The latest figures from the Bureau of Labor Statistics show that the US unemployment rate continues to hover around 9%. Gallup’s measurements are somewhat higher at 9.2%. When you add to the unemployment rate the percentage of Americans working part time but wanting full time work, you get an underemployment rate of 19.1%.
The current period of high unemployment is the longest since the Great Depression. There have been a number of ups and downs in the economy over the past sixty years. But while unemployment went up during the down periods, within a relatively short time, the economy improved and the unemployment rates started to go down once, usually below 5%.
Our current downturn seems fundamentally different from the recessions of past decades. The continuing high rate of unemployment may well be due to a fundamental restructuring of society as we transition from the industrial economy of the past couple of centuries to an information-based economy. As a result, many of the jobs lost in the downturn are not coming back as we have known them.
While the overall economy has started to recover, we are actually in a fairly unique situation: a jobless recovery. Business conditions have significantly improved in the US while unemployment remains high.
The second factor is globalization. This is not just a case of companies moving jobs overseas in search of lower costs. Increasingly, it is also a matter of companies investing where the demand is highest. They are cutting jobs in the US and other countries where demand is weak, while adding jobs in the booming emerging markets.
How will we replace those jobs that are not coming back? This is one of the most urgent questions the country faces. Some are talking of a new normal, an economy in which growth is too slow to bring down the unemployment rate. Others are predicting a great stagnation for advanced economies like the US, because they have exhausted the supply of low-hanging drivers of economic growth.
The dire consequences of such a long period of high unemployment and slow economic growth were described in this excellent if depressing article How a New Jobless Era Will Transform America by Don Peck.
“Ultimately, it is likely to warp our politics, our culture, and the character of our society for years to come,” Peck writes. It would have a major impact on the optimism that has long been at the root of American success. It might well mark the end of The American Dream - the possibility that anyone can get ahead and achieve success and prosperity through talent and hard work.
The best study I have seen of the challenges facing the US labor market, - in particular, the tough pressures facing the middle class, - is The Polarization of Job Opportunities in the US Labor Market by MIT economist David Autor. He examines the changing dynamics of the US labor market by looking at three different segments:
- high skill, high wage jobs, where opportunities continue to expand, with the earnings of the college educated workers needed to fill such jobs rising steadily over the past thirty years;
- low skill, low wage jobs, which have also been expanding, and have particularly dominated employment growth over the past decade;
- mid skill, mid wage jobs which have been declining, and their wages have risen significantly slower than those at the two ends of the spectrum.
In the Introduction to his paper, Professor Autor articulates the two key challenges facing the US Labor market:
“The first is that for some decades now, the U.S. labor market has experienced increased demand for skilled workers. During times like the 1950s and 1960s, a rising level of educational attainment kept up with this rising demand for skill. But since the late 1970s and early 1980s, the rise in U.S. education levels has not kept up with the rising demand for skilled workers, and the slowdown in educational attainment has been particularly severe for males. The result has been a sharp rise in the inequality of wages.”
“A second, equally significant challenge is that the structure of job opportunities in the United States has sharply polarized over the past two decades, with expanding job opportunities in both high-skill, high-wage occupations and low-skill, low- wage occupations, coupled with contracting opportunities in middle-wage, middle-skill white-collar and blue-collar jobs. Concretely, employment and earnings are rising in both high-education professional, technical, and managerial occupations and, since the late 1980s, in low-education food service, personal care, and protective service occupations.”
“Conversely, job opportunities are declining in both middle-skill, white-collar clerical, administrative, and sales occupations and in middle-skill, blue-collar production, craft, and operative occupations. The decline in middle-skill jobs has been detrimental to the earnings and labor force participation rates of workers without a four-year college education, and differentially so for males, who are increasingly concentrated in low-paying service occupations.”
He later summarizes his key conclusions:
“Although the U.S. labor market will almost surely rebound from the Great Recession, this paper presents a somewhat disheartening picture of its longer-term evolution. Rising demand for highly educated workers, combined with lagging supply, is contributing to higher levels of earnings inequality.”
