It’s that time again – another month, another jobs number.  As with other recent reports, it’s a mixed bag.  On the plus side, we see a solid increase in the number of net new jobs and more positive gains in the manufacturing sector, notably more jobs related to durable goods, but a decent increase to overtime and a bump to wages as well.  Both numbers suggest that the manufacturing sector might finally be making a sustained upward move.

Labor Participation Rates: Dark Matter in the Jobs Report

On the downside, Labor Participation Rates are at levels not seen since the early 1980’s, and it should be cause for concern.  While it’s a positive thing that Labor Participation Rates leveled off this month, they remain nearly a full percentage point (.9%) below CBO estimates of a normal participation rate given the size and demographics of the population.  What this means is that we have a lot of people on the sidelines who need to get back into the workforce over time.  If all of these folks were factored into unemployment, the U3 number would be over 11%.

Anyway, I could go off on this issue all day and justifiably so.  Just remember, unemployment only counts those who are looking for work; if you don’t think you can find work and you stop looking, you are considered “not in the labor force” and are no longer counted.  It’s good that we didn’t see continuing declines.  What we need next is to see these numbers start increasing and the sooner the better.

Manufacturing: Rising from the Dead or Just Dead?

In this post, I want to key off the hiring by size of company and by sector.  As with labor participation rates, it’s not just the big numbers that matter with job growth, it’s the little ones. Creating 243,000 new jobs is positive news for sure, but if they are all “burger flipper” jobs or “horse stall maintenance worker” jobs then maybe not so much.  A central issue in the long-term health of the economy is the nature of the jobs themselves.  To support a strong middle-class, we need an economy based on a wide range of skilled and semi-skilled jobs, a significant portion of which must not require a college degree or “knowledge worker” type skills.  Why?  Sixty percent of the workforce only has a high school diploma.

For much of the 20th century, the US supported a strong mix of physical and intellectual jobs, as well as some that were a mix of both.  In the last 30 years, that mix has been increasingly skewed toward the intellectual – according to McKinsey, 70% of the growth in the US economy over the last 30 years has come from knowledge workers and 85% of the new jobs created in the last ten years have required complex knowledge skills. (McKinsey – Economic Conditions Snapshot, 2010).  At the same time, we are offshoring and automating physical work at an ever increasing pace.

Proof from the Shark Tank

I’ll provide some real proof points for this trend a bit further in this post, but by way of anecdotal evidence, I submit two episodes from the TV show “Shark Tank.”  For those of you unfamiliar with the show, the core concept is that an entrepreneur enters the “shark tank” to ask for an investment in his or her business, typically in exchange for an equity stake or share of profits over the long haul.  The “sharks” are investors who have the financial means and business acumen to support the entrepreneurs and help make them successful.  This season, there are five sharks:  billionaire Mark Cuban, real estate mogul Barbara Corcoran, technology innovator Robert Herjavec, fashion and branding expert Daymond John and venture capitalist Kevin O’Leary. Together this group has a wide range of expertise and knowledge regarding viable business models and an eye for successful opportunities.

While I’m not a big fan of the show, I think two recent episodes of the Shark Tank nicely sum up what’s going on with the economy.  In the first clip below, an entrepreneur named Donny is looking for small investment in a truck accessory business that produces a product for those in construction and related trades.  He knows he has a good idea and the venture capitalists on the panel are clearly intrigued, that is until he stipulates that he wants to manufacture it in his home town to help bring jobs to a depressed region.  Watch:

Donny doesn’t want to offshore, even though his business would clearly be viable if he did.  The sharks like the idea enough that they try to convince him of the error of his ways: at one point, one of the VCs says “If you had a successful business offshore, you’d be employing somebody. And as you grew, you’d be employing more people.”  And then another VC chimes in to say, “If you were successful, you’d be employing people in sales and marketing.  You gotta do the right thing for the business, number one.”  While all of these comments are true, they encapsulate all of our jobs data in one neat little package – hire US-based knowledge workers, offshore the rest, make some money.  Donny doesn’t want to go this route and eventually all of the sharks drop out and decline to invest.

By way of comparison, consider this next clip from the previous week:

What’s the business?  Leisure and hospitality – effectively an Open Table business model, but for night clubs and related venues.  The sharks love it; four of them want in and actively compete for the business.  By the end, the entrepreneur has two viable deals on the table, each of which has the support of two VCs and each of which exceeds his initial ask.

One business is about finding a way to slice some revenue off some high rollers by providing a leisure-related service, largely through software automation.  The other is about building a physical product that could employ hundreds of people and provide a valuable product to construction workers, plumbers, electricians, and blue collar workers who rely on light, medium, and heavy duty pick-up trucks.  One gets funded, one gets shot down.  It’s not a surprise, almost a forgone conclusion really, but it does nicely encapsulate our jobs issues.

The obvious analogy for the first entrepreneur, and one even raised by one of the sharks, is Apple: all the design, programming, and marketing know how is here in the US, but the actual manufacturing work happens in China.  And since the manufacturing is happening in China, Corning (which supplies the glass for the iPhone and iPad) is now building a glass manufacturing plant there rather than in the US to reduce shipping costs.  In other words, Apple’s manufacturing move had drag along impacts that affected its whole supply chain.  In fact, it’s estimated that the full Apple supply chain in Asia is close to 700,000 workers.  Nearly all of those jobs are what we used to call middle-class jobs – semi-skilled, manufacturing type work.

