Unemployment, Inc.: Six reasons why America can't create jobs

UPDATE: No net growth in new jobs in August kept the US unemployment rate at 9.1 percent. Six reasons the country is struggling to put people to work – and why it may not last.

At age 25, Kasondra Clanton is a mom, a grad student, and, most worrisome to her at the moment, unemployed. Until recently, she worked as a drug counselor in Mississippi's Noxubee County School District. But local officials decided not to renew her three-year contract amid a paucity of public funding.

Now she and her boyfriend, Andron Harris, are struggling to make a better life for themselves and their 18-month-old daughter, Heaven. The main problem for both: an unforgiving job market.

Mr. Harris is employed. He slings boxes at a local warehouse for $9.82 an hour. But he says he has little hope for a raise or promotions. As a result, he has been looking for months for a better job – applying for more than 50 so far – and has gone back to school to learn to be an electrician.

IN PICTURES: The 10 happiest jobs

Ms. Clanton, for her part, is working on a master's degree in psychology. But both have discovered how hard it can be to find new work – with or without burnished academic credentials – in a state with a 10.4 percent jobless rate.

"Everywhere I go, they say I'm overqualified," says the young mother at the Leigh Mall in Columbus, Miss. While she chats, Harris shifts the baby from one hip to the other and skims e-mails on his phone, one of which relays a familiar message: latest job application rejected. "It makes me sad," Clanton goes on. "People say, 'Go to school and you'll get a job.' There's no guarantee you'll get a job."

He's looking. She's looking. Nearly 14 million other Americans who are out of work are looking. All this even though the nation officially exited recession more than two years ago.

With the exception of August, the economy generally has been adding at least some new jobs each month, so it's not entirely accurate to call this a "jobless recovery," a name that's been used for tepid job markets after the two most recent recessions, those ending in 1991 and 2001. But it could be that the slow recovery symbolizes something just as troubling: a "less jobs economy," one with a set of deeper challenges that may mean it will be years before the United States gets back to anything near full employment.

Certainly the current moment differs sharply from past recoveries from recession since World War II. It's different in its depth, with 6 percent of all US jobs disappearing. It's different in its duration, with the nation still nowhere near regaining those lost jobs two years later. (See chart, page 30.)

And the question of what's wrong is all the more important now because of new worries that the US is close to tipping back into recession. That could be particularly debilitating given the high level of unemployment and concerns that policymakers have already used much of their available ammunition in efforts to revive growth.

So what's going on?

Some economists say it's a simple but harsh reality: Rebounding after a financial crisis simply takes longer than a typical recovery from recession. This is the first time America has been through such a process since the Great Depression. No doubt this explains a lot of the problem, when you factor in the crisis-related issues of high debts (public and private) and a housing market still hobbled by foreclosures and "underwater" mortgages, where the loan balance outweighs the value of the house. After all, recovery from recession usually happens in part because people and businesses can take out new loans and because home building resuscitates.

Yet many forecasters argue that deep "structural" changes in the economy, some of them dating from before the recession and now amplified by it, also are dampening employment. The forces range from a significant skill gap among unemployed workers to shifting approaches to staffing by employers.

"This recession marked one of those paradigm-changing moments in the US economy," says John Challenger, a job-market expert at the outplacement firm Challenger, Gray, & Christmas in Chicago. Goaded by a crisis to downsize, firms "found that they could basically do the same amount of work ... so they have not rushed to add jobs back."

A technological revolution that began with personal computers a generation ago is both allowing increasingly sophisticated tasks to be automated, and allowing employers to guide their workers to do the right tasks at the right time, Mr. Challenger says. While that force continues to play out, "we're now in a period where we're waiting for the next [big sources of job creation]."

In a popular e-book published earlier this year, economist Tyler Cowen of George Mason University in Fairfax, Va., focused widespread attention on what he calls "the Great Stagnation." He argues that for about a century, America was able to reap rapid growth by harvesting "low hanging fruit" – cheap land, the shift toward universal schooling, and the application of technologies like electric power grids. But for more than three decades now, income growth for ordinary families has stagnated, relative to inflation. And the most recent economic expansions, starting in 1991, have been disappointingly slow, at least in their early years.

Rebooting the economy won't be easy. The political left and right have differing prescriptions. President Obama is expected to unveil his latest jobs plan in coming days. But Mr. Cowen, among others, frets that both parties are pushing unrealistic visions that put too much stress on either government spending (the Democrats) or tax cuts (the Republicans).

And the need to put people back to work may be more urgent now than after most recessions. It holds implications for family well-being, as usual, but also increasingly for the fiscal health of government and America's standing in the world.

