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Forget Dip or Dow; Problem is Joblessness—Viewpoints | EPI

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Forget dip or Dow; problem is joblessness

by Jared Bernstein

The major economic questions of the day seem to be: Is a double-dip recession lurking out there? And has the stock market hit bottom? Compelling as they are, these are the wrong questions.

Instead, our biggest economic problem can be summed up in one number: 6 percent. Give or take a fraction of a percentage point, that’s where unemployment has been stuck since April, up sharply from 4 percent in 2000. Two percentage points may not sound like much, but for working families, especially those at the middle and bottom of the income scale, the difference is
huge. It can be measured in millions of workers who have lost their jobs and millions more who can’t get raises because their employers can tell them they’re lucky to have jobs.

These are the families who gained the most from the boom and have the most to lose if we don’t pick up the pace of recovery. Their living standards depend on paychecks, not portfolios, and even if we don’t dip back into recession, their economic future is already in danger, as high unemployment zaps the bargaining clout that full employment gave them in the latter half of the 1990s.

If the economy is recovering, why isn’t unemployment coming back down? There’s no mystery here: Economic growth over the past few quarters has been too slow to lower the jobless rate. We need enough economic expansion to make room for those coming into the labor market and those laid off during the downturn. We also have to grow faster now to absorb the recent speedup in productivity, a positive development that means we are producing the same amount of stuff faster.

Still, 6 percent doesn’t sound that bad. Until this most recent boom, many economists used to think unemployment lower than that would trigger an inflation spiral – a highly destructive myth now in disrepute.

For economists who have long tracked the disappointing trends in the living standards of working families, the benefits of the latter ’90s fairly lit up our spreadsheets. For the first time in decades, incomes grew strongly and persistently. These gains were not just for the rich, but were being shared among the middle class and poor as well, slowing the seemingly relentless trend toward greater inequality.

In fact, income grew and poverty declined far faster for minorities than for white families. Just to take one example, between 1995 and 2000, poverty rates for black and Hispanic families fell by 7.3 and 8.5 percentage points, respectively, to historically low points in both cases. The rate for white families fell by 1.6 percentage points.

With unemployment stuck at 6 percent, these gains are threatened. It takes a while for the labor market to unwind from such tight conditions, but already the hourly wages of non-managerial workers are registering their slowest growth rates since 1995, when we were just starting down the path to full employment. Welfare caseloads are rising again, our progress against poverty is almost certainly stalled, and there is even early evidence of a return to the unequal wage growth that characterized the 1980s and early 1990s.

Our nation’s leaders and their economic advisers need to offer Americans something more than bad-mouthing the prosperity of the 1990s as a “binge” or a “bubble” and Hooveristic declarations that “The economy is fundamentally sound.” Instead, policy-makers need to quickly and convincingly set a course back to full employment.

If it takes another rate cut or even two to stimulate more demand, the Federal Reserve should do so. Government spending is also appropriate, but it has to be wisely targeted. Making the most regressive components of the Bush tax cut permanent most assuredly won’t nudge today’s unemployment rate down one iota.

Far more helpful for generating jobs would be quick delivery of grants to states for safety net or capital projects.

One certainly hopes we avoid a double-dip and that the Dow has hit bottom. But until we bring the unemployment rate back down to 4 percent, the pain of recession will linger in the lives of our working families.

Jared Bernstein is a senior economist at the Economic Policy Institute.