Where the Jobs Aren’t
From the April 18, 2011 issue of NR


Reihan Salam

One of the bright spots in our otherwise dismal recovery has been the strength of U.S. exports, which have risen to 12.8 percent of GDP from 10 percent a decade ago. States dominated by factories and farms have fared relatively well as booming emerging markets have gobbled up American industrial equipment and agricultural goods. There is no guarantee that exports will continue to climb as the global economy slows down. Yet it remains striking that the strongest part of the American economy is the part that faces the most vigorous international competition. 

In March, the economists Michael Spence and Sandile Hlatshwayo published a report called “The Evolving Structure of the American Economy and the Employment Challenge,” a detailed account of how the American labor market changed between 1990 and 2008. Many, including columnist Steven Pearlstein of the Washington Post, believe that the report bolsters the case for activist government. But Spence and Hlatshwayo have also offered ammunition to those who believe that public-sector cartels threaten to choke off economic growth. 

The central premise of the report is that there has been a dramatic divergence between the parts of the economy that are internationally tradable and those that are not. U.S. firms that sell goods and services that can be shipped or delivered electronically face lean and hungry competitors and potential competitors around the world. The good news is that U.S. firms have risen to the challenge, sharply increasing output while keeping costs contained, largely through greater specialization.

But the need to contain costs has meant that large numbers of low- and mid-skill jobs have been shed or sent offshore. While knowledge-intensive industries have seen big gains in employment, traditional blue-collar manufacturing work is vanishing at an accelerating pace. On balance, employment in the tradable sector was flat from 1990 to 2008. 

The nontradable sector, in contrast, has seen rapid employment growth over the same period. There were 27.3 million more jobs in 2008 than in 1990, and 26.7 million of those were in the nontradable sector. This sector, which includes government, health care, retail, accommodation and food, and construction, operates in a very different environment from that of the tradable sector. The largest employer in the nontradable sector is government, which accounted for 22.5 million of the 149.2 million U.S. jobs in 2008, and 4.1 million of the new jobs that were added between 1990 and 2008. Health care, a sector heavily subsidized and regulated by the government, accounted for an additional 16.3 million jobs in 2008, 6.3 million of which had been added since 1990. 

As Spence and Hlatshwayo acknowledge, it is extremely difficult to measure productivity in these sectors, because there is no way to tell what consumers would pay for such services in an open market. The best we can do is measure the inputs: Public schools, for example, are evaluated on the basis of how much local taxpayers spend on them, not how much parents would pay to enroll their children in them.

Spence and Hlatshwayo are careful not to speculate about the drivers of the expansion in government and health-care employment. But one could argue that the last decade saw a kind of undercover fiscal stimulus, particularly at the state and local level. Productivity growth in high-end services and manufacturing translated into income gains for high-skilled workers and asset-rich households, which swelled state and local tax revenues. This revenue was then channeled into politically popular efforts to reduce class sizes and expand the reach of Medicaid, among other measures. As the number of taxpayer-financed jobs increased, so too did the constituency for the growth of government. 

One reason we see so much protest when state and local governments have tried to roll back spending may be that many public employees who insist that they’ve endured steep pay cuts relative to what they’d make in the private sector recognize that this is very far from the case. For them, thanks to the hidden stimulus, the personal stakes are high.