The Longest Sustained Labor Slump
since the Great Depression Is
Taking a Toll on Working Families
Lee Price
Economic Policy Institute
March 10, 2004
http://www.epinet.org
http://www.epinet.org
Distress for those without jobs
First time since 1939 to go 35 months without recovering all
lost job – jobs still down 1.8%
Actual “job gap” exceeds 7 million jobs
• 2.4 mn. jobs lost since March 2001
• 4.7 mn. jobs needed for 1.2% population growth
5.6% unemployment rate understates joblessness
• Job shortage has caused unprecedented withdrawal from
labor force
• 7.4% unemployment rate with inclusion of “missing labor
force” of 2.8 million people
http://www.epinet.org
Distress for those with jobs
Slowing pay gains – living standards now in decline
• 1.6% gain in last year slowest in 40 years
• Slower than 1.9% inflation
• Even lower gains for middle- and lower-paid
Working faster also contributes to productivity gains
• Management says ‘We have to get the same work
done with fewer people’ after firing or attrition
• Acknowledged by both Chairman Greenspan and
President’s CEA
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How could policy have done better?
Better fiscal priorities would deliver more “bang for the buck”
from deficit increases
• focus tax relief on low and middle income people
because they spend money faster
• more timely and extensive state fiscal relief
• accelerate federal spending on infrastructure
• more generous and sustained UI extensions
Rein in deficits to stabilize future debt/GDP
Hike key Asian exchange rates to boost manufacturing
http://www.epinet.org
1939-2000: Jobs always fully recovered
by 31st month after onset of recession
35
31
Number of months to recover all lost jobs
Months to new record job level
30
27
25
25
22
19
20
16
19
19
17
15
10
10
5
?
0
0
Apr 45 Nov 48 July 53 Aug 57 Apr 60 Dec 69 Nov 73 Jan 80 July 81 July 90 Mar 01
Month recession began
http://www.epinet.org
Since 1939, jobs always up
th
by 35 month after start of recession
8.0
6.6
6.2
5.2
4.1
4.0
3.1
2.8
2.6
2.2
0.8
0.0
Percent change in total employment
35 months after start of recession
-1.8
-4.0
'45
'48
'53
'57
'60
'69
'73
'81
'90
'01
http://www.epinet.org
Increased joblessness = rise in official
unemployment + “missing labor force”
7.4%
8
7
1.8%
"Missing“ Labor
Force Effect
6
5
Official
Unemployment
Rate
4.3%
4
3
5.6%
2
1
0
March 2001
February 2004
http://www.epinet.org
“Missing” labor force has larger effects
on younger, Black and Hispanic workers
15.0
13.3%
Mar-01
11.0%
Feb-04
3.5%
10.0
5.0
8.0%
4.1%
4.1%
8.3%
3.6
9.8%
2.4%
Mar-01
6.3%
7.4%
5.6%
0.0
Age 2534
Black
Hispanic
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Average Number of Weeks Unemployed
Rise in long term unemployment
22.00
21.2 Weeks, July '83
(9.9% Unempmt Rate)
20.3 weeks, Feb '04
(5.6% Unempmt Rate)
18.00
14.00
10.00
1980
1984
1988
1992
1996
2000
2004
Year
http://www.epinet.org
Real weekly wages fell last year
for middle and lower wage workers
1.5%
Annual Change 2002 Q4 - 2003 Q4
1.1%
0.9%
0.0%
-1.5%
-0.1%
-0.5%
-1.2%
10%
25%
50%
75%
Percentile for real weekly earnings
90%
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JPMorgan “Daily Economic Briefing”
March 5, 2004, 11:00 am EST
“A profit-friendly US labor market report
“There is no getting away from the fact that today’s US
labor market report was weak….
“The report looks good for profits. We’d thought that the
labor share of national income was in the process of
bottoming out, but whether we’re talking outsourcing or
just old-style downsizing, the effort by US business to
pare costs (and extract productivity gains in services)
continues apace.”
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Profits normally do better than
labor compensation at this stage …
2.6
2
Total real compensation
Total real profits
9.8
1
-10.0
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
10 quarter change from last peak quarter
Average last 4 recessions
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…but profits have never done so well,
nor labor comp done so poorly
2.6
Total real compensation
2
-3.1
Total real profits
9.8
1
60.6
-10.0
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
10 quarter change from last peak quarter
Average last 4 recessions
Latest recession
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President Bush sold 2003 tax cuts
with promise of 306,000 jobs a month,
but only 294,000 jobs added in 8 months
6
6
5
5
5.5 million jobs
million jobs
5.5
promised
promised
by Dec. 2004
by Dec. 2004
Jobs promised with 2003 tax bill:
2003 tax bill:
with
Jobs
5.5
mnpromised
/ 18 mos
= 306,000
per month
5.5 mn / 18 mos = 306,000 per month
4
4
3
3
2
1
2.45
million jobs promised
2.45 million jobs promised
by Feb. 2004
by Feb. 2004
2
1
294,000 jobs added
0
-1
0
JunJun03 03
-1
-2
-2
-3
-3
FebFeb04
04
DecDec0404
2,154,000 fewer jobs than promised
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Administration keeps forecasting strong
job growth just around the corner
Chart from Paul Krugman column, NY Times, March 8, 2004
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Many manufacturing jobs could be restored
with effective trade and exchange rate policies
Strong U.S. demand for manufactured goods
U.S. production of manufactured goods has fallen to
74% of demand for manufactured goods.
The U.S. trade deficit (and its correction) is largely
driven by the deficit in manufacturing.
Correcting the $500+ bn. trade deficit
•
requires a major exchange rate adjustment and
•
would generate millions of manufacturing jobs.
http://www.epinet.org
Offshoring of U.S. white collar work
presents whole new challenge
2 important new developments are driving
increased imports of white collar work:
• Revolutions in IT and telecom allow work
shipped by electrons to be done anywhere.
