Nice job, pity about falling wages

By J Saft
April 6, 2010

It was the strongest U.S. employment report in three years and yet just beneath the surface was plenty of evidence that inflation pressure from the labor market is more of a fond hope than a real threat.

Nonagricultural payrolls rose in March by 162,000, the most in exactly three years and for only the third time since the recession began later that year. Of course, the United States probably needs about 200,000 new jobs a month just to bring unemployment down by a point in a year’s time. No sooner do jobs become available than sidelined would-be workers start seeking employment again. That kept the unemployment rate at 9.7 percent, while the key broader measure of the unemployed, the underemployed, the discouraged and the marginally attached — those game for work but unable to find it, get to it or find child-care while they go — hit a whopping 16.9 percent.

And that, ladies and gentlemen, is why, in an economic recovery with a growing job market, average hourly earnings actually fell by two cents an hour, or 0.1 percent from the month before.

“To see a contraction in wages in any given month is practically a 1-in-100 event and the last time it happened, in April 2003, Alan Greenspan and Ben Bernanke were busy building a ‘firebreak’ around deflation,” David Rosenberg, chief economist and strategist at Gluskin, Sheff wrote in a note to clients.

“In a nutshell, as one chapter of the labor market downturn is closed (employment contraction), another one starts (wage deflation). March’s employment data, on the surface, may well have met the challenge served up by the consensus of economists, but it fell well short of addressing the massive amount of excess slack that still exists in the labor market … So long as we have this much spare capacity in the labor market — with nearly one in every six unemployed Americans vying for every job opening — deflation pressures can be expected to build,” Rosenberg said.

The workweek expanded, so cash flow for those lucky enough to have a job was up, but outside of the kinds of prices set more in China than in Omaha — energy and raw materials –  inflation does not seem to be a near-term threat.

SKILLS MISMATCH

There is clearly debate within the Federal Reserve about this. James Lockhart of the Atlanta Fed indicated last week he believes the structural rate of unemployment has risen. That implies he would be willing to start fighting inflation with higher interest rates while unemployment remains elevated.

Lockhart is absolutely correct that fewer people are migrating for jobs than they used to, almost certainly because so many cannot sell their houses. I’d say that argues for a lower home ownership rate and stopping encouraging people to pay underwater mortgages in order to keep their banks solvent.

While the number of people who have been unemployed for a long time continues to rise, there is an interesting cohort which only stays unemployed briefly. The percentage of people who have been unemployed for less than five weeks has stayed unusually low during this recession, lower than in any other similar period in the 20th century, according to Lakshman Achuthan of the Economic Cycle Research Institute.

This, he theorizes, may show stronger demand in certain parts of the economy where there is a shortage of hard-to-master skills. But while prospects may be good for people with high-tech skills, there is a large mass of workers in construction and manufacturing who may never see demand come back to pre-recession levels. They clearly are staying unemployed for longer periods, and when they return it is often at lower wages in totally unrelated fields.

For these people there is a huge challenge to regain marketable skills, while for the economy having a large army of the unemployed means that wages, at least for a large group, may now slide in a protracted way. Given that these people can vote, the pressure, political and otherwise, on the Fed to not raise rates this year will be intense.

The forces we are looking at are not new. During the past 15 years U.S. consumers squared the circle of stagnant real wages by taking on more debt in order to keep the ship afloat. More private debt is not going to happen, nor is another construction boom with good-paying lower-skilled jobs likely.

The Fed may respond to the threat of inflation, or to asymmetrical inflation in certain parts of the economy, with rate rises later this year, but it would be a brave play.

26 comments

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Wage deflation has been within the economy for well over a year. As a potential employer told me concerning employee’s who do not like the salary he is offering “Yes, the new reality is hard to swallow for some but it is the reality.”. Only academics, public beaurocrats and fianancial reporters think otherwise.

The fact that we are navigating our economy with statistics published by the government as we teeter on the precipice of deflation is frightening and can only be explained in a resurgence of mysticism.

No wonder bankers won’t lend and business men and women have ZERO faith in the recovery. The % change since the recession started (over two yrs ago)in non-farm payrolls is at -6% vs 2001-2006 period of -2% AND 1950-1999 avg of 0%.

Oh yes…keep on chanting the mantra of the 2nd derivative.

