The Stagnation of Employment

Except in times of war, capitalist economies almost never reach full employment. The mere absence of jobs for those desiring paid employment, however, is not necessarily a problem for the ruling economic interests. Unemployment and the underutilization of labor more generally—the existence of what Marx called the industrial reserve army of labor—is a necessary part of a capitalist economy, since it keeps wages low as workers are forced to compete with each other for jobs. This becomes a serious problem for the system or for the political structure when the shortfall in employment coincides with a deeper structural crisis; when aggregate demand and thus investment opportunities are hindered by low employment and low wages; and when a shortage of jobs creates a political problem, sometimes even igniting popular opposition at the grassroots of society. All three of these contradictions are apparent in 2004, setting the stage for a national debate on the question of jobs, which more than three years since the beginning of the 2001 recession is now suddenly a front page story.

In seeking the Bush administration’s stance on the current job crisis, the logical place to look would be the newly released Economic Report of the President. Authored by the president’s Council of Economic Advisers and published in February each year, the Economic Report of the President is the major annual assessment of economic trends by the administration in office. It is also in many ways an ideological report—and interesting for that reason—in that it represents an administration’s most concerted attempt in any given year to account for the most pressing economic challenges that it faces while explaining away many of these problems insofar as they might reflect negatively on its performance. This year’s report, released in an election year, is however extraordinary in the degree to which it attempts not simply to explain away problems, but to sweep them under the rug.

The most important issue covertly dispatched in this way is the stagnation of employment. It is customary for the Economic Report of the President to include a chapter on the labor market at least once every other year. In the administration of George H. W. Bush, chapters on the labor market appeared twice and an average of 16 pages were devoted to employment issues in the four reports authored by his administration. In the eight years of the Clinton administration chapters on the labor market appeared in the report four times and an average of 26 pages were devoted to this topic in these reports. In contrast, in the three reports issued thus far in the administration of George W. Bush, zero chapters have been devoted to employment or the labor market and the average number of pages of text per issue devoted to discussing these issues has dropped to seven.

The neglect of employment is not because it has somehow become a non-issue. Rather the failure to address the question of employment reflects the fact that it is the economic Achilles heel of the present administration. Since the Bush administration took office the U.S. economy has lost 2.3 million jobs.* Although the economy officially entered the recovery phase of the business cycle, ending the 2001 recession, in November 2001, full recovery of employment has not yet occurred. Indeed, this is the first time in 11 successive recessions, going back to 1939, in which there has not been a full recovery of employment within 31 months of the beginning of the recession. In January 2004, 34 months after the beginning of the recession, aggregate employment was still 1.8 percent below its pre-recession level. With the working-age population increasing by 2.4 percent since 2001, jobs are becoming ever harder to find. Between November 2003 and February 2004, 40 percent of those unemployed had been out of work in excess of 15 weeks, the worst record of unemployment duration since 1983. None other than Federal Reserve Board Chairman Alan Greenspan—not known for his sympathy with working people—gave a speech in late February 2004 noting: “Fears about job security are understandably significant when nearly 2 million of our work force have been unemployed for more than a year.”*

To be sure, the official unemployment rate has fallen to 5.6 percent in the most recent quarter—a figure that may seem to suggest that the job situation is getting better, after averaging 5.8 percent in 2002 and 6 percent in 2003. But since the drop in the unemployment rate coincides with a decline in the number of jobs at the very same time that the working-age population is increasing the only possible explanation is that a growing percentage of the population is ceasing to look for work and is no longer counted as belonging to the labor force. Thus the labor force participation rate has declined steadily for three years in a row.

All of this hearkens back to what was commonly called the “jobless recovery” from the 1990–1991 recession. Normally, when the economy recovers from a recession, the number of jobs available expands too. But as the economy recovered from the 1990–1991 recession, job growth was almost nil for more than a year. Nevertheless, the present jobless recovery that began in November 2001 is worse still, since the number of jobs has actually shrunk during the recovery. More than two years into the economic recovery the U.S. economy has fewer jobs than when the recovery began—despite a steady expansion of the working-age population.

