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.
Graph of the Day: One Job Available for Every Four Unemployed
The recently released December job numbers were a mixed bag in many ways, with optimism over the lower headline unemployment rate tempered by still historically high long-term unemployment, a 15.6 percent “U6” unemployment rate (a broader definition of unemployment), and critically low labor force participation.
The latest data from Washington is similarly difficult to get excited about. According to the Labor Department’s new JOLTS survey (Job Openings and Labor Turnover), there were 3.16 million job openings in November, or approximately one job for every 4.2 unemployed workers. That’s a 30 percent improvement since the trough of the Great Recession in June 2009, but a 2 percent decrease from the number of job openings in October, pointing to a still dismal job market. What’s more, JOLTS makes no distinction between part-time and full-time job openings, meaning many millions of Americas are still working fewer hours than they need to make ends meet.
The Trouble with the December Jobs Report
There’s certainly good reason to cheer the latest employment figures from the Bureau of Labor Statistics—according to this morning’s jobs report, the economy added 200,000 net jobs in December, bringing the headline unemployment rate down to 8.5 percent, the lowest level in nearly three years. Still, the public sector continued to shed jobs, with budget shortfalls forcing state and local governments to layoff another 12,000 employees, for a total of 280,000 fewer government jobs in 2011.
And while employment gains were felt widely throughout the private sector, with new hires in transportation and warehousing, retail trade, manufacturing, health care and mining, among others—job security remains weak for many millions of Americans. The U6 unemployment rate—which measures formal unemployment as well as marginally attached workers and workers who are part-time but wish to be full-time—remains uncomfortably high at 15.6 percent, despite dropping nearly one and a half percent from this time last year.
And though 1.6 million new jobs were added in 2011, workers saw virtually no gains in the number of hours they could work, leading about 150,000 people to take on multiple jobs to make ends meet. The long-term unemployment rate dropped slightly but remains at historic highs, while 1.5 million Americans dropped out of the labor force entirely, bringing the participation rate to historic lows. That means that the unemployment rate is artificially depressed, and will likely increase or plateau as a broader economic recovery encourages millions of labor force drop-outs to start looking for jobs again.
Of course, there are plenty of reasons to applaud today’s jobs report—this is the sixth straight month that we have seen over 100,000 workers rejoin the work force, a statistic that is sure to help President Obama in his quest for reelection. But a healthy dose of negativity is a helpful reminder that millions of Americans remain outside our more conventional metrics of economic well-being, and despite the currently upbeat media narrative, they still need support. Extending the payroll tax-cut, for instance, will go a long way towards maintaining this momentum, as will a new round of stimulus for infrastructure investments. The optics on the economy may be shifting in favor of the President, but too many Americans are still struggling to get back on their feet to let such policy opportunities slide.
Long-Term Unemployment Benefits Do Not Increase Unemployment
Although the official unemployment rate remains stuck at around 9 percent—significantly lower than the “U6” rate of 16 percent, which includes discouraged workers and those forced to work part-time for economic reasons—conservative lawmakers are eager to reduce the number of weeks unemployed workers can receive benefits. One potential bill would also require recipients without a high school diploma to enroll in a GED program or lose their benefits, and allow states to screen applicants with a drug test. That position isn’t particularly surprising, considering the typical conservative refrain that unemployment benefits reduce the incentive to look for work. By their account, if we would only take away unemployment insurance (UI), millions of lazy Americans would get to their feet and find jobs.
It’s a deeply flawed presumption, and one that has real world consequences for the 6.7 million families that rely on an average weekly benefit of $300 to afford food, heat, and shelter while they look for work. It also endangers the more than 2 million long‐term unemployed workers, who will lose their UI benefits entirely by the end of February if Congress fails to reauthorize those benefits before they expire.
Luckily, a new report from the U.S. Joint Economic Committee proves just how wrong the conservative position is. According to the report’s authors, there is no evidence that emergency UI benefits inflated the unemployment rate; the intensity with which the long-term unemployed searched for work actually tripled during the Great Recession. That analysis complements a similar study from Brookings earlier this year that found only 0.3 percent of the 4 percent increase in unemployment could be attributed to long-term benefits.
