Previously in Parts II and III, we focused on two subsets of the population that are not employed – non-participants and the unemployed. In Part IV, we finally move on to looking at the population of employed people. However, in a slight change of tack, instead of focusing on the characteristics of these people, we are going to look at the changes in the employment market in general and more specifically at the changes at the industry level.
Declining Industries
Chart 1 – Industries with Declining Shares of the Employment Market 1939 to 2015
Decline in Manufacturing
Looking at the data, the big story since the end of World War II (1945 for those who skipped History class) is the decline of the manufacturing industry. Manufacturing was far and away the biggest sector in the US in terms of employment at the end of the war, but has seen its share of the employment market decline to less than 9% as of 2015. The reasons for this have been the subject of a lot of discussion (see here for example), but if we look at the number of manufacturing jobs (see Chart 2), as opposed to the percentage of the non-farm employment market, we see there are two phases to this decline.
Chart 2 – US Manufacturing Jobs 1939 to 2015
As Chart 2 makes clearer, manufacturing in the US was actually still adding jobs from 1945 through to the late 70s, it was just that the other sectors were adding more jobs, causing the manufacturing sector’s share of the employment market to decline.
From the mid 80s onwards though, the manufacturing sector started declining in both percentage and absolute terms. Increasing automation and the shift of jobs to low cost manufacturing countries such as China, India and other developing nations started what would be a long decline for the industry. There is one ray of light though, and that is that the US has actually been adding manufacturing jobs for the past 6 years. Although this looks like a positive change, it is hard to say whether this is the start of a new trend or just an aberration representing the recovery of jobs lost in the last downturn. The 90s boom saw similar gains before they were reversed very quickly in the new century.
Where is the Tech Boom?
The sector that you may be surprised to see in the declining chart is the Information sector. Information Technology (“tech”) seems to be the only sector that anyone is talking about right now – glitzy product launches, podcasts (the excellent Startup) and TV shows (Silicon Valley is fantastic if you haven’t seen it). So why don’t we see it in the employment data? To explain that, it helps to break the sector down into its component industries (see Chart 3).
Chart 3 – Information Sub Industries, All Employees 1990 to 2015
The finer level data only goes back to 1990, but this is the key period we are interested in anyway. What we see is that despite the hype, the two tech related sub industries (Data processing, hosting and related services, and Other information services) are still very small, even within the Information sector. In terms of the number of people employed, these two sectors are drowned out by the traditional publishing industry and the telecommunications sector. So even though the two tech sub industries have been adding jobs, it has simply not been enough to outweigh the job losses in the larger sub industries.
The Telecommunication Boom
The other interesting point on Chart 3 is how much the tech boom in the late 90s impacted on the telecommunications sector. Despite the popular perception that this boom was a tech boom (it is called the dot com bubble after all), the boom led to far greater increases in job numbers (and job losses after the bust) in the telecommunications sector than in the tech sectors. The boom in telecommunications was primarily driven by telecom companies rushing to upgrade networks and infrastructure in response to exploding demand for the two hot new products of the time: the internet and mobile phones. After the bubble popped, some large companies went bust, others consolidated, but the net result was a lot of job losses.
Expanding Industries
Chart 4 – Industries with Expanding Shares of the Employment Market 1939 to 2015
Moving on from declining industries, let’s look at the industries that have grown their share of the employment market over the past half a century. The clear winners here are the Education and Health sector, and the Professional and Business Services sector.
Professional and Business Services
Professional and Business Services cover a range of services that have gone from non-existent, or the domain of niche firms, to being the domain of some of the world’s largest firms. Additionally, being employed to provide services within this sector has become very prestigious (legal services and management consulting are good examples), allowing these firms to attract some of the top talent in the market place.
