Great American job machine on its way across the Atlantic

Alberto Alesina and Francesco Giavazzi, Project Syndicate

Until the third quarter of this year, the number one doubt facing the U.S. economy concerned the Pyrrhic character of its "jobless" recovery. Then, during September and October of this year, net employment grew by 290,000, well ahead of most forecasts. But while more than 300,000 new jobs were created in services, over 50,000 manufacturing jobs were lost. This is more than can be explained by the long-term shift of the economy out of industry and into services.

At the same time, the jump in labor productivity in manufacturing -- by 7.2 percent in the third quarter -- indicates that there remains a great deal of excess capacity in the manufacturing sector. So don't look for any improvement in U.S. employment to come through factory jobs. Instead, it is the greater flexibility of services that has produced the resumption of employment growth in the U.S.

Evidence for such growth abounds. For example, Kohl's, a large department store, has opened 48 new sites in October, hiring some 140 people at each of them. Stop & Shop, a chain of supermarkets, has reintroduced a delivery service from cashiers to a client's car -- something done away with decades ago -- and has extended opening hours in many stores.

America's reborn service economy stands in stark contrast to what is found in Europe. Thanks to the European Commission's tough competition policy, Europe has gone a long way towards making its industries more viable. In the service sector, by contrast, deregulation has been much more limited, probably because services are much less exposed to international competition, which means that old hidebound rules are easier to preserve.

The outcome is that in Europe, contrary to the U.S., an increase in the demand for services produces higher rents, rather than more jobs. Take the simple case of taxi licenses: if the number of taxi licenses is fixed, and consumers start using taxis more often, what you will observe is, at most, an increase in the demand for powerful Mercedes cars that taxi drivers use, not an increase in jobs.

In other words, a good indicator of the state of the U.S. economy is how many people take care of you at a supermarket cashier. In many European countries, you should instead look at the quality of the stereo in your taxi.

The labor market flexibility in the U.S. service sector is truly remarkable. During recessions and booms, you can feel the changes in quality and number of waitresses in restaurants, in the size of staffs in shops, in the availability of cleaning services. In the roaring 1990s, it was almost impossible to find qualified restaurant staff to fill vacant jobs. During the stagnant economic years of the Bush administration, such workers were plentiful. In Europe, you simply certainly can't see these differences: waiters, busboys, and cooks all have job security.

Part of the problem here is that temporary, short-term jobs in Europe have a very bad connotation. To be sure, the little employment growth that has been seen recently in Europe has mostly been as a result of temporary jobs. Even so, such jobs are widely regarded as a "plot" by companies seeking to fire employees at their leisure. The fact that obstacles to short-term employment contracts lead to long-term unemployment traps is often forgotten.

Such perceptions reflect a deeper difference. By and large, workers and management in Continental Europe retain many of the old class antagonisms that first emerged with the rise of industrialism in the 19th Century. To this day, they often still see each other as "enemies."

In the U.S., such sentiments are much less ingrained in the culture. Leading 19th-Century American thinkers -- and even trade unionists -- spoke of a "harmony of interests" between labor and capital, and workers and managers continue to view each other more as a partner than an adversary. This is all the more remarkable in light of the enormous -- and still growing -- disparities in compensation within U.S. companies. The pay gap between workers and CEO's is far wider in the U.S. than in Europe, and yet resentment of the "boss" appears to be far higher in Europe.

Yet beneath the surface, things are beginning to move in Europe. Stealthily, the competition authorities of the European Commission are starting to get tougher on professional services (consider, for example, "Competition Policy and Liberal Professions," a statement that can be found on the European Commission's Web site, www.europa.eu.int).

Once they have brought the cozy cartels of lawyers and accountants into line, other service industries seem destined to be opened up to greater competition, and hence to become great engines of job creation. Notwithstanding Europe's labor unions, temporary jobs are starting to be accepted. The American service industry job machine may be on its way across the Atlantic.

Alberto Alesina is Professor of Economics at Harvard University and Francesco Giavazzi is Professor of Economics at Bocconi University, Milan.