Why hiring languishes even as economy gains

It's the great riddle that's puzzling everyone from auto-plant workers to Wall Street prognosticators: Why isn't the current economic recovery producing jobs?

In the rebound from almost every post-1945 downturn, the nation has seen companies start to hire - often vigorously - as business turns up.

That isn't happening today. The net loss of jobs - 1 million since the end of the recession in November 2001 - is much greater than in 1992, when the term "jobless recovery" was popularized.

Multiple factors are at work, some of which could affect the shape of future economic cycles as well.

The economy's growing orientation toward services is one example: This can soften the blow of recessions, as people continue getting their hair done and seeing healthcare providers in bad times. But service industries don't tend to hire en masse during a recovery, either.

Another factor may be less benign: Corporate executives appear more likely than in the past to lay off employees permanently, rather than hoarding them temporarily while awaiting a snap-back in sales. "We have a corporate culture of aggressive cost-cutting to increase profits, even in a business slowdown," says Jared Bernstein, an economist at the Economic Policy Institute, a liberal-leaning research group in Washington.

As the economy has picked up in recent months, many US corporations have found ways to step up production while keeping a lid on their payrolls. That means America's workers will continue to lead the world in efficiency. But it also means many are going without jobs.

That problem has the attention of President Bush, who saw his father lose the presidency during the similar environment in 1992. "We want everybody working," Mr. Bush assured union workers in Ohio on Labor Day, kicking off his 2004 campaign. "There are better days ahead."

Economists generally agree that business is just now picking up enough speed to create some jobs next year.

But so far, the dearth of job creation in this upturn has been so puzzling that a committee of the National Bureau of Economic Research declared the 2001 recession over only after noting "the divergent behavior of employment" - normally a key indicator of the end of a slump.

Economists wonder if something "structural" has changed in the economy that makes recoveries relatively weaker, producing fewer jobs. A new study published by the Federal Reserve Bank of New York answers, "Yes."

Reason No. 1, argue study authors Erica Groshen and Simon Potter, is that management may have become tougher in layoff and hiring policies. Managers lay off both blue- and white-collar workers quickly and are not as prone to hire them back again. Thus, new job growth may increasingly depend on the rise of new firms and industries, and less on rehiring at older firms.

Another factor, in this case, was the mildness of this recession. The researchers say that stimulative policies such as interest-rate and tax cuts helped keep the recession short - only nine months long. Low-interest rates meant that the housing, consumer durables, and auto industries were able to maintain strong sales throughout the slump. Thus they had little room to bounce back in the recovery, as would be normal.

TO many economists, a key to the current slackness in job creation is productivity gains. Employers are getting more output from the workers they already have, and thus need to hire fewer new workers. Workers' output per hour usually falters in a recession. That didn't happen in 2001. During recovery, productivity generally accelerates, but this time the pace appears very strong.

Output per man-hour rose at a 6.8 percent annual rate in the second quarter, the Bureau of Labor Statistics reported last Thursday.

"There must be a kind of substitution of labor by capital" - by new or better use of plant and equipment - suggests Victor Zarnowitz, a member of the committee of economists that puts a date on the turning points in the business cycle.

In the long run, higher productivity is usually a boon to workers as well as to management, paving the way for higher wages and profits. But business may be slow to share the gains with their workers. Real wages have been more or less flat over the past year or so.

Job growth is also held back, some say, by the massive $500 billion-plus deficit in international trade.

"There's a migration of jobs abroad where wages are so much cheaper," says Dr. Zarnowitz. The Bush administration, to a degree, has taken up this explanation for job loss, especially in manufacturing. Manufacturing jobs accounted for 22 percent of the US total in 1970, but only 10 percent of all jobs today.

Treasury Secretary John Snow was in Beijing last week, urging China to, in effect, revalue the yuan to make American goods more competitive in China and Chinese goods more expensive in the United States. Eliminating the trade deficit could boost economic growth by about 2 percent.

Mr. Bernstein suggests another culprit: poor economic policy by the White House.

The Bush tax cuts of $3 trillion over 10 years were badly designed, he argues, because they gave most of the benefits to the well-to-do who are less likely to spend it quickly than lower-income people.