This chapter is from the book
This chapter is from the book
This chapter is from the book
Structural Shifts
Unlike previous business cycles, there have been significant structural changes in the economy due to technological advances, increased globalization, and unfavorable demographic trends (see Table 1.6). Aided by advances in computer and communication technologies, organizations have automated, reengineered, and outsourced numerous jobs that were once filled by onsite full-time employees. As a result, many standardized and transaction-based jobs have either been automated or sent overseas to low-wage countries. All this is occurring at a time when the global economic environment is creating significant competitive pressures for U.S. companies.
Table 1.6 Structural Shift: This Is Not Your Typical Business Cycle
Growing skills gap |
Slower economic growth |
Structural unemployment |
Furthermore, advances in technology are fundamentally changing how firms compete. There is pressure to be more innovative, more responsive to customer preferences, and more efficient. The result is a significantly greater need for highly skilled human capital at a time when there are severe constraints. The slow growth of the U.S. labor market due to a decline in birth rates and a plateauing of worker participation rates, coupled with a lackluster educational system, are creating a structural economic shift that will transform how we conduct business and the lives of workers for decades to come.
Growing Skills Gap
A large part of the structural shift constraining economic growth is the growing skills gap due to the imbalance between the current supply of highly skilled workers and increasing demand for these types of workers. Most of the developed world economies are optimized for 20th century industrial-based economies, whereas new jobs being created are for 21st century knowledge-based economies. This negative structural shift in the labor market is creating difficulties for companies that require highly skilled workers to remain competitive as well as immense difficulties for the millions of workers unable to find work. Exacerbating this war for talent is an aging workforce soon to be retiring and a rise of rapidly developing economies’ increasing demand for talent.
The demand for highly skilled labor is expected to increase significantly over the next decade. The BLS projects total employment in the United States will rise 20.5 million (14.3 percent) between 2010 and 2020 from about 143.1 million to 163.5 million jobs. All the occupations that require a college degree are projected to grow at an above-average rate throughout this time period. Occupations that require a master’s degree will see the largest percent increase (21.7), followed by those that require a doctoral or professional degree (19.9 percent), associate degree (18.0 percent), and bachelor’s degree (16.5 percent). In terms of typical on-the-job training, occupations that typically require apprenticeships are projected to grow the fastest (22.5 percent). The occupations that will grow at a below-average rate include those that require a high school diploma (12.2 percent) and those that require less than a high school diploma (14.1 percent) (Lockard and Wolf, 2012).
According to a study conducted by the National Science Foundation (NSF), the number of graduates entering the workforce trained in science and engineering is declining, whereas the number of jobs requiring these skills is increasing. As predicted in the 2004 study, the number of science and engineering jobs increased approximately three times as fast as all other occupations from 2001 to 2010. The rate of growth in these highly skilled jobs is expected to increase over the next decade. Exacerbating this imbalance in supply and demand is the projected retirement of large numbers of scientists and engineers (S&E). S&E workers who are part of the baby boom generation that entered the workforce in the 1960s and 1970s will be retiring over the next 20 years. The study also predicts that other supply and demand imbalances are projected in the jobs within the health science, math, and computer science fields (National Science Board, 2004).
The growing imbalance of the supply and demand for highly skilled workers is not just endemic to the United States, but is a global phenomenon. Research by the McKinsey Global Institute conducted in 2012 found that employers in advanced economies might soon be unable to find as many college-educated workers as they require. The gap in the United States could reach 1.5 million graduates by the end of the decade. In the rapidly growing economy in China, the shortfall can be as high as 23 million college-educated workers by 2020 (Lund et al., 2012).
Companies are not only concerned about finding new talent that have the complex skills in high demand, but are also concerned about the skills and capabilities of existing employees. A study conducted by IBM noted that more than one-third of companies thought their employees’ skills were not aligned with current demand (Benko and Anderson, 2010a). These companies reported that “the inability to rapidly develop skills is the primary workforce challenge” (IBM, 2008). In a worldwide survey conducted by the Manpower Group, one in three (34 percent) employers experienced difficulties filling positions due to a lack of available talent, a nearly 10 percent increase from 2010. When asked why, over one-quarter of the respondents said candidates’ lack of experience necessary for the position; another 22 percent cited a lack of technical competencies or “hard” skills; whereas 15 percent noted candidates’ lack of business knowledge or formal qualifications (Manpower Group, 2011).
