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THE DRUCKER DIFFERENCE July 15, 2011, 10:49 AM EDT

Behind America's 'Jobless Recovery'

Increased manufacturing productivity and a dearth of qualified job applicants in all
sectors present an economic challenge for the U.S.

By Rick Wartzman

In 1984, with the U.S. having emerged from a deep recession two years earlier, Peter Drucker
observed that many people were scratching their heads and asking, "Where have all the jobs gone?"
Drucker, however, had a 180-degree-different question on his mind: "Where," he wondered, "have all
the jobs come from?"

"All developed industrial countries are losing jobs in the smokestack industries," Drucker wrote. "But
only the U.S. economy is creating jobs at a much faster rate than the smokestack industries are
losing old ones, indeed at a rate that is almost unprecedented in our peacetime history." He went on
to praise "Americas entrepreneurial job machine," citing "midsize growth companies" as a
particularly vigorous source of new employment.

Today, with the nation once again two years into an economic recovery, Druckers job machine is
clearly on the fritz. Last weeks Labor Dept. report, showing that employers added a feeble 18,000
net new positions in June, underscored the great disconnect that has characterized this period:
Businesses are earning lots of money, but theyre just not hiring.

Pundits have offered a variety of theories to explain this phenomenon, many of them freighted with
political overtones. But Drucker, I think, would have singled out two reasons for the jobless recovery.

SOARING PRODUCTIVITY
The first is that companies are increasingly figuring out how to do more with fewer hands. It is a
trend that one can see most plainly in manufacturing.

Last week, President Barack Obama talked about the imperative of generating more jobs in the
sector. "We have to be successful at the cutting-edge industries of the future, like Twitter," he said.
"But we also have always been a country that makes stuff. And manufacturing jobs end up having
bigger multiplier effects. So one manufacturing job can support a range of other jobssuppliers, and
the restaurant near the plant, and so forth."
While the Presidents statement was basically true, he left out an important proviso: Yes, America
has always made stuff; in fact, we now run neck and neck with China as the world leader in doing so.
We also make more than twice as much stuff (in inflation-adjusted dollar terms) than we did 40 years
ago.

The rub is that, because of tremendous gains in productivity, it requires far fewer individuals to forge
and fabricate all these products than it used to. What took 1,000 people to churn out in 1950the
dawn of a golden age for blue-collar worknow requires about 185, according to the Federal
Reserve Bank of Chicago. In 1979, at the all-time peak, more than 19 million men and women in the
U.S. were engaged in manufacturing. Today, fewer than 12 million are.

"The real threat to manufacturing jobs," Drucker wrote in Managing in the Next Society, "is not
competition from abroad but the rapid decline of manufacturing as a creator of work."

SHORTAGE OF SKILLS
Yet this is only part of the story. In 1985, a year after touting Americas ability to replace its
disappearing smokestack jobs, Drucker put his finger on another trend: "We face a growing
mismatch," he warned, "between jobs and available labor supply."

Exactly how much this problem is contributing to the current crisis is open to debate. But theres little
doubt Drucker was on to something significant. Narayana Kocherlakota, the president of the
Minneapolis Fed, asserted last year that about a third of the nations joblessness results from a
discrepancy between the skills employers seek and those of the workers available. The McKinsey
Global Institute found that 40 percent of the 2,000 U.S. companies it recently surveyed have had
positions open for six months or more because they havent found the right candidates to fill them.

"Skill shortages are not confined to engineers, scientists, and computer programmers," McKinsey
noted. "Our interviews reveal a broad set of fields that require different levels of educationwelders,
nursing aides, nutritionists, and nuclear techniciansin which employers cannot find qualified
workers."

A fix here wont be fast or easy. We need individuals to take responsibility for acquiring technical and
analytical knowledge, a tall order in a nation where more than a quarter of all public high school
students dont graduate on time.

NEED: TRAINING PROGRAMS

New jobs demand "a habit of continuous learning," Drucker wrote in a 1994 article. Those who
previously would have gone into manufacturing "thus cannot simply move into knowledge work or
services the way displaced farmers and domestic workers moved into industrial work. At the very
least they have to change their basic attitudes, values, and beliefs."

