Puzzling through the Jobless Recovery - Or Is It a Fundamental Shift? (page 1 of 2)

Not only was this far below the 150,000 that economists had predicted, it wasn't even enough to keep pace with the country's population growth. The unemployment rate held steady at 5.6%, but only because many people have given up on finding jobs.

The U.S. economy has been growing since the fourth quarter of 2001, yet few employers are hiring. In fact, the country has lost 2.2 million jobs since 2001. As an article in The New York Times recently noted, "At no other point since World War II has the economy grown for such a long period without adding jobs at a healthy pace."

Economists and other employment experts are stumped. They offer a host of possible explanations - ranging from productivity gains and uncertainty surrounding the Iraq war to fundamental changes in how companies are run - but almost without exception they caution that their hypotheses are, at best, educated guesses. Ben S. Bernanke, a member of the Board of Governors of the Federal Reserve System, noted in a speech last November at Carnegie Mellon that he was somewhat stumped by what has come to be known as the "jobless recovery."

One thing experts at Wharton agree on is that the phenomenon known as 'offshoring' - replacing U.S. jobs with those in lower-wage countries such as India and China - accounts for a far smaller percentage than some politicians and pundits claim. "The fears are far greater than the facts," says Ravi Aron , Wharton professor of operations and information management, who has studied the phenomenon for five years. "You hear all these fantastic projections, but the real numbers are puny compared with the normal churn in the economy."

A key driver of that normal churn is worker productivity. As the economy emerges from a recession, companies push employees harder - leaning on them to work more efficiently and longer - and that manifests itself as more output per worker. Greater productivity lets employers postpone hiring until they are confident that consumers will buy what the additional workers produce.

"Companies will always wait to see that the demand is there because the fixed cost of hiring isn't trivial," says Peter Cappelli, Wharton management professor and director of the school's Center for Human Resources. And firms are, perhaps, better situated to do that than ever because of the now widespread use of contract and temporary workers and staffing firms such as Manpower. These sorts of workers let companies hedge their bets on hiring, rather than committing to paying wages and benefits to permanent, full-time workers.

In this post-recession rebound, productivity gains have been larger than normal, rising at an annual average of about 4.5%, compared with the still-healthy 2.5% gains in the late 1990s. In his speech at Carnegie Mellon, Bernanke called the recent productivity performance remarkable and attributed it, partly, to the hefty investments in technology that many companies made during the late 1990s. "Only over time have managers learned how to reorganize their production and distribution so as to take full advantage of these new technologies and thus enhance the productivity of capital and workers," he explained.

Mark Zandi, chief economist at economy.com in West Chester, Pa., believes that companies are continuing to invest heavily in technology and to wring productivity gains out of it. "The peak in corporate hardware and software spending was the third quarter of 2000.