When it comes to paying workers, employers are relying more and more on bonuses, company stock, and other compensation tied to corporate earnings. But this trend may hurt the economy's chances for a sustained recovery in early 2002. That's the conclusion of research by John M. Youngdahl, senior economist at Goldman, Sachs & Co. Falling earnings in 2001 means lower bonuses at the start of next year, which is likely to slow spending and weaken consumer confidence.
Youngdahl argues that families are apt to cut back spending early in 2002, just as the effect of the tax rebate wears off. Why? Because that's when the reality of lower pay will hit those who get a bonus or other income tied to profits. Those payments, most of which come between January and late April, will show the effect of falling 2001 profits. "There will be this unfortunate surprise in income compared to what workers remember from past years," Youngdahl says.
Consumer confidence will also suffer a setback when the bonus disappointment sets in, which means the belt-tightening may spread in the early months of 2002. Government wage reports will add to the cloud over confidence: A technical feature of how wages are seasonally adjusted will pull down income estimates in the first few months of the year. That adjustment problem will get corrected later in 2002, Youngdahl explains, but the damage will have already been done. The conventional view is that strong economic growth in the late 1990s was due to a boom in business spending on computers and other equipment. True enough. What is overlooked, however, is a robust rise in government spending on infrastructure--such as schools, highways, and airports--which also boosted growth. Federal, state, and local infrastructure investment rose from about $172 billion in 1994 to nearly $280 billion in 2000, or at an 8.5% annual growth rate, according to recent Commerce Dept. data (chart). That compares with a 10.5% growth rate for business investment in the same period.
The boom in infrastructure spending followed sluggish growth in the early 1990s--3.4% increases from 1990 to 1994--and is remarkable compared with the much slower rate of growth in the use of many public services. For example, investment in schools rose 87% between 1994 and 1999, the last year for which figures are available. While some of that increase was catch-up from the previous period, the number of students attending elementary, secondary, and higher education programs grew only at about 6% from 1994 to 1999. Similarly, spending on roads and bridges far outpaced the growth in car and truck traffic. With the economy now slowing and budget surpluses falling, policymakers might be tempted to cut public spending--but that's likely to slow growth even further. Wages for black women are, on average, 13% lower than for white women. That's the finding of Marlene Kim, an economist at the University of Massachusetts in Boston. Using Labor Dept. data for 1999, from the latest available annual survey, Kim calculates that one-third of the wage gap can be explained by observable differences such as education levels and age.
The rest of the gap, nearly nine percentage points, is not accounted for--and is larger than economists expected, she says. It could be that there are differences between black and white women that go unmeasured, Kim explains, such as the quality of their education. But that's not likely to be the whole story: Discrimination "is almost certain to play a role," says Kim. Do Internet sites that allow free music downloads spell disaster for the recording industry? Not according to new research in the Journal of Economic Issues by Terrel Gallaway of Southwest Missouri State University and Douglas Kinnear of Colorado State University. They find that even when free but illegal downloads are available, many college students are willing to pay to download songs legally--although the value students put on a song falls rapidly in the months after its release. They also find no change in the CD-buying habits of most music downloaders.
Gallaway and Kinnear surveyed nearly 1,000 students at their universities in the fall of 2000. Almost two-thirds downloaded songs from the Internet at no charge. Half of those with downloads said they would pay to get a legal copy of the songs they want, in part because the free downloads were often of poor quality. But the value of a song falls rapidly: Students are willing to pay $1.05, on average, to get a new release. When a song is 18 months old, students will pay only 27 cents (chart). "After a few months, they get sick of it," Gallaway says. The authors argue this means copyright holders should put their energy into getting control over new music downloads--and that piracy of older songs can be prevented "by providing a dirt-cheap, legal download."
Students are still buying CDs. About 57% of those with downloads report no change in their CD-buying habits. A further 7% purchased more CDs after the chance to sample music by downloading it from the Internet. Even downloaders who cut their CD purchases plan to buy about six CDs apiece in the next year. Like rock 'n' roll, it seems the recording industry is here to stay.