Ending the Recession's Rough Ride - OZY | A Modern Media Company
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Because whether or not you have a job, things have fundamentally changed for all of us.

Carlos Watson

Carlos Watson

CEO and co-founder of OZY

In so many ways, the economy seems to be picking up. The stock market is hitting new highs, real estate prices are rebounding and Wall Street is innovating. But the other day, I had a conversation with my longtime friend James Manyika that reminded me why it’s so hard for people who are still unemployed, such as my cousin Kevin, to find a job. Basically, we lost 8.5 million jobs in the Great Recession and haven’t recovered 1.5 million of them. 

Manyika is Dr. James Manyika, a 40-something former Rhodes scholar and rocket scientist (literally) turned business adviser at the management consulting firm McKinsey & Company. He helped hire me there years ago and now advises scores of CEOs and government officials around the world on business and economic issues. 

He has focused on a thorny problem: why, despite plenty of signs that the economy is picking up, many Americans are struggling to find jobs. On some levels, my cousin Kevin is a classic example of this conundrum. He’s in his late 40s, and he graduated from community college and worked in retail. But he also has IT experience, and he hasn’t been able to find a full-time position for two years. 

By the early 1990s recession, that lag was 15 months. And nowadays, that lag could be as long as 60 months.

To be sure, there has always been a lag between the technical growth of the economy or gross domestic product (GDP) and an improvement in the jobs situation. But over the last 40 years, that lag time has gotten longer — much longer. In the 1950s, following a recession it generally took six months after GDP picked up again for companies to start hiring in earnest. By the early 1990s recession, that lag was 15 months. And nowadays, that lag could be as long as 60 months. 

Which means that unemployment rates for some Americans may stay stubbornly high for another couple of years, even as “the other America” celebrates stronger stock portfolios, more valuable homes and higher wages. So for people like my cousin, the recession’s rough ride may last a long time.

Why is that the case, given that the recession technically ended in June 2009, almost four and a half years ago? Why is the American economy producing an average of only 180,000 jobs a month instead of the 300,000 to 400,000 we need? 

Like all economists, Manyika thinks there are multiple reasons. First, many companies became more efficient during the recession, figuring out how to make do with fewer people. Second, Manyika points out there is often a skills gap between what companies are looking for and what is available, which explains the puzzling phenomenon of jobs going unfilled even as people are searching for employment.

While some of this may get sorted out as the Great Recession truly moves into the past, the roots of these unemployment problems run much deeper. There are “structural” issues (as economists and other wonks like to say), much of it involving technology, globalization and the changing nature of work. 

While globalization is a factor, low demand growth at home is more to blame than American jobs going to China. 

Consider demand, which is what economists say when they mean people buying things like cars, TVs and laptops. Demand is growing in emerging markets, so jobs are growing there to meet that demand. Here at home, we either have those things already or can’t afford to replace them, so there’s lower demand and fewer jobs. Offshoring and trade account for only about 20 percent of the manufacturing job losses in the first decade of the 21st century, so while globalization is a factor, low demand growth at home is more to blame than American jobs going to China. 

Since many of their new customers are increasingly outside of the United States, not surprisingly, multinational banks, department stores and other American companies are hiring local workers in Brazil, South Africa, Turkey, or wherever their new customers are. To service customers overseas, you increasingly want a Chase bank teller or Walmart checkout person actually in Rio or Lagos, not in Cincinnati or Sacramento.  

This shift in the middle-class customer base is likely to continue over the next 20 years, and fewer of those jobs will be in the United States. In fact, there will be about 1.8 billion new consumers in the coming decade, and the majority of them will be outside the U.S. 

As I talked to Manyika, I became increasingly bummed for my cousin. Not only might there not be a “good” job in his near future, there might not be one over the long term, either. But he disagrees, as he sees real opportunities for growth and employment in the coming years. Here are a few things he could do to improve his chances: 

  1. First, as tough as it may be, undertake significant retraining. Pivot not just from factory work to customer service, but get trained in IT installation or software coding. 
  2. Second, be open to relocation. Over the last two decades, although Americans are thought of as exceptionally mobile, we have become increasingly less willing (or able) to move for a job. Yes, you may have good reasons for staying put, but consider a move if you possibly can. 
  3. Third, create a job that draws on assets you have — work for a sharing economy taxi service like Lyft if you have a car, or rent out a room in your house through a service like Airbnb.

Still, even Manyika acknowledged that these ideas alone may not be sufficient to tackle larger, structural problems. Unfortunately, there is no easy way to spur the U.S. economy to create 350,000+ jobs per month (more than double the current number) quickly and sustainably.  

But what if a courageous politician wanted to promote some bold solutions to close the jobs gap, what might she or he suggest? Encouraging people or businesses to buy more things would help — whether from policies that encourage companies to invest, or smarter stimulus or infrastructure initiatives. 

We should also look to what other countries have done, not to copy them but to come up with creative American solutions. Take Germany, for example. During the recession, the German government created incentives so that companies wouldn’t lay off workers, but rather reduce their hours. It also subsidized the rehiring of those who had been out of work for long periods of time. The German government figures it’s better to pay 20 to 30 percent of workers’ salaries than to shell out 100 percent of their unemployment. 

In a recent report, “Game Changers: Five Opportunities for U.S. Growth and Renewal,” Manyika and his colleagues at the McKinsey Global Institute outline a handful of strong ideas for kickstarting job growth. Three in particular caught my eye:

  1. Shale-gas and oil production. Powered by advances in horizontal drilling and hydraulic fracturing, the production of domestic shale gas and oil has grown more than 50 percent annually since 2007. The shale boom could add as much as $690 billion a year to GDP and create up to 1.7 million jobs across the economy by 2020, but only if it can successfully address the associated environmental risks.
  2. Big-data analytics as a productivity tool. Sectors across the economy can harness the deluge of data generated by transactions, medical and legal records, videos and social technologies — not to mention the sensors, cameras, bar codes and transmitters embedded in the world around us. By 2020, the wider adoption of big-data analytics could increase annual GDP in retailing and manufacturing by up to $325 billion and save as much as $285 billion in the cost of health care and government service.
  3. Increased investment in infrastructure, with a new emphasis on productivity. The backlog of maintenance and upgrades for U.S. roads, highways, bridges, and transit and water systems is reaching critical levels. If the United States increases its annual infrastructure investment by one percentage point of GDP, it could create up to 1.8 million jobs and boost annual GDP by up to $320 billion by 2020. 

Manyika told me that many economists like the ideas in “Game Changers.” But they require action by both the private sector and local, state and federal governments. Concerted efforts by all levels of government would significantly accelerate how quickly these ideas can contribute to GDP growth and jobs growth, and the place to start is at the top. So maybe, just maybe, job creation is an agenda that both House Speaker John Boehner and President Obama could partner on. After all, it’s not like we’re short on ideas. 

This OZY encore was originally published in December 2013.

Carlos Watson

Carlos Watson

CEO and co-founder of OZY

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