Posted by csodak | Report as abusive

Jobs have been lost and wages are going down because we are no longer able to compete in the world. Today’s world requires logic, rationality and the scientific method to create new products and to maintain and improve the old products.

Our workforce can no longer compete because they did not change with the times. Our children can not compete because they are no longer even choosing a technical education.

Faith and hope is not the answer; it is the problem! Relying on hope instead of logic and rationality is the problem. Teaching children faith instead of logic, rationality and the scientific method is the problem.

Posted by Dave1 | Report as abusive

This phase II of industrial globalization. The China factor is having its awaited effect once a great many multinationals have settled their manufacturing in the land of hyper cheap labor.

Phase II is where the Western middle class is under the realization that it is competing against a labor force that devalues lifestyle all the way down to a near slavery status.

I fear what phase III will look like.

Posted by Neander | Report as abusive

@Neander – I suggest taking responsibility for what is happening and for what is about to happen and doing something about it.

American unions and management teamed up with different political parties and have fought for decades which has resulted in businesses fleeing the country. Even if you could fix that problem, you can not do much about it when the current crop of America’s youth have chosen a non-technical education.

Both China and India have 70% of their youth getting a technical education while only 7% American youth are getting a technical education. I suspect that teaching children faith has caused them to focus on careers that do not rely on logic, rationality and science.

I think this is a bigger problem than most people imagine because I think that it was a technical education and innovation that made America great in the past.

We already lost a good part of the manufacturing sector and we are now in the process of even losing some of the service sector. Unless we change our behavior these trends will continue

Posted by Dave1 | Report as abusive

@Dave1 – All that you say is true and taking responsibility is the first step.

I live and work in China for 15 years now. This problem is big and very complex, and education is certainly a part of it, as are so many other issues. But the progress of globalisation is the factor which forces the Western middle class, with all its faults and weaknesses, to compete against a class of people with whom it has so little in common and that is so very happy to work at one tenth of the price of its western counterpart.

I am not so impressed with the education system here in China, or even with these technically educated youth which you refer to. It is a commodity that approaches sub-human status, and when a commodity costs so little, the systems mindlessly will be position and be developed to be compatible in maximizing the use they can make of that commodity. This is very mechanistic and it has little to do with defining a fine society. The suggestion that China’s success might based on education is, with all due respect, a fallacy. This success is based on hyper cheap human labor extracted form a massively overpopulated nation, just as the Saudi’s economy is based on massive oil reserves. The West is cought within its own mecanism in now trying to immitate China’s success story, and that is a great tragedy.

Posted by Neander | Report as abusive

The move from “Nation state” to “State of market” has a lot to do with this …you cant compete with lower wage based economy’s. when you have you manufaturing out sourced to china your workers will suffer…and going to war aint gonna solve it America.

Posted by Wicki | Report as abusive

It has long been a basic tenet of economics that, though an economy may experience temporary downturns, it always returns to full employment. Today’s reality of rising structural unemployment casts doubt on some of economics’ basic theories, including free trade theories that have held sway since the early 19th century and have guided U.S. trade policy since the signing of GATT in 1947.

The problem with such theories is that they fail to account for the role of population density in driving global trade imbalances. Extreme population densities, like those found in China, Japan, Germany, South Korea and others, drive down domestic per capita consumption, leaving enormous excess labor capacities in their wakes. To engage in free trade with such nations is tantamount to economic suicide.

Of America’s top twenty per capita trade deficits in manufactured goods, 18 are with nations more densely populated than the U.S. (most of them much more densely populated), while only six are with relatively poor nations. Contrary to popular belief, low wages and currency valuations are not the root cause America’s trade deficit in manufactured goods. It is the large disparity in population density between us and some of our biggest trade “partners.”

Any trade policy that fails to employ some mechanism to assure a balance of trade with a nation far more densely populated is ultimately doomed to failure.

Posted by Pete_Murphy | Report as abusive

As a tradesman having foolishly devoted my life to understanding several disciplines, it really feels good to have to settle for less while the college boys who add no value to anything remain with obscene paychecks.

So go ahead and blame the little guy again and punish him for the excesses of the few.

Ever read about the French Revolution? I’m looking forward to a similar revolution here.

Posted by Doc00001 | Report as abusive

America has quite likely the most innovative and forward thinking education system in the world. We send all our kids to the same building and test everyone, few countries are bold enough to do this. We’re not stupid enough to believe that a test at the age of 13 can really determine, for the rest of a child’s life, what vocations they are appropriate for. In fact, I think it could be argued that it is the flexibility of our education system that is allowing us to pull out of the recession faster than Europe; our labor force is able to retrain a lot faster than theirs. As for China, they compete on price of labor, not on innovation.