Unemployment benefits also function as extremely effective, targeted economic stimulus. Benefits are spent quickly on basic necessicities, creating a ripple effect throughout the economy that sustains consumer demand and supports employment. The authors of the JEC report argue that reauthorizing emergency UI benefits provide “the greatest ‘bang-for-the-buck’ among a range of fiscal policies,” boosting GDP with a multiplier effect that the CBO estimates to be as high as $1.90 for each dollar spent: far more than the negative multiplier of tax cuts.
As the report points out, Congress has continued to extend UI benefits until the unemployment rate fell substantially below peak in every major recession since the 1950s. And at 3.7 percent, the current long term unemployment rate is nearly three times higher than it has ever been when UI benefits were allowed to expire. It is estimated that, in 2010, over 3 million Americans were kept out of poverty by UI benefits. To allow the extension of those benefits to expire now would risk impoverishing millions of families at a time when consumer demand is already at historic lows.
Graph of the Day: Contractionary Policy is Contractionary
Goldman Sachs may be an unexpected source for anti-austerity rhetoric. Nevertheless, the year-end economic forecast from the research arm of the global investment banking firm warns that Republican fiscal policy is as great a threat to U.S. GDP growth as the European debt crisis in the coming year. According to their latest analysis, an anticipated increase in congressional “fiscal restraint” will shrink the economy by a full percentage point of GDP in early 2012 and as much as 1.75 percent if Republican lawmakers block President Obama’s payroll tax cut extension.
While GDP growth in the last quarter of 2011 has been surprisingly strong at 3.4 percent, Goldman analysts estimates that growth could have been 0.5 percent higher if not the for the fiscal drag of contractionary policies. And “policy freeze here and in Europe” will shrink the economy again, according to economist Jared Berstein. “If [Goldman Sachs] is right about this quarter’s acceleration, it’s yet another crop of green shoots mowed down in its youth by political dysfunction generating terrible economic policy.”
It also confirms the consensus view that weak consumer demand and high unemployment—not the budget deficit—remain the most serious obstacles to a broader economic recovery. The latest jobs data shows that there were just 3.4 million job openings in October, far less than the 6.9 million Americans receiving unemployment insurance and the more than 14 million who remain unemployed. And yet Republican lawmakers want to stand by the contractionary fiscal measures that are failing in Europe and—as Goldman’s analysis shows—is responsible for contracting the economy at home. We have proven fiscal mechanisms at our disposal that can stimulate demand, grow the economy, and create new jobs. It’s not too late to use them.
Graph of the Day: How Many Americans Are Really Unemployed?
By Benjamin Landy
The number 9.1 has been repeated so often in the news media and on the campaign trail that it has taken on an almost totemic significance for policy makers—a numerical representation of all that is wrong with America today. And yet that number—which for the last several months has been the given unemployment rate—vastly distorts the current economic picture. The true number is at least 81 percent higher.
If you didn’t know better, you would probably assume that the unemployment rate reflects the number of people who want a job but can’t find one. But it doesn’t. The problem is that the Bureau of Labor Statistics counts only people who “had made specific efforts to find unemployment sometimes during the [previous] 4-week period” in its official calculation of “unemployed persons.” If, after four weeks without a job, you are not actively looking for work, you cease to be counted as unemployed under the standard definition. This excludes so-called “marginally attached workers,” who have not searched for work in the four weeks proceding the BLS survey, but who want and are available for work. Many of them—i.e. “discouraged workers”—have stopped looking for work because they believe there are no jobs available, or none for which they would qualify.
The “U6” unemployment rate displayed above gives a far more accurate picture of the current jobs crisis. This alternative rate, calculated by the BLS, includes not only discourageed workers, but also marginally attached workers and the underemployed—part time workers who “want to work full time, but cannot due to economic reasons.” That rate was estimated to be 16.5 percent last month, far above the 9.1 percent typically cited in the media.
But the real number could be higher still. Economist Nouriel Roubini is pessimistic:
If you add to it the millions of people that you have in jail in the U.S. — which is four times the amount of any civilized country as a share of population — than unemployment is probably closer to 20 percent. And that’s just among the average population. For minorities, the youth, or unskilled people that don’t have a high school degree, the number is closer to 30 percent.
