Http:// The Longest Sustained Labor Slump since the Great Depression Is Taking a Toll on Working Families Lee Price Economic Policy Institute

http://www.epinet.org

The Longest Sustained Labor Slump

since the Great Depression Is

Taking a Toll on Working Families

Lee PriceEconomic Policy Institute

March 10, 2004



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


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


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


1939-2000: Jobs always fully recoveredby 31st month after onset of recession

16

19

22

19 1917

25

10

27

31

00

5

10

15

20

25

30

35

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

Mo

nth

s t

o n

ew

re

co

rd j

ob

le

ve

l

Number of months to recover all lost jobs

?


Since 1939, jobs always upby 35th month after start of recession

6.66.2

4.1

2.22.8

5.2

2.63.1

0.8

-1.8

-4.0

0.0

4.0

8.0

'45 '48 '53 '57 '60 '69 '73 '81 '90 '01

Percent change in total employment35 months after start of recession


Increased joblessness = rise in official unemployment + “missing labor force”

March 2001 February 2004

4.3%

5.6%

1.8%

0

1

2

3

4

5

6

7

8 7.4%

Perc

en

t of

Lab

or

Forc

e

"Missing“ Labor Force Effect

Official Unemployment Rate


3.6

5.6%4.1%

9.8% 6.3%7.4%

3.5%

2.4%

0.0

5.0

10.0

15.0

Age 25-34

Black Hispanic

Mar-01 Feb-04

8.0%

13.3%11.0%

8.3%

4.1%Mar-01

“Missing” labor force has larger effects on younger, Black and Hispanic workers


Rise in long term unemployment

10.00

14.00

18.00

22.00

1980 1984 1988 1992 1996 2000 2004Year

Ave

rage

Num

ber

of W

eeks

Une

mpl

oyed 20.3 weeks, Feb '04

(5.6% Unempmt Rate)21.2 Weeks, July '83(9.9% Unempmt Rate)


Real weekly wages fell last year for middle and lower wage workers

-1.2%

-0.5%

-0.1%

0.9%

1.1%

-1.5%

0.0%

1.5%

10% 25% 50% 75% 90%Percentile for real weekly earnings

An

nu

al C

ha

ng

e 2

00

2 Q

4 -

20

03

Q4


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.”


Profits normally do better thanlabor compensation at this stage …

9.8

2.6

-10.0 0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0

1

2

10 quarter change from last peak quarter

Average last 4 recessions

Total real compensation

Total real profits


…but profits have never done so well, nor labor comp done so poorly

60.6

-3.1

9.8

2.6

-10.0 0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0

1

2

10 quarter change from last peak quarter

Average last 4 recessions

Latest recession

Total real compensation

Total real profits


-3

-2

-1

0

1

2

3

4

5

6

Jun-03

Feb-04

Dec-04

5.5 million jobspromisedby Dec. 2004

2.45 million jobs promisedby Feb. 2004

Jobs promised with 2003 tax bill:5.5 mn / 18 mos = 306,000 per month

President Bush sold 2003 tax cutswith promise of 306,000 jobs a month,

but only 294,000 jobs added in 8 months

-3

-2

-1

0

1

2

3

4

5

6

Jun-03

Feb-04

Dec-04

5.5 million jobspromisedby Dec. 2004

2.45 million jobs promisedby Feb. 2004

294,000 jobs added

Jobs promised with 2003 tax bill:5.5 mn / 18 mos = 306,000 per month

2,154,000 fewer jobs than promised


Administration keeps forecasting strong job growth just around the corner

Chart from Paul Krugman column, NY Times, March 8, 2004


Strong U.S. demand for manufactured goodsU.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.

Many manufacturing jobs could be restoredwith effective trade and exchange rate policies


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.

Offshoring of U.S. white collar work presents whole new challenge


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)


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.


Additional

Slides

for

Discussion


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.


Job shortfall = 2.4 mn. lost jobs + 4.7 mn. jobs not created

129.0

130.0

131.0

132.0

133.0

134.0

135.0

136.0

137.0

138.0

139.0

0 6 12 18 24 30

Months after NBER Peak

mill

ion

s o

f p

ay

roll

job

s

Actual payroll jobs

Payroll jobs risingwith 1.2% pop growth

March 2001 = 132.5 million jobs

2.4 mn job decline

130.2 mn actual jobs

4.7 mn jobs not created

137.2 mn potential jobs

7.0 mn job shortfall


Share of the population in the labor forceusually higher 35 months after start of recession,

not so this time

0.1

0.6

0.2

1.3

0.0

-1.9

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

Dec 69 Nov 73 Jan 80 July 81 July 90 Mar 01

Month that recession began

Percentage change in labor force participation ratefrom start of recession to 35 months later


Slowdown in wage and salary pay:4% gains in 2000, 2-1/2% in 2003

1%

2%

3%

4%

5%

1999 2000 2001 2002 2003

Nom

inal

yea

r ov

er y

ear

chan

ge

1%

2%

3%

4%

5%

ECI wage & salary incomeper hour

Average hourly earnings


Aggregate wage & salary income still down, unlike past slumps

9.2 9.3

1.7

0.2 -0.3

6.0

-2.00

0.00

2.00

4.00

6.00

8.00

10.00

1960 1969 1973 1981 1990 2001

Per

cen

t ch

ange

34 Month Change in Aggregate Real Wage and Salary Income


Budget deficits increase disposable income while market income stagnates …

6800

7400

8000

2000-Jan 2001-Jan 2002-Jan 2003-Jan 2004-Jan

$ b

illio

ns

Disposable Income(Personal income after tax and transfers)

Market income(Personal income minus transfers)


… and household spending closely tracks disposable income.

6800

7400

8000

2000-Jan 2001-Jan 2002-Jan 2003-Jan 2004-Jan

$ bi

llion

s

Disposable Income(Personal income after tax and transfers)

Market income(Personal income minus transfers)

Household spending(Personal Outlays)


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


Bush deficit increases provided low “bang for the buck” stimulus

Change in GDP per $ of deficit change:Federal UI benefits 1.73Accelerate 10% bracket 1.34Child credit rebate 1.04Marriage penalty relief 0.74Accelerate tax rate reductions 0.59Dividend tax reduction 0.09Source: Mark Zandi, Regional Financial Review, February 2003


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.


Deficits raised indefinitely, not just for short-term stimulus

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

2003 2005 2007 2009 2011 2013

Per

cent

of

GD

P

Tax Cuts Made Permanent Tax Cuts Rescinded

Deficits extending current policy

Deficits with current policy, but without tax cuts


Bush fiscal policy would generaterapid growth in debt to GDP ratio

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

2003 2005 2007 2009 2011 2013

Per

cent

of G

DP

Debt with current policy, but without tax cuts

Debt extending current policy


Key Asian nations: large trade surpluses, but small exchange rate changes to date

23

12

3 2

14

0

-10-6

-4

-22

-30

-20

-10

0

10

20

30

China Japan Taiwan Korea Euroland

2003 deficit share 2000-03 $ Exch Rate Chg

Documents

Http:// The Longest Sustained Labor Slump since the Great Depression Is Taking a Toll on Working Families Lee Price Economic Policy Institute