Dan Alpert's Two Cents

The Third Wave: Is America, Once Again, Pricing Itself Out of a Job?

Dear readers: I am in the process of writing a book for Penguin’s Portfolio imprint that incorporates many of the subjects and views I have presented over the years in Dan Alpert’s 2 Cents and in my writing for Westwood Capital, LLC.  Accordingly, I have had little time to blog of late.  Nevertheless, last week’s U.S. Employment Situation Report demands a long-form post on EconoMonitor, and I am using this occasion to present some recent research as well as to preview some of the arguments from my book.  I hope you will find it useful.

In the second quarters of three successive calendar years—2010, 2011 and 2012—improvements in the U.S. economy that generated hopes for economic rebirth were dashed by what seemed to have been economic forces of gravity that mysteriously pull glimmering positive trend lines downward just as the crocuses of spring are pushing up through the earth’s soil.

In each of those years, for example, the rate of growth in aggregate U.S. payrolls spiked and then declined, leaving hand wringing for much of the balance of the year.  Hourly wage growth attempted to turn positive on a “real” (inflation adjusted) basis, only to be dragged back into the same pattern of stagnation or decline that has been characteristic of each of the last dozen years, save for the years of the Great Recession itself, when the U.S. experienced deflation and real wages rose as a result. 

And sometime in the autumn of each of 2010 and 2011, people (myself included) from every school of economic thinking penned white papers, articles, op-eds in a cacophonous chorus prescribing—in the aggregate—a bipolar set of solutions for aiding the economies of the U.S., and the rest of the developed world, to achieve escape velocity from what can be characterized as a perennial pattern of printempal slump.

There are always other factors at play, the “if only’s,” that pose distraction: If only Europe wasn’t going to hell in a hand basket, if only the U.S. had a government that could achieve consensus on matters of extreme importance, if only the consumers would click their collective heels together and believe enough in economic recovery to go out and “do what they’re supposed to do.”

But the fact remains that consumers gave it their all over the past seven months or so.  As my post on consumer credit, of March 22, 2012, demonstrated the consumer bought into this last round of false-recovery hook, line and sinker—going back towards record-setting levels of unsecured debt in order to continue to show up at the malls and the auto dealers (to say nothing of colleges). The “confidence fairy” successfully covered consumers with pixie dust and—despite Europe and a dysfunctional U.S. government—the 70% of our economy that is dependent on consumption of goods and services was given every benefit of the doubt.

And yet here is where we have, once again, ended up—confidence misplaced and the engines of recovery once again threatening to stall in unison and send us crashing into the turf.

I have been closely watching two Bureau of Labor Statistics’ data points over the past several years: average hourly earnings and the index of aggregate weekly payrolls (in both cases for all private, non-farm workers).  The index of aggregate weekly payrolls, by the way, is a measure of all the total payrolls of all establishments in the country—all the money paid out to workers.  My hypothesis is that each time that average hourly earnings show any acceleration in the rate of growth, whatever growth in aggregate payrolls that we associated with a burgeoning recovery became short-lived and, in fact, fell sharply thereafter.

The May 2012 Employment Situation report released on Friday has given me enough data to confirm at least some of what I have been thinking in this regard.  That is that the ability to absorb the massive amount of underutilized labor in the U.S. (both within and outside of the official labor force tally) appears to be conditioned on the price of labor falling sufficiently to offset at least some of the unprecedented global wage imbalances within the competitive universe of manufacturing and, to a lesser extent, service industries.

But as the Federal Reserve Bank of San Francisco pointed out in an excellent paper in April of this year on wage growth and the impact of nominal wage rigidities (the tendency of employers not to actually reduce—and employees to resist the reduction of—nominal wages, especially during hard times), rather than falling in nominal terms to reflect the excess availability of labor, they have actually risen.  This is not to say that wages haven’t fallen in real (inflation adjusted) terms—they were doing so before the Great Recession and resumed doing so again after the brief bout of price deflation we saw during the recession.  But it is nominal wages (combined with the value of the dollar to an extent) that makes the U.S. economy more or less competitive globally. And the aforementioned wage rigidities are not helpful—and, I would argue, are about to be tested again.

