April 11, 2004

April 11, 2004 | Commentary on Jobs, Jobs and Labor Policy

Jobs: The New Economy Recovers

As a boy, Harry Truman enjoyed an annual picnic oration of a certain Colonel Crisp who recounted in heroic detail the Civil War battle of Lone Jack. "Challenged once on his accuracy by a veteran who had been in the battle, Crisp responded, 'Damn an eyewitness anyway. He always spoils a good story,'" according to biographer David McCullough.

Modern-day Crisps are thriving in the debate over jobs. The eyewitnesses, however, are a string of positive employment situation reports from the Labor Department. They have spoiled the story of a "jobless recovery."

An odd mix of the president's enemies and corporate welfare lobbyists have a vested interest in a gloomy economy, and are reflexively dismissing the following good news:

  • First, payroll jobs grew in March by 308,000, and upward revisions to January and February numbers added an additional 87,000.
  • Second, manufacturing jobs, after 43 months of erosion, ticked up by 3,000.
  • Third, the unemployment rate was essentially unchanged at 5.7 percent, below the average rate of the 1970s, 1980s and 1990s.

Understanding the data

Ted Alexander, president of the San Diego Venture Group, says, "The business climate for start-ups during the last six months in comparison to the four previous years is like night and day." While it is worth cheering the good news on jobs, one cannot help but wonder: Why did American labor markets take so long to recover?

The puzzle is rooted in a divergence between two Labor Department surveys. The payroll survey is based on one-third of all payroll records. Today, total payroll employment remains roughly 2 million jobs below its all-time peak of March 2001. Alternatively, the household survey directly contacts 60,000 U.S. homes to learn what percentages of Americans are employed or unemployed. Total employment in the household survey is higher than ever before.

The 2.2 million jobs growth gap between these two surveys is unprecedented. Top economists have analyzed the issue and it "remains a puzzle" according to the Council of Economic Advisers as recently as February.

My own research was sparked when Bureau of Labor Statistics experts made an offhand observation in an October 2003 document: "If a person leaves one job and starts another during a relatively short time span, they could appear on both employers' payrolls."

By my count, average turnover means that the payroll survey systematically overestimates the level of jobs by about 4 million. While a bit of a surprise, this fact should not matter too much if turnover rates were stable. Guess what? Worker turnover has declined steadily since 1999, meaning there is an illusion of roughly 1 million lost payroll jobs since the end of the recession.

Unemployment

Right now, the pessimists are in denial about the positive data. Instead of arguing that the unemployment rate could or should be lower than its current rate of 5.7 percent, critics are questioning the integrity of how it is calculated. For example, on March 19, a Washington Post editorial claimed that the unemployment rate is "above 7 percent" if "you add in discouraged workers."

The Post has been misinformed. The authoritative data on unemployment rates are available in every month's BLS report, specifically table A-12. The rate of unemployment that includes discouraged workers is known as "U-4." It is currently 6 percent, a full point lower than the Post claims.

Paul Krugman's March 12 column in The New York Times contends the low rate of unemployment is "entirely the result of people dropping out of the labor force." Krugman's statement would make Colonel Crisp proud, given that the labor force has expanded by 2.21 million since November 2001.

A chart on page G1 shows what is really happening in some detail. The labor force is growing, employment is growing, and unemployment (the area between the two lines) has trended down for a year.

The pace of change

The debate over jobs has a broader context of a growing economy. Growth, as we know, means change. Real growth of per capita output has averaged roughly 2 percent per year for the last century.

The "rule of 70" is a profoundly simple way to understand the impact of growth. Divide the number 70 by the rate of growth, and the result represents the number of years it takes for the economy to double in size. Two percent growth means that in 35 years, the economy will be twice as big.

In the fourth quarter of 2003, GDP grew at a 4.1 percent annualized rate. In the third quarter, it grew at 8.2 percent. At that 6 percent average rate, the size of the U.S. economy will double in 11 years and eight months.

Growth is something we tend to take for granted, and only when we stop to realize, "you are twice as wealthy as your parents, and four times as wealthy as your grandparents," does the power of a free market hit home.

Outsourcing

Change is not a one-way street, of course. Because of the creative destruction of capitalism, jobs and companies are eliminated every day, even in the best of times. BLS data on job turnover reveals that the U.S. economy lost an average of 7.71 million jobs per quarter from 1992 to the present. But it also created 8.11 million new jobs.

Fears of exporting industrial jobs to China reached a fever pitch in late 2003, and this year, fears about services and India have risen even higher. This is odd because manufacturing output today is 50 percent higher than 1990. In the latest issue of Foreign Affairs, Daniel Drezner summarizes outsourcing brilliantly, especially his observation that the so-called facts are "vague, overhyped estimates."

The most alarmist prediction by Forrester Research estimates that 3.3 million service jobs will be outsourced between 2000 and 2015. But 55,000 jobs outsourced per quarter is less than 1 percent of all jobs lost anyway.

Three years ago, the charge was that globalization represented the exploitation of foreign workers by rich countries. Nowadays, the fear is exactly the reverse: exploitation of rich countries by Third World labor. Both views are oversimplified and incorrect.

History and economic theory agree on this point: the merits of trade know no national borders. Principles of economic science, like gravity, work the same everywhere.

In a sense, every American community outsourced its transportation jobs to Detroit in the early 20th century. Movies were outsourced to Hollywood. Finance, fashion and publishing services were outsourced to Manhattan.

Today, the division of labor is going global, but trade is taking the blame for what is ultimately a technology story. For example, since 1998, China has lost more industrial jobs than America even has. Manufacturing is in a jobs decline, everywhere, due to factory automation. Manufacturing employed a third of the American work force in the 1940s and 1950s. Today it employs exactly 11 percent of all workers.

We have been here before. In 1900, 40 percent of Americans worked on a farm, declining to 20 percent by 1940, and 5 percent by 1970.

Congress can try to slow down the wheels of progress and "protect" its workers. But isolationism and anti-technology have been tried throughout history, and failed every time. As Robert McTeer, president of the Federal Reserve Bank of Dallas, said when asked about policy responses to outsourcing, "If we are lucky, we can get through the year without doing something really, really stupid."

One final statistic. All through 2000, before the recession started, new claims for unemployment rose incessantly higher. Today, jobless claims are falling sharply, every week lower than before, and are now 10 percent below the historical average.

Sorry Colonel Crisp. The growing economy now has passengers.

Kane is a research fellow in the Center for Data Analysis at The Heritage Foundation. He is a veteran Air Force intelligence officer, and former San Diego software entrepreneur.

About the Author

Tim Kane, Ph.D. Visiting Fellow
Center for Trade and Economics (CTE)

Related Issues: Jobs, Jobs and Labor Policy

First appeared in The San Diego Union-Tribune.