Posted by josefski | Report as abusive

Someday, Americans will realize and regret that Nixon went to China and taught them CAPITALISM.

Posted by nsj | Report as abusive

Free trade and a one world market will never allow a complete rebound of incomes or jobs in the US. It is not about education. Business runs to where labor is cheap. We must institute tariffs to level the playing field, especially where currency manipulation is a factor; China. We will lose our middle class if we do not do so and experience true deflation as none will be able to afford current & future home prices.

Posted by justiceserved | Report as abusive

Globalization is certainly part of the reason why wages are falling in the US, but to suggest that Indians and the Chinese have inferior education is just plain arrogant. How many PhDs graduate from American Universities who also happen to be from India and China? Those students wouldn’t have been accepted to American Universities if they did not get a quailty education. Incidently the most prestigious university system in the world (the IIT system) is in India. It is also a public university system. So before people start knocking the educational institutions of other nations, it would be better to take a hard look at our own and ask why they are not delivering.

Posted by BB1978 | Report as abusive

I agree with justiceserved!

To even imply that education is the root of the problem is naive. I possess sufficient technological knowledge to teach but haven’t had a job in 1.5 years! Our Government has fascilitated this abandonment of the American worker and it was for the worst reason! To line the pockets of those who would make political jobs secure through campaign contributions. The bloodstained winners of the 2nd World War were of a no nonsense mentality and they functioned with common sense. A commodity which is encouraged by our competitors and rebuked by our own society! Want to know how to reverse this problem? Begin at home by controlling the inbalance between capitalism and social responsibility!

Posted by Doc00001 | Report as abusive

I had an industrialist friend once who was talking about low wages in the Dominican Republic, I was astounded at how little a Construction Worker in the Dominican Republic earned per day. To which my very much older successful friend who lived in a noteworthy NY Penthouse Hotel Apartment (who at one time had a Manufacturing Business in the DR) with a smile of approving praise said, “Yeah, Ain’t Slavery Grand!”

America, Ain’t Slavery Grand?

Posted by jimigenius | Report as abusive

BB1978 – please show me these people, they only make up a small percentage of the workers that I have to compete against. If their education is so good why did IBM build a school to teach GRADUATES how to do their jobs, that didn’t happen for me, I had to know my job before being hired.

I am sick and tired of blowhards like yourself making sweeping statements about India’s great technology education system. When I come into contact with people from it who only do what they are told and if it is not written down for them they will ignore it no matter how big the problem is. The only thing they are qualified to do is be paid less for lower quality work.

Posted by MagAodh | Report as abusive

Deflation. You can see it in the tax base for most all States.

Posted by mountclair | Report as abusive

Why are good Americans dissatisfied with their standard of living? The answer: Big Government!

Read on:
http://wp.me/pPdcm-1F

Posted by Orphe_D | Report as abusive

@MagAodh: First and foremost, you don’t know me, so stop with the personal insults. Second, IIT graduates make up a core of group of individuals who are CEOs at many American Companies, IIT is also the hardest university in the world to get into. Third, yes, cheaper labor is the primary reason for companies to go abroad, that is called capitalism (you know the economic system we have here in the United States). Finally, whining about how you can’t find a job because someone in another country can do it at a quarter of the cost will not turn around the job picture in the United States. I have cousins who go to private english medium schools (where most middle and upper class Indians send their kids. By the way the middle class in India is about 300 million people) that can outperform their American colleagues in math and science with their eyes closed. People in India and China are not stupid. To suggest that they are is incredibly arrogant and insulting to about a third of the world’s population. If you have a problem with outsourcing, take it up with the capitalists in Washington and the corporations that fund their campaigns. The public education system in this country is pathetic and is one reason why American workers are having a harder time competing with the rest of the world. When only 25% of your population has a college degree, don’t expect your wages to keep climbing.

