The Longest Sustained Labor Slump since the Great Depression Is
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The Longest Sustained Labor Slump since the Great Depression Is Taking a Toll on Working Families Lee Price Economic Policy Institute March 10, 2004 First time since 1939 to go 35 months without recovering all lost job – jobs still down 1.8%

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The Longest Sustained Labor Slump since the Great Depression Is Taking a Toll on Working Families

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The Longest Sustained Labor Slump since the Great Depression IsTaking a Toll on Working Families

Lee Price

Economic Policy Institute

March 10, 2004

First time since 1939 to go 35 months without recovering all lost job – jobs still down 1.8%

Actual “job gap” exceeds 7 million jobs

2.4 mn. jobs lost since March 2001

4.7 mn. jobs needed for 1.2% population growth

5.6% unemployment rate understates joblessness

Job shortage has caused unprecedented withdrawal from labor force

7.4% unemployment rate with inclusion of “missing labor force” of 2.8 million people

Distress for those without jobs

Slowing pay gains – living standards now in decline

1.6% gain in last year slowest in 40 years

Slower than 1.9% inflation

Even lower gains for middle- and lower-paid

Working faster also contributes to productivity gains

Management says ‘We have to get the same work done with fewer people’ after firing or attrition

Acknowledged by both Chairman Greenspan and President’s CEA

Distress for those with jobs

Better fiscal priorities would deliver more “bang for the buck”

from deficit increases

focus tax relief on low and middle income people

because they spend money faster

more timely and extensive state fiscal relief

accelerate federal spending on infrastructure

more generous and sustained UI extensions

Rein in deficits to stabilize future debt/GDP

Hike key Asian exchange rates to boost manufacturing

How could policy have done better?

1939-2000: Jobs always fully recoveredby 31st month after onset of recession

Since 1939, jobs always upby 35th month after start of recession

Increased joblessness = rise in official unemployment + “missing labor force”

"Missing“ Labor Force Effect




Percent of Labor Force

March 2001

February 2004

“Missing” labor force has larger effects on younger, Black and Hispanic workers

Rise in long term unemployment

Real weekly wages fell last year for middle and lower wage workers

“A profit-friendly US labor market report

“There is no getting away from the fact that today’s US labor market report was weak….

“The report looks good for profits. We’d thought that the labor share of national income was in the process of bottoming out, but whether we’re talking outsourcing or just old-style downsizing, the effort by US business to pare costs (and extract productivity gains in services) continues apace.”

JPMorgan “Daily Economic Briefing”March 5, 2004, 11:00 am EST

Profits normally do better thanlabor compensation at this stage …

…but profits have never done so well, nor labor comp done so poorly

President Bush sold 2003 tax cutswith promise of 306,000 jobs a month, but only 294,000 jobs added in 8 months

Administration keeps forecasting strong job growth just around the corner

Chart from Paul Krugman column, NY Times, March 8, 2004

Strong U.S. demand for manufactured goods

U.S. production of manufactured goods has fallen to 74% of demand for manufactured goods.

The U.S. trade deficit (and its correction) is largely driven by the deficit in manufacturing.

Correcting the $500+ bn. trade deficit

requires a major exchange rate adjustment and

would generate millions of manufacturing jobs.

Many manufacturing jobs could be restoredwith effective trade and exchange rate policies

2 important new developments are driving increased imports of white collar work:

Revolutions in IT and telecom allow work shipped by electrons to be done anywhere.

Nations with millions of underemployed but well-educated people are rapidly joining the world market.

Offshoring of U.S. white collar work presents whole new challenge

9/11: after short term shock, has boosted overall demand through more security spending

Corporate accounting: set-backs to stock market did not hamper investment because credit available and cheap and cash flow strong

Iraq war: defense spending has also provided large boost to demand (Saddam statue fell 11 months ago)

Problem is bad policy, not external events

Employers are unlikely to boost their hiring substantially until their confidence in strong medium term economic growth is restored.

Fiscal policy should boost jobs now but rein in future deficits to prevent explosive debt.

To revive manufacturing and restore external balance, Asian exchange rates must go up.






The population is growing 1.2% annually.

If jobs had grown at that pace since March 2001, we would be adding 137,000 jobs a month.

It’s better to add jobs than lose them, but the labor market weakens every month that fewer than 137,000 new jobs are created.

Jobs must grow, not just recover, to keep pace with working age population

Job shortfall = 2.4 mn. lost jobs + 4.7 mn. jobs not created

Share of the population in the labor forceusually higher 35 months after start of recession,not so this time

Slowdown in wage and salary pay:4% gains in 2000, 2-1/2% in 2003

Aggregate wage & salary income still down, unlike past slumps

34 Month Change in AggregateReal Wage and Salary Income

Budget deficits increase disposable income while market income stagnates …

… and household spending closely tracks disposable income.

Productivity is going up as people work faster, not just as technology improves

“One hypothesis is that some of the increase represents a temporary rise in the level of productivity reflecting a view that an unusual amount of caution is leading businesses to press workers and facilities to a greater degree than can be sustained over the longer haul.”

Federal Reserve Chairman Greenspan, November 6, 2003

“Another possibility is that firms somehow induced extra work effort for a time because they were hesitant to hire new workers until they were more confident that increases in final demand would persist.”

Economic Report of the President 2004, page 47

Change in GDP per $ of deficit change:

Federal UI benefits1.73

Accelerate 10% bracket1.34

Child credit rebate1.04

Marriage penalty relief0.74

Accelerate tax rate reductions0.59

Dividend tax reduction0.09

Source: Mark Zandi, Regional Financial Review, February 2003

Bush deficit increases provided low “bang for the buck” stimulus

Congress created the President’s Council of Economic Advisers (and JEC) in the Employment Act of 1946 during a job slump caused by war demobilization.

The first statutory requirement of the Economic Report of the President is “setting forth the current and foreseeable trends in employment.” The report is also required to provide policy recommendations for achieving full employment.

President should be held accountable for job forecasts and outcomes

Deficits raised indefinitely, not just for short-term stimulus

Bush fiscal policy would generaterapid growth in debt to GDP ratio

Key Asian nations: large trade surpluses, but small exchange rate changes to date

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