Consider just one intertwined issue: The consensus among analysts is that tough choices lie ahead if America is to correct its myriad fiscal issues – including some sort of entitlement reform. But many of these difficult decisions are predicated on the job market getting back to normal. If jobs (and hence tax revenues) fall short, the arithmetic – and politics – will be all that much harder to make work.

Still, for all the daunting challenges, it's not a foregone conclusion that America will suffer a "lost decade." Just because things look bad now doesn't mean they will remain so, as the US and other nations have proved before.

Here are six reasons that help explain why job creation has been so frustratingly slow coming out of the Great Recession – and why those forces may not last forever.

1 The rent-a-worker economy

Laura Dahowski knows a lot about how high-tech firms manage their labor costs. When they need help, she's hired as a contract worker. When the project is over – say, rolling out some new software or video game – so is her employment.

Ms. Dahowski, based in Seattle, is part of a growing cadre of never-permanent employees. That might be a perfectly fine way to work, if the time in between jobs wasn't so long.

Her problem, writ large, may also be a significant factor behind the economy's dearth of job creation. Businesses in many industries are managing their people for maximum efficiency through techniques that range from outsourcing whole departments to relying on contract workers and on-call support. In the past, hiring people project to project was often a way to cut costs in hard times. Now it is becoming a permanent way of doing business.

The result is efficiency gains for employers. That can often be part of a "virtuous cycle" where profits go up, firms invest in new ventures, and jobs and incomes keep growing. But in a depressed economy, moves that have bolstered corporate earnings haven't fueled a recovery in jobs.

"My dad worked for the state of New Hampshire," says Dahowski. "My mother worked for years at an insurance agency. You're there and you're locked in [to wages and benefits]. That's totally not the way that it is now."

Of course, traditional steady jobs haven't vanished entirely. And the definition of "steady" has always depended on the employer's own solvency. But the shift toward more flexible workplaces has accelerated in recent years.

A survey of 2,000 employers by the McKinsey Global Institute, the research arm of the McKinsey consulting firm, found that two-thirds say they have "made changes to achieve the same output with fewer employees" over the past three years. Of those, 44 percent had increased their use of part-time, temporary, or peak scheduling. A similar number have redesigned processes, and 24 percent have outsourced some activities.

In recession periods in the mid-1970s and early '80s, employers didn't lay off as many workers as declining consumer demand suggested they could. In 2001 and 2008, by contrast, employers felt an imperative to keep their per-worker productivity from falling – and the result was deeper layoffs.

Still, labor-market experts point out that workplace flexibility has its benefits as well as challenges. The upside for employers includes being more nimble and focused. It's typical for a firm now to have a core permanent staff – among its most highly valued assets – surrounded by a flexible workforce.

For workers of both types, the current environment includes greater freedom (the opportunity to work at home, for instance) and often good pay as well.

Some types of workplace adaptability can hold advantages even during downturns. Susan Lund of the McKinsey Global Institute notes that Germany has survived the global downturn better than the US, in part because many of its companies reduced work hours instead of cutting so many jobs.

As a result, consumer activity in Germany didn't plunge as sharply.

2 The résumé gap

To say that a lack of job skills is part of the employment problem sounds like blaming workers for their own predicament, at a time when many jobless Americans have both skills and a willingness to retrain.

But some economists argue that this is an important part of the jobs conundrum. And the issue really isn't about blame, but about helping workers, schools, and businesses connect better. If they do, more new jobs and even new industries will be created in the US, rather than overseas or not at all.

Even in the current weak economy, employers say a good number of jobs are going unfilled because companies aren't finding skilled workers.

To give just one example, Mark Hanawalt in Waverly, Iowa, says he's looking for people with technical skills, such as engineering and running computer-controlled tools, for the manufacturing firm he co-owns, United Equipment Accessories. He describes people with those abilities as "highly competitive" and not easy to draw to small-town Iowa. The skills (and in this case geography) gap could become an even bigger problem if the economy shows gradual improvement and more firms want to hire.

The issue goes beyond software engineers and manufacturing to a range of fields, including nutritionists and welders. In some cases, it is a matter of people lacking the know-how. In others, it is simply that they don't know the jobs exist. "There's a clear lack of information getting down to students" as well as the middle-aged jobless about what skills are in most demand, says Dr. Lund.

A skills "mismatch" between job seekers and employment opportunities isn't new. What's different now may be the scale of the problem. Job losses in this recession were deeper. And unlike what happened during business cycles half a century ago, many of the jobs won't be coming back as the US shifts from an industrial economy to one driven by knowledge, new services, and innovation.