The Bush administration has tried to defuse the problem in the latest Economic Report of the President by arguing that even though “the performance of employment in this cycle has lagged even that of the so-called ‘jobless recovery’ from the 1990–1991 recession,” the U.S. economy is currently experiencing high productivity gains, and job creation will necessarily follow. The only difference in the present recovery, we are told, is that there is a longer than usual lag between the start of the recovery and gains in employment. “By definition, labor productivity multiplied by hours worked,” the report declares, “equals output. Thus, in an arithmetic sense, faster productivity growth generally implies that output must expand more rapidly to generate employment gains. The same principle explains why the rapid pace of productivity growth over the past couple of years has meant that gains in output occurred without gains in employment, until recently” (p. 48). We should not blame such productivity gains for the weakness in employment growth, the administration tells us, even though they mean that the economy has to grow faster in order to create jobs, because productivity growth makes it possible for the economy to grow faster.

But the administration’s case that employment will recover as always with a lag, is undercut by the extraordinary length of the present lag. According to the Economic Policy Institute’s February 2004 report, “Understanding the Severity of the Current Labor Slump,” in all prior recessions since the 1930s “the lag between the end of a recession and the trough in jobs had never exceeded three months” yet in the present labor slump it was not until 21 months after the end of the recession (29 months since the onset of the recession) that the trough in employment was finally reached. Job losses have continued to be exceptionally strong and job gains exceptionally weak since then. In January 2004, mass layoffs, defined as layoffs of 50 or more workers in a single establishment, affected a total of 239,454 workers. This was the highest level of mass layoffs since December 2002 (Bureau of Labor Statistics, “Mass Layoffs in January 2004,” February 25, 2004).

Looking for good news with respect to employment, the administration concludes its one page discussion of “The Labor Market” in its economic report by pointing to the growth in average employment in the temporary-help services industry as a sign of an impending take-off in employment—under the theory that this correlates with growth in jobs generally. With no sense of irony, the administration’s economic report states that, “Employment in temporary health-services has expanded 194,000 since last April, suggesting robust growth in overall employment this year” (p. 94). Elsewhere in the report it is noted that the severe decline in manufacturing employment “may somewhat overstate the number of actual manufacturing jobs that have been lost” since some of these jobs still exist but have in effect been taken over by temporary workers or have been outsourced to workers with lower pay and lower benefits (p. 71).

But what has attracted the most attention in the 2004 Economic Report of the President, is a stealth forecast on employment inserted without comment into a table. Entitled “Administration Forecast,” this table (p. 98) shows various projections with respect to GDP, inflation, interest rates, and the unemployment rate, and also includes the administration’s forecasted changes in non-farm employment—amounting to an increase in the average number of jobs by 2.6 million over the course of 2004. Since this was an average based on monthly data, and the level of net new jobs was already much lower in the opening months of the year than what was required to produce this end result, it was clear that well over 3 million jobs would in fact have to be created in order to get the average up by 2.6 million jobs for all of 2004. There are no signs at present, however, that job gains on anything like this scale will occur. Faced with blistering attacks from the very moment that the report appeared, the administration backed off from its employment projections for 2004 within a week. White House spokesman Scott McClellan simply stated that “The president is not a statistician.” According to The New York Times (February 19, 2004), Treasury Secretary John Snow and Commerce Secretary Donald Evans were ordered “to distance the administration from the projection.” But, by abandoning the forecast that it had released only the week before, the administration was in effect admitting that when Election Day comes in November 2004, the U.S. economy will have fewer jobs than when President Bush took office four years before—something that has not happened since the Great Depression when Herbert Hoover was president.

Chart 1 shows the number of “missing jobs” in the U.S. economy if employment constituted the same percentage of the civilian non-institutional working-age population as in 2000, when employment divided by the working-age population was 64.4 percent. The rapid rise in missing jobs over the three years shows the true depth of the current employment slump.

Restructuring the Labor Market

How do we explain this stagnation of employment? What is obvious at this point is that this is not simply the result of normal business cycle fluctuations, but the product of deeper, structural changes in the capitalist economy. One indication of this is the shift from temporary to permanent layoffs as the predominant form in which job losses are experienced. Prior to the 1990s it was common for companies to layoff workers attached to a given business, industry or sector with the intention of rehiring them as economic activity picked up again. Beginning in the 1990–1991 recession, however, the emphasis shifted to permanent layoffs that severed relations between employers and employees and between workers and whole industries. During the first three quarters of the four recessions prior to the downturn of the early 1990s, permanent layoffs accounted for about half of all layoffs on average, around 70 percent in the early 1990s recession, and close to 90 percent in the 2001 recession (“What Recovery?,” Monthly Review, April 2003). Permanent layoffs frequently require that workers switch industries and skills in order to find employment, creating longer spells of unemployment.

