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The labor market has shown some improvement, especially in recent months. That’s good news, but it hasn’t been translating into more personal income, one of the building blocks of prosperity. Over the last 12 months, the Labor Department’s survey of established businesses found 1.95 million new jobs, an increase of 1.5%. Yet personal income rose just 3.6% to $13.2 trillion. Excluding government transfer payments, inflation adjusted personal income was only 1.9% higher in January 2012 than it was in January 2011. Factoring in increased tax payments as well, real disposable (after-tax) personal income is up only 0.6% since January 2011. And on a per-capita basis, that means personal income has had no increase at all for nearly two years. The weakness in personal income is especially daunting given the 2.9% CPI inflation rate. Normally, personal income would go up by roughly the rate of job growth plus productivity growth plus the inflation rate, but it hasn’t been keeping up. That’s especially the case in the last six months when the Department of Labor’s survey of households, which picks up the hiring done by small businesses, surged by 2 million workers or 2.8% at an annual rate. That would normally generate personal income growth above 7%, double the current rate. There are several explanations for this weakness. Many older, higher paid workers have lost their jobs, holding down the average pay for the labor force. Other workers, both white collar and blue collar, are not working as many hours as they would like. The Labor Department records them as being employed, but their incomes aren’t what they used to be. Another weak factor in personal income is interest income, which fell 2.9% over the last year due to near-zero interest rates. On the other hand, personal income has been getting a strong boost from government transfers, which accounted for 18% of personal income over the last year, fully 5 percentage points above the 13% long-term average for government transfer payments. The federal government had to borrow $662 billion over the last 12 months to boost transfer payments to this 18% rate. The overarching reason for the weak growth in personal income, however, is that job growth has been slow and wage gains smaller than normal. The 2010-2011 income weakness has only occurred during recessions — or during occasional data anomalies like the letdown from the December 2004 Microsoft dividend and the April 1987 decline due to taxes paid on capital gains taken before the January 1987 tax rate increase. A longer-term look is equally concerning. Over the last five years, personal income was up only 14% versus a 12% increase in the CPI. Within personal income, employee compensation rose only 10%, transfers 38%, income and rent on assets 9.3%, and small business income 1.9%. The weakness in personal income continues to drag on consumption and GDP. Personal consumption rose 3.8% over the last twelve months, reaching $10.9 trillion in January. Subtracting out inflation, personal consumption was up only 1.4%, barely keeping up with population growth. This is consistent with the weakness in real disposable income discussed above. When people have less disposable income, they usually consume less. Much of the small increase in consumption that has occurred has come from spending savings or from new credit — auto loans outstanding have risen 2.8% over the last year. In conclusion, achieving faster U.S. growth will require not only millions more jobs but also more pay, including more hours worked and more aggressive competition among employers for workers. While job growth has been picking up, we need 300,000 net new jobs per month to make much progress. Similarly, hourly wages, which rose only 1.5% over the last 12 months, will have to double their growth rate if we are to achieve a fast economic expansion. These will require a much more confident business sector, which is hard to envision until Washington addresses the threats of higher tax rates and a heavier regulatory burden.
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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