Congress Applies Brakes to Labor Market

Our sluggish economic growth is not a result of economic forces of nature, but rather due to the forces of politics.

This column was originally published on MarketWatch.

The U.S. job market is moving in the right direction, but not fast enough to fill the employment hole or to deliver a much-needed pay raise for the majority of American workers. According to Friday’s new data from the Bureau of Labor Statistics, the U.S. economy only added 162,000 net new jobs in July, and the measured unemployment rate ticked down two notches to 7.4 percent, demonstrating little deviation from recent trends.

In short, America’s labor market is stuck in the slow lane.

We are not stuck here because of economic forces of nature, but rather due to the forces of politics: Leadership in the Republican-controlled House of Representatives is riding the brakes. House Speaker John Boehner (R-OH) said two weeks ago, “Is anybody in the Congress more focused on cutting spending than I am? I don’t think so.”

The Ohio Republican and fellow members of House leadership could choose to speed up our economy today by restoring funding for public services and investments cut since March by the sequester. This would add nearly 1 million additional new jobs across all industries over the next year, according to analysis from the Congressional Budget Office.

After all, we’re talking about what American Enterprise Institute economist Kevin Hassett calls “a national emergency” of prolonged high unemployment, which remains substantially more dire than headline figures might suggest. Broader indicators of unemployment—so-called U-6, which measures the underemployed and those who are discouraged from participating in the labor force, in addition to conventional unemployment—stood at 14 percent in July, the average for the previous three months. The share of the population employed today, at 58.7 percent, is nearly five percentage points below its pre-recession peak and has not been so low—prior to this episode—since the 1970s and early 1980s, before women entered the paid labor force in such large numbers.

Friday’s BLS data underscore the severity of this national emergency in key population groups. Unemployment among young workers is especially pernicious: 16.3 percent of workers aged 16 to 24 were unemployed in July. For these young people who have only known the post-Great Recession labor market, long spells of unemployment are holding back a generation from gaining critical skills to be more successful on the job, permanently dampening their lifetime income path. This will mean more difficulty paying off student loans, or saving to start a business or a family, as well as diminishing the productive capacity of the overall U.S. economy.

For older workers, too, long-term unemployment cuts deep. Though the unemployment rate for workers aged 55 and over has trended down to 5 percent from 7.2 percent in February 2010, it should be in the 3 percent to 4 percent range based on historical averages. Moreover, the decline is not due to an improving jobs situation but has come about because many are giving up on the prospect of re-employment and are exiting the labor force. Unemployment rates remain structurally elevated for African Americans (12.6 percent) and Latinos (9.4 percent), as well.

Reversing the spending cuts would be a start to addressing the national emergency of unemployment, but that alone would not put our economy on track to produce prosperity across the breadth of the population, as Friday’s numbers underscore. For example, many workers in the in-between age groups, though enjoying lower-than-average unemployment, now find themselves caught between the rock and hard place of supporting unemployed children while planning and providing for long-term care of elderly parents—all on jobs that have seen wages, after inflation, shrink 11 percent from before the recession for the average worker.

Friday’s data points add perspective to the lackluster data on U.S. economic growth released Wednesday, which showed that U.S. gross domestic product—the sum total of all goods and services produced by workers and equipment in the United States—is muddling along at an anemic 1.7 percent growth rate.

The industries in which jobs are growing also show troubling developments for the overall U.S. economy. From the February 2010 jobs-market trough to July, 46 percent of all jobs added to the U.S. economy came in the health care, retail trade, or leisure and hospitality industries—typically low-wage jobs with little career advancement. The manufacturing sector contributed 8 percent of new jobs in this time—reversing a long-term pattern of decline, but insufficient to drive the jobs growth engine.

As the U.S. economy transfers more activity to work in these lower-productivity, lower-pay industries, America’s potential for economic growth will wane and the problems of economic inequality will widen. We are not destined to walk this path, but we are being driven here by the forces of fiscal conservatism.

What’s more, talk of the Federal Reserve “tapering” monetary stimulus is premature given that, by our calculation of BLS and CBO data, reaching the Fed’s threshold of 6.5 percent unemployment at this pace of growth remains sadly far in the future. With orthodox monetary policy measures basically tapped out, the next chairperson of the Federal Reserve will need to explore less conventional ways to encourage growth while building out the financial supervision infrastructure to prevent our current economic mess from recurring.

History shows that spending cuts at a time like this are not a path to prosperity, and our fiscal outlook has changed dramatically. Workers and businesses in the United States would be lucky if fiscal policy could change so dramatically, too, to direct public services and investments into the things we know build America’s long-term economic health.

Adam S. Hersh is an Economist at the Center for American Progress.

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Adam Hersh

Senior Economist