Monday, March 31, 2014

Unemployment, Fear and Trade Patterns

Being unemployed today - or in the last few years - is said to be scarier.  Many of the unemployed remain so for longer.  A larger than historic proportion of those that lose their jobs leave the labor force.  Workforce participation is down. 


Patterns of trade have changed.  Think of each of us as our personal entrepreneur working our way in the economy.  Over the course of time, we make investments in our human capital by going to school or gaining on-the-job training that enables us with a productive skill, whether it be bricklaying, roofing, computer programming, paying accounts payable, or selling shoes or cars. 

What is going on is that relatively long term patterns of trade our changing.   Manufacturing has declined.  A bigger portion of consumer budgets are being allocated to non-physical purchases.  Today, your mobile phone bill for your smartphone isn't that far from a car payment for a small car.  Much of what we buy in physical goods has longer life spans.  In many ways, we need less stuff and that stuff we do need consumes less of our paycheck.

Ergo, we need less people to make stuff, ship stuff, sell stuff, account for stuff.  Think of the auto industry.  With information transmitted over the internet providing much of what we used to go to a car dealer for, how many fewer car sales folks do we need?   This has been coming for some time, but revealed itself during the recent deep recession.  When the tide goes out, you can see who has been swimming naked.

Ok, now if you invested in training yourself to be a car salesperson, what do you do?  Your investment in human capital turned out to be a less profitable one than you hoped.  You can hang on and take a lower wage as the oversupply of car salespeople is worked off.  You can leave the workforce and subsist on your savings and government transfer programs - or your spouse's continued income if you've made good choices in other ways.  Or you can write off the loss and retrain to do something else.  The last is understandably hard.  Most of us make our major investments in human capital - learning a trade - in our twenties.  When you go back to redo this in your forties you don't fit in well to the various ways we've created in society to enable that investment.  It is hard to get an internship, or take an entry level job.  It doesn't fit expectations.  It doesn't fit the investment the trainer shares in training you in on-the-job roles.  It is very uncomfortable.

When the patterns of trade are changing more rapidly, as they are now, more people make wrong decision about their investment in human capital - their career choices.  

What is a good career is less visible, especially those that are not the lead careers in the new patterns.  Right now, it's clear that being a computer programmer, or a data scientist, or a telecommunications engineer are likely good bets, but these have always been dominated by outstanding students.  What is a good bet for the rest?  That's not clear right now.  Heck, it is unclear that being a doctor is a good bet over the next few decades right now with all the changes in healthcare.

It has happened before.  In the early 20th century, the patterns of trade shifted between agriculture and manufacturing.  Food became a declining portion of consumer budgets.  Farms employed fewer people.  A portion of those who had built human capital in farming related industries had made poor investments.  These folks had to go find new lines of work and invest in retraining themselves.

According to the USDA, in 1900 41 percent of the workforce was employed in agriculture.  In 1930 21.5 percent of the workforce was employed in agriculture.  In thirty years, the folks in agriculture halved as a proportion of careers.  As the patterns of the industrial economy took shape, people had to learn what they were and how best to be productive - earn income - among those patterns.

A similar shift is occurring today as the patterns that supported the manufacture of things shift to the information and biotechnology economy.  There is emerging a pattern of tradeable services led by firms like Google, Apple, AT&T, Comcast, Media companies, and the leading edge of the medical revolution that consume a bigger proportion of the consumer wallet.  These are the places where work will be.  Workers will need to find productive careers among this infrastructure.

Accurate Reality:  A stable pattern of specialization and trade from the 1940s to the 1980s enabled us to reach very high levels of workforce participation and employment as workers of many qualities were able to accurately forecast human capital needs and invest appropriately.  Since then, shifts in patterns of trade have made some of those same investments pay off poorly.  Until workers are able to see the pattern of trade clearly and then workers of all levels of productivity are able to invest appropriately, we will continue to see mal investment in human capital, reduced workforce participation and higher unemployment.  Fear will continue astride the land.  It will be justified.

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