Paid for by NDN.
Why Sustainable Growth Isn’t Producing More Jobs and Wages Gains
by Robert Shapiro, Director, NDN Globalization Initiative
October 30, 2006
Remarks delivered to Back to the Economy: Confronting America’s Growth Challenges, a conference organized by the New America Foundation, October 30th, 2006. The remarks were delivered to a panel session entitled “Averting the Next Recession: “Putting the Economy on a Sustainable Growth Path.”
I’m going to take some license here and begin by questioning the question. For the past generation and especially today, the macroeconomic issue that should concern economists and most Americans is not a recession, but the character of our expansions. The last serious U.S. downturn occurred almost 25 years ago in 1981-1982. Since then, we’ve seen unusually long and strong economic recoveries, especially in terms of GDP and productivity growth, punctuated by fairly brief and shallow recessions. The most recent downturn in 2001 was the shortest and mildest of the last century.
Even so, the current recovery is even more different than most expansions. By historical standards, overall growth since 2002 has been healthy, and productivity gains extraordinarily strong. Yet the economic conditions of most people more closely resemble a downturn than a solid expansion. The data show that two of the economy’s most basic relationships are changing -- the connections between how much output expands and how many jobs we create, and between how much productivity increases and how much wages rise.
The 2001 recession cost the U.S. economy just one-half of one percent of GDP; by historical standards, that should have cost us about 500,000 jobs. Instead, we shed 3 million jobs in that recession and the early years of the expansion. Similarly, after the previous downturn, it took 18 months to return to pre-recession job levels; this time, it took 52 months. And five years into this expansion, American businesses are still creating jobs at about half the rate of the comparable point in the 1990s expansion.
Furthermore, while the last four years have seen the largest productivity gains since at least the 1960s, averaging about 3 percent a year, real median wages haven’t risen at all. Nor has the total compensation of an average worker, adjusted for inflation.
It’s hard to overstate the importance of these changes. The historical link between growth and job creation is the political basis for aggregate demand policies. Based on these data, we can no longer claim that by expanding demand and thereby raising output, we ensure that business will create jobs. Similarly, the historical link between productivity gains and wage increases provides the political basis for investment incentives. Here, too, we can no longer claim that by reducing the cost of business investment and thereby increasing the capital at the disposal of an average worker, we ensure that wages will rise.
Both of these relationships rest on how our labor markets work. Yet, those markets haven’t changed in any significant way in the last five years. What is changing, and radically so, is our relationship to the global economy. Since the early 1990s, the share of global output traded between countries has soared from about 18 percent to almost 30 percent. The single most important reason is China, whose exports have grown ten times over that period. From being a minor player in global trade, China has become the number one or number two trading partner of not only the United States, but also Japan, the European Union, the Asian Tigers, and the major Latin American economies.
This is about globalization, but not about offshore outsourcing. The number of people employed by U.S. multinationals in other countries hasn’t increased since 2001. Even though almost half of our imports from China are produced by the Chinese subsidiaries or affiliates of American companies, China’s ascendancy hasn’t cost Americans jobs, at least not directly. Rather, it costs jobs in Thailand, Malaysia, Mexico and other developing countries where American firms outsourced in the 1980s and 1990s.
And that’s the critical clue to what’s going on today with our jobs and wages. China’s exports overwhelm those produced in other developing nations, especially by their native companies. As that competition drives some of those companies out of business, capital and expertise in places like Malaysia, Thailand, Ecuador and Egypt have been shifting out of companies that compete directly with China and into other, generally higher-value industries. This globalizing process doesn’t stop there. As the additional capital and expertise make those higher-value producing companies more competitive, they exert new pressures on their rivals in other, more advanced developing nations, such as Korea, Taiwan and Brazil. The same process is repeated there, with capital and expertise from some of those companies shifting to other, again generally high-value, industries. This historic process begins with new Chinese competition in not just a few sectors, but hundreds. The results, transmitted through scores of national markets, are an overall increase in the intensity of competition everywhere.
Eventually, these pressures reach the United States, where they can’t be transmitted to anywhere else. Here, more intense competition has a different effect: It reduces the pricing leverage of firms. This process makes it harder for businesses to raise their prices, which is why inflation remained so low until the recent oil price shocks. But what happens when a firm’s costs rise and it can’t raise its prices to take full account of it – as we’ve seen in recent years in the huge increases in health care, energy and pension costs? What happens is that firms find other costs to cut – starting with jobs and wages.
The American economy does a lot of things right, especially compared to other advanced countries. From 1990 to 2005, for example, U.S. companies’ share of the world market in high-tech manufacturing rose from about 26 percent to nearly 40 percent. Now we have to get this right, too. If we want to restore the traditional connections between growth and jobs and between productivity and wages -- knowing that reducing the intensity of global competition isn’t an option, even if we wanted to – we have to ease some of the cost pressures on U.S. businesses. To spur stronger job creation and wage gains, it’s time to swallow hard and put in place new national programs that can slow the rising costs of health care, pensions and energy for U.S. businesses and all Americans.
Robert J. Shapiro, Under Secretary of Commerce in the Clinton administration, is chairman of Sonecon, LLC, an economic advisory firm in Washington, D.C. He also chairs the Globalization Project for the New Democrat Network.
