FIXING THE ECONOMY WHERE WILL THE JOBS COME FROM? Big companies are destroying them, small firms aren't hatching them, and wages are falling. Both candidates agree that the solution is better schools and more training.
By Ronald Henkoff REPORTER ASSOCIATE James Rank

(FORTUNE Magazine) – JOBS, JOBS, JOBS! That percussive sound bite uttered by George Bush as the reason for his ill-fated trip to Tokyo has become the watchword of America's anxiety about its economic future. The giant companies -- IBM, Sears, General Motors -- are destroying jobs by the tens of thousands, and small firms, not long ago the engine of so much employment growth, have stalled out or slipped into reverse. In an era of rapid global, financial, and technological tumult, there's only one certainty: change. Workers are increasingly likely to be called upon to change not just jobs but also their very careers several times throughout their working lives. The promising positions of the future will require knowledge, the ability to communicate, technological skills, and flexibility. Yet America's primary and secondary schools continue to produce young adults ill-equipped to perform even basic educational and occupational tasks. And most American employers do not consider worker training to be a corporate imperative. With Germany, Japan, and other countries running circles around the U.S. in education and training, and with the likes of Thailand, China, and Mexico underbidding us on wages, one question looms largest for the U.S.: What are we -- as individuals and as a nation -- going to do for a living? Hold on, you say. Isn't this sluggish recovery just another, if slightly attenuated, turn of the business cycle, one of those periods of consolidation where the excesses of the prior boom -- inflation, debt, speculation, overexpansion -- get wrung out? After all, the unemployment rate, which has risen from 5.2% to 7.6% since President Bush took office, doesn't look all that high in historical terms. In the 1982 recession, for example, it topped out at 10.7%. But remember, while we are technically in a recovery -- 16 months into it, in fact -- 9.7 million Americans are still out of work. Employers have replaced only 18% of the jobs that were lost in the recession. In every other recovery since World War II, the economy had by this point regenerated all the lost slots and more. In this tepid upswing, the only industry that is vigorously creating good, high-paying jobs is the one that is bleeding the rest of us dry -- health care. In fact, much of the turmoil in the labor market has nothing at all to do with the business cycle. Employment in America is changing. Permanently. Even the President, after promising for months that GNP growth would boost employment, has finally begun to acknowledge that there are ''profound changes at work in our economy.'' The end of the Cold War is shrinking the defense industry. High-wage, low- skill factory jobs -- once a main ticket into America's middle class -- continue to migrate overseas, where they become low-wage, low-skill jobs. The North American Free Trade Agreement, if ratified, will intensify that trend, though by increasing orders for machines, technology, and chemicals, it could add to high-wage job growth. Even office jobs, long insulated from foreign competition, are under attack. By dint of high-speed telecommunications, insurance claims or magazine subscription orders that were once processed by American workers can now be handled, at lower cost, by clerks in Ireland, India, or Barbados. Says Roberts Jones, Assistant Secretary of Labor for employment and training: ''There are a substantial number of layoffs that are not recession-related. The American economy is restructuring and retooling itself.'' Is the right word ''restructuring'' -- or ''retrenching''? Despite all you've heard about total quality management, empowerment, teamwork, and all the other ingredients of the ''high-performance workplace,'' only a handful of companies -- such as Motorola, Xerox, and Corning -- seem to be moving in that direction. Most employers still do things the old-fashioned way, with hierarchical management, strict boundaries between departments, and an assembly-line style of production that depends on repetitive, undemanding jobs. Anthony Carnevale, chief economist at the American Society for Training and Development, estimates that only 13% of American companies (employing a mere 2% of the labor force) have actually created a high-performance workplace. Says he: ''Every employer talks about having a flexible work force. But for many employees flexibility is just a euphemism for getting fired or for having a job with no benefits.'' Downsizing has hit the once relatively secure world of white-collar work especially hard. Banks, insurance companies, department stores, advertising agencies, and airlines are cutting middle managers, loan officers, and salesmen. According to the Bureau of Labor Statistics (BLS), white-collar workers account for 41% of the people who have become unemployed since the start of the recession -- the highest proportion on record. All this ''displacement'' -- the politically correct euphemism for the axing of people -- may boost productivity tomorrow, but it is casting a dark shadow of pain across the nation today. The old social contract -- we'll give you a job for life, an annual pay increase, and a package of benefits if you show up on time, work hard, and do what you're told -- is long gone. Instead, employers are moving increasingly toward a brutally utilitarian concept known as core staffing. The company retains a shrinking nucleus of permanent employees and farms the rest of the work out to temps, part-timers, consultants, and suppliers. Core staffing has forced a huge number of workers to trade down to lower- paying jobs. The BLS recently studied the 5.1 million full-time workers on the job for at least three years who became unemployed between January 1987 and January 1992. Only 2.7 million of these pink-slipped workers found new full-time jobs, and nearly half that group had to take a cut in pay. How bad are things out there? Says Lan Patterson, part-owner