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Explaining Anemic U.S. Job Growth: The Role of Faltering U.S. Competitiveness

December 5, 2011
| Reports
More than two years after the “end” of the Great Recession, employment is five percent below its January 2008 peak. Why was this recession so severe and the recovery so anemic despite a myriad of actions by Washington? This report takes up seven explanations, disposes of six of them and makes the case for the seventh. 1) The Great Recession will not be dispatched with more Keynesian moves to jump start demand. 2) We should not simply accept the idea that we need to be patient as financial balance sheets are straightened out. 3) Uncertainty about taxing and regulation is always a consideration but it is not a major factor in hindering growth. 4) While we need better trained and more mobile workers, the reported mismatch between job openings and qualified workers is overstated as a factor in high unemployment. 5) Technological gains have not run their course as a job-creating force. 6) Finally, robots and machines are not making workers obsolete. A seventh factor best explains the sluggish job growth: faltering U.S. competitiveness, including in our manufacturing sector which lost a greater share of jobs in the last decade than in the Great Depression. To get the recovery going full steam, we need to develop and implement a robust national innovation and competitiveness policy.

More than two years after the “end” of the Great Recession, it’s clear that things are not working. GDP remains below its peak of 16 quarters ago while jobs are five percent below their January 2008 peak. As Laura Tyson of the Center for American Progress has calculated, even if job growth doubled from recent levels to the 208,000 per month rate before 2005, it would take until 2023 to get us back to pre-recession employment levels (given new entrants to the workforce).1 Understanding why job performance has been so poor is perhaps the single most important thing for Washington to do to get us on the road to robust recovery. But what is the right diagnosis? There is anything but consensus on this for at least seven diagnoses have been offered. The dominant ones are well known, having been debated almost daily in the media. For some, this is a “Keynesian” recession, albeit of unusually severe proportions. With demand flat, what is required is for government to use significant and sustained countercyclical fiscal and monetary policies to get people and businesses spending again. Others argue that “this time it’s different.” They argue this is a financial crisis-induced recession and as such that conventional Keynesian tools are of limited use and that recovery will inherently take much longer.

But following the logical prescriptions—fiscal stimulus for the first, and cleaning up balance sheets for the second—will provide some relief for the patient, but not the needed cure. Still others argue that regulatory uncertainty is the culprit, that companies worry about vast new regulatory burdens and increased taxes and are hoarding their capital until this threat has passed. But in fact, few businesses actually appear to be worried about this.A next three diagnoses are grounded in micro-level factors. The “skills mismatch” explanation holds that many more workers would be employed if they just possessed the right skills for current job openings. But while a contributing factor, it doesn’t explain why unemployment remains at around nine percent when it was under five percent just a few years ago. The “robots killed our jobs” explanation blames new technology for job loss, even though productivity is lower now since the recession began than previously and even though the economic literature is largely in agreement that productivity does not lead to net job loss. The innovation exhaustion explanation actually posits the opposite cause: too little innovation and productivity, holding that it is because the possibilities of technology-powered innovation have dried up, that recovery is so difficult. This is an appealing diagnosis, in part because it is closer than the other diagnoses. But it is still off the mark. The current IT-driven innovation system is alive and well. To the extent that this diagnosis is accurate, it has to do with where innovation is taking place which is not in the United States as much as it used to be. Unfortunately, the United States as a whole has become less innovative.

This gets us to the seventh, and in our view, most accurate and overlooked diagnosis for the anemic U.S. recovery: the failure of the United States to maintain its competitiveness in the world economy, particularly in manufacturing, means that the overall U.S. engine of growth is not running on all cylinders and that recovery is halting. It will only be when the United States regains the competitiveness of its internationally traded sectors that the U.S. economy will achieve escape velocity.

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