In the past, companies have relied on a flow of highly skilled talent who emigrated to the United States to pursue higher education and the many job opportunities at companies in need of their skills. In 2010, foreign students received 17 percent of bachelor’s degrees, 29 percent of master’s degrees, and 38 percent of Ph.D. degrees awarded in science and engineering (National Science Board, 2012). However, as the demand for highly skilled talent increases globally, the flow into the United States is expected to slow. Indeed, the number of science and engineering positions has increased by 23 percent over the last decade in OECD nations compared to an 11 percent increase in the United States (National Science Board, 2012). According to an OECD report on the mobility of highly skilled workers, as opportunities for these workers increase along with advances in information and communication technologies, a growing class of global in-demand workers is evolving that is highly mobile. These workers, many of whom are educated in the United States, are now returning to their home countries or to other developing countries where the demand for their skills continues to increase at a rapid pace (OECD, 2008).
To make matters worse, U.S. immigration policies desperately need to be updated to reflect the realities of the 21st century workplace. All too often, brilliant foreign students who are trained at our top research universities are forced to leave the country due to their inability to obtain permanent work visas. The need to hire these well-trained students has prompted more than 130 corporations, trade organizations, and chambers of commerce to send a letter to the U.S. Congress urging lawmakers to establish a program to make it easier for foreign-born students who receive advanced degrees in science, technology, engineering, and mathematics (STEM) fields to stay and work in the United States (Heyn, 2012). The letter, which has been signed by such noteworthy firms as Apple and Microsoft, stated that such a policy would enable American companies to retain many foreign students with advanced degrees in STEM fields to work in the United States, which in turn will spur the creation and retention of high-paying manufacturing and research jobs in America.
A number of industries are also facing the prospect of having to replace large numbers of retirees in professional and managerial positions. In a survey of managers at Fortune 1000 companies conducted by Ernst & Young, 27 percent anticipate an upcoming knowledge and skills gap in their organizations due to difficulty in replacing retiring talent. The talent deficit will primarily be in middle management, professional, and technical positions (Ernst & Young, 2010). It’s also forecasted that nearly 60 percent of all government employees will be eligible to retire over the next decade (Barford and Hester, 2011).
Slower Economic Growth
The United States has a consumer-driven economy that for decades has benefited tremendously by a growing and well-educated population and worker participation rates that positively impacted income growth and consequently consumption and economic growth. Today, these engines of economic growth are beginning to stall. The slowing population growth rates and declining worker participation rates have negatively impacted the labor force and income growth rates. Furthermore, there are an unprecedented number of workers expected to leave the workforce over the next two decades.
The retiring baby boomers present a large economic problem for this country. During their working years, baby boomers were a huge force in economic output and consumption. Their exit from the workforce will negatively impact future growth. In addition to these headwinds, there is a tremendous amount of deleveraging at the consumer sector of the economy and pressure to reduce government debt that is further dampening growth. Lastly, though the United States has the largest economy in the world, its global economic dominance is declining, and it continues to generate large trade imbalances with the rest of the world.
As the U.S. population continues to get older, government spending on social security and healthcare has been increasing at an alarming rate. The leading edge of the baby-boom generation became eligible for limited Social Security benefits in 2008 and Medicare benefits in 2010. By 2011, total healthcare expenditures consumed 8.2 percent of GNP, a 600 percent increase from 50 years ago. Total Social Security and Medicare expenditures are projected to outpace GNP growth as this large cohort continues to get older and as the costs of sophisticated medical care, including new technologies, continue to rise. As a share of nominal federal government spending, these two programs grew from 27.9 percent in 1990 to 32.6 percent in 2010. Social Security and Medicare costs are expected to continue rising to approximately 40 percent of nominal federal government expenditures in 2021 (Byun and Frey, 2012). These rising costs will limit the amount of money the government has to invest in education, R&D, and infrastructure.
The en masse retirement of the baby boomers will also put severe economic pressure on the workers who will have to offset the societal financial drain of these retirees. Labor economists measure this support using the BLS’s economic dependency ratio, defined as the number of people in the total population who are not working per 100 of those who are. As large numbers of baby boomers retire and live longer, this ratio is increasing from 90.3 in 2010 to a projected 106.4 in the year 2030 when the youngest of the baby boom generation reach 66 years of age (Toossi, 2002). As a result, either the payroll taxes for workers will be dramatically increased or benefits will need to be reduced.