It’s not surprising that the federal government and the news media choose to distort these facts by reporting only the “U3” official unemployment rate. But big problems require bold solutions. If we want to see more action from Congress, more Americans must understand the scale of the profound jobs crisis we now face.
Graph of the Day: An ‘Occupy Wall Street’ Primer
By Benjamin Landy
As the Occupy Wall Street protest builds strength in lower Manhattan, inspiring offshoot movements to “occupy” Boston, Los Angeles, and numerous other cities, the mainstream media are finally beginning to address Americans’ growing discontent over income inequality, debt, corporate greed and corruption—a conversation dominated until very recently by the Tea Party. Unfortunately, class privilege remains an uncomfortable topic in most media circles, and the hard facts about rising income inequality go largely unreported.
Here, for those wondering what all the fuss is about—or those simply wanting to learn more—is the single most important graph concerning U.S. income inequality.
In the graph on the left (click to expand), it is difficult to discern any appreciable increase in real income for all but the top 15 percent of taxpayers since 1979. But while middle class wages have remained stagnant for the last 40 years, top incomes have skyrocketed, more than tripling in the same period. The graph on the right reframes this dramatic shift in terms of percent share of total income, illustrating a stark divergence between the most wealthy Americans and nearly everyone else.
Of course, it wasn’t always this way. For much of the twentieth century, the United States had a strong middle class. Incomes for all Americans were rising as wages tracked producitivity growth. Then, beginning around 1973, these two trends decoupled. Political scientists continue to debate the exact reasons—lower taxes on the rich, deregulation of business, a widening gap between the technological skills of the labor force and available jobs—but productivity soared while only the incomes of the top ten percent continued to rise in tandem. The middle class, as it had existed since the end of the Second World War, began to decline. The top one percent, meanwhile, now control a substantial majority of the nation’s wealth: In 2010, the 400 wealthiest individuals held more assets—in stocks, home equity and other investments—than the bottom 50 percent of Americans combined. The average wealth of the top 1 percent was nearly $14 million in 2009, down from a peak of $19.2 million before the financial crash.
When you look at the data, it’s not hard to see why so many Americans are upset, nor why Republican strategists are so concerned by the effectiveness of the protesters’ populist slogan, “We are the 99%.” It’s hard to defend tax breaks for millionaires when Congress is slashing budgets for social programs that help the poor, especially when the threshold income to join the top 1 percent is $516,633—about ten times median income.
That anger is now beginning to take form. When I walked down to Zuccotti Park in New York’s financial district last Wednesday to observe the thousands who had gathered there to protest, what I repeatedly overheard was some variation of “I’ve been waiting for this to happen.” And while it is too soon to say whether the Occupy Wall Street movement will grow into the Left’s answer to the Tea Party, the mainstream media and the Democratic Party are at least sitting up and taking notice. We’re long overdue for a national conversation about the unprecedented income inequality in this country, and Wall Street—the symbolic center of the financial world—is as good a place as any to start it.
“THE financial crisis and its aftermath have taken a significant toll on American households, but many of the country’s economic problems predate the crisis. New data on income and poverty released by the Census Bureau reveal a picture of sustained stagnation in incomes for most American households. From the richest to the poorest, inflation-adjusted incomes were lower in 2010 than they were a decade ago. Stagnation is a relatively new phenomenon for the rich, but not for the rest. In 2010, the typical American household earned an inflation-adjusted income of $49,445, scarcely different from that in 1989 and a fall of 2.3% since 2009. Current incomes are at roughly the level of the late 1970s for those near the bottom of the income spectrum.
Of course, many of today’s consumer products are of higher quality today than they were in the 1970s, and the typical household has access now to things like iPods and flatscreen televisions that didn’t exist then. On the other hand, the cost of everything from housing to education has risen steadily in recent decades. From a real income perspective, the American economy has already experienced a lost decade, but for the median household the picture is one of a generation of stagnation.”
—The Economist (link)
Graph of the Day: Why Deregulation Won’t Fix the Economy
By Benjamin Landy
The Republican media complex has been having a field day with last month’s dismal jobs report, taking the opportunity to blame every progressive achievement of the last hundred years—from Social Security to the EPA to Medicare—for the nation’s current economic woes. The latest target in this series of straw men is government regulation, which the Heritage Foundation yesterday labeled the number one impediment to job growth.
