A Tale of Two Economies
by EPI President Lawrence Mishel
After two and a half years of persistent employment losses, the overall output of goods and services (i.e., the gross domestic product, or GDP) grew extraordinarily quickly in the third quarter (June to September) and employment has increased four months in a row. Based on this performance, many analysts have declared the economy “fixed” and have opined that we have “turned the corner.” The political implications, we are told, are that the economy will not be a major election issue in 2004.
Not so fast. Although the economy has clearly improved, America’s working families are still facing sizeable economic problems, and these problems are highly unlikely to be resolved over the next year. Because of these persistent economic problems, roughly half of all Americans in October believed that the economy was still in a recession and 69% believed the state of the economy was either “poor” or “not good.” These polls, taken after the economic “turnaround,” show that Americans are still skeptical about the overall state of the economy.
Should we believe the people or the economists? As usual, the people know something that economists do not, which is that the economy they live in is composed of shrunken paychecks, fears of job loss, and reduced opportunity. Although it is true that production has been growing for more than two years, the United States has also just experienced the sharpest loss of jobs this far into a business cycle since the Great Depression, with nearly 2.9 million private-sector jobs lost (see EPI’s JobWatch.org Web site for further information about recent job and wage trends). There are now three unemployed workers for every job vacancy, and nearly half of all Americans personally know someone who has lost their job. We are a long way from a healthy labor market characterized by strong real-wage improvements and unemployment steadily dropping toward the 4% level we enjoyed in 2000. In economic terms, there is a huge difference between developments in the overall output of goods and services and what is happening in the labor market.
The much ballyhooed job growth—averaging 82,000 new jobs per month over the last four months—only looks good compared to the persistent job losses of the prior two and a half years. However, this level of job growth is not enough to absorb the 150,000 new workers expected to enter the labor market each month. Nor is it enough job growth to reduce unemployment and underemployment to any great extent over the next year—that would require an increase of about 300,000 new jobs each month. The current job creation rate of 82,000 jobs per month also falls far short of the 306,000 jobs each month that the Bush Administration projected would occur starting in June 2003 as a result of its tax cut package. Between June and November 2003, the economy generated 1.26 million fewer jobs than the 1.5 million jobs that the president’s Council of Economic Advisers told us to expect.
Employers have responded to the economic downturn by suppressing the growth of, or reducing, wages and benefits. Jobs are being sent overseas, including many white-collar technical and computer-related jobs not previously at risk. In workplaces across the country, jobs are being lost from layoffs or attrition, while the remaining workforce is pressed to maintain or increase production in order to boost productivity. All this restructuring has led to a strong profit resurgence, with income growth in this recovery tilted far more toward profits and away from wages than in any other postwar recovery. The hourly wages of most workers are now rising more slowly than inflation. Moreover, job quality is declining, as the new jobs created pay 13% less
than the jobs lost.
Given the current economic landscape, what will happen over the next year? Economic forecasters predict a 4.0% rate of GDP growth and about 145,000 jobs created each month. Unemployment will likely stay around the current level of 6%. Although more rapid growth is possible in 2004, there is at least as much chance that our trade imbalances, record consumer debt burden, and sluggish wage growth will lead to slower than expected growth. If employers continue to pursue an overall “speedup” and continual cost restructuring, then job growth will be even less satisfactory and we will not see a decrease in unemployment and a boost in real wages in the near future. If so, working families in 2004 will likely continue to feel pessimistic and vulnerable and will not share Wall Street’s sense of growing prosperity.