Bill Knight – January 16
10:57 am
Wed January 15, 2014

Low Wages Stalling Economic Recovery

Differences on Capitol Hill have made recovery from the Great Recession difficult. Differences in interpreting what’s good and what’s bad in what’s happening with the economy have made recovery efforts worse.

Housing starts, Gross Domestic Product (GDP) and productivity all seem to be improving; unemployment, hourly compensation and income inequality dampen optimism.

The U.S. economy in the third quarter grew at its fastest pace in almost two years, the Commerce Department announced on Dec. 20 – far better than estimated earlier. The annual growth rate from July through September was 4.1 percent, 0.5 percent more improved than projected and significantly better than the second quarter’s 2.5 percent annual rate.

Bill Knight

Meanwhile, housing starts in November were up about 30% from last year, Commerce showed – their highest level since 2008. And the unemployment rate fell to 7.0% for November, as the U.S. economy added 203,000 jobs.

But sometimes the quality of jobs matters as much as the quantity.

Bill Knight's January 16 commentary

Ben Henry, Senior Policy Associate for the Alliance for a Just Society, said, “While the November BLS report shows gains over the previous month, post-recession trends speak to a sharp, steady increase in the percentage of low-wage jobs in the economy.”

His colleague LeeAnn Hall, Alliance’s Executive Director, added, “Post-recession trends demonstrate a serious erosion in the quality of jobs created. This is an erosion of a fundamental American value that full-time work should pay enough to provide for a family, which – as the 51.4 million Americans we found to be in low-wage jobs will tell you – just is not a reality anymore. We must be cautious and not get overly excited about numbers that show a slight uptick from month to month, because it doesn't tell us the full story.”

Indeed, Business Week reported that unemployment now is historically bad: In 1968 (when the minimum wage was at its “inflation adjusted peak” of $10.70), 81% of male workers 20 years old and up had jobs; today, with a much-less valuable minimum wage, only 67% of men have jobs.

Those with jobs are valuable to their employers. U.S. workers’ productivity was up at a 3% annual rate in the third quarter, according to a recent report from the Labor Department.

However, “labor costs” fell in the same time period. After factoring in even a low inflation rate, reflected in the Consumer Price Index (CPI), real hourly compensation is down at an annual rate of 1.0%, BLS reports.

The most recent Midwest CPI, for November, was up 0.5%, influenced by cheaper motor fuel (down 8.7%) and more expensive natural gas (up 16.8%).

Further, income inequality is holding back a recovery, according to a survey of dozens of economists.

As reported by the Associated Press, about 80% of the stock market is owned by just 10% of people, so the affluent are making gains, but not the rest of us – and the rich spend less of their money than everyone else.

Scott Brown, chief economist at the financial advisory firm Raymond James, said, “What you want is a broader spending base. You want more people spending money."

Instead, people being productive aren’t able to benefit from their work, and neither is the national economy.

That 3% increase for “total non-farm business sector labor productivity” was higher than expected, and better productivity should empower companies to pay better. But it also lets employers refrain from hiring because output is up without new jobs being added.

The Federal Reserve, which watches productivity and labor costs to help it gauge inflation, noted that 2013 productivity has been dramatically better than the previous two years. Productivity was up 1.5% in 2012 and a meager 0.5% in 2011.

The other side of that story, again, is that overall labor costs were revised downward, to -1.4%.

The Bureau of Labor Statistics defines labor costs as the ratio of hourly compensation to labor productivity, so increases in hourly compensation can increase labor costs; boosts in output per hour can reduce them.

So, ironically, a more productive American labor force is not being rewarded for its output, and that’s punishing the economy because U.S. consumer spending helps the economy, and the less workers have to spend the less they can contribute to the recovery.

Until employers take action to share in the rewards of good workers doing good jobs by raising pay and hiring more employees, discretionary income will be stagnant and consumer spending without going into debt won’t be able to help drive the recovery.  

Contact Bill at Bill.Knight@hotmail.com; his twice-weekly columns are archived at billknightcolumn.blogspot.com

The opinions expressed are not necessarily those of Tri States Public Radio or Western Illinois University.