Welcome to the Amazing Jobless Recovery
By Robert Kuttner
Is a robust recovery just around the corner? Optimists and defenders of the Bush economic program point to some fine print in the Labor Dept.'s otherwise grim June unemployment report and to the resurgent stock market (which often leads recoveries). But both indicators, on closer inspection, are fool's gold.
The unemployment rate is now 6.4%, a nine-year high. Optimists note that the rate of job decline has slowed and that the unemployment rate is up mainly because formerly discouraged workers are returning to the labor force. The Administration's tax cuts will provide about $200 billion of stimulus in the second half of 2003. All of this supposedly prefigures a real improvement on the labor front in the coming months.
But a closer look at the employment data suggests a bleaker picture. Since the recession began in March, 2001, the economy has shed a remarkable 2.7% of total jobs. That translates to 2.6 million jobs lost since George W. Bush took office. Meanwhile, the working-age population has grown by over 3 million.
That's by far the worst labor-market performance in the post-World War II era. Of the nine recessions since 1953, only four resulted in net job loss 27 months after the recession began (the counterpart of June, 2003). Out of those, only one recession had net job loss greater than 1%, according to a tabulation of Labor Dept. statistics by the Economic Policy Institute. That was the 1990-91 recession, which sank the current President Bush's father.
This time around, the Council of Economic Advisers is projecting that the latest "jobs and growth" tax reduction should add 1.4 million jobs between July, 2003, and November, 2004 -- on top of the 4.1 million new jobs that a normal economic recovery would produce. At more than 340,000 jobs a month, that compares favorably with the job creation of the sizzling 1990s. That's indeed what it will take to get back to near-full employment. But there is no good reason to expect a repeat performance anytime soon.
In fact, the economy needs to generate about 1 million jobs a year just to keep pace with population growth. In 2001 and 2002, it shed about 100,000 jobs a month. In the last few months, this has improved somewhat. In June, the economy lost only 30,000 jobs, for a total of 236,000 in the first half of 2003. But the number of people unemployed more than 20 weeks reached a 19-year high in June. And real median earnings have fallen for four straight quarters. If we counted as unemployed discouraged workers who have given up looking for a job and part-timers looking for full-time work, the unemployment rate would be over 10%.
As Barry Bluestone, who directs the Center for Urban & Regional Policy at Northeastern University, observes, one underlying problem is that the prodigious productivity growth that powered the '90s boom has continued but without comparable growth in gross domestic product. That means, of course, that fewer workers are needed to produce the same amount of goods and services.
The economy needs to grow at better than 4% a year to get back to full employment. In early 2003, it grew at just 1.4%. The stock market boom that ended in early 2000 produced rising rates of capital investment and productivity growth. But nothing on the near horizon suggests a rerun of the Roaring Nineties.
For the economy to escape the jobless-recovery trap, a virtuous circle of more investment in human and physical capital, rising wages, and renewed consumer spending will have to occur. The optimists see the stock market as heralding just such a path. But while there has been a modest increase in both profitability and capital investment, it isn't enough to justify even the stock rebound of the first half, much less a new '90s-style bull market. The price-earnings multiple of the average stock is being reported at around 19, but that figure is based on rosy forecasts of future earnings. The p-e multiple based on the past 12 months' earnings is 33, which is high, even taking into account today's low interest rates.
The market could oscillate within a fairly narrow range, as wishful thinking dukes it out with post-1990s risk aversion and short-term profit-taking. Flat purchasing power, meanwhile, gives industry little appetite to increase investment. So the vicious circle of industry trying to rebuild earnings by cutting labor costs (jobs and wages) and consequently depressing its own markets is likely to continue.
How can government policy help? The Bush tax cuts will provide a spur, but any of several alternatives would have produced more stimulus and job creation for the same dollars. These include public investment in education, research, and health, relief to cities and states, and a payroll-tax reduction that would put money in the pocket of wage workers and lower the cost of new hires.
The Bush Administration cannot be blamed for inheriting the dot-com bust. But it can and will be blamed for applying the wrong economic cure.
Robert Kuttner is co-editor of The American Prospect and author of Everything for Sale.