Overall, the growth in the number of people employed to provide these services is largely explained by the increasing complexity of doing business. Increasing complexity creates demand in several ways, including the need for:
- People who are experts in one or a small subset of specific business functions
- People who are experienced in navigating an increasingly complex regulatory environment, and/or
- Agility to quickly respond to certain business needs that preclude hiring and training staff internally
In recent times there has been talk about larger businesses attempting to ‘in-house’ some of the services that professional services firms typically provide, particularly legal services and various compliance functions. As of yet, this does not appear to be impacting the employment growth of professional services firms.
Inexorable Rise of Education and Health
The Education and Health sector has shown the strongest and most consistent growth of any industry over the last 50 years. But what explains this strong growth? Chart 5 provides a breakdown of the subsectors within this industry.
Chart 5 – Education and Health Sub Industries, All Employees 1990 to 2015
The first thing to note is that all the sub sectors have been adding a large number of jobs over the past 25 years, but there are two standouts:
- Social Assistance (child care workers, personal and home care aides, social and human service assistants) has gone from easily the smallest sub-sector in 1990 to employing as many people as the Education sub-sector, tripling the number of people employed.
- Ambulatory Health Care Services (outpatient medical services like dentists, GPs, diagnostic centers and so on) has become easily the largest sub-sector over the past 25 years, adding over 4 million jobs.
Generally this provides further confirmation of what we saw in Part II of this series – that there are larger numbers of Americans retiring and as they do, the demand for certain services, particularly health care is also growing.
Childcare Catch 22
One additional point to make on this subject is regarding the growth in childcare services, a key component of the overall growth of the sector. As the model of the family has changed to one with two parents in full-time employment, there has been a corresponding growth in demand for childcare services. For a lot of families this has presented a question – is it worth paying for childcare (does the parent earning the least still earn more than the cost of childcare?).
This causes a catch 22 for the childcare industry in most countries – childcare typically struggles to attract enough suitable employees due to a combination of parents’ (understandably) high expectations and generally low pay. However, if businesses in the childcare industry were to offer higher pay to childcare workers to attract more candidates, they would need to raise the cost of the childcare to parents, leading to more parents simply dropping out of the workforce to stay home and raise their children instead. Because of a parent’s ability to provide their own childcare services, without Government intervention, it will be difficult for the wages of childcare workers to ever significantly exceed the average income for parents in the area they service.
The Financial Sector Reflects the Market
The last sector I want to spend some time on in this section is the financial sector. One of the noticeable things from Chart 4 is, as a percentage of the total non-farm employment market, the financial sector hasn’t grown since the late 80s. This would seem to contrast with the general notion of an ever-expanding financial sector that is taking over the US economy. Again, the fact that we are looking at the data in terms of the percentage of total non-farm employees can be deceptive. Chart 6 shows the total financial sector employees from 1990 to 2015.
Chart 6 – Financial Sector, All Employees 1990 to 2015
Looking at this chart, we see the Financial sector did add a significant number of jobs between 1990 and 2015, but the number of jobs in the financial sector is still relatively small compared to the economy as a whole. Additionally, the number of jobs in the Finance sector appears to change in line with with the economy as a whole. Does that mean the Financial sector doesn’t need to be reigned in or that it isn’t sucking talent out of the US economy into relatively unproductive industry? That is a topic for a separate article, but the one thing that can be said is that in terms of the number of people being employed by the Financial sector, everything looks very much like business as usual.