This shift from temporary to permanent layoffs means that industries are undergoing structural changes that entail massive shifts in their shares of employment. In the recessions and recoveries of the mid-1970s and early 1980s around half of industry was undergoing structural changes of this kind. In contrast, in the 1990–1991 downturn and jobless recovery such structural change predominated in 57 percent of all industries, and in the most recent recession and jobless recovery structural change has been evident in almost 80 percent of all industries.*

The brunt of the job loss has been in the manufacturing sector. Manufacturing employment dropped 16 percent between June 2000 and December 2003, making this the biggest cyclical decline in more than 40 years. Manufacturing employment continued to decline throughout 2003 despite the recovery in production and profits. The metalworking machinery industry has reduced its total employment by almost a quarter since 2000. Although productivity in manufacturing is rising rapidly, this is largely a byproduct of the layoffs themselves with each worker now producing more within a leaner and meaner production system—and not the result of the kind of technological dynamism that normally accompanies new investment. Thus as the 2004 Economic Report of the President acknowledges, “The prolonged period of weakness in manufacturing output also bears a notable similarity to the sluggish recovery in investment in equipment and software” (pp. 55–56). The decline in U.S. manufacturing is partly due to global shifts in manufacturing, reflecting the long-term decline of U.S. economic hegemony. Over a quarter of the value of manufactured goods consumed in the United States is now produced abroad, up around 5 percentage points since early 1999 and more than double the level of the early 1980s.*

If unusually high levels of structural change in the labor market are taking place, it remains to be explained what lies behind this. The most obvious answer is that firms are using the recession as an excuse for labor restructuring to decrease their unit labor costs and reduce their overall wage bills—with no intention of then altering this once the economy begins climbing again. A smaller workforce is being compelled to work more intensively by means of both speed-up and stretch-out, while millions of unemployed would-be workers accept worse jobs or are unable to find jobs. Business Week (November 17, 2003) describes corporate heads as “cautious, especially when it comes to hiring. So far, companies have been able to meet orders for their products by working employees harder.” The result has been widening profit margins, even as employment has stagnated and wages have declined. “Businesses are rolling in cash,” Mark Zandi of Economy.com recently stated. “But they’ve yet to step up and expand their hiring” (quoted in Newsweek, “Help Not Wanted,” March 1, 2004).

Not only have corporations cut back on employment but they are also making increased use of temp workers and outsourcing. In January 1972 the personnel supply industry had a little over 200,000 jobs; this grew to a high of about 4 million in September 2000, and, as already noted, is one of the few areas of employment showing dynamic growth during the recovery.

The outsourcing of production and of business processes in general by firms is notoriously difficult to measure. Nevertheless there is no doubt that it has become more and more pervasive as restructuring, with the object of sharply lowering unit labor costs and overall payrolls, has become omnipresent throughout the economy. This is happening not only in goods production, but also increasingly in services, including such white-collar professions as accounting, banking services, and computer programming. Perhaps because the full extent of this phenomenon is so difficult to ascertain, attention has recently focused on the most extreme instance of this in the form of the offshore outsourcing (sometimes simply called “offshoring”) of high-tech jobs from the United States to India and other locales in Asia, Latin America, and Eastern Europe. The reasons for such offshoring are obvious. As Marc Andreessen, a cofounder of Netscape Communications and now the main force behind Opsware Inc.—a company that automates data centers enabling corporations to manage global, including offshore, operations—has stated: the advantage of offshore outsourcing of tech jobs in places like India is that “you can get three or four programmers for the price of one….As a software company, you can cut half your programmers, cut your prices, and your profit margins go up, all at the same time. That’s a big deal.” What drives this phenomenon, according to Andreessen, is quite simply “entrepreneurial capitalism” (Business Week Online, “Outsourcing Isn’t a Zero-Sum Game,” March 1, 2004). Unemployment among computer programmers in the United States is currently at 7 percent; at the same time the number of offshore programming jobs emanating from U.S. corporations is estimated to have tripled in the last three years (Business Week, “Software: Will Outsourcing Hurt America’s Supremacy?,” March 1, 2004).

