Economic Evolution Erodes Long-Term Demand for U.S. Unskilled Workforce

A Lost Generation?

Economic evolution erodes long-term demand for U.S. unskilled workforce

By Rebecca McReynolds

All of the vitriol and finger-pointing going on in Washington over how to right the economy ignores a core issue: U.S. demand for low-skilled and unskilled labor is rapidly disappearing. Jobs that provided a solid living for previous generations are gone, stranding millions of workers with obsolete skills and little hope for achieving the Great American Dream: That each generation will do better than the one that came before.

“This is not cyclical,” says Erik Hurst, V. Duane Rath Professor of Economics at University of Chicago Booth School of Business. “Even if economy improves, it won’t put people back to work.” Hurst and Jesse Greene, Senior Fellow at the Richard Paul Richman Center for Business, Law, and Public Policy at the Columbia Business School, explored structural and evolutionary forces that are eroding demand for the country’s unskilled workforce at a recent workshop. “The Future of the American Worker,” sponsored by the Richman Center, looked at where those jobs have gone, and what it will take to bring them back.

Running the Numbers

It’s no secret that manufacturing jobs have been moving overseas for the years. The problem is that but nobody really noticed because the construction boom during the last decade absorbed most of those displaced factory workers. “In this sense, the housing bust masked the effects of the ongoing decline in manufacturing employment,” Hurst says.

The housing bust pulled that mask off, exposing the real impact of the decline in manufacturing jobs on the overall economy. “Roughly 35% of the increase in non-employment for all groups in the U.S. between 2007 and 2011 can be attributed to the decline in manufacturing demand during the 2000s,” Hurst says.

That impact can be most clearly seen against the backdrop of the country’s anemic recovery. As the overall unemployment rate inches below 9%, most of the jobs being created are for higher skilled and college-educated workers. “The fraction of jobs for low skilled workers has declined, and that decline is persistent,” Hurst says.

It’s Evolutionary

The move away from domestic manufacturing is a natural result of an increasingly global economy, says Green, who also sits on the board of Caterpillar Corp. U.S. corporations were already shifting their focus – and their manufacturing – to markets with the fastest growth opportunities and the lowest cost structures. The Great Recession just sped up the process, Green says.

With the economic collapse of 2008 corporations went into survival mode. Long-term strategic growth initiatives were scuttled in favor of quick fixes with fast payoffs. “The focus became short-term,” Greene says. “Companies needed to save cash, save capital and become more efficient.” That meant shuttering higher cost factories as demand dropped for their products, and outsourcing administrative operations wherever possible.

The result is that companies have learned to do more than less. They have adopted more efficient operating systems, lowered their cost structures, and developed more flexible business models that lean heavily on part-time and temporary workers. “Companies are thriving despite the ‘new normal’ of economic weakness,” Green says. “They have discovered that they can continue to grow without building their employment base, and that is impacting low-skilled and semi-skilled workers.”

Getting Back to Work

This “new normal” puts the pressure on U.S. workers to become more competitive in the international marketplace, Greene says. But that won’t be easy, and it will require major changes in their overall mindset, he says. First, salaries here will have to stay flat or even decline as wages in emerging markets such as China and India catch up. Workers will also need to upgrade their skills while accepting more flexible work rules around hours and job descriptions.

One way to do that is to leverage their skills to meet the needs of the market, including accepting the fact that a global economy will mean more job changes over their careers and constantly upgrading their skills. “Industries are going to die, and technology is going to shift,” Greene says. It’s up to the U.S. worker to keep up.

Government policies will also have to adjust to support these new realities. Historic policy responses to unemployment, such as public work program and tax cuts, won’t ease the permanent effects of structural and evolutionary forces reshaping the job market, Hurst says. A better use of those resources would be to help today’s idle

workers develop the skills they will need to compete in a global economy. “Addressing barriers to skill acquisition may have the most lasting effect on increasing the employment prospects of those workers who leave the labor force as a result of the ongoing decline in the manufacturing sector,” Hurst says.