Monday, December 10, 2012
Despite Headlines, Jobs Problem Continues to Confound U.S.
Over the past year, employment has risen by an average of 157,000 per month in a country with 134 million jobs. That’s an increase of about 0.1% a month.
While the unemployment rate also fell sharply to 7.7%, it was due to a decline in the labor force, not to any improvement in the labor market.
The labor force fell by 350,000 in November and the labor force participation rate (the percentage of people employed and those who are unemployed but seeking a job) fell to 63.6% from 63.8% in October.
For perspective, the labor force participation rate was 67.3 in January 2000. Yet, when the recession began in December of 2007, the participation rate had fallen to 66 percent.
This means that in less than 13 years, the percentage of Americans participating in the labor force has dropped from 67.3% to 63.6%, a rather striking decline.
Clearly the long term trends are not good. The unfortunate reality is that discouraged people continue giving up their search for work.
Additionally, the average duration of unemployment was at 40 weeks in November, near historic highs.
The official unemployment figure doesn't include those who have lost their unemployment benefits. Nor does it count those who only have part-time jobs but want full-time work.
None of that is encouraging.
It takes about 125,000 new jobs per month just to keep up with population growth. Though the economy is currently achieving that, we need 250,000 new jobs per month for a year to truly drop the unemployment rate by a little more than 1%. Yet, in order for that to happen, the economy needs to grow north of 3% per year.
However, U.S. gross domestic product increased at an annual rate of 1.3% in the second quarter and by 2.0% in the first quarter. That does not bode well for job creation.
Unfortunately, at this rate, it will take years to create jobs for everyone who wants one.
At the pace of job creation over the past two years, the U.S. would not return to pre-Great Recession employment levels until after 2025, according to the “jobs gap” calculator from The Hamilton Project.
The Great Recession—which officially lasted from December 2007 to June 2009—resulted in massive job losses that the economy is still trying to recover. In 2008 and 2009, the U.S. labor market lost 8.4 million jobs, or 6.1% of all payroll employment. This was the most dramatic employment contraction (by far) of any recession since the Great Depression. By comparison, in the deep recession that began in 1981, job loss was 3.1%, or only about half as severe.
The economy has since recovered four million of those lost jobs, meaning we are only half way to recovery. Yet, that doesn't even begin to address the monthly increase of new entrants into the labor market, which creates a continual need for even more jobs.
Despite the slow but steady state of job creation, here’s the underlying problem: the recovered jobs on average pay a lot less than did the jobs that were lost. Low-wage jobs like retail and food service workers have made up 58 percent of the subsequent job growth. With less income, Americans have less to spend and spending is what expands economies.
Wages in the retail industry remain low compared to other sectors, with the average full-time sales worker making just $21,000 per year, according to the Bureau of Labor Statistics.
Peter Edelman, a law professor at Georgetown University, says the proliferation of low-wage jobs is the single biggest cause of persistent poverty.
"The first thing needed if we're to get people out of poverty is more jobs that pay decent wages," he argued in a July New York Times op-ed. "We've been drowning in a flood of low-wage jobs for the last 40 years… Half the jobs in the nation pay less than $34,000 a year, according to the Economic Policy Institute. A quarter pay below the poverty line for a family of four, less than $23,000 annually."
And wages in the bottom half "have been stuck since 1973, increasing just 7 percent," Edelman noted.
Jeff Faux, a progressive economist who founded the Economic Policy Institute in 1986, argues that by the mid-2020s, even with the most optimistic assumptions about economic growth, current trends indicate that the average American's wages will drop about 20 percent. One big factor is that more and more good jobs will go overseas, leaving even America's best and brightest no alternative but to enter the service industry.
America's dual problems of high unemployment and low-wage jobs will continue to have negative consequences for our consumption-based economy, which is 70% reliant on consumer spending.
Obviously, there is less consumption when fewer people are working and when so many of those with jobs are earning so comparatively little. Ultimately, there is less disposable income being directed back into the economy. It also results in lower tax receipts at both the state and federal levels.
If unemployment remains stubbornly high, wages will also remain stagnant. That will create a negative feedback loop of both lower consumer spending and lower economic output.
As of now, we're still a long way from recovery, and a full recovery is anything but assured.
Japan's bubble economy burst in the late 1980s and, nearly a quarter-century later, it has yet to recover.
That's a horrible precedent for the U.S.