Not all offshore service employment, however, is directed at highly skilled computer programmers. The greater proportion is still made up of low-value-added transaction processing and call centers. Altogether it is estimated that 300,000–600,000 U.S. jobs are currently moving offshore each year (Business Week, “Offshore This,” March 1, 2004; Newsweek, “Help Not Wanted,” March 1, 2004). These numbers, associated with the offshore outsourcing phenomenon as a whole (both production and services) are, if correct, big enough to account for a significant slice of the job losses in the U.S. economy during the current crisis. India’s National Association of Software and Services Companies estimates that outsourcing to India saved U.S. corporations such as General Electric, Honeywell, and Citigroup $10–11 billion in 2001 alone. While this may be an exaggeration there is no doubt about the general tendency at work (Far Eastern Economic Review, November 13, 2003).

Stephen Roach, chief economist and director of global economics at Morgan Stanley, has referred to the structural changes occurring at a global level, which are now affecting the U.S. economy, as the “new global labor arbitrage.”* According to this analysis, new forces that are fueling offshore outsourcing are “now acting as a powerful structural depressant on traditional sources of job creation in high-wage economies. America’s recovery without job creation could well be here to stay.” When looking at new manufacturing outsourcing platforms, Roach argues, China is the leading player. “Fully 65% of the tripling of Chinese exports over the past decade—from $121 billion in 1994 to $365 billion in mid 2003—is traceable to outsourcing by Chinese subsidiaries of multinational corporations and joint ventures.” Today’s offshore production platforms combine low cost with high tech. When Intel builds a factory in China it is state of the art, employing the same automated equipment used in its factories in the United States.

More surprising than the growth of offshore production platforms, however, is the rapid growth of information technology-enabled offshore outsourcing of services. It is here that India has been the leading player, with its highly educated but impoverished population. India’s information technology–enabled exports of services are expected to increase as much as ten times in the next four years. What is feeding this process, according to Roach, is the fact that “wage rates in China and India range from 10% to 25% of those for comparable-quality workers in the United States and the rest of the developed world.”

The deregulation, restructuring, outsourcing, and offshoring of many of the white-collar jobs that constitute two-thirds of U.S. payrolls means that the U.S. economy is now experiencing a structural shift of national and global dimensions that may entail a long-term decrease in jobs (marking a long-term increase in the industrial reserve army of labor). The share of total U.S. employment represented by manufacturing has been in decline for half a century (though never before so stagnant in an economic recovery). As Roach observed in a June 12, 1998, special economic report for Morgan Stanley on “Global Restructuring,” “services are the ‘shock absorber’ that facilitates the necessary downsizing in manufacturing. Only the service sector can provide the answer to the great conundrum of restructuring: Where do all the displaced workers go?”* But since employment in the service sector itself is now being undercut by information technology-based restructuring, including offshoring, that sector’s capacity to continue to generate new jobs that will absorb labor cast off elsewhere in the economy, may be undermined as well. At the same time, poorly paid offshore workers in poor countries are being exploited for the higher rates of surplus value that they can generate for capital. Multinational capital is thus able to take advantage of global asymmetries to create more vicious forms of competition between pools of labor that are geographically immobile and thus unable to coalesce.

Economic Stagnation

Conservative and liberal explanations for the jobless recovery are usually confined to the factors considered above: (1) displacements (usually presumed to be temporary) of labor arising from productivity growth, and (2) economic restructuring, including offshore outsourcing to China and elsewhere, raising the question of “protecting American jobs.” A deeper explanation, however, would not stop there but would recognize that the employment slump is a manifestation of deep-seated tendencies in capitalism itself. Low levels of employment in relation to the available working-age population are endemic to the system, as is the drive to replace better-paid jobs with poorer-paid ones. In Wage-Labor and Capital, a speech delivered to a working-class audience in 1847, Karl Marx observed that, “This war [between capitalists] has the peculiarity that the battles in it are won less by recruiting than by discharging the army of workers. The generals (the capitalists) vie with one another as to who can discharge the greatest number of industrial soldiers.” For many unemployed workers, Marx argued, this took the form of permanent, not just temporary, unemployment—while for some of the more fortunate among the new additions to the industrial reserve army it led eventually to worse jobs at lower wages:

The economists tell us, to be sure, that those labourers who have been rendered superfluous by machinery find new avenues of employment. They dare not assert directly that the same labourers that have been discharged find situations in new branches of labour. Facts cry out too loudly against this lie. Strictly speaking, they only maintain that new means of employment will be found for other sections of the working class; for example, for that portion of the young generation of labourers who were about to enter upon that branch of industry which had just been abolished. Of course this is a great satisfaction to the disabled labourers….But even if we assume that all who are directly forced out of employment by machinery, as well as all of the rising generation who were waiting for a chance of employment in the same branch of industry, do actually find some new employment—are we to believe that this new employment will pay as high wages as did the one they have lost? If it did, it would be in contradiction to all the laws of political economy.

The real conundrum for capital created by high unemployment and underutilization of labor does not lie directly in the shortage of jobs or the fact that many workers have been thrown permanently out of work. The problem lies elsewhere: in the fact that the system, no matter how dynamic on the supply side (in terms of productivity, its capacity to expand output, and the generation of economic surplus) cannot expand for long without an expansion of aggregate demand. And despite the old misnomer of Say’s Law—or the notion that supply creates its own demand—investment seldom grows for long without at least expectations of a rapid growth of consumption. The latter, however, remains dependent on a rise in income among the population at large.

This points to continuing problems for the economy. Not only has employment been stagnant and even decreased in the recovery, but the real aggregate wage and salary income of those workers who are employed has been falling. In December 2003, 33 months after the start of the recession, real aggregate wage and salary income was 0.7 percent below its pre-recession level. In contrast, in all six of the recessions (going back to 1960) immediately prior to this one, real aggregate wage and salary income had recovered by the 33rd month of the recession (Economic Policy Institute, “Understanding the Severity of the Current Labor Slump”). A consumer-led recovery therefore is not in the offing. What is propping up the level of consumption at present is not employment or wage growth, but the expansion of consumer debt, primarily through borrowing against home equity, which has been expedited by record low interest rates.

Under these conditions a rapid and sustained increase in investment is unlikely. In 2003, real gross private domestic investment had not yet recovered the level reached in 2000. With manufacturing capacity utilization for 2003, according to the latest preliminary estimates, at 73.4 percent, its lowest level since 1982, corporations have little incentive to invest in new plants and equipment.

All of this raises the larger question of the nature and logic of accumulation under globalized monopoly capitalism. The stagnation of employment traced back to its roots leads to the problem of the deepening stagnation of capitalist economies generally. It follows that the continuing weakness of employment is not an anomaly or simply the result of structural shifts between industries, but is rather a product of more fundamental problems of accumulation affecting capitalism as a whole. This can be seen in the long-run decline in the rate of growth of world output per capita since the 1960s as shown in chart 2. Here we see a clear step-by-step reduction in the rate of growth of world output from 1961–2003. The rich economies at the center of the system, from which such stagnation tendencies emanate, enjoyed considerable success in exporting their economic failures to the poorer economies of the periphery, which have then had to carry a disproportionate share of the costs of the faltering accumulation of the system, on top of their already serious problems of underdevelopment and dependency. The result has been generalized global stagnation with very few exceptions.

These facts would seem to challenge received economic wisdom. It is an article of faith among orthodox economists that rapid economic growth is a normal and natural trait of capitalist economies. In contrast, we have been arguing the opposite in this space for many years now.* Far from being an inherent characteristic of the system, rapid economic growth is best understood as occurring under specific historical conditions. In the early stages of industrialization capitalist economies have often been known to grow at a fast pace, since an entire industrial infrastructure is being built up from scratch. But once economies mature, in the sense that the core industries have sufficient industrial capacity to meet all current and prospective demand of the population for goods produced in those industries, investment tends to be more limited, constrained by the weight of productive capacity generated by past accumulation. The concentration and centralization of capital and the emergence of monopoly capital (the capitalism of giant firms) eventually ushers in a system in which price competition is effectively banned in mature industries, while competition to reduce production costs nonetheless continues. This tends to increase the economic surplus generated, which increasingly falls under the control of the giant firms. The result is a growing problem of surplus absorption. Corporations are constantly in search of profitable investment outlets for their investment-seeking surplus—in the face of vanishing investment opportunities.

