I normally have a great deal of respect for the Economist, but we have the occasional exception:
While browsing an Upper West Side book store I could not help but notice the large number of books written on the on the plight of the middle class. The books all contain accounts of middle aged, college educated workers who, after some bad luck, end up impoverished and unemployable.
These authors stress that the US work place does not offer the care free existence it once did. White-collar job stability has vanished, thanks to out-sourcing, and firms have eliminated retirement income security by phasing out defined benefit pension plans. Can it really be that bad?
The extent of outsourcing service industry jobs has been exaggerated. According to Mary Amiti and Shang-Jin Wei of the IMF, outsourcing of service jobs has grown, but it still makes up less than 1% of GDP. In value terms, the US imports more service jobs than it exports. Actually, the US and UK have maintained their position as the world’s largest net exporters of business services.
When it comes to job stability, it is important to distinguish between people who leave a job because they found a better one, and those who lost their job. In the 1990s the rate of job separation did increase for middle income workers, but a majority of these separations were job-to-job changes. A job-to-job change means the worker went from one job directly into the next. The rate of job-to-job movements is twice the rate of moving to unemployment. Bruce Fallick and Charles Fleischman found that college-educated and middle age workers are the most likely to experience a job-to-job transition, rather than a transition into unemployment. In the 1990s the probability of older college-educated workers losing their job did increase somewhat, but these types of workers were still almost two and half times more likely to have left their job for another one, rather than being unceremoniously sacked.
Nor is it clear that retirement income security has declined along with the defined benefit pension. Defined benefit plans become worthless when a worker changes jobs after less than five years at a firm, and lose most of their value if the worker leaves before retirement. So unless you like being chained to a single company for 40+ years, 401(k)-type pension plans may easily be superior, giving workers the flexibility they need to pursue better economic opportunities. They are especially valuable for workers in declining industries, who often lose their jobs and much of their pension when a firm goes under.
It’s probably true that workers would prefer, all else equal, to have a guaranteed income in retirement rather than the work and worry of a defined contribution plan. But of course, all else is rarely equal. If the choice is between some uncertainty, and no possibility of ever changing anything, workers would probably choose the uncertainty. Which makes the defined contribution schemes, and the job changing, all else equal, something to be celebrated rather than bemoaned.
Now you can’t fault the author for citing facts, but his facts aren’t as germane as they might seem. And admittedly, much of my counter evidence is anecdotal, but the stories I hear are consistent, and the people I know hear tales from people they know that conform with them. So either I know a large network of people who are plugged into an oddball labor subsector, or there is something serious afoot that is not fully captured in the data.
Employment security is low among the corporate and professional middle aged (query as to how that corresponds with the writer’s “middle income.” I presume a substantial overlap, but probably quite a few “middle income” people are in their 30s and hence don’t fit). However, since the early 1990s, there have been repeated downsizings (and euphemistic “right sizings”) in large and mid-sized corporations. In 2000-2002, there were massive layoffs in the consulting industry (the large firms shed 35-50% of their US professionals), and some bloodletting in the law and accounting industries.
And the jobs that incumbents hold on to are often at lower pay, or the same job with more responsibility (hence an effective pay cut). One professional I work with tells me that his corporate clients, mid-level managers working in the New York suburbs, used to earn around $350,000. He says $150,000 is a more typical level now. Similarly, law firm partners I know are expected both to bill a large number of hours a year and bring in new business. These are conflicting demands, difficult to meet even by working 10-11 hour days. But management refuses to back down (just as some animals are more equal than others, all partners are not the same either).
With the threat of another headcount cut always looming, employees simply don’t have any bargaining power.
Therefore, the citation that 1% of the jobs have been outsourced, while true, is only a teeny component of a much larger pattern. The real story with the middle income is loss of job security, and the risk of falling off the corporate/professional track.
The cost of losing access to the corporate feeding trough is completely lost on the writer. Yes, he talks about job to job changes versus unemployment. But again, he misses the fact that people earning large incomes who are fired often don’t collect unemployment due to the fact that the benefits are peanuts compared to what they once earned (and, of course, the indignity of dealing with the social services bureaucracy). In addition, upon occasion, the terms of a separation agreement may preclude either party from disclosing the termination, which would prevent someone filing for unemployment benefits.
To a person, headhunters tell me they are swamped with resumes. One airily waved at a stack of unopened envelopes behind his desk that was nearly two feet high. He said he kept them for a few weeks in case a contact of his called and told him to consider someone in particular; then he’d dig through the stack to see if the candidate had potential. Others have similarly told me that they only consider candidates refered by someone they know and trust.
Another factor the author misses is that even if people who have lost jobs again secure employment, it is often not at anywhere near their former level of pay. Unless a candidate has specific skills that happen to be in high demand, or is particularly well connected, individuals over 40 who lose their jobs, even if they have very strong track records, find it hard to secure employment at their former level. Headhunters and employers greatly prefer poaching someone who is already employed to hiring someone who isn’t.
Another chimera is self employment. Many hang out their own shingle out of necessity. However, the line between self and unemployment is very fine indeed. Again, very few succeed in building up a business to anything resembling their former level of pay.
And finally, we have his argument that defined contributions really aren’t all that bad compared to defined benefits. Who is he kidding? Has he done the math? Let’s have the conversation after he has sat down with a spreadsheet and a few reasonable assumptions.
He sets up a false dichotomy between “some uncertainty, and no possibility of ever changing anything” and posits that “workers would probably choose the uncertainty.” In the modern work world, it isn’t just “some uncertainty,” it is a gaping chasm of risk. A partner at McKinsey who was in charge of professional staff development requisitioned a study from Yanekovich, which said, among other things, that the average college graduate today should expect to hold 11 jobs before he retires. Certainty is a thing of the past. With no bargaining power, the only way an employee can effect change is by quitting. And there is no way to assure that things will be much better at a new employer.
Baby, it’s cold out there. Give me that job at AT&T and my pension any time.