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News : US Economy Last Updated: May 4, 2011 - 8:46 AM

Almost all US jobs added in 1990-2008 were in non-tradeable sector led by government and health care
By Michael Hennigan, Founder and Editor of Finfacts
May 3, 2011 - 3:38 AM

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Economists at the Hamilton Project of the Washington DC think-tank, the Brookings Institution, say that up until the early 1970s, virtually all prime-aged men were gainfully employed - - regardless of whether they had a high school diploma or a college degree. Over the last 40 years, however, the United States has witnessed a dramatic change in the employment situation for men, particularly for less-educated workers who have faced greater challenges finding jobs and have increasingly dropped out of the labour force.

As shown in the chart above, while employment rates for men with bachelor’s degrees have declined only slightly, employment of men with only high school diplomas has fallen considerably -- from a high of 97% in 1967 to just 76% today. (These figures exclude incarcerated men - - in 2009, 3.4% of men ages 30-50 with high school degrees were institutionalized, versus only 0.3% of men with college degrees.) Source: Brookings Institution

In the period 1990-2008, almost all the additional increase in US employment was in the non-tradeable sector led by government and health care.

According to a paper by Prof. Michael Spence, a Nobel laureate in economics, and Sandile Hlatshwayo, a researcher at the Stern School of Business, New York University, almost all of the incremental employment increase of 27.3m jobs was on the non-tradeable side. On the non-tradeable side, government and health care are the largest employers and provided the largest increments (an additional 10.4m jobs) over the past two decades.

Ireland had a similar experience in the period 1998-2007 when over 400,000 new jobs were added in construction, public services, non-tradeable business services, retail and distribution but a tiny amount was added in the tradeable goods and services sectors, which comprise the bulk of exporting trade.

The Spence/Hlatshwayo paper says that the US economy did not have a conspicuous unemployment problem until the crisis of 2008 because the non-tradeable sector absorbed the bulk of the expanding labour force. That pace of employment growth now appears unsustainable. Fiscal weakness, a resetting of real-estate values, and lower consumption all point to the potential for long-term structural unemployment.

The economists say that in terms of economic value-added  -- the output of the economy that is measured by GDP and generally correlates with income - - the tradeable sector experienced a slight edge.

This means that one sector was growing in terms of jobs but not income while the other was growing income but not jobs, resulting in increasing inequality in US society.

The authors say that companies in the tradeable sector, under the pressure of global competition, are moving low- and mid-skilled work to other countries while the higher-skilled Americans who remain in those firms share in the benefits of that shift through wages and salaries that started higher and have been growing faster.

In the non-tradeable sector, the story is one of rapidly rising employment but a slow rise in output, which has resulted in stagnant wages and benefits.

The economists say that "while many goods and services are less expensive than they would be if the country were walled off from the global economy, we cannot assume that these cost savings necessarily compensate for diminished employment opportunities. People might trade away cheaper goods for assurances that a wide range of productive and rewarding employment options would be available, now and in the future."

They add that high value-added, higher-paying jobs, especially in the tradeable sector, generally require highly educated people. More and better education does not by itself guarantee that the number of such jobs is significantly expandable, given the scope of the tradeable sector. But more scientific and engineering degrees might promote job growth and - - together with some public-sector investment in promising technologies - - it might also expand the scope of the tradeable sector as well.

However, they say private incentives and social objectives are not perfectly aligned. Nor are they diametrically opposed either. Multinational firms have access to abundant global supplies of relatively low-cost labour in multiple skill categories, so there is not much payoff to investments that increase labour productivity in high-income countries’ tradeable sectors. Public-sector co-investment properly targeted, however, could shift these incentives by lowering the cost of private technology investment.

The paper says given the prospect of slowing employment growth in non-tradeables and rising competitive pressure on tradeables, major employment problems in the near future are a certainty. Even if the non-tradeable sector is able to continue to absorb the growth in the labour force, pressure on wages and salaries will be downward, and consequences for income distribution unavoidable.

The authors conclude that if employment in advanced countries like the US recovers strongly along with growth, political support for an open global economy will be easier to sustain. But, given adverse trends in the tradeable sector and the non-tradeable sector’s exhaustion as a source of job creation, a more likely scenario is that unemployment remains stubbornly high, despite a return of normal growth. In that case, politics will become divisive and polarized, and the inclination toward protectionist “solutions” will increase, jeopardizing global economic openness.

They says: "It is not a good idea to assume that markets will solve these distributional problems by themselves; the evolution of structure and the income distribution are largely the result of market incentives. All countries, advanced and emerging, have to address issues of inclusiveness, distribution, and equity as part of the core of their growth and development strategies."

The economists say that the late renowned American economist, Paul Samuelson, once said that every good cause is worth some inefficiency. "Morally, pragmatically, and politically that seems right. Delivering on the opportunity part of the social contract is one such cause."

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