In such a mature, monopolistic economy, stagnation, characterized by relatively slow growth and rising unemployment and excess capacity, becomes the state toward which the economy gravitates—short of special developmental factors that enter in to lift the economy out of its doldrums. The question to be explained, then, is not so much stagnation itself (as most economists still believe), but rather the advent of more or less rapid growth during certain brief periods, such as the 1960s or the latter half of the 1990s.

In order to explain why relatively high rates of growth have occurred at such times it is more useful to look at the historical environment surrounding the economy than at the internal logic of capital accumulation (see chart 2). Although tending toward stagnation, the U.S. economy has been boosted by various artificial means, much like the respirators used by mountain climbers to scale the highest peaks. The largest such source of stimulus in recent decades has been a vast outpouring of private and public debt associated with an era of financial speculation. Another has been the boost provided by massive amounts of military spending, without which investment and employment would be greatly reduced. A third stimulus has been an enormous development of the “sales effort” in the form of modern marketing, (which encompasses not just advertising, but also product development, targeting and sales promotion) now running at well over a trillion dollars a year.*

Such stimuli, however, have their own inherent limits. The bursting of the financial bubble in 2000, associated with the stock market meltdown, set the stage for the recession that was to follow. Military spending declined as a percentage of GDP, though remaining massive, following the end of the Cold War—and has only now begun to climb back toward its Cold War heights as a result of the so-called War on Terrorism. Marketing, while continuing to increase, seems to run up periodically against the limits of commercialism—the fact that it is more and more difficult to find new aspects of existence to commodify. Moreover, no amount of hard selling can produce consumption where consumer purchasing power is lacking.

Outsized technological innovations and the emergence of whole new industries can help inject new life into the economy—as in the case of the second wave of automobilization of the U.S. economy in the 1960s or the growth of information technology in the 1990s. But even such important innovations may prove insufficient to keep the economy going at a high level for long.

Stagnation is in effect so built into the structure of accumulation that there is no easy way out for the modern capitalist economy. Attempts to overcome the stagnation problem by intensifying exploitation globally have only succeeded in the long-run in aggravating the underlying illness. At the same time the legitimacy of the system is being undermined in the eyes of the larger population. Eventually, this is likely to have political as well as economic repercussions. The fact that there is some awareness of this in the investment community can be seen in a special June 12, 1998, economic report on “Global Restructuring” authored by Stephen Roach for Morgan Stanley, which states:

There are signs that American labor has borne a disproportionate burden of the successes of corporate restructuring. More than 15 years of relatively stagnant wages, combined with a sharp widening in the inequalities of the income distribution, underscores the dark side of the American restructuring experience. I plead guilty of oversimplifying this most basic tension of the Anglo-Saxon restructuring model by depicting it as a classic power play between capital and labor. With worker rewards (compensation) lagging worker contributions (productivity) since the early 1980s, I have argued that it was only a matter of time before a politically-inspired backlash would occur that would shift the pendulum of economic power from capital (shareholders) back to workers. While it hasn’t happened yet, there is no reason to believe that such a reflex action won’t occur at some point in the not-so-distant future.

One thing is certain, the vested interests (which includes both political party establishments) have no interest in raising issues that might awaken the U.S. working class from the deep sleep into which it has fallen and thus invite the class struggle from below that Roach both envisages and fears. Hence every effort will be made by the powers that be to ensure that the real nature of the employment problem under capitalism continues to be swept under the rug. The job debate that is building up in the context of the jobless recovery and current election fight is thus likely to be kept within very narrow limits by representatives of both parties. The Democrats will blame it on the Bush administration. The Bush administration will project huge employment increases in the future arising from its tax cuts—coming into play after an enormous lag. The responsibility of the left in these circumstances is clear: to reject all such opportunistic responses and to connect these problems to their root causes in capitalism itself and to the evolution of its structural crisis.

Please contact the assistant editor. for the notes to this essay.