While some economists see the skills mismatch as a minor issue, a recent analysis by economists at Wells Fargo & Company argued that it's significant enough to push up the economy's "natural" rate of unemployment – the base level of joblessness that's likely to persist even in a good economy. By their estimate, this natural rate has risen from 5 percent to 7.1 percent, with the skills issue a central cause.

The talent gap is one reason some policymakers are calling for, and some students are responding to, a ramped-up effort by community colleges and vocational schools to train people for tomorrow's jobs. Lund points to an advanced manufacturing credential, supported by the National Association of Manufacturers and available through vocational schools, as one model of how to match know-how and shop-floor need.

3 Rise of the 'plutonomy'

The income gap between the richest Americans and those in the middle- or lower-income groups is large, compared with other advanced nations, and it has been widening for several decades. This may be dampening job growth in the current recovery.

The wealthy are less likely than others to spend each new dollar of income – and at a time like this more consumer spending is one of the most reliable ways to boost the economy and produce jobs, explains Peter Cappelli, a labor economist at the University of Pennsylvania's Wharton School in Philadelphia.

Talking about the rise of a so-called plutonomy, a coinage suggesting an economy dominated by wealthy plutocrats, angers many conservatives, who dismiss it as a form of "class warfare." But it's a force worth paying attention to because the economic implications may persist for years. Indeed, one reason for the gap – growing opportunities for a "superstar" or talent elite in a knowledge economy – shows no signs of easing.

There's nothing wrong with rising global wealth, but if it's concentrated too narrowly it could pose a test of social cohesion in places accustomed to broadly rising living standards. In a book published just before the recession, Benjamin Friedman, an economist at Harvard University in Cambridge, Mass., detailed the case that societies benefit from widely shared growth and suffer when their economies stagnate or when gains flow into a few hands.

One example of the growing income divide: If you sort US workers into four groups based on educational attainment, only one has seen its inflation-adjusted median wage rise since 1979. The gains went to people with college degrees or more education, while other groups have experienced declines in real wages. College isn't an automatic ticket to prosperity, but this trend reflects how sophisticated skills and judgment command a wage premium.

4 The China Syndrome

Amid the fecund rows of corn and soybeans in south-central Iowa, Interpower Corporation turns out power cords, transformers, circuit breakers, and other components for electrical and electronics equipment around the world. The only trouble is, so do some companies in China.

Even before the recession, Bob Wersen, the founder and president of the Oskaloosa firm, was feeling global pressure, with Chinese competitors underpricing his products by as much as two-thirds. To survive, Mr. Wersen instituted "lean manufacturing" techniques. Adopting a concept pioneered in Japan, he organized workers in production cells rather than along an assembly line, boosting efficiency. He also cut down on his delivery time of products to customers.

The result is that the company has survived both the recession and the bargain-basement pricing of the Chinese. Yet the transition hasn't been without its difficulties. The company went from record sales in 2008 to a 25 percent drop the next year, and it now employs 82 people, down from a peak of 117 in 2002.

The experience of Interpower is a reminder that globalization has an impact on the employment rolls of American companies, too. While it can make them more efficient, it can also siphon off workers from assembly lines and cubicles.

Like the shift to more flexible workplaces, globalization has been on the march for years. And to some degree, the two trends are related, with some jobs being "offshored" and companies like Boeing learning to make products through global partnerships.

But global competition, in its own right, is another factor behind the weak jobs recovery. "The major emerging economies are becoming more competitive in areas in which the US economy has historically been dominant," warns economist Michael Spence in a recent article for the journal Foreign Affairs.

It's not that trade is a bad thing. Most economists say the gains far outweigh the negative side effects, including job losses in industries that are exposed to tougher competition. But many note that current high US trade deficits symbolize an unsustainable pattern, in which the US keeps going a little deeper into debt each year to finance its import consumption, and emerging nations keep expanding their export edge.

The global economy also represents a major opportunity if US companies like Interpower can make progress. By producing goods for export – or for domestic markets now served by foreign firms – they promise to add jobs.

Several forces may already be shifting to give US firms a better shot. A falling dollar helps make US exports more competitive. Rising oil prices make companies consider locating production closer to customers, and labor costs are rising in nations like China.

5 Somebody start a company!

The formation of new companies typically plays an important role in job creation, as firms pioneer new ideas or products and sometimes notch rapid growth. In the current environment, however, start-up activity has plunged. Running 25 percent below its 2006 peak, it is at its slowest pace since the Labor Department began tracking the activity in 1994.

