Why millions of jobs aren't coming back

By Kevin Mellyn

Though recent jobs numbers seem to suggest improvement, the underlying data tells a different story. The official statistics vastly underestimate real lack of work that Americans are feeling.

One of the key issues in November is which candidate can credibly promise the voters he can create jobs. The problem is that anyone making such promise is not telling the truth.

One of the odd notions that both political parties pay homage to is that government at any level can “create jobs” other than by hiring people itself or subsidizing others to do so. The historical fact is that our modern concept of employment only dates back to around 1880 and has been dying since about 1980, along with the industrial economy that brought it into being in the first place.

The model of full-time secure employment in the private sector (it had always been common in the public sector) grew up in the late 1800s along with heavy manufacturing industries and utilities that needed skilled labor (like machinists or railroad engineers) rather than “hands” to do low-skill tasks (mill girls, longshoremen). Political institutions adapted to the big public companies that employed more and more of the population through both regulation of labor conditions and support of unionization. Companies tried to keep workers cheap and docile but in the end had to bargain with labor and appease politicians.

The result was an Iron Triangle: big business, big government, and big labor. The Iron Triangle focused on the political process in Washington to divide the loaves and fishes brought forth by unquestioned American dominance of the world economy. Conflict and compromise in Washington assumed that most people would work in large, regulated enterprises that could be compelled or induced to provide them with things like pensions, health insurance (a relic of World War II wage-and-price controls), and other protections. The list could always be expanded because American enterprises (and, indirectly, labor) were really only competing against other high-cost developed countries, most with higher taxes and more elaborate social provision and protections for workers.

In fact, only about a third of mankind was involved in the global market economy until the late 1980s when countries as diverse as China, India, and the former Soviet Union became to one degree or another market economies. Technology had in the meantime greatly enhanced worker productivity and, crucially, the ability of firms to contract for inputs on a global basis. The good news was that over a billion people worldwide escaped grinding poverty. The bad news was that for the first time since World War II, American workers faced a vast “reserve army of labor” capable of driving down their living standards to a global norm. This of course is why so many people in the developed world hate and fear what in loosely called "globalization."

Logically, these profound changes in economic reality should have led us to think beyond a political and institutional framework formed in the New Deal. In a dynamic world of global competition, high-cost producers are doomed. U.S. industry painfully restructured to confront this reality a long time ago. High wage union jobs in the private sector have been declining for a generation. However, the massive growth of consumer credit since the 1980s served as a huge bandage to cover the loss of earning power by American workers.

Basically, consumer debt and a huge run-up in house prices fed by cheap and easy mortgage finance became a substitute for real income, sustained a consumption driven economy and created an illusion of prosperity. Blame the banks for our troubles if you must, but the credit-driven economy that blew up in 2008 suited everyone in the old Iron Triangle just fine. The financial market meltdown of 2008 however ripped the bandage off a very old and deep wound of a hollowed-out economy and a profoundly unequal and divided society.

In this election year, both contenders talk as if Washington can restore the world we have lost, the brief century when secure, well-paid employment was both possible and expected. What is really needed is a complete rethink of our Iron Triangle era institutions, from public education to retirement and everything in between, especially government itself. For what’s coming is a world in which most workers will be in effect contractors or temps, and self-employment will become the norm.

Kevin Mellyn is an international banker and consultant at MasterCard Advisors. He is the author of Broken Markets: A User's Guide to the Post-Finance Economy (published by Apress, July 2012).