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The weakness in employment growth during the current recovery is probably more structural than cyclical. The government has applied massive fiscal and monetary policy stimulus without having much employment impact. Government spending is headed for $3.8 trillion in 2012, while the Federal Reserve has maintained an unprecedented 0% interest rate and increased its liabilities 220%. Yet these and other government policies have ended up being contractionary, discouraging business investment in people, equipment, and structures. Meanwhile, in recent months, the growth in jobs and wages has stagnated. Jobs The April labor reports brought discouraging news. The household survey for April showed a loss of 169,000 net jobs. The labor force decreased 342,000, allowing the unemployment rate to fall to 8.1% from 8.2%, but at the expense of a smaller, less dynamic labor environment. The establishment survey showed only 115,000 gains in April, with 53,000 gains in upward revisions to February and March. That’s not enough to keep up with population growth. It brings job gains over the last 12 months to 2.0 million in the household survey and 1.8 million in the establishment survey, with both measures having slowed markedly since the weather-aided winter expansion. The weakness in the April establishment and household surveys was consistent with data from other sources. Weekly jobless claims climbed higher in April. Recent ADP reports on payrolls showed the same weakness in small business employment that was reflected in the 169,000 job shrinkage in the April household survey. Per ADP, small businesses added 58,000 jobs in April and medium-sized businesses added 57,000 jobs, the smallest one-month gains over the previous five months. The labor participation rate fell to 63.6% in April, marking a new low. As the labor environment improves, some people will return to the labor force, increasing the participation rate. However, part of the decline in the participation rate has been due to the aging of the work force and is unlikely to reverse. The ratio of prime-age workers (aged 16-59) to the working-age population is projected to fall as baby boomers retire sooner than anticipated. This means fiscal problems will come earlier and hit harder than expected. Earnings and Income Average hourly earnings from the establishment survey rose only $0.01 in April to $23.38. Over the past 12 months, average hourly earnings have increased 1.8%, lagging behind the 2.7% inflation rate. Average weekly earnings in April were $806.61, up only 2% from April 2011. At the same time, CPI inflation has accelerated from a 1% rate in 2010 to a roughly 3% rate, leaving the typical worker’s wages falling behind inflation. Looking at the broader population, real disposable income per capita has been weak since 2007. It’s been hurt by the weak-dollar policy and high oil and gasoline prices. The result is that after-tax real incomes are barely keeping up with inflation. This is true even with near-record government transfer payments, the payroll tax cut, and the resulting increases in the national debt. Wage stagnation indicates several growth problems. From the supply side, it means that workers aren’t getting more valuable. This reflects a weakness in skills and education, an increase in non-wage costs such as health insurance, and a decline in U.S. innovation, which is one of the most important factors in creating higher-wage jobs. Stagnant wages also reflects insufficient capital investment, which we attribute to a bad tax code, fears of future taxation to pay for deficit spending, the regulatory and litigation morass, and capital flight from the weak dollar policy. From the demand side, stagnant wages mean that workers have less money to pay taxes and mortgages, save, or buy goods and services. Transfer payments beyond the basic safety net are not a useful response to wage stagnation. A better approach is to address the root causes — tax policy, underinvestment, and weakness in small business formation.
2012 Economic Growth Fellow
David Malpass is president of Encima Global, and chairman of GrowPac. He writes a regular Current Events column in Forbes magazine, and his opinion pieces appear regularly in the Wall Street Journal. He sits on the boards of the Economic Club of New York and the National Committee on U.S.-China Relations. Formerly, Mr. Malpass was chief economist of Bear Stearns. Between February 1984 and January 1993, he held economic appointments during the Reagan and Bush Administrations. He was Deputy Assistant Treasury Secretary for Developing Nations, a Deputy Assistant Secretary of State, Republican Staff Director of Congress’s Joint Economic Committee, and Senior Analyst for Taxes and Trade at the Senate Budget Committee.Full Bio
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