.S. into an amazing job-generating machine, because the rapid destruction of companies and jobs in flagging industries was outpaced by even more rapid creation of new jobs in growing sectors. From the bottom of the 1991 recession through the economy's peak in early 2001, the U.S. created 24 million jobs.

That creative/destructive energy, triggered by rapid technological change and globalization, is long gone. From the end of the 2001 recession through December, 2007, the U.S. economy added just 7 million jobs. Even taking into account that this expansion has been shorter than the 1990s one, the growth rate of jobs was about half as fast this decade.

Now, what little energy the jobs machine had left may finally have run out. On Feb. 1 the government reported that U.S. employment shrank by 17,000 jobs in January, the first time employment declined for a month since August, 2003. The weak report helped convince some wavering economists that the U.S. is entering a recession, which would mean further job losses in the months ahead.

On its face, the January jobs report isn't dire. The net loss, while it made headlines, was just 17,000, which is so close to zero that it's statistically indistinguishable from no change. What's more of a concern, though, is evidence in the report that 2000's pattern of pokiness is continuing.

Looking for Jobs

Proof? Once workers do lose their jobs, they're having a harder time finding new ones. In January, 18.3% of jobless workers had been out of work for six months or more, up from 16.2% in that dire situation a year earlier. That's a total of 1.38 million long-term unemployed workers last month. Economist Jared Bernstein of the Economic Policy Institute notes that the number is greater than in March, 2002, when Congress first extended the period of unemployment compensation to cope with stubbornly high joblessness.

A single statistic from a Labor Dept. report called Business Employment Dynamics makes clear how much the U.S. job-creating engine has slowed down. The report pulls apart net job creation (the figure we're used to reading about) into its two components: gross job gains vs. gross job losses. According to the latest edition of the report, gross job gains were actually lower in the spring of 2007 (7.5 million jobs) than they had been in the spring of 2001, when the economy was in a recession (8.4 million jobs). The only reason that net job creation was worse in 2001 is that gross job losses were higher back then.

There is a bright side to this dismal picture: Companies ran lean and mean in recent years, refusing to staff up more than absolutely necessary. That means they don't have a lot of fat to cut now that things are slowing down. So job losses could be relatively mild, says Bernstein, unless the economy gets extremely weak and companies have to cut from the bone. That may be as much solace as we can take from an otherwise gloomy labor market.

Coy is BusinessWeek's Economics editor.

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