Payroll Slump Has Economists
Rethinking Ideas on Job Creation

How fast does the U.S. economy have to grow to create new jobs?

The Labor Department reported Friday that even as economic growth seemed to be accelerating, the nation's level of nonfarm payroll employment fell by 93,000 in August, on a seasonally adjusted basis. It was the largest drop since March and the seventh consecutive decline.

Job losses were widespread, including the 37th straight monthly drop in employment in the manufacturing sector, which has lost 16% of its total work force, or 2.7 million workers, in that period. There were also declines in employment by retailers, governments and local schools.

The unemployment rate declined to 6.1%, though that was in part because the size of the labor force contracted slightly as some discouraged workers stopped looking for work.

"The mood, particularly among chief executives, remains very cautious," said Patrick Lyons, chief financial officer for the U.S. arm of Adecco SA, a Swiss outplacement firm with 1,300 branches in the United States. "A number of them are reminding me that they've been burned before when there have been predictions of recovery that have not materialized."

Temporary help, typically a leading indicator of employment trends, was a bright spot in the report. It rose for the fourth straight month, though the August increase of 7,000 positions was hardly robust.

The weak labor market report startled many economists and the financial markets. The Dow Jones Industrials dropped 84.56 points to 9503.34 Friday.

The labor report came as forecasters were raising their estimates for third-quarter economic growth amid a recent spate of data suggesting the pace of consumer spending and business investment accelerated this summer. Economists now believe the nation's gross domestic product -- a broad measure of the output of goods and services -- is growing at an annual rate of nearly 5% in the third quarter, according to Macroeconomic Advisers LLC, a forecasting firm that surveys economists weekly about their outlook for growth.

In normal circumstances, a growth rate that fast would be enough to produce some job growth, especially since it is following a respectable 3.1% pace of growth during the spring. Indeed, many economists responded to the report by saying it was just a matter of time before job growth picked up.

"The labor market is often viewed as a lagging indicator of conditions," N. Gregory Mankiw, chairman of the White House's Council of Economic Advisers, said Friday in an interview. "I think we'll have employment growing by the end of the year."

But a variety of factors are forcing economists to rethink their models for the way the job market is likely to behave in the months ahead. One factor is the ability of businesses to squeeze more output from existing workers. An unexpected burst of productivity appears to be helping businesses bolster profits; but it is also helping them to avoid adding new workers, at least for now.

Adecco, the temporary-employment company, is an example. Its U.S. revenue rose 6% in the second quarter from the year earlier, but during the same period it trimmed its payrolls 3% to about 3,200. Mr. Lyons said that was possible in part because of investments in technology that have allowed the company to train workers more efficiently.

For the nation as a whole, worker productivity grew at an annual rate of 6.8% during the second quarter. Forecasters say it is on track to grow at a rate of nearly 7% in the third quarter. This is much faster than the 2% to 2.5% productivity growth rate that many economists believe is the nation's longer-term trend.

The burst has some economists beginning to wonder if the nation's productivity potential is higher than has been believed. If this is the case, it would help explain why the job market continues to sputter even as growth accelerates. However, many economists agree it would also mean greater prosperity for most Americans in the long-run, because productivity supports higher profits for businesses and higher wages for workers.

"The numbers that we're seeing suggest [productivity growth] could be so much higher that it just boggles the mind," said Laurence Meyer, a former Federal Reserve Board governor and co-founder of Macroeconomic Advisers.

Another factor is an unprecedented pace of structural change that is sweeping through the economy.

The change was highlighted in a study released by two economists at the Federal Reserve Bank of New York last week. The study -- by Erica Groshen and Simon Potter -- showed that the nature of job-market downturns started changing in the early 1990s and has intensified in recent years. During the 1970s and 1980s, worker layoffs were often temporary. When workers lost their jobs in a downturn, they were often hired back a few months later by their previous employer as demand picked up. This time, layoffs are generally permanent. Companies are eliminating jobs completely and workers who lose their jobs are being forced to shift to entirely new and growing industries to find employment, a painful and time-consuming process.

"What we have is a lot of existing firms becoming more efficient, shedding resources and it takes a while for those workers to make their way to what will be the new growing sectors," Ms. Groshen said.

Updated September 8, 2003