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Thursday, August 25, 2011

Where did all of the jobs go and will they come back

The media reporting of the ‘recession’ its causes and outcomes is, in the main, shallow and biased, depending on the political stance of the news channel.

Marketers need to dig deeper into the causes of our current predicament and how it is likely to play out in the future. The fundamental question for all marketers is: “How does the economy affect the consumers and the quantity and types of goods they purchase.”

A good starting point to finding the answer to this question is to understand the employment environment and how this will change.

I strongly recommend you watch the McKinsey quarterly report that includes a session from Michael Spence, the 2001 Nobel Prize winner in Economics.

This is the nub of his argument:

In his study of the American economy he looked at employment over an 18- year period coming up to 2008, just before the crisis.

The US economy was divided into its tradable and a nontradable parts.

Tradable goods and services are those that can be produced in one country and consumed in another

Nontradable goods and services, which is the largest part of the economy in most advanced economies, are goods and services that have to be produced domestically, like government, healthcare, construction, legal services ...

The net employment generation in the American economy, over this period, was 27 million jobs. But almost all of it was in the nontradable side. So in the parts of the economy where the US competes with other countries few new jobs were created.

OK, so far? Stick with it because it gets worse.

The overall value added increased in both tradeable and nontradeable jobs.

In the tradable sector, it divides into two parts. In the part including sectors like finance, consulting, computer design the value added increased, employment increased, and value added per person increased. This group we normally refer to as the ‘service’ sector.

The second group, what we call ‘manufacturing’ has long value-added chains that can be decomposed and moved around the world. What happened here is that employment went down, but value added went up, so value added per person went up enormously. The lower value added parts moved outside the US.

What this means is, over the past couple of decades,  US job growth has come from government, health care, and other labor-intensive sectors like construction, retail, hotels, food services, restaurants, etc.

Now for the really scary bit.

What Michael Spence did not go on to say – but I will – is that the primary driver of this employment has been government spending. As we all know this has ended. The US most of Europe and Japan are wrestling with a sovereign debt crisis.

The bottom line for marketers is that for the past decade or two we have been living in an artificial world of consumer demand, where much of is has been created by government spending and the expansion of consumer debt. Both of these sources of employment are going to have to reduce.

Marketers had better be prepared to live in the real world of lower employment and demand. The pattern of demand is going to be skewed to a few people (in the high value add tradeable sector). This is world of ultra-fragmentation.

The only place for marketers to get demand, other than these people in employment, is from those who have accumulated it in the past. See where these leads? The better of sector of the older market. Dick Stroud

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