WHY JOB GROWTH IS STALLED When the U.S. job machine gets going again, it won't work the same way, or produce the same kinds of work. Clinton's plans to speed up the process don't look promising.
By Myron Magnet REPORTER ASSOCIATE Ani Hadjian

(FORTUNE Magazine) – AFTER the campaign talk, talk, talk about jobs, jobs, jobs, the time for action is here. And the multibillion-dollar questions are, Can government policy really increase the total number of jobs in the economy? Will the jobs be good ones, and will the benefit of creating them be worth the cost? Longer term, how much can government policy do to wrest the maximum number of well- paid jobs from an economic universe undergoing a fundamental change that is not just national but global? And government policy aside, when each day's paper brings news of yet more thousands of layoffs, from what undiscovered Aladdin's cave will tomorrow's jobs issue forth? All the evidence indicates that market forces will influence job creation much more powerfully than government policy, which, however energetic or well intentioned, will avail little. Indeed, a sense that the market is already at work, doing something unprecedented to demand for labor, is what fuels much of today's acute anxiety about where jobs will come from. Says AFL-CIO chief economist Rudy Oswald: ''I don't ever recall layoffs like those projected for 1993 and '94.'' Two forces have combined to destroy U.S. jobs. The first, a temporary cyclical contraction that is beginning to correct itself, has reinforced and intensified the second, a powerful permanent change that Hoover Institution economist Milton Friedman calls a ''dual revolution -- a technological revolution and a political revolution.'' The technological revolution includes all the ways that computer and communications technologies have changed economic life. With its computer- controlled manufacturing process, for example, a Nucor mini-mill can make a ton of steel with less than one-twelfth the labor a big integrated mill needed a mere decade ago. Moreover, says the Claremont Colleges' management theorist Peter Drucker, ''the labor content of manufactured goods, which has been going down since 1900, is going to keep on going down, not so much because of automation but because the new growth products require less and less labor and raw material.'' Consider microchips, the preeminent product of our era: Compared with the auto, the hallmark product of the preceding age of manufacturing, these electronic components derive a much higher proportion of their market value from intellect than from either material or labor. Not just blue-collar manufacturing jobs have vanished. Bar codes and laser scanners have replaced legions of data-entry and inventory clerks. Computerized information systems knitting global corporations into unified wholes have swept away layers of middle managers whose job was to gather, package, and transmit information. The technological revolution, says Friedman, ''makes it possible to produce a product anywhere, using resources from anywhere, by a company located anywhere, to be sold anywhere.'' At the same time, the political revolution -- Soviet collapse, Latin American and Asian liberalization, China's economic reawakening -- has made available to the capital-rich countries a storehouse of cheap labor that the technological revolution makes easily accessible. So products can now be made by anybody, in a global labor market. When skin creams and diet nostrums are touted as revolutionary, the word ''revolution'' has lost its force. But what is happening today, though less incandescently showy than the storming of the Bastille or the skirmish at Lexington, truly is a world historical change, perhaps as significant as the agricultural revolution that began in England in the mid-18th century. In America that revolution in farming technology transformed a land where 60% of those employed in 1850 worked in farming into one where 39% farmed by 1900, 8.1% by 1960, and 2.7% by 1990. Yet so productive is that minuscule 2.7% that it exports foodstuffs all over the world, with mountains of cheese and grain left over. People living through this change in the 19th century and into the 20th tended not to see it as the vast expansion of national wealth that it was. They shuddered at it as the destruction of a valuable, settled way of life, pushing people off the land and out of the agricultural communities that since Jefferson had seemed the real America. Says Peter Drucker: ''It was seen as a terrible tragedy, not an improvement of living conditions.'' Yet on average unemployment stayed low (except in the occasional depression), and an urban, industrial America took shape, richer and more powerful than before.

