Unemployment: A Brighter Picture
Dec. 9, 1998

Judging by reports in the media, the news on the job front is decidedly alarming. Accounts of layoffs predominate. Consider, for instance, the recently-announced merger of Exxon and Mobil. With two of the largest oil companies about to be rolled into one,j several jobs are at risk: Why have two accountants when you can make do with one? Or have two gas stations in the same neighborhood when shutting down one will result in cost savings?

The oil industry is not the only one to undergo wrenching changes. A principal culprit for oil's woes is the Asian crisis which now has also brought the aircraft behemoth, Boeing, to its knees. With orders drying up from the hitherto fast-growing region, Boeing has announced that its labor force is going to be reduced sharply - by 2001, about 48,000 workers will be laid off.

Not that Asia shoulders the blame for all that is going wrong. It is primarily a lethargic domestic market for breakfast foods that forced cereal maker Kellogg to take the unpalatable step of laying off about 700 workers.

With such dismal accounts grabbing the headlines, one would suspect that the Labor Department's employment report for November would only serve to deepen the gloom. Yet, when the report was released on December 4th, Clinton's economic advisors reportedly celebrated "with loud whoops and an exuberant, if brief, dance."

Now economists are not usually given to such emotion. Hardened as we are by years of joyless training, we tend to eschew wanton displays of elation, embracing instead an inscrutability exemplified by Al Gore's rendition of the macarena at the last Democratic convention.

So what was in the employment report that provoked the celebration in the White House?

Evidence of a vigorous labor market.

In November, the report stated, the economy added more than 260,000 new jobs bringing the unemployment rate to a startlingly low 4.4%. Down from 4.6% in October, and flirting with a 28-year low of 4.3%, the current figure suggests that the much-feared economic slowdown in the U.S. has not yet arrived.

The economy's gross domestic product continues to grow robustly - thanks to brisk consumer spending. Low interest rates and a resurgent stock market have served to augment household wealth, and households have responded by loosening their purse-strings.

But the report also contained some disquieting numbers. The manufacturing sector, which has borne the brunt of the Asian economic crisis, has been shedding jobs - last month, 47,000 jobs were lost. If Asia revives - and there are indications that South Korea and Thailand are on the mend - rising exports to the region will provide the domestic manufacturing sector a boost.

The decline in manufacturing employment is not a recent phenomenon. In the early 1960s, workers in manufacturing accounted for 45% of all private-sector jobs; now, the corresponding figure is 25%.

Why this long-term decline? And, does it bode ill for the future?

As countries grow and their citizens become richer, the demand for manufacturing goods wanes, to be replaced by a rising demand for services - education, health care, vacations and the like. Accordingly, the majority of new jobs is created in the service sector while the manufacturing sector (and for that matter, agriculture) experience declines in employment. The fact that fewer workers are employed in factories, therefore, merely reflects the underlying changes in the consumption patterns of the population.

As far as the ramifications for the future are concerned, the outlook is not as bleak as is sometimes thought. Firstly, the fear that manufacturing jobs are being replaced by less-lucrative service sector jobs is largely unfounded. Look at the industries where employment growth has been robust - computers, medicine, management, consulting, education, law. Employees in these areas hardly fit the profile of the hamburger-flipper, an image that appears to be indelibly linked to the service sector.

Secondly, the loss in manufacturing jobs does not imply that manufacturing output has fallen. Far from it. In the last 35 years, industrial production has risen threefold. This at a time when the sector's share of employment was falling!

How is this possible?

Through gains in labor productivity. An American worker today is far more productive (in terms of output per worker) than his counterpart of the 60s. Better education, more machines, sounder management techniques - all have contributed to the rise in labor productivity enabling manufacturing output to expand while employment in the sector fell.

And that perhaps may be the best news of all. Workers' real wages (i.e. wages adjusted for inflation) are determined by their productivity. As labor productivity rises, so do workers' real wages - which, in turn, allows them to enjoy a higher standard of living.

We may yet hear more whoops of delight from the White House.

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