We got good news on the job front this week, but let’s hold the bubbly. It will take significant further job growth, and a real increase in wages, before Americans will be able to dig out of the debt hole they were forced to dig as jobs dried up and wage growth was anemic over the last three years.
It’s like this. Imagine you had a prolonged illness, went to the hospital for several weeks, and after a few days of feeling a little better, the doctor sends you back to work, so you can pay back the debt incurred while paying your hospital bills. In the meantime, your employer has cut your pay because you were out so long. You are left to buy less food, clothing, housing, education, among other things, to pay back your loans, or you default on your loans.
This, in a nutshell, describes the situation many households face as the labor market recovery appears to get off the ground. More jobs are being created, but pay increases are meager, while households have to pay back record levels of debt that they accumulated in the past three years, because of disappearing jobs, reduced hours, and meager pay increases.
The good news is that, at last, jobs are increasing again. More than 300,000 new jobs were created in the past four months, despite November’s 57,000 new jobs coming in well below the forecast 150,000. However, there are 2.4 million fewer jobs since the beginning of the recession, and 726,000 fewer jobs since the start of the recovery. Compared to prior recoveries since the 1960s there are 7.9 million fewer jobs than there should be given typical employment growth up to this point in a recovery.
Wage growth in this recovery also lags behind that of previous recoveries. Compared to previous recoveries, wages in inflation adjusted terms would usually rise by 2.3 percent by this time in a recovery. This time, though, wages increased by only 1.1 percent. Also, people are still working fewer hours per week than at the beginning of the recession, which further reduces their income.
Tentative employment growth, low employment, slow wage growth, and crawling increases in hours all essentially add up to one thing: low incomes for households. In September, wages, salaries and self-employment income amounted to 60 percent of GDP, with the rest being made up of income on capital, such as profits and interest. This is below the level at the beginning of the recession or the recovery. If this share had remained stable since the start of the recovery, households would have an extra $18 billion to spend this holiday season.
But, alas, “could be” and “should be” mean little in terms of actual dollars and cents. Household income has not grown fast enough to keep pace with consumption needs. Rising costs for education, brought to the American family thanks to state fiscal crises, and higher costs for medical care, among other things, have required households to borrow more to make ends meet as their incomes grew only slowly. By the middle of 2003, households had amassed an unprecedented 115 percent of their disposable income in debt. Consequently, the share of household disposable income that was dedicated to repaying debt in the second quarter of 2003 was close to a record high for the past 23 years, despite record low interest rates.
Only rising incomes can get households out of their debt trap. Without rising incomes, the high debt service burden will ultimately translate into problems for the economy at large, particularly when interest rates begin to rise again. Just because interest rates go up, households will not pay back all their debt at once. They will have to pay back the outstanding debt over time, although it will have become more costly do to so. This means less consumption and higher default rates. Either one is not a good outcome, since consumption makes up more than two thirds of the U.S. economy and since higher default rates will give banks reason not to extend credit. Credit, though, is the grease in the motor of a modern economy, especially with respect to investment.
In the interest of helping households and of putting the renewed strength of the U.S. economy on a stable foundation, it is too early to declare victory in the labor market. We still have a long way to go before the millions of jobs have been created that are necessary to lift incomes further.
Actual and Hypothetical Payroll Employment in Recovery, Based on Past Recoveries since 1960s
During the first 24 months of past recoveries since the 1960s, payroll employment grew by an average annualized rate of 2.7%. In this recovery, it shrank at an annualized rate of 0.6%. If employment had grown at the rate of past recoveries, there would have been 7.9 million more jobs than there were in November 2003.
Source: Bureau of Labor Statistics, Employment Release, author’s calculations.
Consumer Credit Relative to Disposable Income
Because income growth was slow during the recent recession and recovery, but prices for big ticket items, such as education and health care, rose rapidly, households increasingly borrowed money, aided by low interest rates. Total debt amounted to a record high 115%, credit market debt to 110%, and mortgage debt to 80% of personal disposable income by the end of the second quarter of 2002.
Source: Board of Governors, Federal Reserve System, Flow of Funds and author’s calculations.
Dr. Christian Weller is a Senior Economist at the Center for American Progress.