The One Percent’s Jobless Recovery
Something strange has happened in the U.S. economy. Nearly three years after the Great Recession officially ended in June 2009, unemployment remains stubbornly high at 8.1 percent and real wage growth is nonexistent, but corporate profits and GDP have never been higher. Six million workers have dropped out of the labor force in the last two years—twice the number of people who have found new jobs—but the Dow Jones and NASDAQ are trading above pre-recession levels as if nothing had ever happened. Economists like to call this incongruity a “jobless recovery,” but you might as well call it a recovery for the 1 percent: according to recent data, that small fraction of the nation’s wealthiest captured a stunning 93 percent of a income gains from 2009–10. Income growth for the bottom 99 percent was just 0.2 percent.
This unequal pattern of growth is highly unusual in recent history. For most of the post-war years, periods of economic recovery were defined by a rapid return to high employment and GDP growth. But for the past two decades, there has been an increasing disconnect between the strength of the economy and the health of the labor market. When the economy crashed in 2008, businesses aggressively laid off employees while demanding greater productivity from their remaining workforce. Without a union or effective labor laws to protect them—and with fierce competition for their jobs—many workers resigned themselves to more work for the same salary.
That’s not how it used to be. Research shows that until the mid-1980s, labor productivity tended to slow during recessions, as it was difficult for businesses to downsize effectively. But with the sharp decline of unions during the Reagan years, the correlation between productivity and employment turned negative. “These days,” writes economist Brad DeLong, “U.S. labor productivity looks to be countercyclical: firms take advantage of downturns in demand to rationalize operations and increase labor productivity, pleading business necessity in the face of the downturn to their workers.” Which explains why business sector productivity soared 5.3 percent in the depths of the Great Recession, driving corporate profits up 116 percent to a record $1.4 trillion. Although the stock market boom did little for the 70 percent of Americans who received less than 2 percent of their income from capital gains, the returns to the 1 percent were enormous.
The divergence between productivity and labor (including wage compensation and employment) is the key to understanding rising income inequality, the stagnation of average wages, and the current state of our jobless, 1-percent-oriented recovery. “Productivity and the compensation of the typical worker grew in tandem over the early postwar period until the 1970s,” writes Lawrence Mishel, president of the Economic Policy Institute. “However, the experience of the vast majority of workers in recent decades has been that productivity growth actually provides only the potential for rising living standards.” In reality, average wage growth has stagnated, while the gap between productivity and compensation has accelerated.
According to Mishel’s research, this divergence can be explained primarily by growing income inequality and a recent shift in the allocation of compensation from labor to capital. Part of this story is the rise of the 1 percent, whose earnings grew 156 percent from 1979 to 2007. But Mishel differentiates between this divergence at the top—attributable to the extraordinary growth of executives’ compensation (especially in the financial sector)—and the wage stagnation of the middle class, who have suffered disproportionately from ”laissez-faire policies … including globalization, deregulation, privatization, eroded unionization, and weakened labor standards.” Wage inequality at the bottom is similarly a unique phenomenon, the result of continual high unemployment and the eroding value of the minimum wage.
Mishel’s research strongly suggests that improving labor standards—including a higher, inflation-indexed minimum wage and stronger protections for collective bargaining—must be central to any effort to reestablish the historical link between productivity growth and rising median wages. Here the experience of Europe, with its longstanding support for labor and milder income inequality, should be instructive. Another way to increase workers’ leverage would be to return to full employment, putting upwards pressure on wages. But most economists expect that could take years at current trend growth: businesses will continue to squeeze productivity gains from ever-smaller workforces until an increase in consumer demand requires them to begin hiring again. And consumer demand will not return to pre-recession levels until the jobs crisis is resolved.
It sounds like a catch-22. (That is, until you remember the role of the U.S. government, which can borrow cheaply to stimulate the economy, creating outsize returns on investment.) Of course, in the long-term, the market will find equilibrium on its own—it just may not be the equilibrium we want or expect.
What Slowing Productivity Growth Means for Tomorrow’s Jobs Report
The U.S. economy went on something of a crash diet during the Great Recession, cutting millions of Americans from the workforce and squeezing dramatic productivity gains from those who remained. Unit labor costs dropped and output per hour rose as busiensses became leaner and meaner. But slimming down can only increase efficiency to a point, and as the economy has recovered, the pendulum has appeared to swing back in favor of workers. Revised estimates released yesterday by the Labor Department show that productivity growth slowed to 0.9 percent annualized at the end of last year, down from 1.8 percent in the previous quarter. And unit labor costs rose 2.8 percent, more than doubling earlier estimates.
That bodes well for tomorrow’s jobs report, which is expected to show modest gains throughout the economy. If productivity is slowing, than the only way businesses can expand output is to hire more people. Hopefully that will put sufficient pressure on wages, which have plenty of room to rise against price markup without any inflationary effect.
But let’s not miss the forest for the trees—or in this case, the historic trend for the market correction. The graph below—which plots productivity growth against labor costs since 1990—shows that the divergence between efficiency gains and wage compensation is a long-term trend that is not likely to be altered by the recovering labor market. The underlying problem remains intensifiying income inequality, here expressed as workers’ decreasing share of corporate profits. Although tomorrow’s job numbers are likely to be another piece of good news for the economy—joining high consumer confidence and declining unemployment insurance applications on a growing list of positive indicators—it is critical that we do not allow the conversation about systemic inequality to fade into the shadows. The graph below illustrates a tectonic, not cyclical, shift. We’ll need more than a band-aid to correct our course.