Setting aside for the moment that it was a lack of regulation that allowed the derivatives market to wreck the economy, this claim fails to take into account the real reasons business leaders themselves have given for laying off their employees. According to the Bureau of Labor Statistics, which conducts a yearly Mass Layoff Statistics program that requires businesses to report their reasons for firing employees, government regulation can account for only 0.2% of layoffs in 2009. A lack of business demand, on the other hand, accounted for nearly half of the 2.1 million people who lost their jobs that year.
The reason the average unemployment rate doubled between 2007 and 2009, rising from 4.6 percent to 9.3 percent, had nothing to do with new government regulation and everything to do with the deepening financial crisis. As the above graph demonstrates, government regulations and union labor disputes (another frequent scapegoat invoked by the GOP) combined accounted for only 0.3% of layoffs in 2009. In the vast majority of cases, it was insufficient demand and low consumption—caused by the massive overhang of household debt—that forced businesses to shed employees.
Nevertheless, Republicans continue to claim that any and all government programs are ultimately “job killers.” The Heritage Foundation, among other conservative think tanks, frequently refers to a paper drafted for the Small Business Administration’s Office of Advocacy by Nicole and Mark Crain, which estimates that regulations cost the U.S. economy $1.75 trillion dollars annually. They continue to cite this figure despite a recent report, “Setting the Record Straight: The Crain and Crain Report on Regulatory Costs,” which argues that the Crain’s calculations are wildly unreliable, based largely on opinion polling and using only the upper range of estimates given by the Office of Management and Budget. In fact, according to the OMB, the total benefits of regulation in 2008—including money saved from reduced health costs and increased life spans—ranged from $153 billion to $806 billion. Those numbers are backed up by similar analysis by the EPA, which estimates, for example, that the Clean Air Act prevented 160,000 cases of premature mortality, 130,000 heart attacks, and 13 million lost work days in 2010.
Republicans’ misguided focus on eliminating such regulations, which keep our air safe to breath and water clean to drink, will not convince businesses to begin hiring again. Only by investing in our economy and infrastructure and assisting homeowners with their unprecedented household debt will we be able to increase consumer spending and get unemployed Americans back to work.
Graph of the Day: Did Stimulus Money Hire the Unemployed?
By Benjamin Landy
According to a new research paper (PDF) by economists Garett Jones and Daniel Rothschild, “Did Stimulus Dollars Hire the Unemployed?” published by the conservative Mercatus Center, less than half of all employees hired with American Recovery and Reinvestment Act funds actually came from the ranks of the unemployed. “Hiring isn’t the same as net job creation,” the report argues. “In our survey, just 42.1 percent of the workers hired at ARRA-receiving organizations … were unemployed at the time they were hired. More were hired directly from other organizations (47.3 percent of post-ARRA workers), while a handful came from school (6.5%) or from outside the labor force (4.1%) … This suggests just how hard it is for Keynesian job creation to work in a modern, expertise-based economy: even in a weak economy, organizations hired the employed about as often as the unemployed.”
Unsurprisingly, conservative economists like Tyler Cowen see Jones and Rothschild’s research as proof that the stimulus failed. “This paper goes a long way toward explaining why fiscal stimulus usually doesn’t have such a great ‘bang for the buck,’” writes Cowen on his blog Marginal Revolution. “It raises the question of whether as ‘twice as big’ [sic] stimulus really would have been enough.”
However, if you look more closely at the numbers, an alternative, more optimistic story about the ARRA emerges. First of all, for each of the 47.3 percent of workers who left their jobs for new, ARRA-subsidized positions, it is likely that another worker, potentially one who was previously unemployed, took their place. That means that job-shifters weren’t taking away opportunities from the unemployed; on the contrary, their stimulus-sponsored job mobility created a trickle-down effect, leading to new hiring at the businesses they left. Even if only half of these ‘second-order’ hires came from the ranks of the unemployed, that means that the true percentage of ARRA-subsidized jobs going to the unemployed is closer to 66 percent, not 42 percent.
