A recent speech by Federal Reserve Governor Sarah Bloom Raskin, given to the Society of Government Economists and the National Economists Club in Washington, D.C. examined the "Prospects for a Stronger Economy". I've picked out a salient point that I think bears closer examination, particularly in light of the intransigence of the employment problems that the American economy has experienced since the so-called "end" of the Great Recession in 2009.
Here's the quote:
"On the whole, families have benefited from the modest improvement in the labor market, and rising stock prices and rebounding home values have helped some households recoup part of the wealth they lost during the recession.
However, overall wage growth has been anemic, and many households have not seen their circumstances improve materially. As I described in a speech last month, globalization and technological change have continued to shift the occupations and industrial distribution of new jobs available. These currents of globalization and technological change continue on their path, making it more likely that workers who were laid off during the recession would be unable to find reemployment that is of comparable quality to their previous jobs. About two-thirds of all job losses in the recession were in middle-wage occupations--such as manufacturing, skilled construction, and office administration jobs--but these occupations have accounted for less than one-fourth of the job growth during the recovery. By contrast, lower-wage occupations, such as retail sales, food service, and other lower-paying service jobs, accounted for only one-fifth of job losses during the recession but more than one-half of total job gains during the recovery. As a result of these trends in job creation, which could well have been exacerbated by the severe nature of the crisis, the earnings potential for many households likely remains below what they had anticipated in the years before the recession. Moreover, as you all know, the temporary payroll tax cut has now expired, and many households have seen their disposable incomes reduced for this reason as well."
Headline unemployment, measured using the U-3 metric, has dropped by 2.5 percentage points from its high of 10 percent, however, things just don't seem like a typical recovery/inter-recessional period to many American households and Governor Raskin hit the nail on the head.
Let's open by looking at household disposable income, a key measure of household finances. From FRED, here is a graph showing the steady growth in real disposable personal income since 1959:
Here's what has happened to real disposable income since the beginning of the Great Recession:
Excluding the anomalous rise in May 2008, average real disposable personal income averaged $10,076 billion (in chained 2005 dollars) during the first full year of the recession (2008). Disposable personal income fell to a low of $9,707 billion in October 2009 and since that time, has recovered only slightly to its current level of $10,343 billion, a rise of only 2.6 percent over the five year period, a rather pitiful increase.
If you look at past recessions (shaded grey on the first graph), you'll notice that growth in real disposable personal income began relatively rapidly after the end of most recessions and, in some cases, continued to rise during the tenure of the recession itself.
The latest Productivity and Costs news release from the Bureau of Labor Statistics shows what has caused at least part of the problem. While the BLS statistics show that more Americans are working, they are working for less. Nonfarm business sector labor productivity increased at a 0.5 percent annual rate during the first quarter of 2013 reflecting a 2.1 percent increase in output and 1.6 percent increase in hours worked; unfortunately, the same cannot be said for the unit costs of labor (i.e. what you and I see in our bank accounts at the end of every two week period). Unit labor costs, defined as the ratio of hourly compensation to labor productivity (for example, when hourly compensation increases, unit labor costs increase if productivity is constant) fell 4.3 percent in the first quarter of 2013. This drop is comprised of a 3.8 percent decrease in hourly compensation and a 0.5 percent increase in productivity. The 3.8 percent drop in hourly compensation is the largest decline since this metric was first measured in 1947.
Not only has average hourly compensation dropped by 3.8 percent on a quarter-over-quarter basis, but the statistics show that some industries have seen hourly compensation drop at even more alarming levels as shown here:
Non-farm business: -3.8 percent
Business: -3.1 percent
Manufacturing: -6.9 percent
Durable Manufacturing: -8.1 percent
Nondurable Manufacturing: -4.9 percent
While some in the mainstream media suggest that this is a one-time event related to the fiscal cliff tax changes, it also speaks volumes about today's workplace. In general, as Governor Raskin noted, the workplace for many American families is NOT improving. Middle-wage jobs that disappeared during the Great Recession have been replaced with low-wage jobs including retail sales and food service. Maybe we should all work for tips!
Here's a graph showing what has happened to real compensation per hour in the non-farm sector since 1947:
Real wage growth was pretty steady, except during the lean years of the oil price shocks in the 1970s, 1980s and early 1990s and again over the past 10 years.
Here's a closeup of what has happened to real compensation per hour since the end of the recession in November 2001:
At the end of 2001, real per hour compensation was 96.358 in 2005 dollars. This has risen to 102.524 in the first quarter of 2013, a pathetically small increase in real per hour compensation of 6.4 percent over 12 years. It's no wonder that families are finding that they simply do not feel better off and why so many Americans were looking to their homes as a bankable investment that would fund both their current consumption and their future retirement.
It's also interesting to note that companies that still hire American workers are finding it more and more difficult to wring additional productivity out of their employees. Over the decade between 2001 and 2011, on average, productivity increased by 2.2 percent annually. This latest data release from BLS shows that labor productivity only increased at an annual rate of 0.5 percent, a tiny fraction of what was seen in the early part of the new millennium.
Here is a graph showing nonfarm output per hour since 1947:
Here is a graph showing how little output has grown over the past three years:
That's an increase in productivity of only 2.2 percent over the past three years, well below the long-term average as I noted above. It's like squeezing blood from a stone.
Basically, not only are a severely elevated number of Americans finding themselves unemployed for longer periods of time but those who are working are finding that they simply are not seeing their paycheques meet their needs. This can hardly be termed a healthy employment picture. As Governor Raskin noted, "many households have not seen their circumstances improve materially".
No sh!t Sherlock!