The below graph shows a history of the 3-month moving average growth rates of both hourly wages and aggregate weekly payrolls.  It is annotated in a self-explanatory manner, so suffice it to say that in each of this year and the past two the acceleration of payroll growth may have been undermined by slight upticks in hourly wage growth.  And, in fact, a flat or down-trending wage environment may have fostered hiring. The spread between the two rates of growth is shown as a purple dotted line on the graph.  Put simply, the employment picture is better off when the dotted line is between the two other lines (the closer to the red line the better) and worse off when it falls below.  Note that the dotted line, together with the growth rate for aggregate payrolls has once again fallen off sharply.


Source: Bureau of Labor Statistics (please click to enlarge graph)

The concerns I have here are principally twofold:

  • Structural issues are not bringing the people willing to work the cheapest (those who have been out of work the longest) back onto payrolls at lower wage rates because of employers’ resistance to hire them.
  • The very nature of the present crisis is inherently deflationary, and developed countries’ central bank policies are vigorously attempted to counteract those deflationary pressures.  But as extraordinary monetary easing is not flowing into real economies beset by an already existing glut of capacity, but is rather inflating commodities—we find ourselves with price inflation in food and energy that is ultimately not able to be offset by increasing wages (the latter being under global pressure from emerging markets) and we then suffer the stalling out of growth.

We have allowed hopes for revival of developed world economies to transcend the reality of their condition—facing enormous competitive and deflationary pressures and deep in unyielding indebtedness, at both household and governmental levels, that we can’t reduce through austerity in times of sub-par economic activity and, because of anemic business conditions, can’t grow ourselves out of either. 

While we sit about obsessing over paltry levels of job creation and an unemployment rate that fell during late 2011 and early 2012 as much because of departures from the labor force than from job growth, we ignore the real nature of employment in the U.S. and Europe (and to a lesser extent in Japan, which offers a cautionary demographic conundrum as well): Near historically high levels of underemployment (those working few hours combined with those working none), labor force participation levels and the ratios of those employed to total population that are abysmal, and whatever new jobs that are created being overwhelmingly in the lowest paying ranks of the service sectors (a phenomena shared with Japan—despite its vastly lower headline unemployment rate). 

While headline unemployment in the European Union, at 10.25%, is at a post-recession high, and in the peripheral nations of the Eurozone averaging over 17%, the fact remains that—even with a lower official rate of unemployment—the U.S. has only 114.8 million full time workers and 27.5 million part time workers supporting a population of some 315 million people (243 million of whom the government estimates are eligible for work, based on age and other matters).  This waste of human resources is draining society of its vibrancy.  And we cannot hang our hopes on marginal changes in the number of low paid service workers amidst such conditions.

This is not just a “blame Europe” story, as the media would sometimes have us believe.  It is certainly not a U.S. government debt, interest rate fear, or tax uncertainty story, as the Republican’s in congress would have us believe (after all, one cannot be but stunned by the rates in U.S., U.K. and German long term bonds at rates never seen since The Great Depression).  This is a global imbalance/emerging nations integration story and until we start addressing that story directly, the threat of a far more devastating collapse will remain.  Come this winter, there may be no Christmas-to-Easter respite.


9 Responses to “The Third Wave: Is America, Once Again, Pricing Itself Out of a Job?”

LCRJune 4th, 2012 at 3:35 am

"economic forces of gravity that mysteriously" I would say there is nothing mysterious. A tapped out consumer in the US and in Europe are to blame. There is no decoupling. The incentives are not to work with incredible unemployment benefits in the USA. Also, there are many US citizens who, despite being offered jobs, thumb there nose at the jobs.

ScottJune 5th, 2012 at 12:12 am

So where are your statistics about the "incredible unemployment benefits in the USA"?? You only get a direct fraction of your previously earned amount. So If you made $3000 in a quarter, you might end up with $3000 TOTAL (I know, I got it) unemployment benefits.