Posted by BB1978 | Report as abusive

After owning my own business for two years in Oregon, a non business friendly state I have come to this conclusion. If we terminated minimum wage, I would gladly take a job working on a farm for $4.00 per hour or less. My first job in high school, 1995 minimum wage was $4.00 per hour and I paid for college with that job while attending college. I have not earned a paycheck since Aug 2008. The job market here in Salem, the state’s capital is negative. When I moved here from Cincinnati two years ago, I did research prior to opening my business and determined that there was a pre-existing 28% underemployment in a city of 150,000 people. Now with unemployment factored in we are dealing with close to 38% under/unemployment. I would love to see the city, state and national governments be honest with the people about how grave the situation is.

I read Alan Greenspan told a group of bankers that the US is looking at a 20 year road to recovery. Wow. That’s honesty. I would recommend you begin studying economics and the best place to start is http://www.mises.org

Posted by Synthetica | Report as abusive

BB1978 , Allow me to quote you and respond.

“Finally, whining about how you can’t find a job because someone in another country can do it at a quarter of the cost will not turn around the job picture in the United States.”

“If you have a problem with outsourcing, take it up with the capitalists in Washington and the corporations that fund their campaigns.”

The inhabitants of those countries don’t have to cope with the high cost of living we do here in the States. Many of the costs we incur are forced upon us in order to simplify the government’s work.

The second point re the capitalists in Washington,,,That’s exactly my point,, it’s nothing more than bribes being accepted by our corrupt politicians!

An honest man can’t win against the army of corrupt politicians and corporate bigshots with no sense of morality!

Posted by Doc00001 | Report as abusive

@lebinz – Hiroshima and Nagasaki were 21 and 15 kiloton bombs respectively. They are small compared to current nuclear capabilities. The Soviet Union designed a 100 Megaton and tested a 50 Megaton bomb. The Krakatoa eruption was estimated to be about 200 megatons of TNT. It would take several large nukes to cause a nuclear winter that would threaten life on earth.

Biological warfare is a far more serious threat to the world because it is possible that a biological agent could directly or indirectly kill all humans on planet earth. This could even occur accidentally.

Posted by Dave1 | Report as abusive

the bankers look at Chinese workers making $35 / week. then look at Americans, and realize we’re overpaid.

Once we earn what the Chinese earn, we can be competitive again.

Posted by Weaseldog2001 | Report as abusive

If you want to change Washington politics, then go live there and spend your days handing out large sums of cash to politicians. they have to be bribed in order to get them to act like patriots and put the USA’s interests before China’s.

They live their lives in service to the highest bidder, and that isn’t you or me.

Posted by Weaseldog2001 | Report as abusive

We Americans wanted this outsourcing and poor education.

We’ve been supporting politicians since Nixon, who have continually downgraded education and exported jobs.

It makes school easier, because there’s not as much to learn. And it drops prices of products, because slaves are making them at lower prices.

We save a lot of money and energy, and all we had to give up, are our jobs.

When Republican (contract With America) Dick Armey was signing a bill to pay corporations to export jobs, he remarked that the American worker was likely going to be angry at the Republicans for doing it. He was wrong. Hardly anyone noticed or cared. Certainly no that mattered cared.

Posted by Weaseldog2001 | Report as abusive

BB1978 – obviously you have a problem, where was the personal attack? I commented on your sweeping statement by calling you a blowhard (exhaustively talkative person), glad to see your education is showing(sarcasm).

Great information pointing out your middle class and education system or lack of it, if middle class Indians go to school in England. However why do you fail to address the main fact that IBM set up a school to teach Indian IT graduates how to do their jobs?

Oh my I must be personally attacking you for including the fact that I am not competing for jobs on a level playing field. You then personally attack me saying I am whining because I can’t get a job,
point 1 I have a job,
point 2 I work with and manage Indian workers,
point 3 I have seen these workers ignore problems

I am saying the quality of work is not there nor the level of knowledge that workers in England and the US have to display to get the same jobs. Not the same as calling them stupid.

To take these facts as personal attacks against Indians is disingenuous in the least and a dangerous step down the road to calling all who criticize a system they see a problem with as xenophobic/racist, you pick the phobia/’ism.

Posted by MagAodh | Report as abusive

America dislikes any citizen who grows a garden. maintains his or her own property, or any other activity which helps that citizen to avoid pumping money into the economic system in place right now. Which of our competitor nations imposes that much interference on it’s citizenry? For a free country, America is the most highly regulated society in the world. Politicians constantly rant about too much government but they never mention de-regulating the average citizen, just the exploitive corporate enterprises that fund their careers.

Posted by Doc00001 | Report as abusive

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