Down-sizing Downsizing
The Clinton Administration is at war with itself on the hottest economic issue of the day.
By Paul Krugman
Posted Monday, June 24, 1996
The Clinton administration isn't particularly mendacious on economic matters--in fact, economic analysis and reporting under Clinton have been unusually scrupulous. But the president has changed his mind about economic policy so often that now his officials sound insincere even when they speak the plain truth.
And so I feel a bit sorry for Joseph Stiglitz, the eminent economist who chairs Clinton's Council of Economic Advisers. In April, Stiglitz released a report on the state of the American worker, more or less confirming what most independent economists had already concluded: Workers are not doing as badly as recent headlines might suggest. In particular, the impact of corporate downsizing has been greatly exaggerated.
Stiglitz's report was, to all appearances, a sincere attempt to produce a realistic picture of the American labor market. Yet it was treated by nearly all commentators as a purely political document--an election-year effort to accentuate the positive.
But the commentators had reason for their skepticism. After all, other members of the administration--especially Labor Secretary Robert Reich--have been insistently pushing a very different view. In the world according to Reich, even well-paid American workers have now joined the "anxious classes." They are liable any day to find themselves downsized out of the middle class. And even if they keep their jobs, the fear of being fired has forced them to accept stagnant or declining wages while productivity and profits soar.
Like much of what Reich says, this story is clear, compelling, brilliantly packaged, and mostly wrong. Stiglitz, by contrast, is telling the complicated truth rather than an emotionally satisfying fiction.
To understand why Reich is wrong (about this and most other things), think about the strange case of the missing children. During the early 1980s, sensationalist journalism, combining true-crime stories with garbled statistics, convinced much of the public that America is a nation where vast numbers of children are snatched from their happy families by mysterious strangers every year. TV shows about "stranger abductions" are a media staple to this day. In reality, however, such crimes are rare: about 300 per year in a nation of 260 million.
It's not that abductions never happen. They do, and they are terrible things. Nor is the point that the kids are all right: For hundreds of thousands of American children, life is sheer hell. Almost always, however, the people who victimize children are not strangers. For every child kidnapped by a stranger, at least a thousand are sexually abused by family members. But stranger abductions made good copy, and therefore became a public concern out of all proportion to their real importance.
Corporate downsizing is neither as terrible nor as rare as stranger abduction, but the two phenomena share some characteristics. Like stranger abductions, downsizing is a camera-ready tragedy, perfect for media exploitation, that is only a minor part of the real problem.
Stiglitz's report is full of dense statistical analysis making this point, but here's a quick do-it-yourself version. A February Newsweek cover story entitled "Corporate Killers" listed just about every large layoff by a major corporation over the last five years. The number of jobs eliminated by each company appeared in large type next to a photo of the CEO responsible. The article implied that it was describing a national catastrophe. But if you add up all the numbers, the total comes to 370,000. That is less than one worker in 300--a tiny blip in the number of workers who lose or change jobs every year, even in the healthiest economy. And the great majority of downsized workers do find new jobs. Although most end up making less in their new jobs than they did before, only a fraction experience the much-publicized plunge from comfortable middle class to working poor. No wonder Stiglitz found that the destruction of good jobs by greedy corporations is just not an important part of what is happening to the American worker.
The point is that Reich's style of economics--which relies on anecdotes rather than statistics, slogans rather than serious analysis--cannot do justice to the diversity and sheer size of this vast nation. In America anything that can happen, does: Strangers kidnap children; mathematicians become terrorists; executives find themselves flipping hamburgers. The important question is not whether these stories are true; it is whether they are typical. How do they fit into the big picture?
Well, the big picture looks like this: Both the number of "good jobs" and the pay that goes with those jobs are steadily rising. The workers who have the skill, talent, and luck to get these jobs generally do very well. Only a relative handful of "good job" holders (which is to say only a few hundred thousand a year) experience serious reverses. America's middle class may be anxious, but objectively, it is doing fine.
The people who are really doing badly are those who do not have good jobs and never did. Those with lousy jobs have seen their already-low wages slowly but steadily sink. In other words, the main victims of (to use another of Reich's phrases) the "new economy" are not the few thousand managers who have become hamburger flippers but the tens of millions of hamburger flippers, janitors, and so on whose real wages have been declining 1or 2 percent per year for the last two decades.
Does this distinction matter? It does if you are trying to set any sort of policy priorities. Should we, as some in the administration want, focus our attention on preserving the jobs of well-paid employees at big corporations? Should we pressure those companies to stop announcing layoffs? Should we use the tax system to penalize companies that fire workers and reward those that do not? Or, instead, should we fight tooth and nail to preserve and extend programs like the Earned Income Tax Credit that help the working poor? It is disingenuous to say we should do both: Money is scarce and so is political capital. If we focus on small problems that make headlines, we will ignore bigger problems that don't.
So let's give Joe Stiglitz some credit. No doubt his political masters allowed him to downsize the issue of downsizing at least partly because they believed that good news re-elects presidents. Sometimes, however, an economic analysis that is politically convenient also happens to be the honest truth.
Paul Krugman is a professor of economics at Stanford whose books include The Age of Diminished Expectations and Peddling Prosperity. His column, "The Dismal Scientist," will appear monthly in SLATE.
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Job Creation and Employment Opportunities:
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A Report by the Council of Economic Advisers
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April 23, 1996
--------------------------------------------------------------------------------
Executive Summary
Introduction
Job Creation
The Quality of Jobs
The Challenges Created by A Dynamic Labor Market
Conclusion
--------------------------------------------------------------------------------
Executive Summary
Since January 1993, employment has grown rapidly -- expanding by 8.5 million net new jobs. Based on comparable data, employment growth has been stronger in the United States than in any of our G-7 partners.
