Saturday, June 18, 2011

Uncertainty, the silent jobs killer

by Thomas L Friedman

Jun 14, 2011

IF you want to understand why the unemployment rate in the United States has been stubbornly lodged at around 9 per cent, a good place to start is with the eye-popping mortgage statistics released last week by the economic analysis firm CoreLogic: 38 per cent of homeowners with second mortgages are underwater.

They borrowed against the value of their homes and they now owe more than their houses are worth. The total number of underwater homeowners in America, with first and second mortgages, is a stunning 22.7 per cent. In Nevada alone, 63 per cent of all mortgaged properties are worth less than the owners paid; in Arizona 50 per cent, Florida 46 per cent, Michigan 36 per cent and California 31 per cent.

When people are so underwater, they find it hard to move to take new jobs, they find it hard to borrow or raise cash for education or start-ups and banks become even more cautious about lending. Until we as a country figure out how to divvy up these losses on housing, and let these markets clear and move on, they will be a serious drag on employment.

Indeed, this mortgage mess just feeds the three other big problems undermining United States job growth today: Weak aggregate demand, structural impediments and an epidemic of uncertainty about what the future holds for everything from health care to the rate of taxation to Social Security and Medicare spending to the availability of credit to the general direction of the economy - the sum of which has people holding back and thus undermining the government's stimulus.

We need to be working on all three at once and urgently. How? Others have focused on the aggregate demand problem, so I would like to address some of the structural impediments and uncertainty.

On Friday, the McKinsey Global Institute released a long study of the structural issues ailing the US job market, entitled: "An Economy That Works: Job Creation and America's Future."

It begins: "Only in the most optimistic scenario will the United States return to full employment before 2020. Achieving this outcome will require sustained demand growth, rising US competitiveness in the global economy and better matching of US workers to jobs."

Over the last 20 years, McKinsey notes, with each recession more employers have used the downturn to replace workers with machines and software, so it takes much longer for full employment to come back.


I have been working on a book that required talking to a lot of entrepreneurs and have been struck by how many told me some version of: "I used the recession to downsize and get really efficient. None of those jobs are coming back. I am doing a little hiring now but for people with more skills."

At the same time, you talk to US companies doing advanced manufacturing and many will tell you they struggle even now to find workers with the blue-collar skills they need to replace their retiring employees.

Thanks to a credit bubble over the last decade, we created a lot of jobs for people - in construction and retail - who did not have globally competitive skills or post-high school degrees. Those workers will need retooling.

McKinsey says its research found that "too few Americans who attend college and vocational schools choose fields of study that will give them specific skills that employers are seeking. Our interviews point to potential shortages in many occupations, such as nutritionists, welders and nurse's aides - in addition to the often-predicted shortfall in computer specialists and engineers".

The report concludes: "Progress on four dimensions is needed: Ensuring that the work force acquires skills needed for the jobs that will be in demand, finding ways for US workers to win 'share' in the global economy" - by encouraging more foreign investment in the US and by getting companies who have off-shored jobs to take advantage of falling telecom prices to on-shore them to low-cost American cities and towns instead - "encouraging innovation, new company creation, and scaling up of industries in the United States, and removing unnecessary impediments that slow business investment and job creation".

Today, everything from patent delays to overlapping or conflicting land use regulations inhibit start-ups and factory creation. According to the World Economic Forum, America now ranks 27th on the ease of getting a construction permit, behind Saudi Arabia.

But do not underestimate uncertainty as a silent jobs killer. Congress and the White House seem paralysed in deciding the future of taxes and spending. Where are we going in these areas? Investors and companies who have to make hiring decisions have no clue.

"The economy is paying a high uncertainty premium right now," says Mohamed El-Erian, the CEO of the world's largest bond fund, Pimco. "With such uncertainty, people delay as many decisions as possible."

Any good news? Yes, US corporations are getting so productive and sitting on so much cash, just a few big, smart, bipartisan decisions by Congress on taxes and spending (and mortgages) and I think this whole economy starts to improve again.

Workers with skills will be the first to be hired.


Thomas L Friedman has won three Pulitzer Prizes, the most recent in 2002 for commentary.

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