SOMETHING SIMILAR is happening now in manufacturing, which accounted for 27% of those working in the U.S. in 1920, accounts for 17% today, and probably will employ as few as 12% by 2005. The technological change entails a social change: the decay of once vibrant working-class communities, as close-knit as the now vanished rural villages of preindustrial England -- communities like Anderson, Indiana, which sent generations of the same families into General Motors plants, two of them now empty, or the Tremont neighborhood of Cleveland, where generations of workers who manned the then flourishing Jones & Laughlin steel mill supported 25 separate Catholic and Orthodox churches within a single square mile. With their intermarried families and strong union and ethnic and political traditions, these communities represented something of undeniable value; they seem to many today as much the embodiment of the real America as the yeoman's farm did to Jefferson. So it is painful to watch the winding down of a whole way of life based on an organization of labor that belongs more to the past than the future. It is much more than an economic change when assembly labor done by high school grads and high school dropouts shrinks because of technological advances, moves from developed countries like the U.S. to the rapidly developing ones, and falls in value as the wages of low-skill U.S. workers continue their long decline toward parity with the rapidly rising wages of competing workers in Mexico or Asia. Bleak and scary, this scenario can look still grimmer when even some higher-skill jobs migrate to far-flung places made near by computer networks, as witness computer programmers serving GE and Reebok in Bangalore or Swissair's English-speaking certified accountants in Bombay. The AFL-CIO's Oswald sounds a predictably foreboding note: ''If the American corporation thinks of itself as global and moves its capital to wherever it can exploit workers the most, there will be a substantial decline in U.S. living standards.''

But just as happened in the agricultural revolution, the very opposite of this dire prognostication is likely to come to pass. Significantly more productive manufacturing will make the entire nation richer, not poorer, by lowering the price of manufactured goods for all. And of course the remaining workers who man the highly productive mills will flourish, like Nucor's steelworkers, who earn up to $60,000 a year working four 12-hour days a week. Yes, many jobs are disappearing, and workers who thought they were set are having their lives painfully disrupted and their earnings cut through no fault of their own. Yet it's worth remembering, as Progressive Policy Institute vice president and Clinton campaign adviser Robert Shapiro remarks, that ''the process of job destruction is a very normal process of the economy.'' The immediate problem is not that jobs are being destroyed but rather that they have stopped being created. The ferment that proliferated 18.6 million jobs at all skill and pay levels during the Eighties has petered out in the Nineties, generating, as of December, a paltry 442,000 new jobs, most of them in government. Since the majority of jobs created in the Eighties were created by small and medium-size companies, not by the FORTUNE 500, the key question is, Why aren't such companies hiring more strongly now? Part of the reason is the recession, part the Bush Administration's reversal of the lower-tax, lower-regulation policies that fostered the earlier job growth. As former senator and presidential candidate George McGovern wrote, the recent dive into bankruptcy of the Connecticut inn he headed taught him firsthand that federal, state, and local rules designed to benefit employees, customers, the community, and the environment can overwhelm and sink a business, especially a job-creating small business, however laudable the regulations' objectives seemed to him in his days as a politician. The 1991 rise in the minimum wage, for example, almost certainly contributes to the sharp decline of new jobs available for the youngest workers, barring them from the entry-level position that is for many, as McGovern also writes, ''the only opportunity to learn about the workplace.'' Unexpectedly, the coup de grace for job creation has come from the 1988 Basel agreement on bank capital standards, later adopted by U.S. regulators. These standards largely explain why banks stopped lending to the job-creating small and medium-size businesses that need bank loans to open or expand. Says economist John Rutledge: ''GM does not borrow money from a bank. The hardware store does.'' The Basel standards made banks keep high capital reserves for every loan made to business, but no capital reserves at all for loans to the Treasury. With balance sheets mauled by bad real estate loans, banks leaped at the chance to borrow at 3% from depositors and buy riskless Treasury bonds yielding 6% with zero capital requirements. Normally, as recoveries begin, banks sell the T-bonds they bought all through the recession and start lending heavily to business. Not this time. They are still buying Treasuries while the long, steep drop in their business lending bottomed out only this fall, with wan recovery since. Bank examiners, spooked by the S&L debacle and quick to find fault with the loans banks do make, have squelched bank lending further. Insurance companies, normally big lenders to midsize businesses, similarly feel regulators and rating agencies skittishly second-guessing their business loans and have closed their coffers.