of a temporary employment agency in Cleveland: ''I see people with master's degrees who are willing to work for $12 to $13 an hour -- and that's without benefits.'' Contrast core staffing with the notion of lifetime employment in Japan. The relationship between corporation and worker often begins when a youngster is still in school. According to Thinking for a Living by Ray Marshall and Marc Tucker, Japanese companies treat schools as they do other important suppliers. They cultivate teachers and encourage the production of the best-quality products. How? By offering jobs to those academically talented students the teachers recommend. The company then invests heavily in training its new recruit, usually in a yearlong indoctrination process that binds employee to employer. Lester Thurow, the dean of MIT's Sloan School of Management, in his book Head to Head says that the worker turnover rate (which includes people who quit or are fired) in Japan is 3.5% per year. In the U.S., it is 4% a month. The American unemployed are not the only ones suffering. Wage earners are making less. For production and nonsupervisory workers -- some 80% of all employees -- average weekly earnings, in constant dollar terms, have fallen 3.5%, to $353.41, since Bush took office, according to an analysis by the Economic Policy Institute. Those households that have managed to keep a few steps ahead of inflation have often done so by sending another wage earner -- usually the wife -- off to work. But even two-paycheck families are struggling now. According to the Census Bureau, median household income tumbled 3.5%, to $30,126, last year, the second consecutive annual decrease. Reversing these trends won't be easy. Politicians still believe in bold- stroke job creation, exemplified by President Bush's recent approval of the sale to Taiwan of as many as 150 new F-16 fighter planes. The manufacturer, General Dynamics, estimates that the sale would save 11,000 American jobs per year during the peak years of production, 1995-1999. THE REALITY of job creation is even more complex. That's because it does not occur primarily in huge companies like General Dynamics but across a diverse universe of medium-size and small enterprises.

David Birch, president of Cognetics, an economic research firm based in Cambridge, Massachusetts, has identified some 500,000 mid-size companies that are taking on workers. His research is based on the quarterly Dun & Bradstreet credit reports of 11 million businesses. The expanding firms -- Birch calls them gazelles -- have prospered more by ingenuity than by invention. Sandlapper Fabrics of Danbury, Connecticut, for example, exploited a niche in the market by producing small batches of material for clothing manufacturers. Its payroll has increased from 20 to 120 since 1987. Companies with fewer than 20 employees spawned 47% of all new jobs from 1976 to 1990, according to the Small Business Administration. But the small fry aren't creating jobs the way they used to. When the National Federation of Independent Business surveyed its members in August, it found that only 12% planned to hire anybody in the next six months and that another 12% planned to fire somebody. Says Birch: ''Over the last two or three years, very small companies have taken a tremendous beating.'' Why? Because most of these pint-size businesses aren't run by rocket scientists who have invented the latest breakthrough in fiber optics in their basements. More typically, says Birch, who has studied small-business behavior since the 1970s, they consist of homebuilders, dry cleaners, and hairdressers -- all vulnerable to trends in consumer spending. In fact, even in good times, small companies aren't the thousand points of might that politicians and pundits sometimes make them out to be. The jobs they create tend to come with low pay, few or no benefits, no formal training, and little or no security. Just over half of all people working at companies with 25 or fewer employees, for example, have any employer-provided health care coverage, according to the Employee Benefits Research Institute. Perhaps the biggest impediment to job creation at companies of all sizes is government. Unemployment insurance and worker's compensation, combined with federal Social Security taxes, can add 25% to the cost of taking on a new worker. Listen to Brad Roller, president of Swiger Coil Systems, a thriving Cleveland-based manufacturer of electric motor coils and subway equipment. Roller has 98 workers on his payroll, but despite the steady growth in his business, he is reluctant to add more. Says he: ''You get penalized for hiring people. You have no incentive to add full-time employees. You have an incentive to hire temps.'' After all, companies don't have to pay benefits -- or handle nearly as much paperwork -- for temporary workers. OVER THE LONG HAUL the best way to encourage the growth of high-wage jobs is to upgrade the skills of the work force. The theory here is that better- trained workers become more productive workers, enabling a company to become more competitive and expand. The company then hires more workers and prompts its suppliers to take on more employees as well. Studies by the American Society for Training and Development shows that every $1 spent on training generates $3 in new economic activity. Despite the recent spate of white-collar job losses, the marketplace still places a high premium on education. Last year college graduates earned, on average, 1.6 times as much as high school graduates. Among the unemployed or underemployed, college graduates often strike out on their own, starting new companies or consultancies. The best of America's colleges and universities are the best on the planet. It is no accident that their graduates are in demand by the world's leading companies. Says Robert Reich, professor of political economy at Harvard's Kennedy School of Government, author of The Work of Nations, and a Clinton adviser: ''In the global economy, the market for people with problem-solving skills -- such as engineers, designers, investment bankers, and lawyers -- continues to integrate and expand.'' One