America’s Human Capital Paradox and Employment Crisis: Long Term Causes and Policy Options

Thomas A. KochanMIT Sloan School of Management andInstitute for Work & Employment Research

Employment: Global and Country Perspectives’ WorkshopNew York University Stern School of BusinessSeptember 26, 2011

Overview

• The U.S. Human Capital Paradox

• Two Dimensions of the Employment Crisis– Persistent High Unemployment and underutilization of human capital

– Long term declines in job quality: wage stagnation, income

inequality, benefit risks/declines, job satisfaction declines

• Causes– Market failure: gaps between firm and national interests

– Institutional failures: atrophy of labor market institutions and

breakdown in ability to coordinate

• Options– Short term and immediate

– Longer term policy, institutional, and organizational reforms

Our Human Capital Paradox

• “Human capital has to be a source of competitive advantage if the U.S. is to be a globally competitive economy with a high and rising standard of living”

• Yet we:– Tolerate persistent unemployment/underemployment

– Privilege financial/shareholder interests over human resource/human capital strategies and interests

– Attack and destroy unions and employee voice

– Tolerate declining job satisfaction and living standards

Dimension 1 of the Employment Crisis: Persistent Jobs’ Deficit

• 9.1% unemployment; 16-20% underemployment

• Deeper, faster employment declines in Great Recession than GDP decline would have predicted

• Slower (almost non-existent) post-recession job growth– Large firms reluctant to invest in U.S.– Longer term decline in new start-ups

• Serious cohort problems– New graduates—underemployment will leave long term, possibly

career long, imprints on income– Long term unemployed—50+ year olds will never recover

Job Loss in Five Most Recent Recessions as Percent of Peak Employment

Source: Bureau of Labor Statistics, Center for Economic and Policy Research

Dimension 2 of the Employment Crisis:

Long Term Declines in Job Quality• Broken “Social Contract”

– 1945-80: wages and productivity grew in tandem

– Since 1980: good productivity growth; stagnant wages for majority of workforce; trend worsened in past decade

• Top 10% of population captured 58% income growth

• Greatest inequality since 1928—eve of Great Depression

• Other job quality indicators

– Declines in retirement plans and savings

– Health insurance coverage gaps (45 million without employer provided health insurance

– Declines in apprenticeship training

– Declining job satisfaction

Social Contract: 1940s-70s: 1980s +

Median Weekly Compensation of Men Working Full Time, 1980-2008Non Farm Business Productivity on the Right Axis

Source: Frank Levy and Peter Temin, “Institutions and Wages in Post-World War II America,” in Clair Brown et.al, Labor in the Era of Globalization. Cambridge University Press, 2009. Data updated to 2009 at http://www.employmentpolicy.org/topic/12/research/addressing-problem-stagnant-wages.

Source: Employee Benefit Research Institute. EBRI's estimates for 1998-2008 were done using Department of Labor and Current Population Survey data. Credit: Alyson Hurt / NPR Source: http://www.npr.org/templates/story/story.php?storyId=124131819

Private Sector Defined-Benefit and Defined-Contribution Plan Coverage, 1979-2009

Wall Street Journal, February 19, 2011.downloaded at: http://online.wsj.com/article/SB10001424052748703959604576152792748707356.html

Wall Street Journal Estimates of Retirement Income Shortfalls

Declining Job Satisfaction 1987-2009

Source: The Conference Board. Data used with Conference Board Permission.

Causes: Market Failure• Financialization of the economy

– Rise of investor capitalism in 1980s • Leveraged buyouts, hostile takeovers• Deregulation of financial markets and institutions• Rise of shareholder maximization as the sole purpose of the firm• Growth of financial sector—talent, profits, and compensation

• Globalization of investment options and markets

• Net result: – Gulf between interests of individual firms and national

economy– Yet overall business community and national economy

interests are more aligned

Net Result: Two Equilibria Economy

• Some firms compete with “high road” strategies– Focus on innovation, productivity, quality, service