Stable Industries
Chart 7 – Industries with Stable Shares of the Employment Market 1939 to 2015
The Government Sector
Despite there being observations we could make about both the other two industries on this chart, I am going to focus on the most interesting story on this chart – the Government sector. The basic story in the chart is the build up in the percentage of non-farm employees in the Government sector from 1945 to the mid 70s, and then a slow decline through to 2015. Again looking at the percentages can be deceiving, so let’s look at the number of employees in the Government sector (Chart 8):
Chart 8 – Government Sector, All Employees 1955 to 2015
The period from 1955 to 2009 saw a pretty consistent build up in the Government sector – close to 15 million jobs were added in this time. But since 2009, ignoring census hiring in 2010 (you can also see corresponding spikes in all years ending with ‘0’ for the same reason), the number of people employed by the Government had its biggest decline since the early 80s. To help determine what is happening, let’s look at the Government sector broken down into its three sub-sectors, Local, State and Federal (see Chart 9):
Chart 9 – Government Sub Sectors, All Employees 1955 to 2015
At first this would seem to show a slightly confusing picture. This decline from early 2009 through to late 2014 represents almost 6 years right in the middle of Barrack Obama’s presidency, but for all the noise about political stalemate in Washington, the sequester and the Government shutdown, there appears to have been minimal impact on the number of Federal Government employees. At the same time, Local Governments have been slashing payrolls and State Governments have essentially been in a hiring freeze. The explanation for this is largely due to:
- The nature of Local and State Government revenue sources – the three main types of taxes that Local and State Governments collect are income tax, forms of sales tax, and property tax. All three sources took sharp downturns in the recession, with property tax continuing to decline even as income and sales tax collections were recovering.
- Balanced budget requirements – many State and Local Governments have balanced budget requirements, which meant in the face of sharply falling revenues, they were forced to slash expenditures. In many cases this meant cutting payrolls, which unfortunately only exacerbated the effects of the recession locally.
The combination of sharply falling revenues and the inability to use debt financing led to large job losses at the State and Local Government level. On the other hand, it is well known that Federal Government does not have a balanced budget requirement (much to the chagrin to some on Capitol Hill) and, in contrast to the State and Local Governments, significantly increased spending going into the recession (the American Recovery and Reinvestment Act of 2009). The merits and impact of Government financed stimulus may be debated, but the impact on employment within the Government sector is pretty obvious.
A Strange Observation
The other surprising observation from Chart 9 is that the Federal Government has employed more or less the same number of people since the late 1960s – all the growth in the Government sector has come from the Local and State Government sectors. The growth in Local Government makes sense, the population of the US has increased significantly in that period and providing Governance for that population requires more employees. We also see growth in State Government for the same reasons – but nothing at the Federal level.
Technology and other efficiency gains should allow fewer people to do the same amount of work over time, and the productivity gains between now the 1960s have been huge. Additionally, the impact of these efficiencies would be greatest at the Federal level where the scale of the work is typically bigger and there is less need to maintain a physical presence all over the country/state in the same way that Local or State Government has to. But the efficiencies wouldn’t apply everywhere:
- To audit the same percentage of businesses over time, the IRS would need to continually hire additional auditors to keep up with the growing number of people and businesses
- For Social Security to continue to service a growing population, the number of locations (and the staff to keep them running) would also need to expand significantly
Even allowing for a more efficient work force, it seems unlikely that the Federal Government has been able to maintain the same levels of service, regulatory effectiveness and Government advisory when the country has grown so much in population and complexity.
From here it would be easy to launch into a diatribe about an understaffed Federal Government leading to issues like the financial crisis, the failure to detect various huge frauds (Enron, Bernie Madoff), and the generally poor quality of Government services (the torturous immigration process comes to mind[1]). I could then also go on to talk about how using the points above to argue for further reductions in the Federal Government seems crazily wrong-headed. However, linking all these events to a shortage of Federal Government employees is far too simplistic. These events were caused by a range of factors and simply adding more Federal public servants would not have solved the problem on its own.
All that said, not increasing staffing levels for 50+ years does have an impact. The next time you are forced to suffer through some unnecessarily archaic (Federal) Government process, read about another fraud that the SEC and/or FinCEN failed to pick up, or lament that lobbyists are writing a significant amount of legislation that gets put before congress, keep in mind that collectively the Government agencies providing these functions are today operating with the same number of people as they were when Neil Armstrong took his first steps on the moon.
[1] Please don’t tell me that this is done intentionally to discourage applicants – there are plenty of ways to discourage applicants without wasting huge amounts of time and money.
Have any thoughts on what impact constant levels of Federal Government staffing since the 1960s might have had? Please leave them in the comments!