A Long Way to Dig Out of the Income Hole

Today, the Bureau of Labor Statistics (BLS) released the latest figures for employment and wages for September 2004. With almost complete data for the first nine months of this year, it has become pretty clear that 2004 will likely mark the end of the weakest first three-year period of a recovery since the 1960s, when data were first collected.

Just before Labor Day, the Census Bureau released a new set of income figures, covering the entire year of 2003. These figures showed that over the past three years, from 2000 to 2003, the income of a typical family declined by about $1,500 in inflation adjusted terms. That was a loss of 3.4 percent, but that was also a period that ended in 2003.

The decline in incomes over the past few years was largely a result of the fact that jobs were lost from 2001 to 2003, while the population grew. From the start of the recession in March 2001 to the end of 2003, the economy lost a total of 2.5 million jobs. At the same time, the working age population grew by 3.6 percent. The fact that inflation adjusted weekly earnings grew at a meager 1 percent for the entire period did not help to fill the gap.

But that was then, and this is now. Hasn't the situation in 2004 been much rosier? Yes and no. While employment growth has been positive in 2004, it has still been slow. According to today's employment numbers from the BLS, average monthly employment growth has been 0.13 percent for 2004, barely keeping pace with population growth. In fact, the share of the population that was employed remained almost constant for the first nine months of 2004.

As employment growth has shown some signs of life in 2004, wage gains were a laggard. By August 2004, the last month for which complete figures are available, inflation adjusted hourly earnings were below those in December 2003, and inflation adjusted weekly earnings were only marginally higher.

What does this all mean for households' pocket books? We won't know the answer for sure, since the Census Bureau will not release its income figures for 2004 until next summer, but we can get a good sense of where we are heading. Specifically, trends in household income are determined by employment, weekly earnings, and population growth. Adding employment gains and wage gains together tells us approximately by how much total wage income has risen. Subtracting the rate of change in the number of households from this number tells us roughly by how much household income has changed.

While this is a rough approximation, it gives a very good sense of how middle-class families are doing. For the past 37 years, there were only three years when this method would have shown an increase or a decrease for the typical household income, when it actually was moving in the other direction. Also, for the past ten years – from 1993 to 2003 – this estimate of household income grew by 9.5 percent, whereas the income for the typical family grew by a total of 10.6 percent during this time.

The employment and wage figures for the first nine months of this year are now available. Employment grew by 1.2 percent and non-inflation adjusted wages grew by 2.7 percent. If we assume that inflation rose by 0.1 percent in September, the same rate as in the month before, inflation adjusted weekly earnings for the first nine months of 2004 increased by 1 percent. Even if the number of households rose at its slowest rate in history in 2004, household income growth for the first three years of the recovery would only equal 0.5 percent in 2004. For the first three years of the recovery, this would mean that incomes fell by an annual average of 0.3 percent. If the number of households rose at its average rate, which was comparable to its rate in 2003, household income would actually decline in 2004, if jobs and wages continue to grow at their current rates.

This may be a big assumption. For instance, from August to September, employment creation fell from 128,000 to 96,000. For all of 2004, jobs increased each month by 0.13 percent. However, in the past five months, this growth rate has slowed to 0.09 percent, and employment growth remains weak. Today's employment report, for instance, shows that once again, the creation of new jobs in September did not keep pace with population growth. The employed share of the population dropped for the second month in a row.

At the same time, though, wage gains have grown, mainly due to the fact that inflation has slowed. Given the recent surge in oil prices, it is not at all clear that faster inflation won't eat away again at middle-class wages in the coming months.

Regardless of how one looks at the figures, it is clear that the labor market has so far not gained the strength to lead to a strong surge in household incomes in 2004. Employment creation is barely keeping pace with population growth and wage gains are threatened by rising prices everywhere. It is hard to see how this combination of slow employment and wage gains will allow households to dig themselves quickly out of the income hole that they have fallen into over the past three years.

Christian E. Weller is senior economist and Scott Lilly is a senior fellow at the Center for American Progress.