The new Administration won't end the job-killing credit crunch with its proposed capital gains tax cut for equity investments in new business, since only the high-tech sliver of business in general depends on venture capital rather than bank loan financing. What the Clinton Administration really needs to do is to call in the regulators for a serious talk. When credit eases and job creation resumes, what kind of jobs -- and how many -- will emerge? To this question the only truthful answers must be rather vague. Notes economist Rutledge: ''It's always much easier to identify what everybody's cutting out, what's no longer profitable, than what they're going to add.'' Trying to guess which industries and companies will grow enough to create the jobs of the future is the preoccupation of investors, after all, and their guesses are not exactly infallible. Says Rob Shapiro: ''The market will decide where the jobs get created, and if you can anticipate the market a week or a month in advance, you get very rich.'' Still, you can bet that most job creation will come not from the corporate dinosaurs but from small companies getting larger and companies not yet imagined springing into existence and growing. The Bureau of Labor Statistics industriously tries to predict job creation in fine detail, and if you believe its projections for job growth between 1990 and 2005, you will be reassured: During that period, 24.6 million jobs will be created, a 20% growth in employment. Though that's about half the growth rate of the previous 15-year period, the difference results not from any weakening of America's capacity to create jobs but almost entirely from much slower growth of the labor force. Service industries will create virtually all the new jobs, with manufacturing employment falling by 600,000, assuming moderate economic growth during the period. Some of that drop presumably will come soon after the North American Free Trade Agreement lifts the protection that such low-wage, low-tech industries as broommaking now enjoy. AS IN THE RECENT PAST, job growth will be fastest in higher-skill, higher- pay occupations, the BLS predicts. Executives, managers, professionals, and technicians -- a quarter of today's workers -- will account for 41% of all job growth until 2005, with managerial jobs in marketing, public relations, advertising, communications, engineering, and labor relations proliferating at the fastest clip. Among professional jobs, those for computer analysts, psychologists, health professionals, and (inevitably) lawyers are predicted to grow fastest. But because lower-skill occupations, though growing more slowly, start from a larger base, they will grow strongly in absolute numbers, especially since the BLS expects many who already hold those jobs to retire or trade up to better jobs. Employers, the bureau concludes, will need workers at all levels. The problem is that these are only projections, and in times of rapid change, like now, projections from past experience are shaky. For example, while the BLS predicts a 92% growth in home health care aides and a 44% increase in such health workers as ambulance drivers and nurses' aides, who knows what the growth will be if the nation ever gets health care costs under control, as the new Administration promises? And nothing confounds BLS projections more than rapid shifts in world trade -- exactly the foreseeable scenario. IT'S UNDERSTANDABLE that anxiety about where new jobs will come from is sharper than in the past. After all, the job loss attending a vast, permanent change in the global economy was reinforced by a U.S. recession that struck professional and white-collar workers -- so-called opinion leaders -- usually insulated from cyclical unemployment. But over the long pull, job growth will resume. Says BLS associate commissioner Ronald Kutscher: ''Our economy is not dead in the water.'' In a more productive economy, where real incomes rise because prices are falling, people can have more -- more movies, more income tax software or accountants, more lawsuits, more courses at the community college -- all requiring more workers. Says Milton Friedman: ''People's tastes and wants are infinitely expansible. If you don't have anything else to do with people, every man can have his own private psychiatrist.'' Against this background, what can government do to get more people working? The new Administration seems to take for granted that it can create jobs: All you need is political will. This impulse to help the victims of economic change does the Administration great credit. But plenty of critics warn that its basic assumptions are flawed enough to make its contemplated bets look disconcertingly risky. Will employment rise if the Clinton team decides to stimulate the economy with an investment tax credit and heavy spending on infrastructure? The reasonable, triple-pronged, job-enhancing goal is to put people to work right away on public works projects, to encourage the vigorous economic growth that stokes further demand for labor, and to raise productivity through public and private investment, so that the jobs that are created will be well paid. But previous experience on these fronts isn't reassuring. Take investment tax credits: After the Reagan Administration greatly enlarged the ITC in 1981, for example, wage-boosting productivity didn't budge for years. And since plans are to pay for the incentive by taxing precisely the people who have a lot of investment income and make a disproportionate share of the nation's investments, they will be able to invest less when the tax bite takes hold. Argues Harvard economist Dale Jorgenson: ''It's a wash as far as investment is concerned.'' Equally lackluster are the prospects for effective anti-recession stimulus: As former Treasury official Bruce Bartlett found by reviewing government studies, every postwar countercyclical stimulus took effect too late, after the recession had ended and the economy was already growing under its own steam. So too with job-creating infrastructure