Two-thirds (68 percent) of the net growth in full-time employment between February 1994 and February 1996 occurred in industry/occupation groups paying above-median wages. Over half of the net growth occurred in the top 30 percent of job categories. Although many of these new jobs were in the service sector, they did not conform to stereotypes.
The evidence suggests that the vast majority of the net new jobs are full-time. Both the household and establishment survey suggests that the proportion of employed persons working multiple jobs has remained at about 6 percent.
The share of workers holding multiple jobs has remained roughly constant since the late 1980s. The household survey suggests that the proportion of employed persons working multiple jobs has remained at about 6 percent.
The overall number of workers displaced was roughly the same proportion of the workforce in 1991-2 as in 1981-2, although the recession during the early 1980s was more severe than the one during the early 1990s. However, it is difficult to determine precisely how to account for the business cycle in assessing displacement rates. The official data on displacement after 1993 are not yet available, but an alternative job loss measure has fallen since then.
The characteristics of displaced workers have changed somewhat. Displacement rates for older, white-collar and better educated workers have risen, although they remain low relative to those for younger, blue-collar, and less educated workers.
Despite some recent positive signs, long-term challenges remain. Between the 1970s and the early 1990s, real wages stagnated and income inequality widened. But in 1994, for the first time in 5 years, real median family income rose and the poverty rate fell. We must continue to build on these gains to improve living standards and reduce income inequality. And although many more jobs are being created than destroyed, a dynamic economy inevitably imposes costs on some workers. For example, data from 1981 to 1993 indicate that job losers were more likely to be permanently dismissed (rather than temporarily laid-off), that older workers were subject to greater risk of job displacement, and that the average real wage loss due to displacement was significant and persistent. In order to obtain the full benefits of a dynamic economy, we must redice these adjustment costs.
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Introduction
Employment growth in the United States has been robust since January 1993, with nonfarm payroll employment expanding by 8.5 million. Based on comparable data, U.S. employment growth has been stronger than in any of our G-7 partners. The first purpose of this study is to sift through the evidence to develop a more detailed picture of where the job growth is occurring and the nature of the jobs being created.
The news is encouraging: employment has grown disproportionately in the industry/occupation job categories paying above-median wages. Even in the traditionally lower-paying service industry, a majority of the net employment growth has been managerial and professional specialty positions, which typically pay above-median wages. Contrary to conventional wisdom, the new jobs are not disproportionately part-time, low-skill positions.
The second purpose of the study is to examine job displacement. Although the economy is generating millions of net new jobs, it is clear that the speed of transformation in the U.S. labor market has left many American workers anxious about their economic futures. A dynamic and growing labor market can impose costs as well as offer opportunities, and policies to help workers deal with job transitions are critical to reducing these adjustment costs.
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Job Creation
According to the Bureau of Labor Statistics establishment survey, nonfarm employment grew by 8.5 million (7.8 percent) between January 1993 and March 1996. Private-sector payrolls (up 8.7 percent) grew even faster, while federal payrolls (excluding the postal service) actually declined by 11.4 percent, and state and local government payrolls combined grew by on 5.0 percent (see Figure 1). The public sector's share of employment is therefore falling.
The unemployment rate has fallen from over 7 percent in January 1993 to 5.6 percent in March 1996, and has been below 6 percent for 19 consecutive months. Given current demographic trends, the Bureau of Labor Statistics projects the labor force to continue growing by approximately 1.1 percent annually between 1994 and 2005. Therefore, to keep unemployment low, the economy needs to average a net increase of about 120,000 new jobs per month. Employment is now expanding at a pace consistent with steady, sustainable growth and low unemployment.
International Comparisons. The United States has experienced faster employment growth than any of the other G-7 countries. Only Canada has experienced any significant employment growth, while the other G-7 members have experienced negligible job gains or outright declines. The U.S. labor market performance is particularly impressive given that it has occurred during a period in which the federal budget deficit was reduced from 4.9 percent of GDP in FY 1992 to an estimated 1.9 percent in FY 1996.
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The Quality of Jobs
According to data from the Current Population Survey, 38 percent of the net employment growth between February 1994 and February 1996 occurred in "service" industries.1 This section therefore first examines job quality in the service sector. It then presents a more detailed analysis of all sectors of the economy.
Higher-paid Jobs in the Service Sector. The "service sector" is quite diverse. It includes many low-wage positions, but also many high-wage positions in financial services, hospitals, and computer and accounting services. For this reason, it is important to determine whether employment growth within services has occurred primarily in the high-skill managerial and professional specialty occupations or in low-paying occupations. The Current Population Survey provides evidence on employment growth by occupation.
The data show that recent net job growth in services has been predominantly in managerial or professional specialty positions (Figure 2). These are relatively high-paid occupations.
Thus, the conventional wisdom suggesting that the growth in service sector employment is disproportionately concentrated in low-wage job categories is wrong. v
Growth of Higher-paid Jobs by Industry and Occupation. An even more detailed picture of the nature of the new jobs created emerges from an examination of industry/occupation categories. Using data from the February 1994 and February 1996 Current Population Surveys, we sorted full-time workers into 45 detailed occupations in 22 major industries. A quarter of the sample reported earnings in addition to the industries and occupations in which they worked. Although many of the possible 990 industry/occupation cells were small, only 6 percent of the population-weighted sample was found in cells with 10 or fewer sample members reporting earnings data for both surveys. In order to avoid the high sampling variability associated with insufficient numbers of observations, we eliminated these small cells from our analysis. There were 287 job categories in each year after eliminating the cells with 10 or fewer sample members.2
The first step in our analysis was to rank the 287 occupation/industry cells by the median weekly earnings of full-time workers. Approximately half of all full-time employment in February 1994 was found in cells with median weekly earnings above $480 (in February 1996 dollars). The employment growth in these "high-wage" job categories can then be compared to overall employment growth. Our key measure of job quality is the percentage of total employment growth that occurred within the occupation and industry categories that paid above-median wages in February 1994. The results were striking.