“Demand for middle-skill jobs is declining, and consequently, workers that do not obtain postsecondary education face a contracting set of job opportunities. Perhaps most alarmingly, males as a group have adapted comparatively poorly to the changing labor market. Male educational attainment has slowed and male labor force participation has secularly declined. For males without a four year college degree, wages have stagnated or fallen over three decades. And as these males have moved out of middle-skill blue-collar jobs, they have generally moved downward in the occupational skill and earnings distribution.”
“The obvious question, as Scrooge asks the Ghost of Christmas Yet to Come is: “[A]nswer me one question. Are these the shadows of the things that Will be, or are they shadows of things that May be, only?” Is the labor market history of the last three decades inevitably our destiny - or is it just that it could end up being our destiny if we do not implement forward-looking policy responses?”
This last Scrooge question may well succinctly capture the jobs crisis the US faces, especially middle class individuals, families and communities. As we transition to a new information-based, knowledge economy, what are the implications of that transition on the people around us who have lost their jobs? We know that in any such disruptive transition, some individuals and groups do very well, while others truly suffer. What should we do to lessen their suffering?
Professor Autor briefly discusses some policy responses to these challenges: encouraging more young adults to obtain higher education; improvements in K-12 education so that more people will be prepared to go on to higher education; training programs to boost skills levels and earning opportunities in historically low-skilled service jobs; and R&D and infrastructure investments. I agree with all of them and have written about them extensively in my blog.
But, I keep wondering if they are enough. Perhaps we also need to take a somewhat different approach, which in Hollywood elevator pitch fashion I would characterize as Entrepreneurialism meets The American Dream. Let’s examine the two key characters in this plot.
In March of 2009, The Economist published a special report on entrepreneurship that concluded: “The rise of the entrepreneur, which has been gathering speed over the past 30 years, is not just about economics. It also reflects profound changes in attitudes to everything from individual careers to the social contract. It signals the birth of an entrepreneurial society.”
The special report focuses primarily on the kind of high-tech entrepreneurship that has become cool in the past few decades, given the success of Silicon Valley, the Boston area and other regions that have become global centers of innovation and startups. But, as The Economist acknowledges, there is a wider definition of the term:
“For most people the term entrepreneur simply means anybody who starts a business, be it a corner shop or a high-tech start up. This special report will use the word in a narrower sense to mean somebody who offers an innovative solution to a (frequently unrecognised) problem. The defining characteristic of entrepreneurship, then, is not the size of the company but the act of innovation.”
Wikipedia’s definition of the term goes beyond its current high-tech connotations, and adds to the act of innovation another very important element - a willingness to take risks: “An entrepreneur is a person who has possession of a new enterprise, venture or idea and is accountable for the inherent risks and the outcome.” Entrepreneurs are thus “highly creative individuals who imagine new solutions by generating opportunities for profit or reward, . . .” and are then “. . . willing to launch a new venture or enterprise and accept full responsibility for the outcome.”
Which brings us to The American Dream “. . .a national ethos of the United States in which freedom includes a promise of the possibility of prosperity and success, . . .” and where “ . . . life should be better and richer and fuller for everyone, with opportunity for each according to ability or achievement regardless of social class or circumstances of birth.” The ability to imagine new opportunities for a better and fuller life combined with the willingness to take the necessary risks to achieve them is what drove both the American pioneers who migrated west to settle and develop new areas, and the tens of millions of immigrants who have been coming to the US to achieve prosperity through talent and hard work.
For most of its history, the US has been regarded as the quintessential entrepreneurial society, in the broader definition of the term. It has been viewed as a land of opportunity, but also a place where people have to work hard and rely on their wits to achieve prosperity. But, things changed in the period following WW2, especially in the 1950s. We started to switch from the entrepreneurial capitalism of the pioneers and immigrants, as well as a growing number of businessmen and industrialists, to a managed capitalism that relied more on large institutions, - in both business and government, - to get things done.
