What has happened to job growth?

Daniel Gross writes:

Mystified economists have pointed to various possible culprits: outsourcing, competition from China, high health care costs and lower work-force participation, to name a few. But there’s one force that so far has managed to avoid blame for the sluggish pace of job growth: Enron.

In 2000 and 2001, as the bull market imploded, there was a spike in accounting problems – a mix of outright fraud, earnings manipulation and more benign restatements necessitated by changes in business conditions. Clearly, investors were burned by earnings restatements at Enron and WorldCom, and at hundreds of smaller and less infamous companies. "Nobody had actually explored the real consequences of earnings management, as opposed to the financial ones," says Thomas Philippon, assistant professor of economics at New York University’s Stern School of Business.

In a recent National Bureau of Economic Research working paper, Professor Philippon and a colleague, Simi Kedia, assistant professor of finance and economics at Rutgers, argued that the widespread accounting problems for which Enron was emblematic might have helped suppress employment growth – in the affected companies, and in the industries in which the misreporting was concentrated.

Professors Philippon and Kedia examined the roster of companies that restated earnings from January 1997 to June 2002, as compiled by what is now the Government Accountability Office, and matched it up with available employment data. It was a regrettably large sample: 919 restatements by 845 public companies. About one-tenth of publicly traded companies announced at least one restatement.

Not surprisingly, companies that were misrepresenting their financial results – intentionally or inadvertently – helped juice employment growth in the late 1990’s as they added employees. "During periods of suspicious accounting, firms hire and invest excessively," the professors said. From 1997 to 1999, the restating companies added 500,000 jobs, a 25 percent increase.

When these companies restated their earnings, the growth they had reported often turned out to be an illusion. As a result, the same companies shed labor quickly. At its peak, Enron employed 20,000 people. But in the weeks after its earnings restatement in November 2001, this new-economy profit machine was suddenly revealed to be an old-fashioned money pit. Within months, the company was down to about 500 employees. The authors label Enron a "typical – if somewhat extreme – example" of a company whose employment rose and fell rapidly.

On the whole, Professors Philippon and Kedia conclude, companies that had to restate earnings in 2000 and 2001 axed anywhere from 250,000 to 600,000 jobs in 2001 and 2002. That would account for a significant chunk of the jobs lost during the period.

What’s more, restatements create industrywide uncertainty that can inhibit future hiring. When WorldCom was revealed to have fudged its earnings, it became clear that the business model for telecommunications and data services wasn’t nearly as profitable as WorldCom had made it out to be. "All of the sudden, the entire industry appears to have excess labor," Professor Kedia said. And once many of the assumptions about the industry’s business models turned out to be false, executives and investors were naturally gun-shy about hiring and expanding.

It is too early to evaluate this research, and let us not get carried away by monocausal theories, but today I felt I learned something.  Here is the full story.

Comments

There's nothing really new here. Obviously the 90's employment surge was driven by "free" investment dollars thrown at economically wasteful employees to do work that no one really valued at more than cost. Another effect of the bubble was to give companies greater than usual incentives to fake earnings. Yes, fake earnings led to higher employment, but so did excessive investment. How are these factors to be separated? As a causal behind the scenes matter, they probably cannot be to any great degree. Gross has latched on to the accounting frauds because they are still around with reduced head counts. The real story is all of the companies that disappeared and never should have existed in the first place, fraud or no.

It's hard to remember what the late 1990s were like -- so different from now. But here's a reminder:

"Philip [Greenspun of ArsDigita] was describing how cool it would be to have a koi pond suspended from the ceiling of the atrium, so you could see the fish swimming from beneath and from all sides. Brian Stein replied, 'You know what would be even better? A solid-gold trash can, burning cash 24/7.'"

http://michael.yoon.org/arsdigita

It's amazing how many articles about the job situation fail to mention illegal immigration.

The low interest rates are causing a construction boom, which is employing huge numbers of illegal immigrants. Otherwise, not much good is going on with the economy.

Edwin S. Rubenstein has been covering this story for a couple of years, but nobody else seems to want to touch it. http://www.vdare.com/rubenstein/050907_nd.htm

The funniest thing is that Paul Krugman won't point out that a huge fraction of the new jobs being generated under Bush are going to noncitizens!

Steve,

Interesting link and good data, but your spin on his data about foreign born citizens being illegal is misguided. Is it possible that some of them are illegals? Sure, but his stance is on Hispanics, not illegal Hispanics.

More importantly, so what if 57% of all of the jobs are going to Hispanics? That also means that 63% of all new jobs are going to non-Hispanics. As a consumer, I want the highest quality, lowest price product I can freely purchase. I don't care who makes it.

The government doesn't collect data on jobs going to illegal aliens, but it does collect data on jobs going to Hispanics, so Edwin S. Rubenstein tracks the Hispanic job figure as the best available proxy for the missing illegal alien job figure.

If you'd look around, you'd see that the low interest rates have set off a construction, remodeling, and landscaping boom, and an awful lot of the jobs are going to Spanish-speaking immigrants, no doubt many of whom are in this country illegally. How this all the investment in fancier front yards that I see in my neighborhood with homeowners paying immigrant workers to put in grape trellises and water features is helping prepare America to compete better with China and India remains a mystery, one that economics writers other than Rubenstein seem to be simply ignoring.

Steve,

It probably is a proxy in terms of the trend, but we have no way of knowing how good a proxy it is. Since we don't know how good the proxy is, I don't think anyone can argue either side too vigorously.

Even though he backtracked, I think Vicente Fox hit the nail on the head about Mexicans (in reality all unskilled immigrants) being willing to do the jobs that Americans did not want to do. When I used to live in CA, fast food shops in Compton, Watts, etc. were hiring Hispanics from other neighborhoods(assuming legal) because blacks in the neighborhood thought the wages were too low and that the work was beneath them. I would hardly call this stealing jobs. The car wash down the street in Santa Monica got busted not for hiring illegals (even though they were), but for only paying them $2/hr. Do you know any American that would work for $2/hr? Would you rather pay $20 for a basic car wash so an unskilled American can make $6/hr?

To your last question, to the extent that the cheap labor substitutes force Americans out of unskilled labor jobs, it will make us focus on different types of jobs whose technology we may have to invent. Since you are focused on the housing market, imagine being able to plant a seed, adding water too it and watching it grow into the house that you designed. Do you think it will prepare us better to keep Americans doing unskilled labor or designing a new housing system that fuses many technologies and then marketing it to a country of 2 billion? Removing unskilled jobs frees us to focus on the next big thing, that is unless Americans can't come up with any good new ideas.

For a historical perpective, remember when Japan started putting all of their customer help centers here in the U.S. and people were complaining that Japan was dumping these unskilled jobs on us? Now that those jobs are going to India and Africa, they are sacred?

looking job

資金を増やそうとするのに不動産投資をするのが手っ取り早い。日本で不動産で東京 賃貸をさがすのはきわめて難しくシステム開発は日本の会社が良い。

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