Two-thirds (68 percent) of the net growth in full-time employment between February 1994 and February 1996 was found in job categories paying above-median wages.3
Another way to summarize the results from our industry/occupation analysis is shown in Figure 3. Here we ranked the 287 industry/occupation categories by their median weekly earnings for full-time workers, and sorted them into 10 ordered groupings -- each with 10 percent of employment in February 1994 -- by their earnings ranking. If all 10 groups had grown proportionately to their share of employment in February 1994, each would have accounted for 10 percent of the net new employment. But rather than accounting for their proportional share of total employment growth (30 percent), the top three deciles accounted for much more (over 50 percent).
Over half (52 percent) of employment growth was found in the top 30 percent of job categories.
More Detailed Data on Occupations. The Bureau of Labor Statistics also publishes an annual series on wages and employment growth for an extremely detailed set of occupational categories, based on pooling a year's population survey responses. The survey included 488 categories with data for both 1994 and 1995 (the 1996 annual estimates will not be available until next year). The results from this data set give additional support to the results reported above. Some of the categories with the largest employment gains included "sales supervisors and proprietors," "electricians," "managers of marketing and advertising," and "electrical and electronic engineers." And consistent with the above calculations, the detailed occupations in the top half of the wage distribution accounted for 70 percent of the net employment growth, while the top 10 percent of the distribution produced a third of net employment growth.
Employment in "hamburger-flipping jobs"4 actually fell between 1994 and 1995.
In sum, the data indicate the following about the nature of recent job growth:
Two-thirds of full-time job growth between February 1994 and February 1996 occurred in occupation/industry categories paying above-median wages.
Over half of full-time job growth between February 1994 and February 1996 was in occupation/industry categories paying even higher wages (top 30 percent).
The New Jobs are Mostly Full-Time. Data from both the Current Population Survey and the BLS establishment survey indicate that most of the net new jobs are full-time. The Current Population Survey includes data on part-time employment. Figure 4 portrays the proportion of employed persons reporting that they worked part-time for "economic" as well as "non-economic" reasons. Despite a shift in both series corresponding to a redesign of the survey in January 1994, the proportion of employed persons reporting to be employed part-time has actually declined slightly. The declines have been even larger for those working part-time for "economic" reasons, often referred to as the "involuntarily underemployed."
The establishment data indirectly support the conclusions from the household survey. If the net new jobs were disproportionately part-time, we would expect average hours worked per job to fall.5 But the employment data show that average hours worked for all jobs (including the new jobs) remained roughly constant: the number of nonfarm payroll positions and the total number of hours worked both grew at about the same rate over the past three years (see table). This suggests that the new jobs have not been disproportionately part-time.
Data collected from both households and companies indicate that most of the net job creation over the past three years has been full-time.
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Employment and Hours Worked at Nonfarm Establishments
January
1993 March
1996 Percent
Change
Employment millions 109.5 118.0 7.8
Hours worked (annual basis, billions) 202.2 217.8 7.7
Based on data from the Bureau of Labor Statistics.
Little Change in Multiple Job Holding. Some Americans decide to hold more than one job, in order to save for a house or to meet unexpected expenses. Nonetheless, multiple job holding would raise concerns about the quality of jobs if an increasing number of Americans have to work two or three jobs to make ends meet. A frustrated worker is said to have reacted to the news that 8.5 million new jobs have been created by replying, "Yeah, and I have three of them." But the data simply do not indicate any significant movement in multiple job holding. The percentage of employed persons working multiple jobs has remained in the neighborhood of 6 percent since the late 1980s.
Impact on Wages and Income Inequality. Between the 1970s and the early 1990s, average real wage growth slowed and income inequality widened. In recent years, however, there are some encouraging signs that the tide may be turning on these labor market challenges. In 1994 -- the most recent year for which data are available -- real median family income rose and the poverty rate fell for the first time in 5 years. Improving job quality can enhance these recent gains, although the effects may only become manifest after an extended period of time. As discussed above, most of the recent net increase in employment has occurred in occupations and industries that typically pay above-median wages. But the additions to the workforce have had only a marginal effect on aggregate wage data, since net employment growth represents only a relatively small percentage of total employment for the U.S. workforce. Nevertheless, the news about the quality of net job growth is encouraging, and bodes well for the future. Although there is still much left to be done, recent trends show that the labor market is on the right track.
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The Challenges Created by A Dynamic Labor Market
A dynamic, health labor market creates enough jobs to accommodate a growing labor force. But at the same time, jobs in a dynamic economy continually shift away from certain areas and toward other areas with greater growth opportunities. (For example, the decline in federal payrolls has been more than offset by increases in private-sector employment.) Meanwhile, research conducted by Robert Valletta and published by the Federal Reserve Bank of San Francisco concluded that, after controlling for the business cycle, the share of unemployment attributable to permanent dismissals (rather than temporary layoffs) has increased -- particularly from 1980 to 1993. A higher proportion of job losers thus do not expect to be recalled by their former employers. As a result of these labor market changes, many workers feel less secure about their job prospects.
While the anxiety felt by many workers is real and important, it is also important to take an objective look at the evidence. Not all sources demonstrate increased economic anxiety. For example, the Michigan and Conference Board surveys of consumer sentiment recently have been above their historical averages. Respondents to those surveys apparently do not view employment prospects as poor. Nevertheless, considerable evidence suggest that many Americans are concerned, some very concerned, about job displacement. In order to know how best to respond to these concerns, we need a more precise assessment of the nature of the displacement problem. Has job displacement in fact increased? Is it affecting different categories of individuals today than it did ten years ago? This section of the report examines these questions.
Evidence from the Displaced Worker Survey. The BLS conducts a survey of displaced workers every two years, with the most recent published data from February 1994. The table below summarizes the displacement rates (defined as the number of workers displaced per 100 employed) for the 1981-82 and 1991-92 periods.
