Small Matters: Jobs: New dynamics, but no clear policy path

Posted: November 14, 2011

Last week, the Board of Governors of the Federal Reserve System, in conjunction with the Federal Reserve Bank of Atlanta and the Kauffman Foundation, conducted a two-day conference on employment and entrepreneurship.

The bottom-line concern, of course: the fact that even though the economic expansion is more than two years old - the recession officially ended in June 2009, and the economy has grown ever since - the unemployment rate is still 9 percent.

And of particular concern is the duration of unemployment - millions of people have remained jobless for a long time. The economy is producing about the same value of output (gross domestic product) as it did at the peak of the economy in 2007, before the recession's start in January 2008, but we are using seven million fewer workers to do so.

Part of the explanation for this is that the composition of GDP has changed. We are producing a million fewer new houses, condominiums, and apartments than we would expect to based on our population growth, and 1.7 million fewer than in 2006.

This is a labor-intensive activity, dominated by the small-business sector. If building a housing unit occupies an average of five workers for a year - directly and indirectly making all the stuff that goes into a house, as well as assembling it - then missing a million housing starts could account for five million of the seven million missing workers.

Housing units have been replaced in the pile of GDP by manufactured goods and agricultural products. So the dollar value of the GDP pile is the same, but the composition of the goods and services is quite different, and this is important because it takes far fewer workers to make manufactured or agricultural goods than it does to make housing units.

Today, it takes only about 180 workers to make the same amount of manufactured goods that 1,000 workers could make in 1950. Similarly, it takes only about two million workers to make all the food we need today, compared with 11 million in 1950, when our population was much smaller. Thus, if we make manufactured goods, we do not need as many workers as we need if we produce labor-intensive goods and services such as housing units, medical care, and education.

The dynamics of this are quite amazing. For example, in 2006 (the peak year for housing starts), about 860,000 new firms were launched, producing about 3.8 million new jobs just for the new firms. Established firms hired more workers, as well. But about 770,000 existing firms terminated operations, eliminating about 3.2 million jobs. Thus, net job creation was about 600,000.

In the recession, the tables were turned. As consumers stopped spending as much and new-home construction plummeted as a result of overbuilding, about 700,000 new firms were started in 2009, adding about 2.9 million new jobs - but about 880,000 firms terminated operations, eliminating about 3.2 million existing jobs. That added about 300,000 to the job losses being reported by six million existing employer firms.

Last week's employment and entrepreneurship conference produced a wealth of information about our current situation, but no clear policy recommendations for Washington politicians.

Some recommended that we focus on developing new firms since they, in the long run, are responsible for most new jobs (more population requires more barbershops, etc.). And it was suggested by some that government get into the "venture capital" business, providing funds to new ventures.

Skeptics noted that the government's record in that regard is not impressive. Others indicated that our current problem is that existing firms are not being fully utilized (some barbershop chairs are not staffed because consumers are deferring haircuts to save money), and so what is needed is more consumer spending by all, not just new additions to the population.

So maybe tax cuts are in order. Skeptics wondered how these cuts would be financed, suggesting that more government borrowing might induce consumers to save the tax cuts, not spend them, since they are concerned that spending and deficits could produce a debt crisis over here like Europe's.

Everyone agreed that business owners and consumers lacked confidence in the current policies being implemented, indicating that new policy leadership will be required to restore confidence.

We all agreed, crossed our fingers, and left. We hope Congress gets the job done.


Bill Dunkelberg is a professor of economics at Temple University and a nationally recognized expert on the small-business economy. Contact him at dunk@temple.edu. Read more of his columns at www.philly.com/dunkelberg

 

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