September 12, 2007
Economic Scene

Larger Message Emerges From Summer Jobs Slump

When Americans think about their lives in relation to the past, they are decidedly upbeat. In resounding numbers — regardless of whether the economy is in a boom or a bust, whether the country is at war or peace — they tell pollsters that they live better than their parents did. And there is good reason for the good cheer: People live longer today than past generations did; they’re healthier while alive; they’re more educated; they’re richer; and they face less discrimination.

But when the discussion is about the future, the national mood darkens. In one typical poll from last year, only 34 percent of people said they expected today’s children to be better off than people are now, down from 55 percent when a similar question was asked in 1999. So while Americans are generally pleased with their lot in life today, they’re anxious about the future.

It’s in this context that most people may want to think about last week’s bad employment report from the Labor Department. Professional economists are now trying to figure out whether the unexpected loss of jobs in August means that a recession is on the way or whether the decline was just a blip that will soon be reversed. Wall Street puts the odds of a recession at around one in three, which — given Wall Street’s penchant for rosy forecasts — means the odds are probably closer to one in two.

In an earlier time, the recession question would have been the one that mattered most for typical American families. The answer would have meant the difference between getting continued raises above inflation and being forced to take an effective pay cut. But something important has changed since the 1970s. A growing economy, by itself, is no longer enough to bring solid pay increases, which are in turn the lifeblood of rising living standards. We now seem to need a major boom.

As Lawrence Katz, the labor economist and Harvard professor, says, “What’s striking about the last few decades is that unless the labor market is really, really tight, we don’t see widespread benefits like we did in the past.”

If you look at the chart above, you’ll notice that inflation-adjusted wages fell throughout most of the 1980s, even though the overall economy was growing nicely. It took the boom (and bubble) of the 1990s to get real wages rising. By the time its effects had fully worn off, in about 2003, pay began stagnating again, despite good economic growth.

Only in the last year did the current expansion get strong enough to deliver real pay increases. And for all the talk about how inequality has grown under President Bush — which it has — the gains for ordinary workers in late 2006 were truly impressive. For a few months, wages were growing as fast as they had been in the roaring 1990s.

The problem is that, as far as most families are concerned, the modern economy has little room for error. It has to be firing on almost all cylinders — adding something like 200,000 jobs a month for at least a couple of consecutive years — before employers feel competitive pressure to pay their workers more.

Even if the economy does bounce back from the mortgage crisis, almost no economist is expecting sustained monthly gains of 200,000 jobs anytime soon. In fact, the housing slump was already causing job and wage growth to weaken before stocks dropped last month. In both June and July, the economy added fewer than 70,000 jobs and in August, it lost 4,000, the first loss in four years.

Going forward, the debate is between those who see a continued slowdown and those who see a recession. In either case, wages will probably keep rising for a while because it takes time for a weakening job market to affect paychecks. Sometime soon, though, most workers can probably say goodbye to healthy raises.

By now, the reasons that middle-class pay increases are so hard to come by will sound familiar. Technology lets computers do jobs that people once did, and it also allows jobs to be done in low-wage countries on the other side of the globe. As a result, workers, save for the most skilled, have less bargaining power. These trends can’t be reversed.

What’s disappointing is that the political response to the changes has been so limp. If anything, government has probably made the situation worse.

Just look at schools. Every successive generation over the last century has been more educated than the previous one, measured by the average level of educational attainment. But the gains for men have stopped in recent decades, and for women they have slowed to a crawl, Mr. Katz notes.

The United States, the world’s leader in producing college graduates 25 years ago, has fallen behind South Korea, Norway and the Netherlands. Our lead over Japan, Australia, England and Canada has shrunk.

Remember that this has happened over a 25-year span in which the economic benefits of education have grown enormously. If the government had figured out how to get college graduation rates to rise more quickly — probably by giving schools more money but also by holding them more accountable — wages might have increased more quickly, too.

Health care is an example on the opposite end of the problem, a place where better policy could make life easier for families coping with weaker wage growth. Medical science can do much more than ever before, but many people aren’t receiving the care they need. Given the explosion of diabetes, some epidemiologists worry that today’s children could become the first generation in the modern era not to have longer life spans than its parents.

So I think Americans have the right reading on the situation: we unquestionably live better than we used to, but there are real reasons to worry whether the gains can continue at anything like their recent pace.

In an ideal world, this issue and all the related subjects — from universal health care to school choice — would dominate the domestic side of the 2008 presidential campaign. I’m not sure whether that will happen. But if there is one silver lining in the latest bits of troubling economic news, it’s that they make the larger problem harder to ignore.