Jobs Returning Slowly—as Wages Lag

Where are the jobs? That’s the central question with 25.4 million people unemployed, involuntarily working part-time, and marginally attached to the labor force. Payrolls did rise by 80,000 in October and the figures for the previous two months were revised up by a total of 102,000. Government statisticians reported that the unemployment rate improved fractionally to 9%. The latest data support the belief held by many economists that the American job market is on the (slow) mend, barring a European financial implosion. It’s hard to believe, but private job creation is better in this recovery than it was during the early-2000s rebound and almost as good as the early-1990s upward turn in the business cycle, according to James W. Paulsen, chief investment strategist at Wells Capital Management. So, the answer to the question “where are the jobs” appears to be that they’re returning-little by little.

The same optimism doesn’t hold for the average worker’s wages. Think of it this way: When do you believe the average employee will feel comfortable asking the boss for a pay raise of, say, 5 percent? For employees below the ranks of senior management all signs point toward sluggish wage growth at best, even when the unemployment rate retreats to more normal territory.

Little wonder that more scholars are calling for dramatic public policy actions to boost the wages of lower- and median-income workers. “If we don’t do anything, wages will stagnate,” says Paul Osterman, professor of human resources and management at MIT and co-author of Good Jobs America: Making Work Better for Everyone.

Decades-Long Pay Slide for Workers

The workplace had become a tough environment for the average worker long before the Great Recession and its painful aftermath. Employers have downsized, right-sized, restructured, reengineered, and outsourced their employees over the past several decades, putting the squeeze on nearly all paychecks. For instance, from 1973 to 2007 the real economy grew by 950 percent but the full-time, year-round median earnings of men dropped by 3.3 percent. Women did better, with a 35 percent gain—a still-paltry figure compared to the economy’s growth. The recent downturn accelerated the underlying trend. Since 2007, inflation-adjusted earnings for men have fallen by 4.8 percent and declined by 2.4 percent for women.

“I am very pessimistic about wages,” says Lane Kenworthy, professor of sociology and political science at the University of Arizona.

And with good reason. The pressure on wages has multiple causes. None of the main factors seems poised to change for the better. Advanced information technologies have slashed the ranks of many careers, such as travel agents. Competition from emerging markets has sliced away jobs on the factory floor and customer-service phone banks. Union membership has plunged, from some 35 percent of private sector workers in the early 1950s to 6.9 percent in 2010.

The economy’s dynamism is faltering. Fewer U.S. entrepreneurs created startups with at least one employee in 2007 than in 1990, after adjusting for population growth. Private sector job growth has been in a steady decline, expanding at a 2 percent annual rate in the business cycle expansion of the 1980s, dropping to 1.8 percent in the ‘90s and to a mere 0.6 percent in the 2000s. Economists like Tyler Cowen of George Mason University have made a persuasive case that there has been a decline since the 1970s in the kind of economy-wide innovations that generated lots of domestic jobs in earlier eras such as the late 19th and early 20th centuries.

Unsettling Work Conditions

The upheavals in the economy have carried enormous social costs at the workplace. In recent decades, the changes battering the economy have forced Corporate America to sever the traditional social compact between management and labor—a contract that allowed the average worker to raise a family and buy a home. The company offers a more hostile environment in which to spend one’s day. For many workers, it’s less engaging: Jobs that once took skill have turned into routine tasks at the computer.

“The job in the middle is less exciting than it used to be,” says Edmund Phelps, Nobel laureate at Columbia University. “What is important is that jobs are less engaging, less fulfilling, with fewer problems to solve.”

Public policy can’t do much about alienation in the workplace. It can affect the pay rewards of work, especially for the working poor and struggling median employee. For instance, Kenworthy of the University of Arizona has called for expanding the earned income tax credit (EITC) into the lower middle class. The EITC is currently targeted at low-income workers; he proposes tying the benefit to average wages. Phelps has long argued for using generous tax credits targeted at employers to encourage companies to hire low-wage workers at a decent pay rate. Osterman advocate slowly raising the federal minimum wage as one way to help the working poor slowly escape poverty.

Of course, such creative ideas are going nowhere in the real world of politics. The U.S. political system is too polarized at the moment. That said, the threat remains that the social cost of stagnant wages and anemic household incomes will eventually undermine the productivity and competitiveness of American business. In that case, everyone will suffer.

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