Despite a very mixed track record, we also need large-scale government investment in learning
programs for all ages, a daunting notion during an era when politicians from both parties are set on
slashing budgets. "The school can no longer be content to be a place that takes care of juveniles,"
Drucker advised. It must "be the partner of adults as well as the partner of their employing
organizations."

And we need businesses to take a more aggressive approach to the issue. "Companies will have to
both step up and considerably change their training," Drucker declared. "American business is
already the countrys largest educator. But most companies have training programs rather than a
training policy. Few focus their training on the companys needs five years out. Fewer still have
any idea of what they are getting for all the money and effort they spend on training, let alone what
they should be getting."

Although Drucker wrote that passage more than 25 years ago, it is hard to imagine that much has
really changed since then. But, somehow, its going to have to change if we have any hope of getting
the job machine cranking again.

Rick Wartzman is the executive director of the Drucker Institute at Claremont Graduate University.

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BUSINESS

Contract Workforce Outpaces Growth

in Silicon-Valley Style Gig Jobs
New research shows labor shift affects health care, education and other industries that have
traditionally offered stable employment

The growth of Silicon Valley companies such as Uber Technologies has shined a bright light on the so-called gig
economy. PHOTO: JEFF CHIU/ASSOCIATED PRESS

By ANNA LOUIE SUSSMAN and JOSH ZUMBRUN

March 25, 2016

Uber drivers arent the only gig workers rattling the U.S. economy. Older
workers, especially women, increasingly are filling in as contractors across a
range of traditional industries, from highway inspectors to health aides.

As companies look to shed noncore tasks and government budgets come under
strain, an expanding share of the workforce has come untethered from stable
employment and its attendant benefits and job protections.

The explosive growth of Silicon Valley companies such as Uber Technologies

Inc., where on-demand drivers summoned by an app set their own hours and are
paid by the ride instead of an hourly wage, has shined a bright light on the

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so-called gig economy. But new research shows this shift away from steady
employment has taken place largely in the shadows.

The rise has happened

even across industries
including health care
and education,
manufacturing and
public administration,
with professions that
have traditionally
offered stable
employment.

Since 2005, the

number of workers in
alternative
arrangements has
climbed by more than
half, rising to nearly
16% of the workforce
from 10% a decade ago,
according to forthcoming research by Alan Krueger of Princeton University and
Lawrence Katz of Harvard University. Meanwhile, the on-demand workforce or
gig economy employs only about 600,000 people, or less than 0.5% of the
workforce, the research finds.

RELATED

The Entire Online Gig Economy Might Be Mostly Uber (http://blogs.wsj.com/economics/2016/03/28/the-

entire-online-gig-economy-might-be-mostly-uber/)

Worries about the gig economy have distracted us from this larger change thats
had more fundamental and pervasive effects, said David Weil, administrator of
the Labor Departments Wage and Hour Division, which enforces employment
standards.

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The Labor Department breaks down the four main types of alternative work
arrangements into independent contractors, on-call workers, temp workers and
workers employed by contract firms, but it hasnt updated its count of such
workers since 2005.

Messrs. Krueger and Katz hired Rand Corp. to replicate the survey, sampling
roughly 4,000 people. The findings show how alternative work has spread across
industries and occupationsincluding those not associated with the gig
economy.

For example, they estimate the share of workers in alternative arrangements

has more than doubled to 11% in manufacturing and to 16% in health and
education. It has quintupled, to 10%, in public administration.

Workers in these alternative arrangements often find themselves with erratic

schedules, spotty earnings and few benefits such as health insurance, Social
Security or a retirement plan. Some arrangements, like subcontracting or
independent contract work, raise questions about worker safety, employer
liability and consumer protections.

Mr. Krueger said the sharp rise in these kinds of jobs highlight the need for
measures to help people smooth their incomes from up and down periods,
adding that it also left workers on the hook for their own social safety net.

That is often the case for home health-care aides like Nena Ruiz, 72 years old,
who has worked as a caregiver since 2003, sometimes as a full-time employee
and sometimes as an independent contractor. For the past two years, she has
been working on-call, filling in for other caregivers when they call in sick or go
home for a vacation. She would like to find more regular work, but without any
savings she cant afford the $60 to $80 to do fingerprinting and a tuberculosis
test that are required in applying to a new agency.

