Shadowed Economy

Profits are up and productivity is soaring, but many workers aren't sharing the benefits with more jobs and higher wages

September 05, 2004|By Michael Hill | Michael Hill,SUN STAFF

Economic indicators have come to resemble that old chestnut about the weather - if you don't like the latest one, just wait 15 minutes and something different will come along.

The United States economy - by definition in a recovery mode for over two years now - continues to confound. It is making a lot of money but not many jobs. Even as it gets more productive, the wages it pays remain flat.

Its schizophrenic nature seems on display almost every day, when some new figure comes out. Jobs are created like gangbusters one month, hardly at all the next. Consumer spending is up, but consumer confidence is down. The Gross Domestic Product grows, but the auto industry says it can't sell cars. The stock market moves in fits and starts, essentially remaining flat.

On Friday, the Labor Department reported that 144,000 jobs were created last month and that the unemployment rate dropped from 5.5 percent to 5.4 percent. But analysts said much of that decline was caused by discouraged workers giving up their search for employment.

All of this provides plenty of fodder for whatever side of the political argument you are on but does little to help people who are out of work or struggling to make ends meet on a reduced wage.

The Economic Policy Institute in its biannual study - The State of Working America, released today - concludes, "Despite being two and a half years into an economic recovery, many of the problems that beset working Americans in the 2001 recession and protracted jobless recovery persist today."

It points to an unemployment rate that remains in the mid-5 percent range; a large and growing number of underemployed and discouraged workers, those who have quit looking for work; a stagnant hourly wage rate; and a failure to come close to providing America the number of jobs available in March 2001.

"The United States has been tracking employment statistics since 1939, and never in history has it taken this long to regain jobs lost over a downturn," the report states.

The EPI's Sylvia Allegretto, one of the report's authors, emphasizes that point. "We are now 40 months since the last peak and over 1 million jobs short of where we started in March 2001," she says. "We are really in a massive jobs deficit."

This analysis might not be surprising coming from the Economic Policy Institute because it is funded by organized labor and its conclusions are always critical of the Bush administration. But others are clearly worried about this economy as well.

"The EPI is flat out a Democrat institution," says Peter Morici of the Smith School of Business at the University of Maryland. "I'm not a Democrat, but right now what I see is a lot of bad news."

"Real personal income is growing at 1.9 percent; that's the number for the last 12 months," he says. "Yet productivity is growing at 3 to 4 percent. With that number, you would expect real wages to be growing at 5 percent.

"Why is that happening? The answer is that the labor market is not functioning well," he says. "The administration has turned a blind eye to that and should be held accountable. The Republicans sent the B team to run the White House, and they are not doing a good job."

The difference between that rise in productivity and wages is crucial to understanding the weirdness of this economy. It means that businesses are getting more work out of the same number of people, or at least for the same cost.

Allegretto blames what she calls "just-in-time employment practices."

"Businesses are adjusting their work force the way they have traditionally adjusted inventory," she says, pointing to the use of more temporary hires, part-time workers, outsourcing and simply threatening workers with firing if they don't work harder.

"They are resistant to hiring new workers because that is a fixed cost," he says. "The high cost of health care insurance is part of that."

The bottom line of these practices is the bottom line. If you can get more work for the same money, you are going to increase your profits. And that is exactly what businesses have been doing during this recovery.

"It's actually quite strange," Allegretto says. "We have seen profits soaring, but it is not going to wages. There is a lot of money being made by a small number of people. Some people think this economy is great. It really depends where in the economy you are situated, which economy you are living in."

Normally, in this part of a growth cycle, businesses are spending their growing profits on expanding, updating and improving their business. This creates more jobs, which puts some stress on the job market, which leads to higher wages, which increases consumption.

But that's not happening with the profits made in this cycle.

Steve Hanke, a Johns Hopkins economist who was on Ronald Reagan's original Council of Economic Advisers, says businesses are keeping this money because they are not sure what the future will bring.

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