Graph of the Day: Putting the Squeeze on Labor, Part II
Yesterday I commented on what Mark Thoma and Karl Smith both identified as one of the most significant graphs in the White House’s Economic Report of the President. That graph showed how the historical post-war relationship between wages and prices—or more fundamentally, between labor and capital—has broken down over the last thirty years. You can probably guess who has gotten the short end of the stick. Traditionally it has been the case that a competitive market prohibits businesses from raising prices too high or pushing labor costs too low, as both consumers and labor will look elsewhere for a better price. And historically, that dynamic has held: from 1947 until the mid-1980s, American wage earners accrued a proportionate share of economic output as productivity rose. But since the Reagan Revolution, corporate profits have surged while wages have flatlined, breaking the post-war trend that essentially created the American middle class. As I argued in my previous post, the present imblanace between capital and labor is unlike anything we have experienced in two generations. A global oversupply of labor and skill-biased technological change account for much of this inequality. But we cannot ignore that “laissez-faire” policies have encouraged this unprecedented redistribution of wealth to the richest 0.1%, while diminishing social mobility for the poor. Regressive tax policies that privilege capital gainsand loopholes like the carried-interest deduction have created the conditions that allow the Forbes 400 to control as much wealth as 150 million Americans while paying an average tax rate of just 18 percent. We cannot accept that disparity as the new normal.
Graph of the Day: Putting the Squeeze on Labor
The White House’s new Economic Report of the President—broadly, an annual overview of how the president and his Council of Economic Advisors (CEA) view the state of the economy—is generally optimistic for 2012, noting better-than-expected job growth and economic expansion for ten straight quarters. It also underscores just how severe the financial crisis was that the president faced, with revised estimates showing that the economy contracted at an 8.9 percent annualized rate in the last quarter of 2008, not the 3.8 percent initially claimed.
The outlook on wages, productivity, and prices is less rosy. The CEA notes ominously that for the first time since World War II, the historical link between wages and prices has broken. For the last ten years, inflation has been driven by rising price markup, while unit labor costs have fallen behind productivity gains. In other words, prices are increasing and corporate profits are soaring—but workers are being left behind, with labor share of output (the inverse of price markup over labor unit costs) at its lowest level in seventy years.
On the one hand, that means there is now considerable slack in the labor market, so the CEA can predict that the economy has plenty of room to expand without creating inflationary pressures. But it also indicates a tectonic shift, since the Reagan Revolution, in the relationship between unskilled labor and capital. If this new trend holds, then we are looking at an economic environment that is unlike anything we have experienced in the post-war era. Karl Smith is more blunt: “At its heart the issue is that Industrialization Really Was Different, and there is no reason to think it will come again. The reality of this new world is that you cannot simply work hard and make a good living.”
In a way, he’s right. The post-war era really was a unique time in American and economic history, with wage compensation tied to productivity growth—a rising tide that lifted all boats mostly equally. The past several decades have seen that relationship erode, as manufacturing and union jobs disappeared overseas, and corporations sought massive gains in competitiveness and profit at the expense of labor. Globalization and technology share much of the blame, but it is also instructive to look at the experience of other industrialized countries, many of which have been able to mitigate soaring income inequality with education and industrial policies designed to equalize opportunity and share the benefits of economic growth. Once, around the turn of the twentieth century, enterprising young progressives headed to Europe to study policy, returning to America with the seeds of what would become the New Deal, and later, the Great Society. Perhaps it is time, once again, to look abroad for answers.
Productivity Is Rising, So Why Aren’t Workers Profiting?
By Benjamin Landy
The specter of “market inefficiency” is commonly invoked as a reason to fear higher taxes and new regulations. But productivity -– a measure of economic efficiency in terms of output per hour worked -– actually grew at the relatively fast rate of 2.8 percent between 1948 and 1973, when tax rates were far higher and regulations were more extensive in many industries, relative to 1973 to 2010, when average productivity growth slowed to 1.9%.
In addition, during the period from 1948 until 1973, almost all Americans were seeing their average income rise as productivity climbed. Income inequality in the United States was at its lowest levels in history, with the rising economic tide lifting all boats. But beginning in the mid 1970s, the income of the bottom 90% –- all but the highest earners -– started to fall behind productivity increases. As the graph shows, though,the incomes of the top 10% and 1% continued to track productivity growth. As of 2008, the average American’s real wages were no higher than they were forty years ago. Since all workers are collectively enhancing the efficiency of the economy, there’s little justification for perpetuating policies that have enabled only the wealthiest to benefit from those improvements.
Graph(s) of the Day: Can Higher Education Solve the Jobs Crisis?
By Benjamin Landy
With the fragile U.S. economy struggling to recover and millions of Americans still out of work, many pundits and policy makers have taken to claiming that high unemployment is a structural, not cyclical problem. In other words, the issue is not that there is low consumer demand — and therefore low demand for workers — but rather that unemployed workers do not have the skills or education that employers require. Further, it is claimed that as the economy returns to full employment, businesses will be stymied by a significant lack of qualified college graduates.
However, a recent report (PDF) by the Economic Policy Institute shows that there is little evidence to support the claim that higher education is the solution to the current jobs crisis, including rising wage and income inequality.
According to Lawrence Mishel, the author of the report, there have been far too few job openings for all of the unemployed looking for work, suggesting the underlyling economic problem remains cyclical low demand. As the above graph from the report shows, the ratio of unemployed workers per job opening remains nearly twice as high as at the peak of the 2001 recession. And the current jobs shortfall is not just in one or two affected industries, like construction, but across all sectors. Neither does one education group account for the increase in long term unemployment, as the structural argument would suggest.