Moreover, the report does not specifically detail how many people were able to keep their jobs thanks to ARRA funds. Even if no new jobs were created, a large amount of the stimulus money that went to the states enabled local governments to employ workers that would otherwise have been laid off. And in fact, Jones and Rothschild’s research indicates that the average organization receiving stimulus funds equal to 10 percent of its annual revenue reported retaining or hiring workers equal to 6 percent of its workforce. Which helps explain why, according to Recovery.gov, over 550,000 have been created or maintained by ARRA funds just between April and July of this year.
Of course, no one is claiming that the ARRA funds have been apportioned or managed perfectly — $787 billion is a lot of money. But considering the time constraints that the Obama administration was working under, it would be unreasonable to expect that such a massive economic stimulus could be implemented without some waste. That being said, the CBO estimates that relative to what would have happened without the law, the ARRA raised real GDP by between 1.5 percent and 4.2 percent in 2010, and boosted employment by as much as 3.3 million. That may be the kind of recovery that Cowen dismisses as not much “bang for the buck”, but I’d wager that the majority of the 14 million Americans who are currently unemployed would like to see more such stimulus, not less.
What Can We Expect from Obama’s Jobs Speech?
At this point, it seems unlikely that Obama will be able to deliver more than empty rhetoric at his upcoming jobs speech, absent a bold plan on mortgage refinancing (as I discussed in a recent post). This kind of politics, unfortunately, is relevant for few outside of the punditocracy — and, as Yglesias notes, won’t accomplish anything meaningful in the real world. You know, the one that real, unemployed people still live in.
The fact that President Obama is requesting a joint session of congress to hear his jobs speech certainly reflects an effort to raise the political stakes around it, despite the considerable evidence that presidential speeches don’t move the needle on politics. Still, let’s assume for the sake of argument that a presidential speech can be a big deal. What do progressives want to hear? Paul Krugman, for example, says “let’s see what the jobs plan looks like — and more important, since the GOP will block everything, how (and if) he makes a political issue of that obstruction.”
As I said yesterday, the problem here is that the kind of robust jobs plan Krugman or I would like to see is probably quite different from the kind of jobs plan that makes for optimal politics. If you’re talking about a purely political speech then dwelling on the fact that negative real interest rates are crazy or how the Federal Reserve should be more tolerant of higher prices and especially higher prices for food and gasoline is a bad strategy. The public doesn’t have a deep understanding of the deficit or passionate views about it, but they know that they’re “bad.” The public has less understanding of monetary policy, but they know that inflation is “bad.” You can revive the economy with higher deficits and more tolerance for inflation, but you don’t inspire the public with it. If the speech is just about politics, you have to judge it purely as political messaging and not for agreement with wonky accounts of the truth.
Graph of the Day: For the Long-Term Unemployed, Finding a Job is Only Getting Harder
By Benjamin Landy
For the long-term unemployed in America, life is only getting harder. While national unemployment remains high at 9.2 percent, near where the rate has stuck for the last two years, the average number of weeks an unemployed worker has been jobless is still growing. According to the Bureau of Labor Statistics, if you are one of the 14 million unemployed today, the odds are you’ve been unemployed for at least five months, or nine months if you look at the arithmetic mean.
Source: Bureau of Labor Statistics
Unfortunately, more and more businesses are using current employment as a proxy for employability, meaning the long-term unemployed face mounting discrimination and ever diminishing prospects compared to their recently laid-off peers. And, unlike discrimination based on race, ethnicity, disability, religion, sex and age, employers are entirely within their legal rights to use unemployment –especially long-term unemployment – as grounds for rejection. So while the number of people unemployed for less than 5 weeks declined by 387,000 in July, the number of people unemployed for over 27 weeks barely changed, holding steady at 6.2 million.
Only New Jersey has outlawed this kind of discrimination, and although several other states are considering similar legislation, the 6 million Americans who have been without work for over six months are still in serious trouble. According to a new report by the National Employment Law Project - an advocacy group for the employment rights of low wage workers - the half-year mark is a watershed moment in the eyes of many employers. Many companies are far less likely, even unwilling, to hire people who have been unemployed for over six months.
Until the unemployed are able to find work, we should extend their jobless benefits for another six months, which studies show generates two dollars of economic growth for every one dollar the federal government spends. Without bipartisan support to continue these unemployment insurance programs, many millions of Americans may find themselves in poverty when their benefits expire at the end of this year.