In noting the above, I’m not looking to cast blame or even suggest that Apple is wrong to leverage global talent pools.  In fact, I noted this as a key trend in our Underlying Drivers of Change report that was released in October – global talent pools are here to stay and smart companies are going to figure out how to tap them.  That said, it does raise serious issues about the future for US employment and the US middle class.  No matter how big Apple gets, it’s only going to need so many designers, programmers, and marketing folks.  Roles like these don’t scale linearly with the business – not even close. But manufacturing roles do.  Thus, the bigger Apple gets, the more it hires – outside the US.

So as Apple grows, its global workforce expands significantly; its investors, shareholders, and knowledge workers get wealthier (justifiable so); and its US worker base remains relatively flat.  The US-based knowledge worker class stays employed and is further enriched, and the non-knowledge US worker class remains unemployed with no new jobs in sight.  Which of course, is why Donny doesn’t want to offshore his business. While the investors are rightly thinking about the big picture, Donny is rightly thinking about the actual people he wants to hire.  He clearly recognizes that a significant portion of the folks he wants to help aren’t going to be able to jump into marketing and sales jobs, but could be a good fit for manufacturing work.  Neither position is wrong per se, but both have negative consequences.  One results in the continued erosion of the US middle class and the other means slower growth, if the business is even viable in the first place.

Proof from the Data

So how does this all play into the latest jobs report?  Well, the story above is playing out in real life, in the real numbers. The strongest growth sector last month has been Professional and Business Services with 70,000 more services jobs created in January.  Manufacturing followed with 50,000, and Leisure and Hospitality with 44,000.  The strong growth outside of manufacturing continues the trends of both this recession and of the past few decades.

Last year, the number of people employed in manufacturing jobs increased by roughly 225,000 workers for a net gain of around 1.91%.  Leisure and hospitality increased by 260,000 for a net gain of 1.95%.  By way of perspective, in 1980, the US employed 18,733,000 manufacturing workers and 6,721,000 leisure and hospitality workers.  Today, it’s 11,723,000 for manufacturing and 13,219,000 for leisure and hospitality.  More simply put, we’re now employing around seven million fewer manufacturing workers than we did in 1980 and nearly six and a half million more leisure and hospitality workers.  As a country, we now employ more people to book our travel and check us into hotels than we have working in our factories.

What to Do?

It would be nice to think that a growing economy would lift all ships and that eventually some of these long-term unemployed workers and high school graduates will get reintegrated into the workforce, but I’m increasingly skeptical.  Manufacturing work, particularly of electronics, isn’t coming back to the US anytime soon.  And as far as a recovery – we’re already in one.  Corporate profits are at all-time highs and companies are sitting on boatloads of cash.  Perhaps more to the point, large enterprises are hiring plenty of people – they just aren’t hiring them here in the US.  They are hiring them offshore.  So when we talk about a jobless recovery, that’s not really accurate.  Hiring is happening all over the world.

There are fundamentally two intertwined solutions that are required:

• We need to get serious about tax credits for manufacturing firms to make it cost effective manufacture in the US and compete globally.  In other words, we need to change the math for guys like Donny who can employ high school and even non-high school grads in a real business making real stuff.
• We also need to get serious about education reform.  One of the reasons that Apple is in China is the abundance of semi-skilled labor – folks who are more skilled than a high school grad, but who don’t necessarily have a four year degree.  In the US, that might mean trade schools, an expanded role for Associate programs, or maybe something else entirely. Donny might not need this kind of workforce, but solar and wind firms do, as well as a host of other manufacturing roles.  Even in something as old school as automotive manufacturing, technology skills are a must.  Assembly lines are partly driven by robotics and the average Ford vehicle has more lines of software code and electronic systems than an F16.  While not everyone can design robots or write that code, we need more folks who understand the basics of these technologies to service them, support them, and work alongside them.  That’s not going to be a typical college graduate.

Key Take Aways

So key takeaways from this jobs report:

• Job Participation Rates – under reported and ugly as hell. If this rate keeps falling, this is one to watch.  If nothing else, it will eventually slow down continued decreases in unemployment should these folks decide to reenter the work force.
• Manufacturing – looking better, but with a long way to go, both in the short-term and perhaps more importantly, the long-term.  We need to seriously consider what it’s going to take to restructure the balance of the economy to include a middle-tier of jobs that don’t require a four year degree.
• Disturbing Trend Lines – Continued growth in lower paying services and hospitality jobs and a shrinking number of opportunities for the high-school educated members of the middle class.  If it’s not solved through the introduction of more manufacturing work as suggested above, we need to tackle this in some other way.

 Update

In the original version of this post, I incorrectly noted a drop of .3% in the labor participation rate.  Apparently, the drop to the participation rate this month is an artifact of the census update.  In reading the raw data tables, I missed this bit from the BLS Summary:

The adjustment increased the estimated size of the civilian noninstitutional population in December by 1,510,000, the civilian labor force by 258,000, employment by 216,000, unemployment by 42,000, and persons not in the labor force by 1,252,000. Although the total unemployment rate was unaffected, the labor force participation rate and the employment-population ratio were each reduced by 0.3 percentage point. This was because the population increase was primarily among persons 55 and older and, to a lesser degree, persons 16 to 24 years of age. Both these age groups have lower levels of labor force participation than the general population.

So the good news is that Labor Participation Rate actually did remain constant.  Given this, I removed references to this phantom decline from the first section of this post.  I did however, leave in comments regarding the overall state of our labor participation numbers.  We still have a huge hole to climb out of — Participation Rates at levels not seen since the early 1980′s and a gap of about 11 million jobs.  That said, the first step in any recovery is to stop falling so we should keep an eye on this number next month for signs of growth.