In addition to growing government entitlement deficits impeding economic growth, many private pension funds are severely underfunded, requiring massive new capital that otherwise could be put to more productive use. In 2012, as noted in The New York Times, companies in the Standard & Poor’s (S&P) 500 reported that their pension plans had obligations of $1.68 trillion and assets of only $1.32 trillion. The $355 billion shortfall was the largest unfunded amount ever reported according to the S&P. A number of companies reported that their plans were underfunded by more than $10 billion, with General Electric having the largest shortfall at $21.6 billion (Norris, 2012). The main cause of these shortfalls is the lackluster performance of investment markets that have not performed well for a sustained period of time. Over the last 15 years, the S&P stock index rose at an annual rate of less than 5 percent even when including dividend reinvestments. Not since 1945 had a 15-year period been so bleak for the stock market.
The United States and much of the developed world experienced a severe economic downturn as a result of the 2008 global financial crisis. Though the stock market has recouped much of its losses, the continued weakness in real estate and labor markets has wiped out the positive wealth effect that fueled much of the economic growth leading up to the recession. As of the end of 2012, the bull market in stocks that began in 2010 along with modest gains in home prices have helped Americans to regain the estimated $16 trillion they lost during the recession (Federal Reserve, 2013). However, most of the gains that resulted in higher stock prices have been flowing mainly to the wealthy. By contrast, middle class wealth that is mostly in the form of home equity has risen much less.
The disproportional gains to the wealthy will dampen the positive wealth effect on future economic growth. The wealthy are more likely to save these gains rather than increase spending that could help spur growth. In addition, any future gains in home equity are unlikely to result in the type of home equity loans bonanza that fueled consumer spending in the past. Much of the euphoria associated with continuing rising home prices has dissipated. The good news is the U.S. economy is slowly improving, albeit at a much slower rate compared to historical norms.
After experiencing the worst downturn since the Great Depression, the U.S. economy is experiencing a slower-than-average recovery more than 3 years later. Significantly, the recovery coming out of the recession is the lowest on record. It seems that this is not a typical downturn, but something that is fundamentally different than other recessions experienced in recent decades. There is a structural shift in the economy that is a restructuring of the old economic order.
In years past, the average GDP quarterly growth rate immediately following a recession averaged more than 4 percent. However, in 2011 there was no quarter in which GDP grew at a 4 percent rate, and the entire year averaged a 3.1 percent growth rate. Even worse, GDP fell in 2011, growing at an anemic 1.6 annual growth rate. During the first quarter of 2012, the GDP fell back to a 2.2 percent growth rate (it was 3.0 percent in the fourth quarter 2011) and fell further to a mere 0.1 percent growth rate in the fourth quarter of 2012 (Bureau of Economic Analysis, 2013). According to the U.S. Congressional Budget Office and the Bureau of Economic Analysis, the U.S. GDP is projected to grow at an annual rate of 2.7 percent during the 2010 to 2020 time period, which is higher than the 1.6 percent annual growth rate over the 2000 to 2010 period, but slower than the 3.4 percent growth rate from 1990 to 2000 (Bureau of Economic Analysis, 2012).
Another indicator of the structural changes of the economy is the growing divide between the haves and have-nots. These growing inequities have given rise and visibility to many groups around the world that are expressing concern about the future of the global economic and social fabric. The widening inequity within many countries is hindering the prospect of future economic growth. At issue is not only the huge disparity between the wealthiest and the poor, but also the weak growth in median income. Between 1979 and 2007, the average U.S. real pretax income per household grew at a 1.2 percent annual rate. However, during this time period, the bottom 99 percent saw their income grow at one-half that annual rate, at only 0.6 percent, whereas the top 1 percent’s income grew at 4.4 percent annually, more than three times the average growth rate (van Ark, 2011).
Though the concentration of income at the top is a concern and the growing number of people falling into poverty distressing, the weak growth of middle-income earners creates the biggest problem for sustainable economic growth. For example, between 1979 and 2007, the median hourly compensation in the United States increased at a dismal 0.3 percent annual rate (van Ark, 2011). Given the size of this cohort, an income growth rate that fails to at least stay even with inflation significantly diminishes their purchasing power and overall economic demand.
