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Is the job market broken?
Economists struggle with hiring forecasts; some say globalization makes all the difference.
February 9, 2004: 2:17 PM EST
By Mark Gongloff, CNN/Money staff writer

NEW YORK (CNN/Money) - Confounded by sluggish job growth, some economists are starting to suggest that underlying changes in the labor market -- including globalization -- mean it may be time to throw out the old forecasting models.

If they're wrong, then the current labor market could look a lot like that of the early 1990s -- a "jobless recovery" followed by a job boom. If they're right, then the next job boom could be a long time coming.

Before the Labor Department issued its report on January payrolls Friday, most economists had been forecasting a number north of 150,000. Some estimates went as high as 300,000. The average of 25 forecasts, according to a Reuters poll, was 165,000.

Those forecasts were wrong -- only 112,000 new jobs were created.

The shortfall was nothing new, however -- economists' forecasts for payroll growth have been overly optimistic in 11 out of the past 14 months. In five of those months, predictions for payroll growth have been met with reports of actual job cuts.

Economists' forecasts for January stemmed from very strong economic growth in last year's second half, surveys showing CEOs had stopped firing and were getting ready to hire, and -- most critically -- a drop in new weekly jobless claims to the lowest level in three years.

Those reports had made it quite clear that the worst of the job-cutting had ended, which often means hiring is right around the corner. Not this time.

"Traditionally, we have had some connection between the amount of firing and the amount of hiring in the economy. That linkage has broken as productivity gains have taken hold and firms have become more cautious overall," said Drew Matus, senior economist at Lehman Brothers.

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Lehman economists got their call for January payrolls just about right. They took what the old models told them would happen, then adjusted for recent strong gains in productivity and other factors discouraging companies from hiring, including higher health-care costs and very little ability to raise prices.

As any economist will tell you, productivity -- which measures how much work employers squeeze out of employees -- is a wonderful thing, leading eventually to higher employment and income.

But in the short run it can make the job market weak, especially when many businesses are doing everything they can to cut costs. That includes moving many higher-skilled jobs -- including information technology, health care, architecture, financial services and more -- overseas.

 

Most economists still believe that, sometime this year, demand will be strong enough to overwhelm companies' ability to keep production running smoothly with their current roster of workers -- both overseas and domestic -- and hiring will strengthen.

"The gap between rapid growth and subdued employment is a familiar story reflecting a possible 'once in a lifetime' surge in productivity," Citigroup chief economist Robert DiClemente wrote in a note to clients Friday. "These patterns ought to normalize somewhat in the months ahead," resulting in "stronger hiring" and faster wage growth, he added.

Good times around the corner?

Some economists believe the current labor market is similar to that of the early 1990s. An August 2003 study by New York Federal Reserve economists suggested that the last two post-recession job recoveries have been weaker than usual because the labor market has changed.

The Fed study, by economists Erica Groshen and Simon Potter, suggested that most of the layoffs in the last two recessions were not temporary, as in past recessions, but permanent. Since finding a new job is a lot harder than simply being rehired by the factory when business picks up, people have stayed unemployed for longer.

What's more, many businesses may have over-hired during the late 1990s, the study said. The latest recession and prolonged profit slump convinced many CEOs that running lean and mean was the way to go, leading to a replacement of U.S. workers with machines and offshore labor.

But that study also suggested that better times could be right around the corner -- after all, the "jobless recovery" of the early 1990s was eventually followed by a job boom.

"The parallels between the two most recent recoveries raise hopes that the current recovery will ultimately follow the same course as its predecessor," the study said. "After about eighteen months, the 1991-92 recovery ushered in very strong employment growth and the longest economic expansion of the postwar period."

President Bush certainly hopes so -- the early-1990s jobless recovery cost his father the presidency, and he likely doesn't care to see history repeat.

The White House said Monday it expects 2.6 million new jobs in 2004, but the administration has also had trouble forecasting job growth -- in early 2003, it promised that tax cuts would create an average of 306,000 new jobs each month, starting in July 2003. That forecast, obviously, was incorrect.

'Global labor arbitrage'

In fact, the current "jobless recovery" has been much worse than the last one. Some 2.35 million jobs have disappeared since the job market peaked in March 2001, 34 months ago. That long after the labor-market's peak in June 1990, about 400,000 jobs had been added.

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Some economists believe globalization, technology and stagnant prices have conspired to make today's economy a great deal different than even that of the early 1990s, making it easier -- even critical, in fact -- for businesses to move work overseas, where workers' skills are growing at a fast clip.

"This is really the first post-NAFTA, post-WTO economic recovery we've ever had in this country," said Wachovia Securities chief economist John Silvia. "Because of the globalization of the labor market, the relationship between economic growth and employment is different this time than it has been in the past."

In other words, he said, "the models are permanently broken."

Like most other economists, Silvia doubts the solution is to cancel trade agreements such as NAFTA. Instead, a better policy response could be to better educate workers so they can get higher-paying jobs when their current jobs move overseas.

But Morgan Stanley chief economist Stephen Roach warned in a note Monday that U.S. workers may already be behind in educating themselves. He cited statistics showing the number of Asians getting science and engineering degrees has jumped more than 50 percent in the past two decades while the number of Americans getting similar degrees has been stagnant.

"The United States has long drawn comfort from the quality differential of its educational system," Roach wrote. "However, in the Internet Age with its ubiquitous diffusion of knowledge, innovation, and technological change, that may turn out to be an increasingly false sense of security."  Top of page




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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.