October 2, 2012
The HBS research
Lazear and Spletzer focused only on data from the labor market over the last five years, whereas the HBS project examined trends across US industries over the last century. The project, a collaboration of research by individuals at several institutions, not just HBS, touched on a number of dimensions, including education, strategy, politics, and trends in the labor market.
A common thread across the findings was that America faces deep-rooted structural problems, many of which have been evolving over the last three decades. I’ll highlight some of those insights.
Michael Porter, an HBS professor and leading authority on strategy, coauthored the lead Harvard Business Review article, along with his colleague Jan Rivkin; the pair also led the HBS project. That article began, “The American economy is clearly struggling to recover from a recession o f unusual depth and duration, as we are reminded nearly every day. But the US also faces a less visible but more fundamental challenge: a series of underlying structural changes that could permanently impair America’s ability to maintain, much less raise, the living standards of its citizens.”
First among the structural problems Porter and Rivkin identified was the growth in US labor productivity. After rising for 30 years, productivity levels have been sustained since the recession, according to Porter and Rivkin, only by rising unemployment and lower labor-force participation, which they called an “ominous” sign for US competitiveness.
Productivity growth can be fine, as long it is accompanied by a growth in income and an increase in standards of living. When it isn’t, though, productivity growth becomes a structural problem.
Wages and productivity both grew before 1980, but in the three decades since wages have failed to keep place, which has led to the widest income inequality since 1928. Since 1975, the rolling 10-year average rate of jobs added to the private sector has hovered around 2% annually, but since 2001 it has dropped to below zero.
Moreover, growth of median annual income has been weak. In the two decades prior to 2007, that number grew by only 0.5% annually, and it has declined on an inflation-adjusted basis since the recession.
A major cause of the Great Depression was the sustained growth of productivity in the agricultural sector, which dominated the economy at the time, along with falling median incomes. It wasn’t until the stock market crashed in 1929, however, that those structural problems were exposed and mass unemployment began.
Virtually all of the net new jobs created over the last decade were in local industries – government, healthcare and retail – according to Porter and Rivkin. Those sectors are not exposed to international competition. “That was a sign that the US was not doing well in businesses that have to compete internationally,” they wrote, labeling those shifts in the labor market as “clearly structural.”
Lazear and Spletzer acknowledged productivity growth throughout the 2000s, but concluded that it was “too early” to deem this a structural change.
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