Can you live on $1000 per month?? And four months of benefits? Incredible! Try getting a job when you're 60. No one, and I mean, NO ONE, wants you. They look at your resume and say, "Hey, he made $100k twelve years ago…he might quit!!"

"Once upon a time" stories about thumbing noses won't get it. I worked for the US Census, and there were TWENTY applicants for every ONE position hired. In my group, no one had worked for a year. And out of twenty, SEVEN held PhDs, and SIX held Masters degrees. And you think they didn't hustle to get a job?? You must watch Faux News.

curtJune 4th, 2012 at 11:47 am

Suppose you are working at McDonalds making 9 dollars an hour. And then they offer 18 dollars an hour. Are you more likely to take that job or work harder. I would say yes.

On the other hand say you are a CEO and make 14 million a year. Now you are offered 28 million a year. Are you going to work harder? You really need to think about this.

Wage is not going to influene how hard you work but where you work. Thus a simple tax structure on wages will not influence how hard you work as much as where you work.

We may then raise the tax rate with good effects if we can invest the revenues productively.
This becomes the big question in America. Who and how do we invest productively.

I do not think our tax system, our pay system, our corporate structures, our patent laws, etc encourage productive investment. There are funds to invest , why are they not invested productively and if they are why is productivety not sky rocketing

GuestJune 4th, 2012 at 11:49 pm

Global developing market integration is part of the story, and so is transformative technology. As Michael Lewis pointed out in "The Big Short," a major motivation for the dinvestment banks to create toxic paper was their loss of profitability on traditional brokering and underwriting, as they were increasingly undercut by computerized trading platforms.

Wanda ReneeJune 5th, 2012 at 6:38 am

As Congress has decided to use the political power to dismantle the incumbents chances for re-election they have forgotten to do what is right for the country they live in. They could cry, "Look what direction the President chose to go in," but that does not excuse them from doing somehting to help their bosses THE AMERICAN PEOPLE. Hopefully, the people will see their aggregious error, and vote them out and find the right people to move this country; regardless of what is happening in Europe. We must solidify our nation first before we can truly assist our cousins abroad; although, we are already deeply involved in helping where we can. If we can reduce the hipocrisy, plutocracy and autocracy (rule by one party) we could begin to build a nation less the inequality which has forced the stagnant movement of all indicators and markets. Another economic crisis is looming as we approach the election, and those who believe this is the time to cut instead of problem solve the situation help's a dire environment to impede itself to unrecoverable circumstances of no return.

benleetJune 8th, 2012 at 6:24 pm

Wage growth of 5.7% over 30 years, 1980-2010, while the GDP/capita grew by 67% — this is the picture described by Lawrence Mishel of the Economic Policy Institute. "From 1978–2011, CEO compensation grew more than 725 percent, substantially more than the stock market and remarkably more than the annual compensation of a typical private-sector worker, which grew a meager 5.7 percent." OK, the 67% is my own calculation. But the picture is obvious, the 70% of the economy spurred by consumer spending is shut-off when consumer income hardly rises. Debt substituted for income to create growth. Inequality flourished. Mishel here:… — I don't think worker income is driven down by interface with low-wage nations, not entirely. Capitalism tends on its own to drive down wages, and without union pressure wages are a sitting duck. Albert published the best paper on The Way Forward, with Roubini and Hockett in October 2011. I await his book. The guy who worked for the US Census, that was a great post. My blog: — about inequality

Valli GenevieveJuly 24th, 2012 at 2:37 am

Thank you Scott for shooting down that ridiculous post. Here is the puzzle to me: It is not as if we have gleaming infrastructure, and low productivity. We have the average wage earner working the jobs of 2-3 people, not using sick time, not using vacation time, high levels of stress and burn out. You either have a job and work under sweatshop conditions or you are unemployed. We have so many things in this country that need doing! Infrastructure, education improvement, energy retrofitting and on and on.

This isn't structural – there are not too many workers. Work is going undone, things are decaying. What is happening is that capital has sucked up all the money, removing it from the world. The owners are hoarding or gambling while the world collapses.

Your theory is only partial.