Reports from the Economic Front

a blog by Marty Hart-Landsberg

The US Economy Doesn’t Create Jobs Like It Used To

Business pursuit of private profit drives our economy.  Sadly, firm profit-maximizing activity increasingly appears to view job creation as a distraction.

The official US unemployment rate fell to 4.5 percent in March 2017; that is the lowest unemployment rate since May 2007.  Many economists, and even more importantly members of the Federal Reserve Board, believe that this low rate indicates that the US economy is now operating at full employment.  As a result, they now advocate policies designed to slow economic activity so as to minimize the dangers of inflation.

Unfortunately, the unemployment rate is a poor indicator of the current state of the labor market.  For one thing, it fails to include as unemployed those who have given up looking for work.

An examination of recent trends in the employment/population ratio (EPOP) makes clear that our economy, even during periods of economic growth, is marked by ever weaker job creation.  It also appears that this is not a problem correctable by faster rates of growth.  Rather, we need to change the organization of our economy and reshape its patterns of income and wealth distribution.

The Employment/Population Ratio and the shortage of jobs

The employment/population ratio (EPOP) equals the share of the non-institutional population over 16 that works for money.  The non-institutional population includes everyone who is not in prison, a mental hospital, or a nursing home.

The figure below, from a LBO News blog post by Doug Henwood, shows the movement of the EPOP for all workers and separately for male and female workers.

As we can see, the participation rate of male workers fell steadily from the early 1950s through the early 1980s recession years.  It then slowed its decent over the next two decades until the 2008 Great Recession, which caused it to tumble.  Its post-recession rise has been weak.  The male EPOP was 66 percent in March 2017.

The female EPOP rose steadily from 30.9 percent in 1948 to a peak of 58 percent in 2000.  Thereafter, it drifted downward before falling significantly during the Great Recession.  Its post-recession rise has also been weak.  It was 54.7 percent in March 2017.

The overall EPOP, the “all” line, began at 56.6 percent in 1948, hit a peak of 64.7 percent in April 2000, and was 60.1 percent in March 2017.

The recent decline in the EPOP for all workers over 16 translates into hard times for millions of people. As Henwood explains:

If the same share of the population were employed today as was in December 2007, just as the Great Recession was taking hold, 4.3 million more people would have jobs.  If it were the same share as the all-time high in April 2000, 7.3 million more people would be working for pay.  Either one is a big number, even in a country where 153 million people are employed.

In other words, it is likely that there are many people who want and need work but cannot find it.  And it is important to remember that the EPOP only measures the share of the non-institutional population with paid employment.  It tells us nothing about the quality of the existing jobs.

Flagging job creation  

It is easier to appreciate the growing inability of our economy to provide jobs by examining the movement of the EPOP over the business cycle.  Figure 1, from a note by Ron Baiman, a member of the Chicago Political Economy group, shows the number of quarters it takes for an economic expansion to return the EPOP to its pre-recession level.

As we can see, the expansion that started in November 2001, and which lasted for 73 months, ended with an EPOP that was 2.48 percent below where it had been before the start of the March 2001 recession.   This was the first post-war expansion that failed to restore the EPOP to its pre-recession level.  But, it is very likely not the last.  In particular, it appears that our current expansion will be the second expansion.

Our current expansion started June 2009 and as of October 2016 it was 88 months long.  Yet, it remains 4.78 percent below its pre-recession level, which as noted above, was already lower than the EPOP at the start of the March 2001 recession. Given that the EPOP is currently growing very slowly, it is doubtful that it will close that gap before the next recession begins.

Explanations

Many economists argue that the downward trend in the EPOP over the last business cycles is largely due to the aging of the population.  The EPOP of older workers is always lower than that of younger workers, so as their weight in the population grows, the overall EPOP falls.  However, as Baiman explains, and shows in Figure 2, this cannot fully explain what is happening:

Figure 2 below repeats the analysis of Figure 1, but does so within population cohorts of ages 16-24, 25- 54, and 55 and over, whose shares are held constant at October 2016 levels to remove the effects of changing demographics over the post-war period. For example, this eliminates the impact of an increased over 55 population share that is likely to reduce the overall employment/population ratio.

Thus, even with this correction, the current expansion seems very unlikely to recover its “demographically controlled pre-recession employment/population ratio.”

In fact, it is younger, not older workers that are suffering most from a declining EPOP.  As Henwood points out: “Those aged 35-44 and 45-54 have yet to return to their 2000 and 2007 peaks—but those aged 55-64 have, and those over 65 have surpassed them (though obviously a much smaller share of the 65+ population is working than the rest.”

In short, we can rule out an aging population as the primary cause of the growing inability of economic growth to ensure adequate job creation.

A look at the behavior of our dominant firms produces a far more likely explanation.  As Henwood notes:

despite copious profits, firms are shoveling vast pots of cash to their executives and shareholders rather than investing in capital equipment and hiring workers. From 1952 to 1982, nonfinancial corporations distributed 17 percent of their internal cash flow (profits plus depreciation allowances) to shareholders; that rose to about 30 percent in the 1980s and 1990s, and to 48 percent since 2000. (In 2016, the average was an incredible 64 percent.)

This behavior certainly pays off handsomely for top managers and already wealthy stock holders.  But it is not so great for the rest of us, especially for those workers–and their families–who find paid employment increasingly difficult to obtain, even during an economic expansion.

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