The overall number of workers displaced was roughly the same proportion of the workforce in 1991-2 as in 1981-2, although the recession in the early 1980s was more severe than the one in the early 1990s. However, it is difficult to determine precisely how to account for the business cycle in assessing displacement rates. A comparison of aggregate displacement rates also conceals a fundamental change in the incidence of job displacement. The table shows that older, white-collar workers were considerably more at risk of displacement in 1991-92 than during the previous recession. And further analysis shows that job displacement rates rose for more educated workers. These changes in the incidence of job displacement may be a reason for the reports of heightened anxiety regarding job loss. Although blue-collar and less educated workers remain more likely to be displaced than others, displacement rates have clearly risen among those workers who had previously been largely immune from the threat of job dislocation.
Displacement rates for older and more educated workers, who had largely been unaccustomed to facing such risk, rose between 1981-2 and 1991-2.
Changing incidence of displacement
Displacement Rates*
1981-2 1991-2
Total 3.9 3.8
Occupations
White-collar 2.6 3.6
Blue-collar 7.3 5.2
Age
25-34 years of age 5.0 3.8
35-44 years of age 3.8 3.9
45-54 years of age 3.0 3.8
55+ 3.6 4.3
* Expressed as a percent of workers with three or more years of tenure on their current job.
Based on data from the Bureau of Labor Statistics.
Indicators of Recent Job Displacement. As noted above, the Displaced Worker survey is conducted only once every two years, and the most recent published data are from the 1994 survey, which covers the 1991-93 period. Unfortunately, the official displacement data for the period after 1993 are not yet available.6 (The results of the 1996 Displaced Worker Survey, conducted in February, should be available later this summer.) Until the official displacement data are available, other measures can be used to get an indication of how the labor market has been changing since 1993.
One indicator comes from unemployment data on job losers. Figure 5 shows the job loss rate, defined as the ratio of recently unemployed job losers -- those who are unemployed due to job loss (as opposed to job leavers or labor market entrants), unemployed less than 5 weeks, and not on temporary layoff -- to total employment in the Current Population Survey. This job loss rate roughly approximates the net "flow" into unemployment due to job loss, since it considers only those who have los their jobs recently. As shown in Figure 5, the job loss rate has continued to fall since 1992.
Official data on job displacement are not yet available beyond 1993. But based on unemployment data for job losers, the job loss rate has declined since then.
The Costs of Job Displacement. The Displaced Worker Survey provides information on the impact of job loss
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Wall Street View on Downsizing
November 14, 1996
US: Chainsaw Al, Meet Michael Porter
There seems to be no end in sight to the layoff craze of the 1990s. We have made this point repeatedly (see, most recently, "Post-Election Worker Anxiety," November 7, 1996), and now the great Al Dunlap drives the point home with ultimate clarity. After a mere four months at the helm of Sunbeam Corp., "Chainsaw Al" has unleashed a headcount reduction that will ultimately hit fully 50% of the company's current staff of 12,000 workers. The archivists of the American downsizing carnage -- the consulting firm of Challenger, Gray, and Christmas -- insist that this is the largest corporate layoff, in percentage terms, on record.
Whether or not that claim is true, the Sunbeam case underscores one of our greatest fears -- that the restructuring of Corporate America has become an end, in and of itself. Business strategies are being increasingly framed around the basic premise that downsizing is synonymous with competitive revival. The only problem with this approach, as we noted some time ago, is the encore. If headcount reductions and plant closings are all there is to the script, the end result could well be increasingly "hollower" companies that will be unable to hold on to market share in an ever-expanding global economy. In the end, a steady stream of downsizings is a recipe for industrial extinction. By contrast, improved competitive prowess ultimately requires a growth strategy. The Sunbeam case fits the hollowing script to a tee, in our view: According to press accounts, the just-announced restructuring entails an elimination of 87% of the company's existing products and the closing of 69% of its factories. Like it or not, the "new Sunbeam" will be a mere shadow of its former self.
The tough-nosed, of course, say "smell the coffee" -- in the new competitive era of the 1990s, only the lean and mean will survive. While there's undoubtedly a grain of truth to that assertion, I continue to believe that while the downsizing tactics of restructuring may be necessary in some cases, they are hardly sufficient conditions for long-term competitive prowess. Interestingly enough, the same point has recently been made by Harvard Professor Michael Porter in the current issue of the Harvard Business Revie (see "What is Strategy?"). Porter makes the important distinction between "operational effectiveness" and strategic positioning. He argues that corporate mind-sets have become increasingly focused on the former, developing a host of managerial tools -- total quality management, benchmarking, outsourcing, reengineering, time-based competition, and the like -- that are aimed largely at achieving little other than superior cost performance. Porter fears that the growing fixation on this approach leads companies to copy one another, embracing an increasingly generic set of best practices by racing headlong down a "path of mutually destructive competition." Missing in a corporate world striving for greater operational effectiveness, are strategies that are increasingly lacking in what Porter calls a "difference that can (be) preserve(d)." To paraphrase the Porter punch-line -- sustained competitive advantage comes from a unique strategic vision rather than from excellence in operational efficiency.
All right, I confess that it's easy to seek out a sympathetic voice. Porter's argument, of course, fits neatly with the position that I have also been advocating (see "The Hollow Ring of the Productivity Revival" in the same issue of the Harvard Business Review.) But don't get me wrong -- neither of us are insisting that it's time to put an end to corporate restructuring. The trick is to have a strategic vision that looks beyond restructuring. The saga of Chainsaw Al reveals what is sorely lacking in that critical respect.
Stephen Roach (Toronto), Morgan Stanley Dean Witter
The Clinton Administration is at war with itself on the hottest economic issue of the day.
