The American Job Market and US Economy
Total American Jobs Added, 1940s-2000s
The jobs situation in America
The first decade of this century was the first in generations to feature an overall decline in American jobs. Every decade from 1940 to 2000 saw a net gain of over 10 million jobs.
The dismal performance of the 2000s is directly tied to the financial crisis and Great Recession of late in the decade. The last year of the period, 2009, saw a total loss of over 5 million jobs. And over 3.6 million jobs were lost in 2008. As a result, the average annual change in jobs for the 2000s was far below the one to two million range of previous decades. On average, the US lost about 121,000 jobs each year for the first ten years of the 21st century.
The good news is that there has been a net gain in jobs in each subsequent year. 2010, 2011 and 2012 have each added over 1 million jobs to the US economy.
Average annual change in jobs, by decade
Finance as a share of GDP, 1860-2006
Financialization of the US economy
Job growth is created by a healthy economy. The American economy suffers from a number of structural problems that restrain or harm overall job creation.
One problem is the "financialization" of the US economy, in which the financial and insurance sector contribute an increasingly large share of GDP. The financial sector has reached its highest-ever share of GDP in 2011, at 8.4% of the economy. The previous major peak was around 6% in the 1920s, right before the stock market crash and Great Depression. Finance industry profits have ranged between one-third and almost one-half of total business profits in recent years.
Why is financialization a problem? Because the financial sector is very volatile, as we have seen in recent years. When it booms, things are great. But when it crashes, many jobs are lost. And other industries are also more severely affected than they otherwise would be if they were not so tied to finance. Hence the boom and crash in the US housing market, which became highly influenced by the financial sector through the securitization of mortgages and other trends.
In addition, the more of the economy that is occupied by a single sector, the more fragile the whole system becomes. It becomes more and more sensitive to the fortunes of that one industry. When an economy is diversified into many sectors, declines in one sector will have less overall impact.
Education, skills and government regulations
A second major structural flaw is the education and skill level of the American workforce. As low- and moderate-skill jobs are outsourced to cheaper workforces in other countries, different kinds of jobs are left. Many of these jobs require much higher skills than the outsourced jobs, which often means that the laid off workers must turn to lower-skill, lower-paying jobs for which they are still qualified.
But an even bigger factor is technology. Sophisticated robots and computer systems are able to do the jobs of many people, more efficiently, and at lower cost. There is probably not a single industry that has not been affected by technological advancement. The good news is that technology does not just destroy jobs--it also creates jobs. The bad news is that the new jobs tend to require much higher skills than the jobs they replace. Workers that have been replaced by technology often do not have those skills.
If there is no change in the general education or skill level of American workers, this trend will only worsen over time.
In addition, the structure of government regulations is flawed. Some industries are over-regulated, and some are under-regulated. Finance, unsurprisingly, is an example of an under-regulated industry. Lack of oversight and regulation in the financial industry, underway since the 1970s, contributed to the economic crisis of the late 2000s.
Growing inequality and a shrinking middle class
Another structural problem in the American economy is ever-higher social inequality.
The middle class has shrunk in America as society has become more unequal. In 1971, 61% of Americans qualified as middle income. Today it is 51%. Meanwhile, the ranks of both low-income and high-income earners have grown.
In the first decade of the 21st century, median household income of the middle class fell from about $73,000 to $69,000, and median wealth rose to a high of $153,000 before dropping to $93,000--a level last seen in the early 1990s.
Between 1971 and 2011, the share of total national income earned by the middle class fell from 62% to 45%. All of that lost income has gone to the upper class.
Consequences of a declining middle class
Why is a declining middle class a bad thing? Because the more the economy is bifurcated into the very high-income and the very low-income, the more unstable it becomes, and the more unstable the overall job market becomes.
Many argue that "low-paying jobs are still jobs." While it's true that they still provide income, the problem is that low-paying jobs are very unstable and unreliable. Turnover is extremely high, workers do not last long in a single job, and layoffs are more common. Since low-paying jobs are occupied by low-skilled workers, there is limited potential for career advancement.
Workers and their families do not have reliable income, and face an uncertain existence that is highly tied to the fickle demand for low-skilled labor in their city or state. If there is a downturn in that demand, they often must pickup and move elsewhere where there is more demand, which imposes a variety of financial and personal costs.