problem: According to Labor Department projections, there will be 30% more college graduates than college-level jobs from now until 2005. But an even more serious problem lurks with the three-fourths of America's work force who do not get a college education. Up to now, they have taken a grab bag of ''general'' high school courses, equipping them for absolutely nothing. Little wonder that so many of them, seeing the irrelevance of school, simply drop out. Says Thurow: ''If Japan can graduate 96% of its high school students, we cannot continue to allow one-third of American high school students to drop out. In a global economy you may live in a First World country, but if you get a Third World education, then eventually you will get Third World wages.'' George Bush, the self-styled ''education President,'' took an important step when he and the nation's governors agreed on a broad set of national goals and standards for primary and secondary schools. But industry can't wait for the schools, which have been broken for a long time, to be fixed. When the National Association of Manufacturers surveyed its members on work force issues last year, 40% said they had serious problems upgrading their technology, 30% said they couldn't reorganize their factories because their employees were unable to learn new jobs, and 25% said they couldn't improve product quality because their workers were unable to understand new quality- control techniques. Until recently, most American employers pretty much got the caliber of workers they asked for. The problem is, they didn't ask for much. Foreign competition was negligible, unions had more power, and customers were not particularly demanding. Says Assistant Labor Secretary Jones: ''America was spoiled.'' If companies are now so hard up for skilled workers, why don't they do more training? Because they are reluctant to invest time and money in workers who may then take their new skills to a new job at a higher-paying competitor. Training works best when all the companies in a particular industry, or all the employers in a particular community, cooperate -- a common practice in Japan but not exactly standard operating procedure in the U.S. Cooperation can work here, though. In Whitfield County, Georgia, the carpet- making capital of the U.S., all it used to take to get a job in a mill was a healthy body. Nobody ever required production line workers to think. In fact, in 1980 only 45% of the county's adults held a high school diploma or its equivalent, a general equivalency degree (GED). Then manufacturers began introducing faster, more sophisticated machinery. Many of their workers, they discovered, lacked the reading and mathematics skills necessary to operate the new equipment. Two years ago business leaders, working through the chamber of commerce, introduced a countywide, computerized basic skills and GED training program. The software, developed by Computer Curriculum Corp. of Sunnyvale, California, allows students to learn at their own speed -- at work, at two adult-education centers, at the local community college, and at the welfare office. Since 1990, 450 adults have earned their GEDs, the high school dropout rate has fallen, and productivity at many carpet factories has improved. The state of Georgia has helped defray the cost by granting employers a $150 tax credit for each employee who demonstrates measurable progress. Says Shirley Lorberbaum, vice president of Aladdin Mills: ''We are totally convinced that this is one of the best investments we could ever make.'' Both Bush and Clinton, despite their avowedly different views on the role of government, have called for more adult training. In August, Bush unveiled a $3 billion proposal developed by the Labor Department that would give $3,000 ''skill grants'' -- vouchers to be used at approved institutions -- to workers who have lost their jobs, workers who are about to lose their jobs, and workers who are in industries that make them vulnerable to losing their jobs. The Bush plan would also create a Youth Training Corps to provide conservation jobs for disadvantaged young people. Clinton's program would vest the responsibility for training in the hands of employers. All companies with more than 50 workers would be required to devote 1.5% of their total payroll expenditures to training. They could either do the training themselves or pay the money into the government's special ''skills development fund.'' Says Ira Magaziner, an educational consultant and Clinton adviser: ''Hopefully, that fund would not have any money. Our intent is that the companies would spend the money internally.'' Like Bush, Clinton also promises the creation of a job program for disadvantaged teenagers. Both the Democratic and the Republican plans are flawed. As is typical in this election year, the President did not explain how he would fund his so- called New Century Work Force. And would $3 billion really be sufficient to help all displaced, imminently displaceable, and putatively displaceable workers? CLINTON'S PROGRAM would be coercive and administratively complex. Most large companies already spend at least 1.5% of their payroll on training, but for the small and medium-size companies, who would decide what constituted a valid training expense? Who would ensure that all workers, not just senior managers -- which is where most companies now spend their training dollars -- benefited from the instruction? Before creating any new programs for adult education, the next President should bring some order to the bewildering array of existing ones. The federal government runs 60 different training programs emanating from seven different Cabinet-level departments -- most geared to specific groups, like the poor, the long-term unemployed, or the disabled. Both Bush and Clinton have promised to streamline this bureaucratic maze, but neither candidate has offered a specific blueprint. The federal government should also take steps to bolster America's fragmented system of vocational education. At many high schools, vocational education is a joke, a feeble attempt to keep non-college-bound kids occupied rather than an honest effort