Soaring Profits but Too Few Jobs
By WILLIAM A. GALSTON
Facts often speak for themselves, but sometimes they scream out at us. That is what the employment market is doing.
Today, 75 months after the Great Recession began, 57 months after it ended, and 32 months after real gross domestic product surpassed its previous high, fewer Americans have jobs than in December 2007.
Before the recession, the average duration of unemployment was about 16 weeks. It then surged to more than 40 weeks in 2011 and still stands at 37 weeks today. The long-term unemployed (27 weeks or more) constitute 37% of the total, and research by Princeton’s Alan Krueger, Judd Cramer and David Cho suggests that the odds of these Americans ever regaining permanent full-time jobs are dismal.
During the recession, 60% of job losses occurred in middle-wage occupations paying between $13.83 and $21.13 per hour, while 21% of losses involved jobs paying less than $13.83 hourly. During the recovery, however, only 22% of new jobs paid middle wages while fully 58% were at the lower-wage end of the scale. In other words, millions of re-employed workers have experienced downward mobility.
Median household income fell for four consecutive years (2008-11) before making marginal gains in 2012 and 2013. The income of the median household now stands 6.1% lower than it was at the beginning of the Great Recession and—remarkably—4.4% lower than when it ended.
According to a report last week from the Commerce Department, corporate profits after taxes in the fourth quarter of 2013 rose to an annual level of $1.9 trillion—11.1% of GDP, a postwar high. Meanwhile, total compensation—wages and benefits such as health insurance and pensions—fell to their lowest share of GDP in at least 50 years. From December 2007 through the third quarter of 2013, the compensation share of national GDP declined to 61% from 64%. A simple calculation shows that if compensation had remained at the 2007 share, workers would have earned $520 billion more in 2013.
There’s no end in sight. The Wall Street Journal’s Justin Lahart reported recently that analysts expect profits for the S&P 500 to grow by 7.4% in 2014, far faster than nominal GDP. So profits will once again command a larger share of national output. Some of this, he says, reflects short-term factors. Persistently low interest rates have allowed companies to refinance debt, cutting interest costs even as they have increased net debt for 14 consecutive quarters. Moreover, companies have been able to offset gains in gross profits with losses incurred during the recession, reducing their effective tax rates.
But less cyclical trends are at work as well. Companies have not boosted hiring in line with revenues, or wages in line with productivity. As Richard Cope, the CEO of a rapidly growing firm, told this newspaper’s Jonathan House, “Businesses are sitting on tons of cash . . . and they’re choosing to invest their capital in hardware, rather than hiring.” The reason: They believe that “investing in technology is likely to have [a] better effect on sales than hiring more people.” But even these investments slowed in 2013 after robust gains in the years immediately following the recession.
Economists don’t agree about why the recovery has been so grindingly slow. Let me offer my own non-economist’s suggestion: However necessary a low-interest-rate regime may have been at the beginning of the recovery, it has moved through a phase of diminishing returns, which have now turned negative.
The current regime has allowed the banking system to recover and spurred gains of 250% in the equities markets from their spring 2009 low. No doubt the “wealth effect” boosted consumption among those fortunate enough to hold substantial amounts of stock. Homeowners who have been able to refinance have benefited as well.
That’s the upside. But the downside has been sizable. Low interest rates have reduced the purchasing power of retirees struggling to supplement fixed incomes with decent returns on low-risk investments. And the low rates have altered business decisions, at least at the margin. Today’s interest-rate regime lowers the cost of capital—and therefore of capital investment relative to labor. To be sure, the substitution of technology for labor is a continuing process. But the pace of that substitution is crucial for the job market, and current policies are having the unintended effect of accelerating it, further retarding job creation.
We should be having a robust national discussion about these trends, which polls say are of intense concern to the American people. Instead, Republicans are banging away at the Affordable Care Act while Democrats are busy scheduling votes on a grab bag of subjects designed to boost turnout from the party’s base in the fall elections. The economic problems we face are getting lost in the partisan din.
We need new policies—not just monetary, but fiscal, tax and labor-market policies as well—that focus relentlessly on aligning growth with job creation and compensation with productivity. The alternative is more of the same for average American households