By Paul Krugman
Posted Monday, June 24, 1996
The Clinton administration isn't particularly mendacious on economic matters--in fact, economic analysis and reporting under Clinton have been unusually scrupulous. But the president has changed his mind about economic policy so often that now his officials sound insincere even when they speak the plain truth.
And so I feel a bit sorry for Joseph Stiglitz, the eminent economist who chairs Clinton's Council of Economic Advisers. In April, Stiglitz released a report on the state of the American worker, more or less confirming what most independent economists had already concluded: Workers are not doing as badly as recent headlines might suggest. In particular, the impact of corporate downsizing has been greatly exaggerated.
Stiglitz's report was, to all appearances, a sincere attempt to produce a realistic picture of the American labor market. Yet it was treated by nearly all commentators as a purely political document--an election-year effort to accentuate the positive.
But the commentators had reason for their skepticism. After all, other members of the administration--especially Labor Secretary Robert Reich--have been insistently pushing a very different view. In the world according to Reich, even well-paid American workers have now joined the "anxious classes." They are liable any day to find themselves downsized out of the middle class. And even if they keep their jobs, the fear of being fired has forced them to accept stagnant or declining wages while productivity and profits soar.
Like much of what Reich says, this story is clear, compelling, brilliantly packaged, and mostly wrong. Stiglitz, by contrast, is telling the complicated truth rather than an emotionally satisfying fiction.
To understand why Reich is wrong (about this and most other things), think about the strange case of the missing children. During the early 1980s, sensationalist journalism, combining true-crime stories with garbled statistics, convinced much of the public that America is a nation where vast numbers of children are snatched from their happy families by mysterious strangers every year. TV shows about "stranger abductions" are a media staple to this day. In reality, however, such crimes are rare: about 300 per year in a nation of 260 million.
It's not that abductions never happen. They do, and they are terrible things. Nor is the point that the kids are all right: For hundreds of thousands of American children, life is sheer hell. Almost always, however, the people who victimize children are not strangers. For every child kidnapped by a stranger, at least a thousand are sexually abused by family members. But stranger abductions made good copy, and therefore became a public concern out of all proportion to their real importance.
Corporate downsizing is neither as terrible nor as rare as stranger abduction, but the two phenomena share some characteristics. Like stranger abductions, downsizing is a camera-ready tragedy, perfect for media exploitation, that is only a minor part of the real problem.
Stiglitz's report is full of dense statistical analysis making this point, but here's a quick do-it-yourself version. A February Newsweek cover story entitled "Corporate Killers" listed just about every large layoff by a major corporation over the last five years. The number of jobs eliminated by each company appeared in large type next to a photo of the CEO responsible. The article implied that it was describing a national catastrophe. But if you add up all the numbers, the total comes to 370,000. That is less than one worker in 300--a tiny blip in the number of workers who lose or change jobs every year, even in the healthiest economy. And the great majority of downsized workers do find new jobs. Although most end up making less in their new jobs than they did before, only a fraction experience the much-publicized plunge from comfortable middle class to working poor. No wonder Stiglitz found that the destruction of good jobs by greedy corporations is just not an important part of what is happening to the American worker.
The point is that Reich's style of economics--which relies on anecdotes rather than statistics, slogans rather than serious analysis--cannot do justice to the diversity and sheer size of this vast nation. In America anything that can happen, does: Strangers kidnap children; mathematicians become terrorists; executives find themselves flipping hamburgers. The important question is not whether these stories are true; it is whether they are typical. How do they fit into the big picture?
Well, the big picture looks like this: Both the number of "good jobs" and the pay that goes with those jobs are steadily rising. The workers who have the skill, talent, and luck to get these jobs generally do very well. Only a relative handful of "good job" holders (which is to say only a few hundred thousand a year) experience serious reverses. America's middle class may be anxious, but objectively, it is doing fine.
The people who are really doing badly are those who do not have good jobs and never did. Those with lousy jobs have seen their already-low wages slowly but steadily sink. In other words, the main victims of (to use another of Reich's phrases) the "new economy" are not the few thousand managers who have become hamburger flippers but the tens of millions of hamburger flippers, janitors, and so on whose real wages have been declining 1or 2 percent per year for the last two decades.
Does this distinction matter? It does if you are trying to set any sort of policy priorities. Should we, as some in the administration want, focus our attention on preserving the jobs of well-paid employees at big corporations? Should we pressure those companies to stop announcing layoffs? Should we use the tax system to penalize companies that fire workers and reward those that do not? Or, instead, should we fight tooth and nail to preserve and extend programs like the Earned Income Tax Credit that help the working poor? It is disingenuous to say we should do both: Money is scarce and so is political capital. If we focus on small problems that make headlines, we will ignore bigger problems that don't.
So let's give Joe Stiglitz some credit. No doubt his political masters allowed him to downsize the issue of downsizing at least partly because they believed that good news re-elects presidents. Sometimes, however, an economic analysis that is politically convenient also happens to be the honest truth.
Paul Krugman is a professor of economics at Stanford whose books include The Age of Diminished Expectations and Peddling Prosperity. His column, "The Dismal Scientist," will appear monthly in SLATE.
T H E W H I T E H O U S E
Job Creation & Employment Opportunities
Help Site Map Text Only
President and First Lady
Vice President and Mrs. Gore
Record of Progress
The Briefing Room
Gateway to Government
Contacting the White House
White House for Kids
White House History
White House Tours
Job Creation and Employment Opportunities:
The United States Labor Market, 1993-1996
A Report by the Council of Economic Advisers
with the U.S. Department of Labor, Office of the Chief Economist
April 23, 1996
--------------------------------------------------------------------------------
Executive Summary
Introduction
Job Creation
The Quality of Jobs
The Challenges Created by A Dynamic Labor Market
Conclusion
--------------------------------------------------------------------------------
Executive Summary
Since January 1993, employment has grown rapidly -- expanding by 8.5 million net new jobs. Based on comparable data, employment growth has been stronger in the United States than in any of our G-7 partners.