Moreover, the average number of jobs that each new business creates has declined, dealing a secondary blow to job creation. One problem facing start-ups is tight funding, not just bank loans but the channels of money a nascent firm often gets first from "angel investors," then from venture capitalists, and finally from initial public offerings of stock (IPOs). More broadly, businesses large and small feel high uncertainty and low confidence about launching new ventures in a weak economy.

Yet, even in this slack time for start-ups, forces are at work encouraging more innovation. For one thing, the current "lean start-up" model, involving minimal staff, hints at how the Internet has made it easier than ever to launch a new venture.

"There are all kinds of entrepreneurial opportunities that don't require significant capital," says Bruce Tulgan, head of Rainmaker Thinking, a consulting firm in New Haven, Conn. "The learning curve is much lower than it used to be," and the Web makes it easier to find help, whether it's partners to develop a product or advice on marketing.

6 When a home is a dungeon

We'll end the tour of job-market impediments where we began: with the overhang of high debts in the wake of the 2008 financial crisis. Most people don't need to be reminded that the fallout from the recession has added to an already high national debt, or that about 11 million Americans have a mortgage balance larger than what their home is worth.

The result is that consumers feel less able to spend, while banks are still working through an in-box full of foreclosures and other bad loans. Governments (state and local as well as federal) have their own debt and deficit tribulations.

All this acts as both a financial and a psychological barrier. By some measures, consumer households are making progress. The average ratio of debt-service payments to income has fallen from historic highs to mid-1990s levels, for instance. But by other gauges, there's a long way left to go.

A new survey of 1,000 US adults by Bankrate.com, a financial information firm, found numerous signs of backsliding over the past year. Some 35 percent say their overall financial situation is worse now than 12 months ago, while just 19 percent say it's better. Many now feel less secure in their jobs, and people who have jobs are more likely to have reduced their rate of saving for retirement.

Less in view for the average family, but perhaps just as important, is the turmoil in Europe. Government debt in nations such as Spain and Italy, if not addressed effectively through some fiscal restructuring, could spawn a new financial crisis that would spill over into banks and the global economy. Concern about such a collapse, as well as worries that the US could dip into a new recession, have recently set global stock markets on edge.

The risk of another US downturn highlights the balancing act ahead: The federal government will face financial pressure to curb spending, especially on entitlements like Medicare and Medicaid, but finance experts say the economy could face a short-term hit if fiscal policy shifts too fast from "stimulus" to retrenchment.

So, will there ever be enough jobs again?

The answer in all likelihood is yes, but ...

America faces an enormous jobs hole to dig out of, which could take years. The good news is, for all the problems, at least some jobs are being created.

Marvin Bentley, who works at a direct-mail service firm in New Hampshire, says his company has slashed costs without cutting pay and is now hiring. "We've got ads in the paper right now," he says.

At United Equipment Accessories, the manufacturing firm in Iowa, employment is up modestly this year despite slow sales. "We have been in the process of hiring technical staff for the introduction of a new product line," says Mr. Hanawalt.

And in Boston, the young online retailing firm Wayfair has been expanding its sales and staffing rapidly, even in the Great Recession's wake. The firm has doubled its payroll, to more than 800 people, over the past two years.

In almost an echo of the halcyon days of the 1990s, the firm is not just adding people but trying to nurture them on the job, too. Wayfair cofounder Steve Conine says the firm hands each employee $20 a month to pay for some fun with colleagues, such as bowling or a boat ride, and the founders take time to meet all new employees for lunch.

Still, overall the country would need to generate about 21 million new jobs by the end of the decade in order to return to a 5 percent jobless rate. The McKinsey Global Institute, in an analysis earlier this year, concluded that those gains are possible with the right policies. The leisure and hospitality sector alone could add 3 million jobs, for instance, partly by luring more foreign tourists to the US.

For those searching for one of these elusive positions, the best advice might be patience and perseverance.

These are two traits Clanton and Harris, back in Mississippi, seem to have cultivated. They remain optimistic about their job search, buoyed in part by the simple fact that they are a team. They believe in each other – so much so that they fill out job applications for each other online. Their families believe in them as well. It helps.

As a relative swipes a credit card to pay for a pair of black-and-white boots for Clanton, she returns to Harris's side, grinning with the almost-forgotten pleasure of "retail therapy." She's not discouraged. Not while Harris is still so shyly proud of his fresh start as a college student. Like millions of other Americans, they are building for the future as best as they can.

• Contributing to this report were Carmen K. Sisson in Columbus, Miss.; Steve Dinnen in Des Moines, Iowa; and Kevin Moran in Boston.

IN PICTURES: The 10 happiest jobs