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Nobel Laureate Spence: U.S. May Have to Live with Slow Employment Growth

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"Major employment problems in the near future are a near certainty." That's one of the conclusions of a March report co-authored by Nobel-Prize winning economist Michael Spence. Spence, the author of a new book, The New Convergence: The Future of Economic Growth in a Multispeed World, says the U.S. is grappling with a multispeed domestic labor market.

A study he conducted for the Council on Foreign Relations with co-author Sandile Hlatshwayo, entitled "The Evolving Structure of the American Economy and the Employment Challenge", paints a pretty bleak picture. It broke down jobs in the U.S. into two very large sectors: tradable and non-tradable. Tradable jobs are ones that can be done by anyone around the world: manufacturing, back-office operations, pharmaceuticals, engineering, finance, consulting. Non-tradable jobs are those that really can only be done by people in the U.S., such as retail, health care, food service, government, and construction.

Looking back on the period from 1990 to 2008, the co-authors found that 97 percent of the 27.3 million U.S. jobs created were in the non-tradable sector. (The five largest non-tradable sectors, mentioned above, contributed 65 percent of the 1990-2008 jobs growth.) "The employment creation occurred mostly in non-tradable sectors — where we don't have international competition," Spence said.

On the one hand, that's good news. It means the overwhelming majority of the new jobs created can't be offshored easily. But the report notes that powerful forces may inhibit further growth in these areas. The two leading employment sectors, after all, are government and health care, which accounted for 40 percent of the incremental jobs created between 1990 and 2008. Due to high deficits and rising pressure on health care spending, those areas aren't likely to be huge sources of job growth going forward. What's more, construction and retailing, two other large sources of nontradable jobs, are sectors that relied on debt-fueled consumption. In an age of tight credit and continual deleveraging, those areas aren't likely to be big jobs generators. Finally, these jobs tend to add less value and pay lower salaries than jobs in the tradable sector.

The study unearthed an irony. Conventional wisdom holds that cheap foreign labor and the ever-greater ability to outsource simultaneously reduces the number of tradable jobs and keeps wages down. That may be true for call-center positions. But the study found that, on the whole, tradable sectors such as technology, consulting, and finance have performed well. Companies and professionals have been able to take advantage of global growth by getting involved in hot markets overseas. "Value-added per person and incomes are rising. We're competing and we have this big sandbox called the global economy," Spence said. But this dynamic hasn't created a great number of jobs. (It doesn't take that many people to run a hedge fund that invests in Latin America, for example).

The headwinds in the vast non-tradable sector and the muted job gains in the tradable sectors combine to put pressure on job creation, and on the salaries of middle-income workers.

Spence doesn't see any short-term fix. In essence, there's a mismatch between the skill sets and competencies of the American workforce and the sectors that are producing higher incomes. For too long, complacent Americans consumed too much and saved and invested too little. Spence says a list of reforms would help: greater investment in human capital, education, research, and infrastructure; a sensible energy policy; a simplified pro-investment tax system. "They're not easy things, and they're harder with a fiscal deficit," he says. "But if we did all of those things for five years and upped our game, it would have a material effect on the employment challenge."

Of course, as we discuss in the accompanying video, this pessimistic view overlooks the fact that global growth can turn what we view as "non-tradable" occupations into ones that depend on trade. For example, substantial growth in foreign tourism is supporting more jobs in retail and hotels. In cities like Miami and New York, foreign buyers are supporting a lot of jobs in construction and real estate. With more foreign students attending U.S. colleges, America's massive higher education sector is increasingly participating in global trade. As Spence notes, global growth doesn't have to be a zero-sum game.

Daniel Gross is economics editor at Yahoo! Finance

Email him at grossdaniel11@yahoo.com; follow him on Twitter @grossdm