Saturday, July 2, 2011

The "wageless and jobless recovery" in the US?

The labor market problems facing the US economy shows no signs of easing even as an ideological battle over the policy alternatives is on. By every imaginable yardstick, the labor market is at its weakest in decades and for all talk of recovery, unemployment rate remains stuck near its recession-time peak.

All labour market figures make very depressing reading. Almost 14 million people, or 9.1% of the labor force, were unemployed in May, with 45% of those unemployed for 27 weeks or more. Another 8.5 million part-time workers wanted but could not find full-time jobs; an additional 2.2 million dropped out of the labor force because they could not find work. The percentage of the population working has fallen to 58% from 63% over the past five years, reducing the number of Americans with jobs by 10 million.

Laura Tyson
writes about the other costs of long term unemployment,

"The economic and human costs associated with the jobs crisis are staggering. An extended period of unemployment means lower earnings: workers who return after long-term unemployment earn 20 percent less over the next 15 to 20 years than a worker who was continuously employed. The longer workers are unemployed the more likely they are to lose their skills and drop out of the labor force. And the longer workers are unemployed, the more likely they are to lose their homes, their health and their marriages – and the more likely their children will grow up in poverty - with adverse implications for their health, education, and future incomes."

Now economists from Northwestern University have found that the woes are not confined to persistent unemployment but also includes wage changes. They "found that the current economic recovery in the United States has been unusually skewed in favor of corporate profits and against increased wages for workers". They show that since the recovery began in June 2009 following a deep 18-month recession, "corporate profits captured 88 percent of the growth in real national income while aggregate wages and salaries accounted for only slightly more than 1 percent" of that growth.

They also found that between the second quarter of 2009 and the fourth quarter of 2010, national income rose by $528 billion, with $464 billion of that growth going to pretax corporate profits, while just $7 billion went to aggregate wages and salaries, after accounting for inflation. In other words, the share of income growth going to employee compensation was far lower than in the four other economic recoveries that have occurred over the last three decades.

In fact, each of the indices of corporate profits showed strong growth over the past seven quarters - the index for the Dow Jones industrial average was nearly 46% higher at the end of the 2011 I quarter, and the S&P 500 index was 44% higher in that same quarter. In contrast, the three indices of hourly and weekly real wages of US workers showed little to no positive growth between the second quarter of 2009 and the first quarter of 2011. While each of the three corporate profit and stock value indices were far above their values in the base period, each of our three hourly and weekly wage indices were basically flat.

The BLS data reveals that average real hourly earnings for all employees actually declined by 1.1 percent from June 2009 to May 2011 and real wages and salaries declined by $27 bn over the seven quarters, the first ever such decline in any post-War II recovery. Further, worker productivity has grown just under 6 percent since the recovery began, helping to keep employment down while lifting corporate profits.

There is nothing surprising about this trend. In financial market meltdown induced balance sheet recession, consumers postpone spending and businesses defer investments to pay off their massive accumulated debts. When the magnitude of balance sheet damage is considerable, the recovery takes time, especially without substantial direct support from government. A downward spiral becomes inevitable - since consumer spending goes down, businesses start lay-offs and postpone investments; high unemployment and the excuse of recession also gives them the perfect excuse to squeeze more out of each employee without paying more. Corporate profits rise even as wages stagnate. And dismal economic expectations add to the woes by discouraging businesses from investing. The recovery path becomes a steep and arduous climb up.

Update 1 (4/7/2011)

The debate in the US about the economic policy options is between Conservatives who call for austerity measures to rein in the burgeoning public debt and Liberals who advocate more fiscal austerity to provide the stimulus that can lift the economy from its deep aggregatee demand slump.

Mr John Taylor traces the economy’s ailments to the abandonment of predictable, rules-based fiscal and monetary policies. The bail-outs and stimulus of George Bush junior and Mr Obama, and the Fed’s emergency lending and QE, he argues, sowed paralysing uncertainty. He believes that deep spending cuts would reverse this effect and thus generate private spending and growth.

In contrast, Christina Romer argues that near-term fiscal stimulus, by boosting employment and income, lessens the pressure on households to pay down debt whereas premature austerity could worsen the cycle of weaker growth and deleveraging.

Household debt in US remains well above its normal levels despite all the deleveraging of the past three years. As Carmen and Vince Reinhart have shown, countries that experienced macroeconomic and banking crises could repair their debt overhang only after a prolonged period of deleveraging. While Conservatives say that fiscal stimulus will only substitute private debt for government debt, Liberals argue that such stimulus spending expedites the process of balance sheet repairs.

Since recession ended in June 2009, GDP growth has averaged 2.8%, roughly its long-term trend. After so deep a slump, the pace is usually much faster. The gap between actual and potential GDP has been stuck at around 5% since late 2009.

For the record, the Obama administration has so far injected about $1.2 trillion in fiscal stimulus, the Fed has cut interest rates to nearly zero and then, in two rounds of QE, bought $2.3 trillion of government and mortgage-backed bonds.

Update 1 (19/7/2011)

David Leonhardt has a nice article on the huge consumer spending slump that the US is facing. He writes that,

"The auto industry is on pace to sell 28 percent fewer new vehicles this year than it did 10 years ago — and 10 years ago was 2001, when the country was in recession. Sales of ovens and stoves are on pace to be at their lowest level since 1992. Home sales over the past year have fallen back to their lowest point since the crisis began...

The Federal Reserve Bank of New York recently published a jarring report on what it calls discretionary service spending, a category that excludes housing, food and health care and includes restaurant meals, entertainment, education and even insurance. Going back decades, such spending had never fallen more than 3 percent per capita in a recession. In this slump, it is down almost 7 percent, and still has not really begun to recover...

If you’re looking for one overarching explanation for the still-terrible job market, it is this great consumer bust. Business executives are only rational to hold back on hiring if they do not know when their customers will fully return. Consumers, for their part, are coping with a sharp loss of wealth and an uncertain future (and many have discovered that they don’t need to buy a new car or stove every few years)."

He feels that the US economy is moving away from the debt-financed consumption dominated model that underpinned its growth since the eighties. See the graphic here.

1 comment:

sai prasad said...

why cant the corporates share a part of the profits with theiir workers ? The nation ?

Seems like the policy regime has placed them in the back seat.