Two-thirds (68 percent) of the net growth in full-time employment between February 1994 and February 1996 occurred in industry/occupation groups paying above-median wages. Over half of the net growth occurred in the top 30 percent of job categories. Although many of these new jobs were in the service sector, they did not conform to stereotypes.
The evidence suggests that the vast majority of the net new jobs are full-time. Both the household and establishment survey suggests that the proportion of employed persons working multiple jobs has remained at about 6 percent.
The share of workers holding multiple jobs has remained roughly constant since the late 1980s. The household survey suggests that the proportion of employed persons working multiple jobs has remained at about 6 percent.
The overall number of workers displaced was roughly the same proportion of the workforce in 1991-2 as in 1981-2, although the recession during the early 1980s was more severe than the one during the early 1990s. However, it is difficult to determine precisely how to account for the business cycle in assessing displacement rates. The official data on displacement after 1993 are not yet available, but an alternative job loss measure has fallen since then.
The characteristics of displaced workers have changed somewhat. Displacement rates for older, white-collar and better educated workers have risen, although they remain low relative to those for younger, blue-collar, and less educated workers.
Despite some recent positive signs, long-term challenges remain. Between the 1970s and the early 1990s, real wages stagnated and income inequality widened. But in 1994, for the first time in 5 years, real median family income rose and the poverty rate fell. We must continue to build on these gains to improve living standards and reduce income inequality. And although many more jobs are being created than destroyed, a dynamic economy inevitably imposes costs on some workers. For example, data from 1981 to 1993 indicate that job losers were more likely to be permanently dismissed (rather than temporarily laid-off), that older workers were subject to greater risk of job displacement, and that the average real wage loss due to displacement was significant and persistent. In order to obtain the full benefits of a dynamic economy, we must redice these adjustment costs.
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Introduction
Employment growth in the United States has been robust since January 1993, with nonfarm payroll employment expanding by 8.5 million. Based on comparable data, U.S. employment growth has been stronger than in any of our G-7 partners. The first purpose of this study is to sift through the evidence to develop a more detailed picture of where the job growth is occurring and the nature of the jobs being created.
The news is encouraging: employment has grown disproportionately in the industry/occupation job categories paying above-median wages. Even in the traditionally lower-paying service industry, a majority of the net employment growth has been managerial and professional specialty positions, which typically pay above-median wages. Contrary to conventional wisdom, the new jobs are not disproportionately part-time, low-skill positions.
The second purpose of the study is to examine job displacement. Although the economy is generating millions of net new jobs, it is clear that the speed of transformation in the U.S. labor market has left many American workers anxious about their economic futures. A dynamic and growing labor market can impose costs as well as offer opportunities, and policies to help workers deal with job transitions are critical to reducing these adjustment costs.
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Job Creation
According to the Bureau of Labor Statistics establishment survey, nonfarm employment grew by 8.5 million (7.8 percent) between January 1993 and March 1996. Private-sector payrolls (up 8.7 percent) grew even faster, while federal payrolls (excluding the postal service) actually declined by 11.4 percent, and state and local government payrolls combined grew by on 5.0 percent (see Figure 1). The public sector's share of employment is therefore falling.
The unemployment rate has fallen from over 7 percent in January 1993 to 5.6 percent in March 1996, and has been below 6 percent for 19 consecutive months. Given current demographic trends, the Bureau of Labor Statistics projects the labor force to continue growing by approximately 1.1 percent annually between 1994 and 2005. Therefore, to keep unemployment low, the economy needs to average a net increase of about 120,000 new jobs per month. Employment is now expanding at a pace consistent with steady, sustainable growth and low unemployment.
International Comparisons. The United States has experienced faster employment growth than any of the other G-7 countries. Only Canada has experienced any significant employment growth, while the other G-7 members have experienced negligible job gains or outright declines. The U.S. labor market performance is particularly impressive given that it has occurred during a period in which the federal budget deficit was reduced from 4.9 percent of GDP in FY 1992 to an estimated 1.9 percent in FY 1996.
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The Quality of Jobs
According to data from the Current Population Survey, 38 percent of the net employment growth between February 1994 and February 1996 occurred in "service" industries.1 This section therefore first examines job quality in the service sector. It then presents a more detailed analysis of all sectors of the economy.
Higher-paid Jobs in the Service Sector. The "service sector" is quite diverse. It includes many low-wage positions, but also many high-wage positions in financial services, hospitals, and computer and accounting services. For this reason, it is important to determine whether employment growth within services has occurred primarily in the high-skill managerial and professional specialty occupations or in low-paying occupations. The Current Population Survey provides evidence on employment growth by occupation.
The data show that recent net job growth in services has been predominantly in managerial or professional specialty positions (Figure 2). These are relatively high-paid occupations.
Thus, the conventional wisdom suggesting that the growth in service sector employment is disproportionately concentrated in low-wage job categories is wrong. v
Growth of Higher-paid Jobs by Industry and Occupation. An even more detailed picture of the nature of the new jobs created emerges from an examination of industry/occupation categories. Using data from the February 1994 and February 1996 Current Population Surveys, we sorted full-time workers into 45 detailed occupations in 22 major industries. A quarter of the sample reported earnings in addition to the industries and occupations in which they worked. Although many of the possible 990 industry/occupation cells were small, only 6 percent of the population-weighted sample was found in cells with 10 or fewer sample members reporting earnings data for both surveys. In order to avoid the high sampling variability associated with insufficient numbers of observations, we eliminated these small cells from our analysis. There were 287 job categories in each year after eliminating the cells with 10 or fewer sample members.2
The first step in our analysis was to rank the 287 occupation/industry cells by the median weekly earnings of full-time workers. Approximately half of all full-time employment in February 1994 was found in cells with median weekly earnings above $480 (in February 1996 dollars). The employment growth in these "high-wage" job categories can then be compared to overall employment growth. Our key measure of job quality is the percentage of total employment growth that occurred within the occupation and industry categories that paid above-median wages in February 1994. The results were striking.
