July 2004
By ROBERT PEGG
The U.S. economy has dramatically changed over the last few years. A major difference has been the unrelenting pressures on businesses to turn an ever-increasing profit. New technologies have emerged that have given management the tools to meet global competition. Innovation has brought ever-cheaper computing power and new ways to deploy it.
As capital has become increasingly cheaper relative to labor, the returns on investment in new labor-saving, high-tech investment have soared. Because labor accounts for about two-thirds of the cost of developing and selling products, greater labor productivity is essential for survival. Therefore, productivity is growing faster now than in the late 1990s. Unfortunately, economists estimate that a one-percentage point increase in annual productivity growth costs 1.3 million jobs.
Until recently, pressures have been most evident in the manufacturing sector, particularly at old-line factories. Increased foreign competition has, for many years, forced U.S. carmakers to design and engineer cars in a better, faster and cheaper way. Now however, global competition is spreading to a broad range of service industries and even small businesses are striving to accomplish robust gains in efficiency. For instance, retailers are now able to generate 35 percent more volume in goods and services than they did five years ago. That means fewer jobs are needed. Companies are gaining efficiencies from equipment purchased over the past year as well as from the technology acquired and implemented in the 1990s. Companies have been finding new ways of integrating technology into their production and distribution process, and getting customers to use this technology to make purchases.
Companies that might wish to hire, face a situation that has plagued many non-American companies for years: soaring employee benefit costs that are forcing companies to hesitate to add workers unless they are absolutely necessary. Benefit costs, driven by soaring health-care premiums and the need to pay and restore pension plans, are up three times the rate of consumer inflation. Saving on benefits also helps explain the demand for temporary workers. In the past year, temporary jobs, which represent a small fraction of the U.S. workforce, have accounted for about one-third of the increase in payrolls. The concept of "just-in-time" inventory, so essential in making the American economy competitive with its rivals, has been complemented by "just-in-time" labor. Unfortunately, this process of destroying jobs in the short-run to bolster the economy in the long run is what is facilitating the lack of job creation.
As a result, the terrain of today's economic recovery is far different from the path of the recession and recovery of the early 1990s. In the three-year period from mid-1990 to early 1993, the gross domestic product increased at a modest 1.8 percent. However, gains from this relatively weak growth were well balanced. Wages and salaries, adjusted for inflation, rose by almost as much as corporate earnings. This time, stronger productivity growth has meant that the nation's economic pie is bigger. But most of the additional growth has gone to corporate profits. Total wages and salaries are actually lower now compared with the beginning of the recession, because of the loss of 2.4 million jobs.
The present recovery brings us back to the issue of outsourcing. Small businesses, which generate most of the nation's new jobs, are also beginning to outsource jobs. Outsourcing has been extending into occupations such as telemarketing, accounting, Wall Street research and even architecture. While some economists argue that the number of jobs being outsourced is limited, what has clearly changed are the kinds of occupations that are being affected. White-collar jobs are increasingly being outsourced, something that did not happen during previous business cycles.
In short, American workers have been hit by a confluence of forces, stemming from productivity changes in the workplace, soaring benefit costs and intense global competition, as well as outsourcing. There are two scenarios that could play out. The pessimists may turn out to be right: job growth will not materialize and eventually demand will fall. American incomes will be ultimately driven down by intense competition from India, China, and other low-wage countries. The alternative is that new industries will arise to take the lead. These new industries will be based on a next generation technology, such as bioengineering or nano-technology. If that occurs, today's job anxiety will feel like a distant memory.
About the author: Mr. Pegg is managing director of Tocqueville Asset Management LP, the New York City-based investment advisory firm which serves businesses, institutions and private individuals.