• Nations with millions of underemployed but
well-educated people are rapidly joining the
world market.
http://www.epinet.org
Problem is bad policy, not external events
9/11: after short term shock, has boosted overall
demand through more security spending
Corporate accounting: set-backs to stock market did
not hamper investment because credit available and
cheap and cash flow strong
Iraq war: defense spending has also provided large
boost to demand (Saddam statue fell 11 months ago)
http://www.epinet.org
Conclusion
Employers are unlikely to boost their hiring
substantially until their confidence in strong
medium term economic growth is restored.
Fiscal policy should boost jobs now but rein
in future deficits to prevent explosive debt.
To revive manufacturing and restore external
balance, Asian exchange rates must go up.
http://www.epinet.org
Additional
Slides
for
Discussion
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Jobs must grow, not just recover, to keep
pace with working age population
• The population is growing 1.2% annually.
• If jobs had grown at that pace since March
2001, we would be adding 137,000 jobs a
month.
• It’s better to add jobs than lose them, but the
labor market weakens every month that fewer
than 137,000 new jobs are created.
http://www.epinet.org
Job shortfall = 2.4 mn. lost jobs
+ 4.7 mn. jobs not created
139.0
138.0
137.2 mn potential jobs
millions of payroll jobs
137.0
136.0
Payroll jobs rising
with 1.2% pop growth
135.0
4.7 mn
jobs not created
134.0
133.0
7.0 mn job shortfall
March 2001 = 132.5 million jobs
132.0
2.4 mn job decline
131.0
Actual payroll jobs
130.0
130.2 mn actual jobs
129.0
0
6
12
18
24
30
Months after NBER Peak
http://www.epinet.org
Share of the population in the labor force
usually higher 35 months after start of recession,
not so this time
2.0
1.5
Percentage change in labor force participation rate
from start of recession to 35 months later
1.3
1.0
0.6
0.5
0.2
0.1
0.0
0.0
Dec 69
Nov 73
Jan 80
July 81
July 90
Mar 01
-0.5
-1.0
Month that recession began
-1.5
-2.0
-1.9
-2.5
http://www.epinet.org
Nominal year over year change
Slowdown in wage and salary pay:
4% gains in 2000, 2-1/2% in 2003
5%
5%
ECI wage & salary income
per hour
4%
3%
4%
3%
Average hourly earnings
2%
1%
2%
1%
1999
2000
2001
2002
2003
http://www.epinet.org
Aggregate wage & salary income
still down, unlike past slumps
10.00
9.2
9.3
34 Month Change in Aggregate
Real Wage and Salary Income
Percent change
8.00
6.0
6.00
4.00
1.7
2.00
0.2
-0.3
0.00
1960
1969
1973
1981
1990
2001
-2.00
http://www.epinet.org
Budget deficits increase disposable income
while market income stagnates …
8000
Disposable Income
$ billions
(Personal income after tax and transfers)
7400
Market income
(Personal income minus transfers)
6800
2000-Jan
2001-Jan
2002-Jan
2003-Jan
2004-Jan
http://www.epinet.org
… and household spending
closely tracks disposable income.
8000
Disposable Income
$ billions
(Personal income after tax and transfers)
7400
Market income
(Personal income minus transfers)
Household spending
(Personal Outlays)
6800
2000-Jan
2001-Jan
2002-Jan
2003-Jan
2004-Jan
http://www.epinet.org
Productivity is going up as people work
faster, not just as technology improves
“One hypothesis is that some of the increase represents a temporary
rise in the level of productivity reflecting a view that an unusual
amount of caution is leading businesses to press workers and
facilities to a greater degree than can be sustained over the longer
haul.”
Federal Reserve Chairman Greenspan, November 6, 2003
“Another possibility is that firms somehow induced extra work
effort for a time because they were hesitant to hire new workers until
they were more confident that increases in final demand would
persist.”
Economic Report of the President 2004, page 47
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Bush deficit increases provided low
“bang for the buck” stimulus
Change in GDP per $ of deficit change:
Federal UI benefits
Accelerate 10% bracket
Child credit rebate
Marriage penalty relief
Accelerate tax rate reductions
Dividend tax reduction
1.73
1.34
1.04
0.74
0.59
0.09
Source: Mark Zandi, Regional Financial Review, February 2003
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President should be held accountable
for job forecasts and outcomes
• Congress created the President’s Council of Economic
Advisers (and JEC) in the Employment Act of 1946
during a job slump caused by war demobilization.
• The first statutory requirement of the Economic Report
of the President is “setting forth the current and
foreseeable trends in employment.” The report is also
required to provide policy recommendations for
achieving full employment.
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Deficits raised indefinitely,
not just for short-term stimulus
5.0%
Deficits extending current policy
Percent of GDP
4.0%
3.0%
2.0%
Deficits with current policy, but without tax cuts
1.0%
0.0%
2003
2005
2007
2009
2011
2013
-1.0%
Tax Cuts Made Permanent
Tax Cuts Rescinded
http://www.epinet.org
Bush fiscal policy would generate
rapid growth in debt to GDP ratio
60.0%
Debt extending current policy
Percent of GDP
50.0%
40.0%
30.0%
20.0%
Debt with current policy, but without tax cuts
10.0%
0.0%
2003
2005
2007
2009
2011
2013
http://www.epinet.org
Key Asian nations: large trade surpluses,
but small exchange rate changes to date
30
23
20
14
12
10
3
2
0
0
-6
-10
-4
-10
-20
-22
-30
China
Japan
2003 deficit share
Taiwan
Korea
Euroland
2000-03 $ Exch Rate Chg
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