Two-thirds (68 percent) of the net growth in full-time employment between February 1994 and February 1996 was found in job categories paying above-median wages.3
Another way to summarize the results from our industry/occupation analysis is shown in Figure 3. Here we ranked the 287 industry/occupation categories by their median weekly earnings for full-time workers, and sorted them into 10 ordered groupings -- each with 10 percent of employment in February 1994 -- by their earnings ranking. If all 10 groups had grown proportionately to their share of employment in February 1994, each would have accounted for 10 percent of the net new employment. But rather than accounting for their proportional share of total employment growth (30 percent), the top three deciles accounted for much more (over 50 percent).
Over half (52 percent) of employment growth was found in the top 30 percent of job categories.
More Detailed Data on Occupations. The Bureau of Labor Statistics also publishes an annual series on wages and employment growth for an extremely detailed set of occupational categories, based on pooling a year's population survey responses. The survey included 488 categories with data for both 1994 and 1995 (the 1996 annual estimates will not be available until next year). The results from this data set give additional support to the results reported above. Some of the categories with the largest employment gains included "sales supervisors and proprietors," "electricians," "managers of marketing and advertising," and "electrical and electronic engineers." And consistent with the above calculations, the detailed occupations in the top half of the wage distribution accounted for 70 percent of the net employment growth, while the top 10 percent of the distribution produced a third of net employment growth.
Employment in "hamburger-flipping jobs"4 actually fell between 1994 and 1995.
In sum, the data indicate the following about the nature of recent job growth:
Two-thirds of full-time job growth between February 1994 and February 1996 occurred in occupation/industry categories paying above-median wages.
Over half of full-time job growth between February 1994 and February 1996 was in occupation/industry categories paying even higher wages (top 30 percent).
The New Jobs are Mostly Full-Time. Data from both the Current Population Survey and the BLS establishment survey indicate that most of the net new jobs are full-time. The Current Population Survey includes data on part-time employment. Figure 4 portrays the proportion of employed persons reporting that they worked part-time for "economic" as well as "non-economic" reasons. Despite a shift in both series corresponding to a redesign of the survey in January 1994, the proportion of employed persons reporting to be employed part-time has actually declined slightly. The declines have been even larger for those working part-time for "economic" reasons, often referred to as the "involuntarily underemployed."
The establishment data indirectly support the conclusions from the household survey. If the net new jobs were disproportionately part-time, we would expect average hours worked per job to fall.5 But the employment data show that average hours worked for all jobs (including the new jobs) remained roughly constant: the number of nonfarm payroll positions and the total number of hours worked both grew at about the same rate over the past three years (see table). This suggests that the new jobs have not been disproportionately part-time.
Data collected from both households and companies indicate that most of the net job creation over the past three years has been full-time.
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Employment and Hours Worked at Nonfarm Establishments
January
1993 March
1996 Percent
Change
Employment millions 109.5 118.0 7.8
Hours worked (annual basis, billions) 202.2 217.8 7.7
Based on data from the Bureau of Labor Statistics.
Little Change in Multiple Job Holding. Some Americans decide to hold more than one job, in order to save for a house or to meet unexpected expenses. Nonetheless, multiple job holding would raise concerns about the quality of jobs if an increasing number of Americans have to work two or three jobs to make ends meet. A frustrated worker is said to have reacted to the news that 8.5 million new jobs have been created by replying, "Yeah, and I have three of them." But the data simply do not indicate any significant movement in multiple job holding. The percentage of employed persons working multiple jobs has remained in the neighborhood of 6 percent since the late 1980s.
Impact on Wages and Income Inequality. Between the 1970s and the early 1990s, average real wage growth slowed and income inequality widened. In recent years, however, there are some encouraging signs that the tide may be turning on these labor market challenges. In 1994 -- the most recent year for which data are available -- real median family income rose and the poverty rate fell for the first time in 5 years. Improving job quality can enhance these recent gains, although the effects may only become manifest after an extended period of time. As discussed above, most of the recent net increase in employment has occurred in occupations and industries that typically pay above-median wages. But the additions to the workforce have had only a marginal effect on aggregate wage data, since net employment growth represents only a relatively small percentage of total employment for the U.S. workforce. Nevertheless, the news about the quality of net job growth is encouraging, and bodes well for the future. Although there is still much left to be done, recent trends show that the labor market is on the right track.
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The Challenges Created by A Dynamic Labor Market
A dynamic, health labor market creates enough jobs to accommodate a growing labor force. But at the same time, jobs in a dynamic economy continually shift away from certain areas and toward other areas with greater growth opportunities. (For example, the decline in federal payrolls has been more than offset by increases in private-sector employment.) Meanwhile, research conducted by Robert Valletta and published by the Federal Reserve Bank of San Francisco concluded that, after controlling for the business cycle, the share of unemployment attributable to permanent dismissals (rather than temporary layoffs) has increased -- particularly from 1980 to 1993. A higher proportion of job losers thus do not expect to be recalled by their former employers. As a result of these labor market changes, many workers feel less secure about their job prospects.
While the anxiety felt by many workers is real and important, it is also important to take an objective look at the evidence. Not all sources demonstrate increased economic anxiety. For example, the Michigan and Conference Board surveys of consumer sentiment recently have been above their historical averages. Respondents to those surveys apparently do not view employment prospects as poor. Nevertheless, considerable evidence suggest that many Americans are concerned, some very concerned, about job displacement. In order to know how best to respond to these concerns, we need a more precise assessment of the nature of the displacement problem. Has job displacement in fact increased? Is it affecting different categories of individuals today than it did ten years ago? This section of the report examines these questions.
