No Recovery for the American Worker

By Desmond Lachman

The present U.S. economic recovery will be difficult to sustain without a meaningful increase in labor incomes, yet scant attention is being paid to how little this recovery is benefiting the average worker.

By now it is widely recognized that the U.S. economic recovery, which began in mid-2009, is among the weakest of all postwar U.S. economic recoveries. Scant attention, however, is being paid to how little this recovery is benefiting the average U.S. worker. This is rather surprising, since the present economic recovery will be difficult to sustain without a meaningful increase in labor incomes. It is also surprising in view of the profound social and political implications that continued wage stagnation would have for the U.S. body politic.

During the Great Economic Recession of 2008-2009, the U.S. economy lost a record 8.5 million jobs, or some 6 percent of the labor force. Yet, the U.S. Bureau of Labor reports that, for 2010, the U.S. economy created only 1.1 million new jobs, a rate of increase well short of the number of new entrants into the U.S. labor market. Little wonder that the unemployment rate remains stuck around 9.5 percent, or at practically its highest level in the postwar period.

Including in the unemployment measure discouraged workers and those involuntarily working part time, the unemployment level is around 17 percent.

Sadly, the state of the U.S. labor market is even more appalling than headline unemployment numbers suggest. The present economic cycle has been characterized by a surge in the number of discouraged workers, who have dropped out of the labor force, and in the number of workers involuntarily working part time for want of full-time job openings. Including in the unemployment measure discouraged workers and those involuntarily working part time, the Bureau of Labor estimates that the unemployment level is approximately 17 percent of the workforce. This means that a staggering one-sixth of American workers do not now have full-time employment.

The paucity of new jobs in the current business cycle has been accompanied by virtual stagnation in wage growth. The Bureau of Labor reports that over the past year household incomes increased by barely 1 percent. Adjusting for inflation, wages hardly changed from the previous year.

Stagnating wage incomes are not new to the American economy. Over the past 20 years, wage incomes have only modestly increased. Most mainstream economists have attributed this stagnation in wages to a combination of rapid advances in technology and increasing globalization. This latter trend has seen many U.S. manufacturing and service jobs outsourced abroad and a marked increase in competition from low-priced Chinese and Indian labor.

For 2010, the U.S. economy created only 1.1 million new jobs, a rate of increase well short of the number of new entrants into the U.S. labor market.

New to the current business cycle is the aggressive degree to which U.S. corporations have taken advantage of the unusually high amount of slack in the labor market to extract major concessions from the U.S. workforce in terms of reduced wages and benefits. For example, a recent study found that, between 2007 and 2009, around a third of those workers who held full-time jobs for more than three years and then succeeded in finding new full-time jobs did so at wages that were on average 20 percent below the wages they received in their previous jobs.

Looking to the year ahead, the economic outlook for U.S. workers hardly seems auspicious. It is all too likely that the U.S. economic recovery will remain subpar in 2011 as it faces strong headwinds from the ongoing housing foreclosure crisis, weak income growth, and high international oil prices. As such, there seems to be little prospect for any meaningful decline in unemployment.

One must also expect further downward pressure on wages and benefits in 2011 as companies continue to take advantage of the slack labor market to extract further concessions from employees. At the same time, there is every reason to expect that U.S. workers will continue to suffer from the adverse effects of global competition, especially from those Asian economies that continue to manipulate their exchange rates for competitive advantage.

If President Obama is serious about economic change, little time should be lost in addressing the stagnating living standards of the American worker that threaten to undermine social cohesion in the country. Aside from maintaining measures to stimulate aggregate demand, an overhaul of the education and training programs for the American worker is long overdue to better prepare the workforce for global economic competition. And a much tougher stance should be adopted toward exchange-rate manipulators in Asia, particularly in China, as such countries continue to expose the American worker to unfair competition at a time of national economic distress.

Desmond Lachman is a resident fellow at the American Enterprise Institute.