programs. Government studies have found that the jobs created by such programs last on average less than a month, cost a bloated $70,000 to $198,000 per person-year of employment to create, and don't get started until unemployment has dropped all the way back to pre-recession levels and the need for job creation has passed. What's more, only 12% to 35% of the workers who get these jobs are the previously unemployed. On reflection, you can see why such programs almost inevitably tend not so much to create a larger total number of jobs as to move employed people from one job to another. Says Temple University business school dean William Dunkelberg: ''The government creates a job by hiring you to do something that I probably don't even want, and it pays you out of my pocket. So my spending goes down by as much as yours goes up.'' As the government siphons money from the private economy to fund public works programs, private employment falls. Says Hudson Institute economist Alan Reynolds: ''The best the government can do in the way of creating jobs is to take one $50,000 job and carve it into two $25,000 jobs.'' President Clinton and his advisers have long argued that infrastructure improvements are productivity enhancing by nature. By making travel, shipping, and communication more efficient, they can boost the nation's productivity growth rate by up to 0.5 percentage point for each $20 billion spent, according to one much-quoted enthusiast, Bates College economist David Aschauer. That's why public works projects are not so much spending as ''investment.'' WHILE THIS argument has a core of truth, all investors know that just because you make an investment, it doesn't mean you get a return. The specific projects chosen, and their cost, are all-important. Says Hoover Institution economist Alvin Rabushka: ''A road from Billings, Montana, to Cheyenne, Wyoming, isn't much more useful than filling in ditches around Cheyenne.'' Plans to build billions of dollars of as-yet-undesignated infrastructure in order to create jobs are, says Economic Policy Institute research director Lawrence Mishel, who supplied data for Clinton's campaign speeches, ''a little like black boxes waiting to be filled in.'' The Administration's longer-term ambitions rightly go way beyond creating infrastructure construction jobs. To gear the economy to generate high-wage employment, Clinton advisers believe, will require worker training. It will give workers the skills they need to qualify for good new jobs if they're laid off, or to become more productive at their current companies, generating rising profits that will in turn win them higher pay. The Clinton campaign outlined a scheme requiring companies to spend 1.5% of their payroll on employee training. The beauty of the idea, from a politician's point of view: zero cost to a deficit-strapped government, unlike giving individuals further tax deductions, or tax credits, for getting their own training through community colleges and the like. Trouble is, says Murray Weidenbaum, head of Washington University's Center for the Study of American Business and a former Council of Economic Advisers chairman, ''it's a lot of fun for Congress to do good with other people's money, but government mandates are not costless to society.'' If labor costs suddenly zoom 1.5% and employers facing stiff global competition can't easily raise prices, they're likely to stop hiring, freeze wages, perhaps even lay people off. So the unintended consequence of such worker-oriented initiatives as mandated employer-supplied training programs, or mandatory parental leaves with full benefits, or pay-or-play employer-funded health insurance, or an indexed minimum wage, is to raise employment costs, depress take-home wages, and inhibit job creation, harming the very group supposedly being helped. No one could seriously disagree with the Administration about the need to upgrade America's human capital in an era when productivity, which determines the worker's wage and the nation's wealth, is increasingly linked to skill. But arguably the crucial arena for accomplishing this task is less the workplace than the school system. Employers who find workers lacking necessary skills aren't looking for plasma physicists or molecular biologists but for people who are literate and numerate, competent in problem solving, self- disciplined, and willing to work. Though employers can -- and sometimes do -- teach some of these skills to workers lacking them, the most dependable way of instilling them in the nation's work force is to make sure the average American doesn't leave school without them. With companies restructured and the world opened to freer economic activity, we may be on the brink of a vast expansion in productivity, a second Industrial Revolution, as some have called it. How exactly that would reshape the world, no one can specify -- beyond saying that an increase in world wealth, in economic freedom, in global trade and cooperation rather than tension, can't be anything but good for employment and remuneration. THE DANGER IS that a fear of letting go of the old -- the unionized, assembly line factory -- will lead us to try to abort the future through legislation regulating plant closings or protective tariffs against cheaper foreign-made goods or central planning initiatives that will only clog the economy in the name of streamlining it. Protectionism will not only push prices up, pushing Americans' real incomes down. By stunting the economic development of countries whose free economic existence has just begun, it will also retard a rapid increase in global purchasing power. Most important, to fail to nurture the growth of liberal capitalism in such countries is to let slip a unique historical moment when the collapse of communism makes world peace based on open, mutually beneficial trade among free nations a real possibility. Setting ourselves against such a future in the name of helping America's workers would be illiberal and reactionary in the most literal sense.