Alternative work has evolved from industries like construction and

transportation to health and education. A decade ago, the phenomenon was
more common for male workers, about 12% of whom were in alternative
arrangements compared to 8% of women. That gender pattern has reversed,
Messrs. Krueger and Katz found. Today, about 17% of women and 15% of men
hold such jobs.

Nor have white-collar industries been immune from the shift. The number of
workers in alternative arrangements, for example, in the legal industry has
nearly doubled over the past decade. The business process outsourcing industry

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essentially white-
collar contracting
firmshad $136
billion in revenue last
year and has been
growing 4% a year
since 2000, according
to the industry
research firm
IBISWorld.

Companies seeking to
reduce in-house
operations have many
options. Large staffing
agencies like Adecco
SA, ManpowerGroup
Inc. and Kelly Services
Inc. can place workers
into a growing range of
rolesincluding
higher education,
government and
health care.

The steep jump in workers in alternative employment complicates the rosy

picture of the labor market highlighted by officials at the Federal Reserve and in
the Obama administration. While the economy has added nearly 14 million jobs
since 2010, more than recovering the number of jobs lost during the recession,
the new data suggests a growing slice of the workforce has only tentative ties to a
main employer.

The rise of alternative work has many causes. Some workers, such as lawyers,
doctors or professionals near retirement, may prefer the flexibility of
self-employed contracting.

In other cases, companies contract out to shed benefits they pay to full-time
staff, to focus on core competencies, or to distance themselves from liability
costs.

Last November, Tori Johnson was hired through a staffing company to work the

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overnight shift as a production technician at Nissans auto plant in Canton, Miss.

She hopes to get hired by Nissan at the end of her six-month contract, since the
unionized workers doing the same job can make nearly twice as much as the
$13.75 an hour she gets as a temp.

But she isnt optimistic her status will change, since she works alongside people
who have been permatemps for two or three years.

Im on my feet the same amount of hours, and Im making $13 an hour, said Ms.
Johnson, 40.

A Nissan spokesman said the company offers wages well above the average
manufacturing wage in areas where it has U.S. operations and has clear career
progression for its contract workers.

Even federal, state and local government increasingly use contractors

throughout their ranks to carry out administrative, management and
information technology tasks.

A Congressional Budget Office report last year said spending for these
government services had nearly doubled between 2000 and 2012, after adjusting
for inflation, accounting for about $260 billion of spending. The contracts were
so widespread and complex that CBO said it was unable to quantify how many
people were in this contracted workforce.

Supporters of these outsourcing practices such as Jeffrey Eisenach, a business

consultant and economist with the American Enterprise Institute, a
conservative think tank, see them as ways to use labor more efficiently and to
hire people when you need them.

However, opponents like Rebecca Smith of the National Employment Law

Project, which advocates for low-wage workers, see the practice as a pattern
where companies that call the shots distance themselves from the people doing
the work at the bottom.

Mr. Weil of the Labor Department dubbed this economywide phenomenon the
fissured workforce, the title of a 2014 book he wrote on the topic. Messrs.
Krueger and Katzs new research provides the broadest confirmation to date
that these trends are growing.

His hunch for the future? The economic, technological and organizational forces
behind this fissuring are likely to be stronger than ever.

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Special report: The new economy
In this special report
Untangling e-conomics
Elementary, my dear Watson
Solving the paradox
Virtual guesswork
Bubble.com
Labour pains
Knowledge is power
The end of taxes?
Catch up if you can
Falling through the net?
The beginning of a great adventure
Sources
Reprints
A survey of the new economy

Wanted: more brains, less brawn

Sep 21st 2000 | from the print edition
GO TO www.paywatch.org
(http://www.paywatch.org) , a website set
up by trade unionists to monitor bosses
pay at all big companies, and tap in your
annual pay. Suppose you are a blue-collar
worker employed by General Electric,
Americas biggest company, earning
$25,000 a year. You will learn that if you
want to equal what your ultimate boss,
Jack Welch, got paid last year (including his stock options), you will
have to work for 3,663 years. Todays average chief executive earns
475 times as much as the average factory worker, up from a ratio of 42

1 of 6
in 1980. The new economy is rewarding some more handsomely than
others.

