Employment Faces Grim Decade

By Kevin Brekke

Today is the celestial start of summer, when the solstice occurs at 12:16 EDT, but it will likely pass with little notice or fanfare. Prior to the age of mechanized farming and corporate agribusiness and the migration of populations from outhouses to townhouses, life was largely dictated by the seasons. Ignoring them meant hunger and hardship… or worse. The metaphors of sowing and reaping, of advance planning, of understanding that everything has its right place, have long been exalted in poetry and alliterative song – the timeless classic Turn, Turn, Turn by the Byrds comes to mind.

Yet the lessons foretold and consequences forewarned are as equally true in the practical sense as they are aesthetically. A report from the McKinsey Global Institute brings home this hard reality. The title of the report, An Economy That Works: Job Creation and America’s Future, is misleading and belies its message, which is that the U.S. lacks sufficient workers with the right education and training to meet the skill profiles of the jobs that will likely be created over the next decade.

The U.S. has sown its primary and secondary education system with curricula that are overweight on the social sciences and underweight in science, technology, engineering, and math – the so-called STEM fields. And today’s unemployed are reaping the consequences.

The challenge ahead might be summed up using a popular joke format:

Q: How many social scientists does it take to change a light bulb?

A: None. STEM graduates have developed a hundred-year light bulb. When it burns out it won’t need replacing, as it will be obsolete.

That is the predicament in which too many of today’s unemployed find themselves: They are obsolete. The headwind facing today’s unemployed in their search for work is formidable. It’s a sobering thought.

Here’s a sampling of the statistics presented in the report about the jobs picture in 2011:

• 20% of the men in the population are not working today, up from 7% in 1970.
• The workforce in 2020 will contain an estimated shortage of 1.5 million college graduates.
• 40% of the companies planning to hire have had openings for 6 months due to lack of qualified applicants.
• The rate of new business creation has dropped 23% since 2007.
• The number of U.S. jobs has declined by 7 million since December 2007.

The hurdles that must be overcome include adapting the structure of the U.S. education system to better meet the shifting needs of the marketplace. This will be a herculean task, because by extension the report implies that many of the departments in today’s universities are themselves obsolete. Any cuts or reapportionments in a college curriculum mean teacher layoffs. And the unions will resist this change with ferocity.

The report discusses other areas of concern that I will leave to the reader to pursue via the above link. The report opens with an executive summary that makes for quick reading and conveys the major points.

I want to focus on one of the report’s central themes: that it will probably take a decade or longer for unemployment to return to pre-recession levels. To understand how this might be achieved, the paper looks at three possible scenarios for job recovery, as shown in this chart that I re-created from the report:

To fully grasp the height of the employment bar that must be overcome, here are the monthly net new jobs needed over the next 120 months to satisfy each scenario:

Low Scenario: 77,000

Middle Scenario: 145,000

High Scenario: 187,000

The low-job-growth scenario is fundamentally the continuation of the anemic job creation trend in place since 2000 – meaning that more of the same will condemn the U.S. labor market to high rates of unemployment for at least the next ten years.

Supporting this employment bar and lending credence to the low-job-growth scenario is the expanding time lag between GDP recovery and employment recovery to pre-recession levels. Again, I have re-created a chart from the report that says it all:

The chart shows that all postwar recessions were characterized by a quick snap back to pre-recession levels of GDP and employment – until the 1990 recession. That year, the boomerang effect took more than double the six-month average of the previous seven recession episodes. In 2001, the return time was more than doubled again. This exponential growth trend in lag time does not bode well for hopes of job growth accelerating anytime soon.

In the current "jobless recovery," it has been six months since GDP returned to pre-recession levels while employment has not. This intermission will be extraordinarily lengthy unless serious changes are undertaken.

The report candidly – and accurately in my opinion – concludes that the U.S. labor market will not return to full employment (defined as a 5% unemployment rate) by following a "business as usual" course. In conjunction with reforms to the U.S. education system to ensure that the workforce has the needed skills to succeed, progress in other areas must happen. Among them, the report cites changes in business regulation that promote innovation and new company creation, as well as the removal of impediments to investment and job creation. To all that we respond, "Hear, hear!"

As I wrote this afternoon, I took a break to gaze out the window at the armillary sundial in the yard. Although a weathered, verdigris patina has replaced the shine of the once-new copper arrow and orbital rings, it still functions if properly positioned. And that is the lesson here. Many economic and social changes lie ahead for the U.S. economy that will have a direct impact on just about all aspects of American habits, investments, and careers. Being prepared means making the right adjustments now to get positioned for the course corrections ahead, and to survive and prosper. That is our mission here at Casey Research.