to prepare them for a job. Most voc-ed students wind up in occupations that are completely unrelated to the training they received. Community and junior colleges get higher grades, but most students don't enroll in those institutions until they have reached their late 20s or early 30s, often after having bounced around in low-wage, low-skill jobs for a decade or more. The key, as with company-sponsored training, is to get high schools, community colleges, businesses, and government agencies to work together. Their aim should be to figure out what jobs are needed and then to create a curriculum that will train students for them. The good news is that more of that is happening -- and that both presidential candidates want to give it a push. At the Cleveland campus of Cuyahoga Community College (known as Tri-C), East Ohio Gas Co. has set up a demonstration kitchen with 35 of the latest restaurant-grade ovens, fryers, and grills. Students enrolled in the college's hospitality management program learn how to use, manage, and maintain state- of-the art equipment. Kerry J. Kokinda Sr., 31, who has been a cook for 16 years, thinks Tri-C's program will help him make the jump from chef to restaurant manager. More skills, he believes, will mean more pay. His main regret is that his high school teachers didn't make that connection clear to him while he was still a teenager. Things are different in Cleveland now. Tri-C has teamed up with local high schools in a so-called Tech-Prep program, part of a nationwide curriculum that allows voc-ed students to begin taking some courses for college credit in their last two years of high school. Community colleges can also help local manufacturers -- particularly job- creating small companies -- make the jump to that vaunted high-performance workplace. Tri-C's Unified Technologies Center (UTC) is part of the Cleveland Advanced Manufacturing Program, one of seven such centers around the country funded, in part, by the Department of Commerce. Manufacturers use UTC's laboratory, equipped with state-of-the-art machinery, to help devise more efficient methods of production. Standard Products Co., a manufacturer of plastic automotive parts, contracted with UTC to train its extrude-line technicians in a range of skills, from basic literacy to statistical process control. Says Michele Ridella, Standard's employment manager: ''These people have been able to retain their positions, prepare for technological change, and learn to work together as a team.'' The Democrats want to subsidize another 170 of these manufacturing extension centers as part of their plan to channel defense dollars into civilian R&D. The idea has great potential. Both political parties believe that community colleges ought to be key players in a system of local labor force boards, organizations where employers, educators, and workers can exchange information. These boards already exist, after a fashion. They are called Private Industry Councils (or PICs). There are some 650 PICs, set up to administer grants under the Job Partnership Training Act, a federal program designed to aid the disadvantaged and long-term unemployed. Some are more effective than others, but they set a precedent for the kind of community-wide cooperation on employment and training that is much more common in European countries. Foreign models have their limits. Germany's much praised apprenticeship program sets clear national standards for a multitude of vocations, but it also acts as a barrier to entry for those who don't graduate from the program. The Japanese system of lifetime employment doesn't look like the answer either. The historical intertwining of Japan's business values with its societal ones simply couldn't be replicated in the U.S., Thurow argues. Besides, in the current economic slowdown, even some Japanese companies are rethinking the concept of lifetime employment. Says he: ''We need to find a way to build an American solution.'' THE CHALLENGE is to upgrade the skills of the American work force while maintaining the flexibility and ingenuity that are among the best features of our national culture. Companies that really do empower and train their workers are likely to earn their loyalty. But rebuilding the shattered trust between employer and employee will not be easy. Cleveland Heights, Ohio, is a comfortable suburb with roomy houses and graceful, tree-lined streets, a near-perfect image of white-collar America. Every Friday morning a group of at least 50 well-dressed, well-educated people, ranging in age from their early 20s to late 50s, meets at St. Paul's Episcopal Church, a solid stone edifice with a tall bell tower. They are garrulous, articulate, opinionated -- and unemployed. Most are out of work for the first time in their lives. Some have been jobless for as long as 12 months.

One member of Job Seekers, as the group is known, is Kristen O'Brien, 30, a college graduate displaced six months ago from her job as a government compliance expert at an insurance company. She wonders if all this work force carnage is really necessary: ''I have a real suspicion of corporate America. Are these companies actually in crisis, or are they just taking advantage of a weak labor market?'' O'Brien is looking for a new career in, you guessed it, health care administration. Somewhere behind all the flailing rhetoric of the presidential campaign, there are actually some shared values. Says William Kolberg, president of the National Alliance of Business: ''Both candidates are now saying that the most important factor in America's competitiveness is the quality of our work force. And the solutions they offer are remarkably similar.'' Pray they work.


-- The worker turnover rate in Japan is 3.5% per year. In the U.S., it is 4% a month. -- The best way to encourage the growth of high-wage jobs is to upgrade the skills of the work force. -- Before creating new programs for adult education, the next President should bring some order to the bewildering array of existing ones. -- According to Labor Department projections, there will be 30% more college graduates than college-level jobs from now until the year 2005.