Structural Unemployment
Compared to previous recessions, in terms of employment loss, the 2007–2009 recession was both severe and long. Regarding the 1973, 1981, and 1990 recessions, employment recovered to the level it had at the beginning of the recession in 25, 28, and 31 months, respectively, after the recession began. The 2001 recession took 47 months to recover all job losses. In sharp contrast to all these recessions, 5 years since the beginning of the 2007–2009 recession, employment has still not fully recovered and remains 5 percent below the level it had at the start of the recession (Sommers and Franklin, 2012).
Although the economy has been growing, albeit at a slow rate since 2010, there are still large numbers of unemployed individuals. From December 2007 to June 2009, the U.S. unemployment rate doubled from 5 percent to a peak of 10 percent. Since the Great Recession ended in the third quarter of 2009, the unemployment rate has remained at more than 8 percent for the longest period of time since the Great Depression. It wasn’t until October 2012 that the unemployment rate finally fell below 8 percent. As of March 2013, the unemployment rate stood at 7.7 percent (BLS, 2013).
The concern is many of those jobs eliminated during the economic recession are not expected to return. Many positions have been lost due to technology, offshoring, and squeezing more productivity out of existing workers. The slow recovery in employment has also been accompanied by a severe decline in the labor force participation rate, with many long-term unemployed workers having grown discouraged and dropping out of the labor force. As of 2012, the labor force participation rate stood at 64 percent, the lowest rate since January 1984. The BLS posits that this is a structural decline and expects it will persist over the coming decade falling further to 62.5 percent in 2020 (Byun and Frey, 2012).
Labor economists debate whether the slow employment recovery is the result of structural changes in the economy or due to a severely slow recovery in cyclical demand. Cyclical unemployment typically results in workers being laid off due to weak demand, but who expect to be hired again in their same occupation either by their previous firm or within the same industry when demand picks up. Structural unemployment is the result of weak demand rooted in other causes that hinder a worker’s ability to return to work as demand revives. For example, weak demand may motivate firms to outsource or offshore nonstrategic work or accelerate the adoption of new technologies and practices that result in work being eliminated or transformed (Sommers and Franklin, 2012).
Workers who are unemployed due to structural causes are likely to be out of work for a longer period of time than someone who is unemployed due to cyclical reasons. Some workers who lose their job due to structural causes might have to completely change occupations and might require retraining. Though there is some debate, we are experiencing significant structural changes in the labor force and economy that may result in a natural unemployment rate that is much higher than recent decades.
In addition to high unemployment, the United States is also witnessing high underemployment. Underemployment is defined as working in a job that is below one’s full working capacity, such as a full-time worker who is forced to work in a part-time or temporary job or in a job that does not fully utilize the individual’s skills and consequently pays a lower wage. In 2012, the BLS reported approximately 17% of the labor force (26 million workers) was underemployed (BLS, 2012).
As the economy starts to grow, more jobs become available and more workers enter the labor force, which ironically will temporarily increase the unemployment rate, but also increase worker participation rate. However, the continuing technological advances and interdependency of global markets are creating many difficulties for low-skilled workers. For example, many jobs in the manufacturing sector have been permanently eliminated due to technological advances, and many of the newly created manufacturing jobs require higher skills. If the United States cannot enhance the skills of the bottom half of the workforce soon, then those lower-skilled workers must accept the prevailing global wage levels. The result can be a massive decline in the standard of living. Echoing this sentiment, the National Academy of Sciences issued a report warning that the United States is “on a losing path” competing in the global economy if it does not start strengthening the national commitment to education and research (Galama and Hosek, 2008).
Indeed, in the 2012 World Economic report, the United States’ global ranking among the most competitive economies fell for the fourth year in a row, from fifth to seventh. It listed government bureaucracy, high taxes, and an inadequately educated workforce among the biggest deterrents of doing business in the United States. Other factors contributing to the decline of U.S. competitiveness include the millions of manufacturing jobs outsourced to countries that have lower wages, the spread of capitalism to formerly closed economies, and advances in technology that have enabled companies to do business almost anywhere in the world. The nation’s $16 trillion debt is also a deterrent to U.S. competitiveness because it diminishes government investments in education and infrastructure and increases uncertainty among businesses about taxes and interest rates (Schwab, 2012).