Until a few years ago, workers main worry was that new technology
would create mass unemployment as people were replaced by
computers and robots. Americas boom during the past few years has
muted such fears: unemployment has fallen to 4%, the lowest rate for
30 years. Ever since Britains Luddites in the early 19th century
smashed the power looms and spinning jennies that threatened their
livelihood, people have feared that technological change would increase
unemployment. Yet during two centuries of huge technological progress,
employment has risen almost continuously. Millions of jobs have been
destroyed, but even larger numbers of new jobs have taken their place.
For blacksmiths and coachmen, read car mechanics and airline pilots.

But that is little consolation if you are one of those whose job is
destroyed by new technology. A steel worker cannot easily get a job as
a computer programmer. Most of the jobs being lost as a result of IT are
concentrated among the low-skilled, whereas many of the new jobs
require good education and skills. As the demand for brains has risen
relative to the demand for brawn, so wage differentials have widened in
favour of the better-educated. Since 1979, average weekly earnings of
college graduates in America have risen by more than 30% relative to
those of high-school graduates (see chart 12), increasing the wage gap
to its widest for at least 60 years. The wage gap between college
graduates and high-school drop-outs has grown by twice as much. Since
average real wages rose relatively slowly for much of this period, the
real pay of the least educated has actually fallen over the past 20 years.

Why life isnt fair

Economists have put forward four main

explanations for the increase in wage
inequality: technological change;
increased imports from low-wage
developing economies; higher
immigration of low-skilled workers; and
the waning power of trade unions. All
four have probably played a role, but

2 of 6
most economists reckon that new technology is by far the most
important factor. Trade by itself is simply not large enough to be the
major culprit, and the timing is wrong. Americas trade with developing
economies grew much faster in the 1990s than in the 1980s, yet most
of the rise in wage inequality dates from the 1980s.

There are two reasons why computers might increase the relative
demand for better-educated and more highly skilled workers.
Low-skilled, routine jobs, done by clerical and production workers, can
be automated and replaced by computers more easily than professional
or managerial jobs. The second reason is that computers complement
skilled workers, increasing the return on the creative use of information,
whether in designing a car, trading bonds or managing a company.

To shed some light on the factors behind rising wage inequality, Larry
Katz, an economist at Harvard University, has examined the changes in
wage differentials and skill levels over the past century. Educational
standards have increased continuously over time, yet despite a larger
supply of educated workers, the wage premium enjoyed by the better
educated has increased in every decade since 1950. This suggests that
the increase in the relative demand for skills started well before
computers became widespread, but accelerated in the 1980s.

Even so, the pay gap today is still considerably narrower than at the
beginning of the 20th century. Between 1900 and 1939, wage
differentials by educational level were severely compressed. Factory
electrification, like IT, also eliminated many unskilled manual jobs and
increased the demand for skills, but this was more than offset by a huge
increase in the supply of educated workers. In 1910 fewer than 10% of
American youths had high-school diplomas; by the mid-1930s the figure
had risen to 40%.

Skill premium

Mr Katz suggests that although the greater relative demand for skilled
workers caused by IT must have played a part in the widening of wage
inequality over the past two decades, slower growth in the supply of
more educated workers may have been an even bigger factor. In the
1970s, the supply of educated workers surged in America as the

3 of 6
baby-boom generation entered the workforce and college enrolment
rose. But since then the education level of the workforce has improved
much more slowly.

A comparison of the United States with Canada supports this argument.

During the 1980s and 1990s the ratio between the earnings of
university graduates and high-school graduates rose sharply in America,
but fell in Canada. In both countries the demand for skills rose by
similar margins, but the supply of educated workers rose much more
rapidly in Canada than in the United States.

Looking at a wider range of countries, Mr Katz finds that where wage

differentials between skilled and unskilled workers have widened the
most, growth in the supply of better-educated workers has generally
slowed down. In contrast, in France, Germany and the Netherlands,
where wage differentials have not increased over the past two decades,
the supply of educated workers has grown rapidly. Static wage
differentials in continental Europe are usually explained by factors such
as powerful trade unions and high minimum wages. But it is possible
that faster expansion in the supply of well-educated workers is more
important. This suggests that the real culprit behind rising inequality in
America is not IT, but the governments failure to improve education
and training.

