Monday, July 9, 2012

Hollowing Out

Tom Edsall does a nice job summarizing the increasing hollowing out of the job market in his New York Times column today.  The employment/population ratio has fallen drastically since 1999 even as Real GDP hit an all time high this month.  Edsall quotes Andy McAfee and me arguing that technological progress is part of the story for both these trends. Fewer people are working in America today than in the late 1990s, even though overall income is higher.

James Hamilton and Amar Bhide are quoted by Edsall as being skeptical that the restructuring of the economy contributed to job losses.  While Andy and I agree that the Great Recession is undoubtedly the biggest driver of the job losses since 2007, we also see a longer-term forces at work.  In fact, employment growth was sluggish well before 2007.

Digital technologies have advanced very rapidly in recent years.  This can and does create enormous wealth. That’s the good news.  But there’s no economic law that everyone will share in this wealth.  In fact, as David Autor has noted, in recent years, the demand for middle skill jobs, involving routine cognitive and/or physical skills has plummeted. This is reflected both in wages and in employment. At the same time, those in the top 1% have seen their incomes soar.  The median family actually has less income today than 15 years ago, even though the nation is producing more goods and services than ever before.

Of course, creative destruction has always been important to the US economy.  90% of Americans worked in agriculture in 1800.  By 2000, it was less than 2%. This switch did not result in mass unemployment.  Instead, new industries, from autos to computers, were created to employ people more productively.  However, this time around, job destruction is happening faster than job creation, at least for certain types of workers. Demand for jobs involving routine work is rapidly falling since those jobs are the easiest to automate.  As entrepreneurs discover and invent new ways to employ the laid off workers, the economy should come to a new equilibrium and re-employ those who lost their old jobs.  However, even though the overall economic pie will likely grow, the new equilibrium may involve lower wages for many types of workers, and many may choose to drop out of the labor force entirely, as they have over the past decade.

The first step to addressing the challenges of this great restructuring is correctly diagnosing it.  It won’t do to assume that, just because things worked out in the past, everything will ultimately work out this time as well.


  1. I keep hearing media people say we haven't fully recovered from the Great Recession, that we're still in a hole, that this is a cyclical downturn. I don't know whether to laugh or cry. The boom economy of the 90s is not coming back and things could get considerably worse than they are now.

  2. Eric

    It's a bit misleading to begin the Civilian employment/population ratio in 1999. A look at the complete series suggests a large secular increase beginning in the 1960s. Of course, much of this has to do with women in the workplace and, as some labor economists argue, a transfer of some work from the household to the marketplace. Nevertheless, it still represents a net increase in job creation relative to population. If automation and IT are destroying jobs, it can only be during the last decade. Yet much of the labor-saving technology was being used well before that.

  3. Two points:

    1. The employment to population ratio is adjusted for population; Real GDP is not. Last I checked, real GDP per capita has not yet recovered to its previous peak.

    2. "90% of Americans worked in agriculture in 1800. By 2000, it was less than 2%. This switch did not result in mass unemployment." Really? You may want to look up the Long Depression and other agricultural depressions of the 1800s.

  4. Hi Erik,
    Great post; although I do not think the real GDP being at all time high is a good measure here because it does not consider the population growth.
    On the other hand, I do agree with you that transforming from industrial era to digital era has been (and will be) a key factor in a lower employment. I just do not see the proper update in our education system to prepare our children for the new kind of work - i.e. building those droids that Andrew and you have been talking about.


  5. One other thing to consider is changing demographics. National Journal is the only mainstream journal which has a dedicated section on this. However, people are being lulled to think there is time. That is not the case. 2011 was the year the new minority majority era as born according to the Census. Research has revealed gap between middle class and poor is smallest in early education. The gaps becomes larger as time goes by. Then there is the local government factor that makes this more intractable. Why? Cities, even rich New York City provide more inexperienced teachers and less funding to poor students. Meanwhile, in the suburbs there is economic segregation. So time is not America's friend and the clock is ticking rather quickly.