Because of all these factors, over time a permanent underclass develops at the bottom of society.
As more and more people are caught in the low-income, low-skill trap, economic growth suffers. Lower incomes mean less spending, less spending means less revenue for businesses. The economy becomes less diversified over time as business opportunities reflect the bifurcation of consumer incomes. (This is related to the aforementioned trend toward more financialization.) A less diversified economy means there are fewer types of well-paying jobs available, which in turn contributes to more inequality, and the cycle continues.
Middle class and democracy
It is worth noting that for most of human history, societies were divided between an extremely rich and powerful elite, and an extremely poor mass of peasants and commoners. The utter economic domination of the tiny minority at the top went hand-in-hand with total political domination in the form of dictatorship and monarchy. It is only in the last 100 to 200 years that a viable, sustained middle class has existed on a large scale anywhere. And it is no accident that this novel economic phenomenon also coincided with the rise and consolidation of democracy.
Political systems and economic systems reflect each other, because economic systems create wealth, wealth is power, and politics is about managing power. An egalitarian political system cannot last indefinitely alongside an unequal economic system, and vice versa. At some point, one of them will give.
The French Revolution occurred because a centuries-old absolutist political system was becoming even more absolutist, even as the Industrial Revolution and international trade were beginning to deliver significant wealth gains to those lower in the social hierarchy. The extremely unbalanced political system was put under pressure by a more equal economy.
Today, the reverse is happening in America: a democratic political system is being put under pressure by an increasingly unequal and unbalanced economic system. The result is ever-higher levels of corruption in government, less responsiveness from legislators, lighter effective tax burdens on the very rich relative to the middle class, and greater influence of well-funded lobbyists and special interest groups, among others.
US rates of educational attainment, 2011
- High School or higher: 87%
- Some College/ Associate's Degree: 28%
- Bachelor's Degree or higher: 28%
- Master's Degree: 7%
- Doctorate or Professional Degree: 2.6%
Solutions to the problem
How can the economy overcome these structural problems? Most observers offer one of three major options: (1) embrace the high-skill trend in the economy and try to chart a new course, (2) attempt to return to the old economic structure where low-skill work was rewarded more, or (3) a combination of both.
In the case of the first option, education and training will have paramount importance. The general educational and skill level of the American worker will have to increase dramatically so that the average person actually has a chance of doing well in a very knowledge-based, information economy. In addition, the specific kinds of skills taught to children will have to change. Under this scenario, the middle class would begin to grow again, populated mostly by workers in technology, finance, information, healthcare, education or business services.
The average American worker will have to evolve from a high school graduate proficient in basic math and literacy, with spotty knowledge of history, civics and science and well-equipped to follow orders, to a college graduate proficient in developing and using digital technology, with comprehensive knowledge of national and global socioeconomic trends, and well-equipped for problem solving, critical thinking and innovative thinking at a high level. On top of this, a much higher portion of the workforce will need to have advanced degrees beyond the Bachelor's level.
In the second scenario, low-skilled workers would enjoy higher incomes and would more often be middle class. Low-wage service workers like fast food employees, hotel workers, cashiers, office cleaners, sales clerks and others would gain higher wages, more benefits and more stable careers with room for advancement. This implies greater unionization in low-skill service jobs, as well as worker-friendly changes in government regulations and labor laws.
These two major approaches are not mutually exclusive, which is why a combination of both is a viable option. Whatever course is taken, it is clear that a continuation of the status quo is not acceptable to anyone who seeks a large and stable middle class and a healthy, growing economy.
- The Rich Do Not Create Jobs
- Why the Rich Should be Taxed More: Moral Argument for Progressive Taxation
- Why the Rich Should be Taxed More: Progressive Taxation, Spending Patterns and Unemployment
- Why the Rich Should be Taxed More: Flat Taxes, Progressive Taxes and Income Inequality
- 10 Things You Didn't Know About Economics: Numbers 1-3
More by this Author
Economic and fiscal arguments for progressive taxation.
Economic justifications for progressive taxation. The rich are not as affected by tax increases as other groups, the rich will always pay more in taxes, and high inequality and low interclass mobility are bad.
The rich should pay more in taxes than the middle class or poor. A moral argument for why tax rates should increase as income increases.