Since the mid-1990s, wage inequality in America has flattened or even

narrowed slightly, and growth in the relative demand for college-
educated workers seems to have slowed, despite the continuing spread
of computers. Will IT continue to favour better-educated workers in
future?

Some economists argue that part of the increased wage premium

enjoyed by skilled workers reflects the fact that they tend to be more
flexible, so all technological change increases the relative demand for
skills during a transitional period. But as technologies mature, the
advantage of the better-educated wanes. If this is true, the wage
premium for skill or education depends on the pace of innovation. As a
technology matures, the skill premium will narrow. Perhaps this is
happening now. However, a more likely explanation of why inequality
has stopped rising in recent years is that Americas economic boom has
reduced the unemployment rate to a historic low and pushed up wages

4 of 6
at the bottom end of the labour market.

An alternative, and more persuasive, theory about technology and jobs

argues that each technological innovation favours different skills.
Electricity and computers have both increased the relative demand for
skilled workers, whereas the mechanisation of factories during the
steam age in the 19th century increased the relative demand for
unskilled workers. Highly skilled craftsmen, such as weavers, were
replaced by machines and unskilled labour. So perhaps what matters is
not the pace of innovation, but the type. IT, the current driver of
change, favours better-educated workers, so during this particular wave
of innovation the demand for such workers will go on growing.

Even so, if the government puts more effort into increasing the supply
of well-educated workers, then Americas wage inequality could narrow
in future years. However, that still leaves the question of the growing
divide between the information haves and have-nots. Richer and better-
educated people are more likely to have a computer and access to the
Internet (see chart 13). In 1998, 60% of Americans with incomes above
$75,000 used the Internet, compared with under 20% of those with
incomes below $25,000. More than 60% of college-educated workers,
but only about 15% of high-school drop-outs, used the Internet. Poorer,
less educated people are therefore at a double disadvantage. They have
less access to information which might help them to get a better job,
and they are shut out of e-commerce and the opportunity to seek lower
prices that could most benefit the less well-off.

But the Internet also has a more direct

effect on the labour market: a growing
number of jobs are being advertised
online. About 400 of the worlds 500
biggest firms (and over 90% of
American ones) use websites for
recruitment, and half accept
applications online. Employment
websites, such as Monster.com, can
improve information and reduce search
costs in the labour market. By better
matching of vacancies and job seekers,

5 of 6
this may reduce the level of
unemployment consistent with stable
inflation. But what will the Internet do
to pay structures?

One view, based on standard trade theory, holds that by making it

easier for workers to keep informed about job opportunities and pay
rates, the Internet will help to create a uniform market for skills and
reduce pay variations within occupations, just as Amazon.com has
caused a move towards uniform book pricing across America.

A competing theory suggests that as the Internet expands the market

for individuals with special talents, small differences in ability will lead to
huge differences in rewards. This idea is based on the work of Sherwin
Rosen, an economist at the University of Chicago. In a classic paper
written in 1981, The Economics of Superstars, he explained why in
sectors such as sports and films a few top stars are paid vast sums
whereas the runners-up lag far behind. This winner-takes-all principle
already applies to an increasing number of occupations, including bond
dealers, doctors, lawyers and chief executives. In these jobs, being
slightly ahead of the pack is hugely important. An ambitious investment
bank does not want the second-best bond dealer, so it pays well over
the odds for the best. IT has expanded the market for such skills to a
global scale, so the premium for superstar talent has increased.

David Autor, at MIT, suggests that the Internet could cause both effects
in different parts of the labour market. In routine occupations, such as
cashiers and clerks, pay is likely to become more uniform as technology
reduces regional wage differentials. On the other hand, the superstar
effect could spread to more occupations, such as teaching and software
engineering, as the Internet increases the power of talented individuals
to serve a bigger market.

But if winners take all in the labour market, does the knowledge
economy reward companies in the same way?

from the print edition | Special report

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Write to Anna Louie Sussman at Anna.Sussman@wsj.com and Josh Zumbrun at

Josh.Zumbrun@wsj.com

Corrections & Amplifications:

Alan Krueger of Princeton University and Lawrence Katz of Harvard
Universitys new research provides the broadest confirmation to date that
workforce trends are growing. An earlier version of the article incorrectly
described the new RAND research. RAND collected the data, but Messrs.
Krueger and Katz did the research. (March 26, 2016)

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