By Derek Thompson Jun 9 2011, 1:00 PM ET 4 Where do jobs come from? It's a simple question with vast implications. This article previews findings from a forthcoming report by the McKinsey Global Institute. 590 job seekers REUTERS Lucy Nicholson.jpg For the second straight summer, the U.S. recovery hit a wall. Unemployment is on the wrong side of 9 percent. The velocity of job creation is one-third of the pace we need to keep up with our growing population. To understand why, let's start at square one: Where do jobs come from? That's no childish question, but it deserves a simple answer. A job is born when demand grows faster than productivity, either because consumers buy more of the same stuff or because innovations create new stuff. Even simpler: Jobs are the difference between real economic growth and productivity. When the economy grows, jobs tend to grow in tandem. But when productivity grows faster, companies can make do with fewer people. You can sum this up with an easy equation: Employment growth = economic growth (-) productivity growth. Apply that equation to two industries: manufacturing and health care. In the last 30 years, manufacturing jobs have declined (see the graph below) but output has grown as steadily as almost any sector in the country. What's making up the difference? Productivity. Labor productivity in manufacturing grew at a whopping 5 percent annualized between 1980 and 2010. That's almost twice as fast as any other industry in the country. mck manufacturing.png In health care, the opposite has been true. Employment has grown faster in health care than any other large sector, even in the recession. This is because demand has increased rapidly due to an aging population with wider treatment options, while productivity gains have been limited or even negative. McKinsey rounds up the largest sectors in the handy chart below. Productivity is a good thing for America, but it's not always great for American workers. Since 2000, employment grew fastest where productivity grew slowest (health care) and jobs grew slowest where productivity grew fastest (manufacturing). So, Where Are the Jobs Hiding? To recap, there are three founts of new jobs: 1. More buyers for existing stuff (Higher demand) 2. New buyers for new stuff (Innovation) 3. Stable demand in less productive sectors (Growth in government, health care, or construction employers). At the moment, all three founts are dry. Demand has suffered, because the housing crisis, the debt overhang, and high unemployment are strangling the American consumer. You can't have healthy demand with one sixth of the workforce underemployed. You can't have healthy spending with the average U.S family entering the recession with debt equal to 140 percent of income. And you can't have a confident consumer with housing prices falling quarter after quarter. Innovation has suffered for more mysterious reasons (Michael Mandel has detailed the drought in biotech innovation here). Finally, the end of the stimulus and the cut-happy Congress are contributing to employment slowdowns in state and local governments. Some economists chalk up the jobless recovery to a demand shortfall and end the discussion there. But there's something else happening. It's the new, relentless pursuit of efficiency. There was a time when recessions meant shallower unemployment and deeper productivity loss. During the 1973 recession, McKinsey says, reduced employment constituted one-third of every percentage point decline in GDP. Lost productivity made up the remaining two-thirds. But with each following downturn, workers suffered more. In the most recent recession, employment absorbed 98 percent of the decline in GDP. For many industries, productivity actually grew during the recession. If the economy is making more stuff, who is making it if not more American workers? The answer is robot arms and foreign arms. Globalization and technology are making millions of U.S. worker disposable. The upshot: The U.S. economy is learning to produce more work without workers. Let's Get Growing! High job growth depends on rising demand, an export revival, and addressing the skill mismatch, McKinsey concludes. But how do we do that? Consider a three step plan for America: Recover, Export, and Innovate. First, in the short term, nothing heals like more demand. In the current political environment, where nothing seems possible, this will require patience. Consumer spending will rise slowly, small business confidence will rise slowly, and jobs will grow slowly. Second, while domestic demand recovers, companies should look for foreign demand to fill the gap, and the U.S. government should provide resources to help them discover, finance, and manage relations with foreign companies. Finally, there is the innovation conundrum. Calling for more innovation doesn't mean inviting the 25 MacArthur Grant Fellows into a room and asking them to fix health care inflation. It means investing in all the people who aren't MacArthur Grant fellows. This begins with education, training and immigration. Let's revamp our student aid and college investments policies to encourage community colleges to provide high quality, low-cost education. Then let's liberalize our immigration laws so that we keep the smartest people in the world here rather than use a lottery system to boot them out after we've invested in their education.