The Best Explanation of The Jobless Recovery Today and For Future

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This article summarizes a report published in the current issue of Foreign Affairs. It was primarily about job growth in the US but some of the findings of the study will apply to Europe as well. The results are sobering and should be read by everyone who wants to understand why job growth has lagged growth in GDP.

GDP was broken into two segments: One is for tradable goods such as manufactured products and the other is for non-tradables such as medical and legal services. The US economy created 27.3 million jobs between 1990 and 2008. Only 620,000, or 2.3% were created in the tradable sector!!! The non-tradable sector accounted for almost 98% of the jobs that were created. Since most of these jobs are not as high paying as jobs in the tradable sector, it also helps to explain rising income inequality.

It is instructive to look at Apple Computer's iPad as an example of a tradable good. The parts and assembly were off shored to low wage countries. About 42% of the iPad price was retained as gross profit by Apple in the US. The gross profit paid for marketing, engineering and administration in the US and thus added to GDP. The addition to GDP required a relatively small number of new employees. Therefore, the success of the iPad improved GDP without creating many new jobs.

Countries like China, India and Brazil have been providing the low value added manufacturing but they want to move up the value added chain. There will be more competition for the high valued added jobs in the tradable sector over time.

The non tradable sector which produced 98% of the jobs in this period consists of government and healthcare services which accounted for 40% of the new jobs. Retail and construction followed government and healthcare in providing the most jobs. Much of this growth, however, depended debt and the housing bubble.

Everyone is looking for government to fix the job growth problem but what is being proposed by politicians. They want to reduce spending by government and healthcare which has produced 40% of the job growth over the last 18 years. Little can be done about construction jobs until the housing market recovers and that will not be soon.

Unfortunately, in addition to reducing job growth in the two areas that have produced most of our new jobs, the other proposals that are coming from government are wide of the mark. Helping to fund new high tech start ups will contribute to GDP but it won't create many new jobs. Google, Facebook and other high tech companies employ a very small number of people. Training more Americans for technical careers won't help much either. The number of workers required to perform this work is small relative to the employment gap. In general, we will have to find ways to grow jobs in the tradable sector. That means investing in new areas that will grow and create opportunities for a wider range of employment opportunities.