Evidence from the Displaced Worker Survey. The BLS conducts a survey of displaced workers every two years, with the most recent published data from February 1994. The table below summarizes the displacement rates (defined as the number of workers displaced per 100 employed) for the 1981-82 and 1991-92 periods.
The overall number of workers displaced was roughly the same proportion of the workforce in 1991-2 as in 1981-2, although the recession in the early 1980s was more severe than the one in the early 1990s. However, it is difficult to determine precisely how to account for the business cycle in assessing displacement rates. A comparison of aggregate displacement rates also conceals a fundamental change in the incidence of job displacement. The table shows that older, white-collar workers were considerably more at risk of displacement in 1991-92 than during the previous recession. And further analysis shows that job displacement rates rose for more educated workers. These changes in the incidence of job displacement may be a reason for the reports of heightened anxiety regarding job loss. Although blue-collar and less educated workers remain more likely to be displaced than others, displacement rates have clearly risen among those workers who had previously been largely immune from the threat of job dislocation.
Displacement rates for older and more educated workers, who had largely been unaccustomed to facing such risk, rose between 1981-2 and 1991-2.
Changing incidence of displacement
Displacement Rates*
1981-2 1991-2
Total 3.9 3.8
Occupations
White-collar 2.6 3.6
Blue-collar 7.3 5.2
Age
25-34 years of age 5.0 3.8
35-44 years of age 3.8 3.9
45-54 years of age 3.0 3.8
55+ 3.6 4.3
* Expressed as a percent of workers with three or more years of tenure on their current job.
Based on data from the Bureau of Labor Statistics.
Indicators of Recent Job Displacement. As noted above, the Displaced Worker survey is conducted only once every two years, and the most recent published data are from the 1994 survey, which covers the 1991-93 period. Unfortunately, the official displacement data for the period after 1993 are not yet available.6 (The results of the 1996 Displaced Worker Survey, conducted in February, should be available later this summer.) Until the official displacement data are available, other measures can be used to get an indication of how the labor market has been changing since 1993.
One indicator comes from unemployment data on job losers. Figure 5 shows the job loss rate, defined as the ratio of recently unemployed job losers -- those who are unemployed due to job loss (as opposed to job leavers or labor market entrants), unemployed less than 5 weeks, and not on temporary layoff -- to total employment in the Current Population Survey. This job loss rate roughly approximates the net "flow" into unemployment due to job loss, since it considers only those who have los their jobs recently. As shown in Figure 5, the job loss rate has continued to fall since 1992.
Official data on job displacement are not yet available beyond 1993. But based on unemployment data for job losers, the job loss rate has declined since then.
The Costs of Job Displacement. The Displaced Worker Survey provides information on the impact of job loss
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Wall Street View on Downsizing
November 14, 1996
US: Chainsaw Al, Meet Michael Porter
There seems to be no end in sight to the layoff craze of the 1990s. We have made this point repeatedly (see, most recently, "Post-Election Worker Anxiety," November 7, 1996), and now the great Al Dunlap drives the point home with ultimate clarity. After a mere four months at the helm of Sunbeam Corp., "Chainsaw Al" has unleashed a headcount reduction that will ultimately hit fully 50% of the company's current staff of 12,000 workers. The archivists of the American downsizing carnage -- the consulting firm of Challenger, Gray, and Christmas -- insist that this is the largest corporate layoff, in percentage terms, on record.
Whether or not that claim is true, the Sunbeam case underscores one of our greatest fears -- that the restructuring of Corporate America has become an end, in and of itself. Business strategies are being increasingly framed around the basic premise that downsizing is synonymous with competitive revival. The only problem with this approach, as we noted some time ago, is the encore. If headcount reductions and plant closings are all there is to the script, the end result could well be increasingly "hollower" companies that will be unable to hold on to market share in an ever-expanding global economy. In the end, a steady stream of downsizings is a recipe for industrial extinction. By contrast, improved competitive prowess ultimately requires a growth strategy. The Sunbeam case fits the hollowing script to a tee, in our view: According to press accounts, the just-announced restructuring entails an elimination of 87% of the company's existing products and the closing of 69% of its factories. Like it or not, the "new Sunbeam" will be a mere shadow of its former self.
The tough-nosed, of course, say "smell the coffee" -- in the new competitive era of the 1990s, only the lean and mean will survive. While there's undoubtedly a grain of truth to that assertion, I continue to believe that while the downsizing tactics of restructuring may be necessary in some cases, they are hardly sufficient conditions for long-term competitive prowess. Interestingly enough, the same point has recently been made by Harvard Professor Michael Porter in the current issue of the Harvard Business Revie (see "What is Strategy?"). Porter makes the important distinction between "operational effectiveness" and strategic positioning. He argues that corporate mind-sets have become increasingly focused on the former, developing a host of managerial tools -- total quality management, benchmarking, outsourcing, reengineering, time-based competition, and the like -- that are aimed largely at achieving little other than superior cost performance. Porter fears that the growing fixation on this approach leads companies to copy one another, embracing an increasingly generic set of best practices by racing headlong down a "path of mutually destructive competition." Missing in a corporate world striving for greater operational effectiveness, are strategies that are increasingly lacking in what Porter calls a "difference that can (be) preserve(d)." To paraphrase the Porter punch-line -- sustained competitive advantage comes from a unique strategic vision rather than from excellence in operational efficiency.
All right, I confess that it's easy to seek out a sympathetic voice. Porter's argument, of course, fits neatly with the position that I have also been advocating (see "The Hollow Ring of the Productivity Revival" in the same issue of the Harvard Business Review.) But don't get me wrong -- neither of us are insisting that it's time to put an end to corporate restructuring. The trick is to have a strategic vision that looks beyond restructuring. The saga of Chainsaw Al reveals what is sorely lacking in that critical respect.
Stephen Roach (Toronto), Morgan Stanley Dean Witter
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