We saw the rise of a kind of bureaucratic corporate culture, more interested in preserving its organizational power and managing orderly prosperity. Instead of creativity, hard work and individualism, we got The Organization Man that William Whyte wrote about in his classic book, where well-rounded team players were viewed as more valuable than creative, but potentially disruptive men. Following the Great Depression and WW2, the country was ready to trade-off the risks inherent in entrepreneurial capitalism for the stability promised by managed capitalism.
But, those days are over. We are likely in the early stages of a major industrial, economic and societal recomposition, which started in the private sector as companies had to embrace technology and innovation to become more efficient and be able to survive in an increasingly competitive world. The pressures to lower costs and become more efficient are now coming to the public sector, including states, cities, counties and federal agencies.
In my opinion, such structural changes are the main reason for our jobless recovery. The ongoing institutional recomposition also means that people can no longer rely on large companies and government for jobs, as large institutions continue to be under pressure to become more productive. We thus need to encourage and help people whose lost jobs are not coming back to explore opportunities beyond those of large companies and government.
There is little question that the vast majority of jobs in our new global economy will be more entrepreneurial in nature, involving groups of individuals and small businesses. And, for those willing to accept the inherent risks, this 21st century New Entrepreneurialism is full of opportunities. Digital technologies are giving these new waves of entrepreneurs access to technologies, skills, administrative capabilities, and global reach that were previously only available to larger companies.
Many new jobs and companies, - perhaps whole new industries that we can barely imagine, - will accompany the transition to an information-based society. This transition to a more entrepreneurial, global economy will likely be one of the most important factors in job creation over the next several decades.
Does that mean a return to the laissez-fair style of capitalism that prevailed prior to the Great Depression, in which everyone is on their own with a minimal role for government? Not at all. The world has changed too much in the last eighty years. Both the economy and society have become way too complex to function effectively without the checks and balances between the private and public sector. Let me conclude with four suggestions for government to help bring about this New Entrepreneurialism:
First, we need a good safety net, including universal health care, otherwise people will be reluctant to leave their jobs and start new businesses on their own. I strongly believe that good safety nets are necessary for the dynamic economies and job mobility that societies now require.
Second, the rapid growth of government over the past sixty years has resulted in many regulations that make it difficult and expensive to start new businesses. While some are needed, others are unnecessary. A recent article in The Economist observed:
“In the 1950s, when organisation man ruled, fewer than 5% of American workers needed licences. Today, after three decades of deregulation, the figure is almost 30%. Add to that people who are preparing to obtain a licence or whose jobs involve some form of certification and the share is 38%. Other rich countries impose far fewer fetters than the land of the free. In Britain only 13% of workers need licences (though that has doubled in 12 years).”
“America’s Licence Raj has extended its tentacles into occupations that pose no plausible threat to health or safety—occupations, moreover, that are governed by considerations of taste rather than anything that can be objectively measured by licensing authorities. The list of jobs that require licences in some states already sounds like something from Monty Python—florists, handymen, wrestlers, tour guides, frozen-dessert sellers, firework operatives, second-hand booksellers and, of course, interior designers—but it will become sillier still if ambitious cat-groomers and dog-walkers get their way.”
Third, governments, especially cities and local municipalities, should do everything possible to help people start new job-creating businesses, including making it easier for them to get and repay low interest loans. This is particularly important in areas of high unemployment or underemployment. In addition, programs, like JumpStart NYC in which I am involved, can help people who lost their jobs in large companies explore new career paths in small and entrepreneurial firms.
Finally, while not sufficient, the policy responses mention by David Autor to improve K-12 education, encourage more young adults to obtain higher education and invest in infrastructure and R&D are absolutely essential for the future. Other major studies, like the 2004 US National Innovation Initiative have made similar recommendations.
I really believe that the American Dream has a potentially bright future, but like just about everything else around us, it must be adapted to our changing environment. This new economic environment, which I think of as a New Entrepreneurialism, must bring together the optimism, hard work, innovation and risk taking that built the country in the first place, with a smart government that does everything possible to enable the creation of new companies and new jobs. I believe that this is both a pragmatic and realistic view of the future, as well as a vision full of exciting opportunities.