– Invest in employees’ human capital development

– Employ “high performance” employment practices and labor

management partnerships

• But are held back by dominant “low road” competitors– Focus on low cost/low labor cost strategies

– Outsource lower skill work (domestic and global)

– Avoid (successfully) unions

– Employ traditional command and control management practices

– Oppose any and all employment/labor policy reforms

Institutional Failure(s)• Mismatch between labor market demand and institutions

– Movement to “knowledge” intensive economy; college education and technical training did not keep up

– Decline of unions and collective bargaining as • A countervailing power• Source of innovation in employment practices

– Retreat of government from labor market policy• Wage norms abandoned

• Labor Relations policy breakdown and long term impasse

• Weaker enforcement of employment standards

• Slow take up of new “two-track” enforcement models

• Labor policy relegated to low status as a political problem rather than a set of

economic policy tools

• Vacuum in business-labor-government-education dialogue

Challenges a Strategy Must Address

• It is not necessarily in the interests of individual firms to compete,

invest, and manage in ways necessary to gain value from human

capital.

• Strategies and practices capable of achieving both high productivity

and high wages are not diffusing across firms.

• While the American business community shares an interest in

emphasizing human capital as a source of competitive advantage, it

cannot do this alone without the support of government, labor, or

education stakeholders. The same is true for each of these other

stakeholder groups—none can do it alone with the support of the

others.

• There is insufficient dialogue across these groups to achieve a

collective effort to do so.

Where to Start: Current Proposals for Addressing The Jobs’ Deficit

• Unemployment insurance extensions & reforms– Keeps purchasing power from falling further– Would address specific cohorts—wage insurance for elderly

unemployed; incentives to train, etc.

• Tax cuts– Employee and employer payroll tax cuts– Job growth tax incentives/credits– Investment tax incentives

• Direct Job creation– Infrastructure bank and investments– State and local funds to create/maintain jobs

• Longer term spending cuts to address deficit

Addressing the Market and Institutional Failures

• Two Challenges:

– Reforming/changing behavior and practices of key institutions:• Businesses—individual and the overall business community• Labor organizations—traditional unions, occupational

associations, and community advocacy groups• Education institutions: universities; particularly business

schools• Government policy making: Brining employment policy back

into economic policy

– Rebuilding Dialogue & Problem Solving Among these Key Stakeholders

A Single Text Negotiations’ Approach?

• No prospect for ending current stalemate(s)

• Some new approach is needed

• If approached as a negotiations problem….

– Expand the participants--universities/b-schools

– Reframe the problem (institutional-market failures)

– Jointly explore root causes (we just did this)

– Focus on shared (national) and group interests

– Develop options

– Employ “single text” strategy

– Build commitment to implement and sustain solutions

New Modes of Coordination: Examples of things the parties can bring to the table

• Labor and Wall Street take initiative to create an infrastructure bank

• Industry associations and unions rebuild/expand apprenticeship programs

• Business-universities-technical schools expand internships and hiring

commitments

• Universities expand on-line and on-campus adult learning programs and open

access to advanced technical (engineering and management) degrees to

underemployed college graduates

• Industry associations, unions, and government agencies work on diffusing high

performance work practices, modern approaches to enforcing employment

standards, and reframe and modernize labor law and policy to support

productive partnerships

• B-Schools expand teaching of Sustainable Organizations– Management and diffusion of high performance employment systems/strategies

– Sustainable entrepreneurship—strategies for building and sustaining high quality jobs

right from the start

Likely and Possible Scenarios

• Is this likely: – No, institutional deadlock prevails

• Is it possible, maybe if…– Leadership comes from private sector actors

– Business Schools—collectively are willing to lead

– Each group—business, labor, education, government:• Mobilize and coordinate as collective actors rather than individual

players (key to solving market failures)• Engage in necessary internal reforms and changes• Are willing and able to engage in a modern

negotiations/consensus building and sustaining process

What if we Fail to Act?

•Continued decline in American living standards

•End to the “American Dream” (each generation should be able to do better than the last)

•Serious risk of social unrest—might we experience an “American Spring?”