More jobs don't mean more growth

Sectors adding the most workers are not the most productive

How can the US economy keep creating jobs and still grow so slowly? One explanation can be found in the latest employment data: The sectors adding the most workers are among the less productive.

The Labor Department’s monthly survey for May suggests that employers were still in a hiring mood. They added an estimated 138,000 jobs — less than expected but still enough to push down the unemployment rate, which declined slightly to a 16-year low of 4.3 per cent (albeit due to a drop in the number of people actively seeking work — a requirement for being counted as unemployed). In all, non-farm payrolls have expanded by more than 16 million jobs since the end of 2009.

Impressive as the employment growth may be, it won’t do as much as it could for the economy unless those workers start producing a lot more goods and services. So will they? To get a sense, I took 14 industry sectors and divided them into three productivity groups, based on a very rough estimate of how much their output per hour increased during the decade through 2016. 

The results aren’t encouraging. The high-productivity-growth group — which included sectors such as manufacturing and information —saw by far the smallest job gains, only 0.4 per cent in the year through May. It’s still more than a million jobs away from recouping its losses in the last recession. The groups with slow and middling productivity growth — including sectors such as education, hospitality and construction — gained 1.8 per cent and 2.6 per cent, respectively.

Employment is also shifting towards sectors with lower levels of output per hour, a phenomenon that should reduce measures of economy-wide productivity growth. 

The trends are troubling, because producing more for each hour worked is crucial to boosting wages and increasing living standards in the longer run. The shift toward lower-productivity jobs also supports a theory posited by the late economist William Baumol: That as some sectors figure out how to make do with fewer workers, overall employment will inevitably gravitate towards those that can’t or don’t (which also helps explain why costs keep growing in the latter). Manufacturing might ultimately need hardly any workers at all, but we’ll pretty much always need the same number of people to perform a live concert.

To be sure, measuring productivity is a tricky business. If the quality of entertainment, health care or houses has increased more than the economic data reflect, workers in those sectors might be a lot more productive than we recognise. Also, past gains might not be the best guide to the future: Driverless cars and trucks, for example, promise to be a game changer in the transportation sector.

Still, it’s worth considering what can be done to boost productivity in services. As economist Victoria Bateman has noted, various barriers to trade and to the free flow of labour — such as poorly crafted immigration policies and excessive occupational licensing — stifle the competition needed to catalyse gains. Removing such obstacles might not have an effect on all kinds of jobs, but every bit helps.

© Bloomberg