For the Baez-Rodriquez family of Providence, even a mild economic slowdown can spell financial gloom. During the flush times, Wilfredo Baez found plenty of construction work, which usually pays him about $10 an hour. His wife, Ivelisse Rodriquez, looks after their three children, ages 4, 8, and 13, and supplements their income by cleaning houses. But as the economy started to sputter in recent months, both parents have struggled to find employment. Many weeks they have had to make humiliating trips to the local food bank, where Rodriquez also pitches in as a volunteer. "I go to the temp agencies but I never get a call back," she says. "I'm open to anything, really."
The golden economy of recent years worked wonders for all Americans, from the very rich to the very poor. After decades of flagging wages and soaring inequality, the booming New Economy delivered juicy income gains for middle- and lower-income families. Investment dollars flowed into all-but-abandoned inner cities. Poverty levels plunged. Crime eased as the prospect of jobs lured young people off the streets. And lower-wage employees like Baez and Rodriquez made significant economic advances. Perhaps most promising of all, black unemployment, which many experts thought would never fall below double digits, plummeted to an astonishingly low 7.3%, its lowest level since 1972. Even the least employable workers suddenly found themselves in demand, from welfare mothers to low-skilled black men.
WARNING SIGNALS. Now, much of that progress is threatened. Even if the economy fends off an all-out recession, the sharp slowdown will likely slam the brakes on many of the social gains fueled by the New Economy. And more workers may lose their jobs if companies manage to keep the productivity gains of the New Economy going, despite recent signs of slackening (page 44). "If you believe the New Economy thesis that the growth rate of productivity has increased permanently, then you'd expect unemployment to rise," says Harvard University economist Dale Jorgensen.
At stake is full employment, the most successful social program the U.S. has seen in decades. Already the warning signals are flashing. Employment fell by 86,000 in March, the steepest decline in a decade. That helped to push up unemployment by four-tenths of a percent, to 4.3%, still very low by historic standards. But the black jobless rate has jumped much more, climbing by 1.4 points, to 8.6%, while the rate for Hispanics has risen by seven-tenths, to 6.3%. Income inequality is also rearing up again: Wage hikes have stalled for non-white-collar workers and have slumped for welfare recipients. Yet wages continue to climb for those workers higher on the pay scale.
The reason has to do with why average and low-end workers made out so well in the first place. It took the magic elixir of super-low unemployment to offset all the negative economic forces that held down wages for 25 years. Pay for middle- and lower-income workers didn't accelerate in 1995, even though joblessness fell into the 5% range, then considered full employment. Instead, it took years of 4% unemployment to create demand for labor powerful enough to bring in those on the margin and ignite even modest wage growth.
The problem now is that the weakening labor market is no longer strong enough to offset the long-term negative trends. Globalization, heightened immigration, the decline of unions, and the ongoing shift from manufacturing to services all continue to press down the wages of middle- and low-income workers. As a result, even the relatively small slack-off in labor demand now under way undercuts the slim gains that workers such as Baez and Rodriquez have enjoyed. Even if GDP grows at 2% this year, as most economists still expect, "unemployment will go up to 5% or 6%, which will take us out of the area where people on the bottom can prosper," warns Harvard University labor economist Richard B. Freeman.
Just look at average wages to see how quickly most Americans are likely to lose ground in a sustained slowdown. Adjusted for inflation, the median pay of 90 million nonsupervisory workers--about two-thirds of the workforce--outpaced inflation by one to two percentage points a year starting in 1997, according to the Bureau of Labor Statistics (BLS). But late last year, their median wages ground to a virtual halt, climbing by less than a tenth of a percent.
TEMPS TOSSED. Employers are also shedding temporary workers and scaling back the workweek for hourly earners to trim costs. The temporary-help industry has lost more than 200,000 jobs, after nearly quadrupling in the '90s, according to the BLS. And in hard-hit manufacturing, the workweek has fallen by an hour in the past year. Such cutbacks have slashed $10,000 to $20,000 in annual overtime pay for steel and auto workers.
While the high-tech meltdown has focused attention on skilled employees, lower-end workers are likely to feel greater pain. The demand for tech workers has fallen by half in the past year, but employers still face a shortfall of 425,000 skilled employees in 2001, according to a study released on Apr. 2 by the Information Technology Assn. This is one reason why the growth of weekly earnings of employees in the top quarter of the wage ladder bested inflation by 1% last year, according to an analysis of Census Bureau data by the Economic Policy Institute (EPI), a Washington think tank. Those in the top 10% enjoyed 3.2% hikes. Meanwhile, the weekly paychecks of workers in the bottom three-quarters have come to a standstill. "This suggests that inequality between the top and the bottom is reversing upward again, even before unemployment has begun to climb much," says EPI economist Jared Bernstein.
One problem is that many lower-wage workers don't have full-time jobs, so their incomes get squeezed rapidly when the economy slackens. Just ask Mcarthur Watt, a house painter by trade who works as a day laborer when painting jobs are scarce. The Muskegon (Mich.) resident had plenty of work during the boom times but got hit right away when the economy slowed. Now he often goes to labor agencies for day work. His last assignment: a two-week, $7.50-an-hour job closing up boxcars for a sand mining company. Watt, 45, whose wife works as a cook at a women's shelter, says the family income has plunged from $30,000 a year to $20,000. "We have a 16-year-old daughter in high school, and now we can't buy her a new pair of shoes or get a dress for my wife," says Watt.
The slow-growth economy is likely to have more harsh consequences for those even lower down the income ladder than the Watts. Extremely low unemployment prompted employers to hire millions of welfare mothers, slashing the rolls in half. The hourly wage of newly hired recipients outpaced inflation from 1998 through last June, according to surveys by the Welfare to Work Partnership, a nonprofit group set up by employers and the Clinton Administration. Then their wages hit the wall. The average starting wage for welfare mothers fell to $7.54 an hour, 3% lower than in June, after inflation adjustments, according to a new Partnership survey taken over December and January.
The risk is that America's many social ills could return with a vengeance. Inner-city poverty, which plunged in the late 1990s, could soar again, followed by homelessness and hunger. Even during the flush times, food banks have seen ever-rising demand. America's Second Harvest, a hunger relief group, doled out 1.4 billion pounds of food last year, up a third from the year before. "We're very frightened about what will happen if the economy continues to weaken," says President Deborah Leff.
The hypersensitivity of U.S. wages does have a silver lining of sorts. It suggests that super-low unemployment doesn't automatically trigger runaway wage-push inflation anymore, as conventional economics assumes. As a result, the Fed today can more confidently drop interest rates without fear of triggering an inflationary spiral. If it does and the economy comes roaring back, the U.S. may yet hang on to the widespread social gains and success stories that full employment has wrought.
By Aaron Bernstein in Washington