The Damaging Cycle of Depressed Wages

 | Sep 26, 2011 | 5:29 PM EDT
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Everyone seems to focus on unemployment, but there is more to consider than just whether one has a job or doesn't.  There is another concern: what happens when the unemployed, particularly those who have been without work for some time, do get jobs?

Regaining employment is a good thing, of course, but one factor that seems to evade attention is the hit to earnings that these workers face, not just now, but well into the future. That can affect the economic growth potential of the country as a whole. The Dallas Fed noted that the long-term unemployed take an immediate hit, on average, of 30% to 40% of their previous earnings when they do take another job, and six years later, their earnings are reduced, on average, by 10% to 15%.  Similarly, recent college graduates, should they not find a job right away, may find themselves earning 2.5% less than they otherwise would 15 years later.

The reasons for this are fairly intuitive. Skills erode, professional connections dry up, technical knowledge becomes obsolete as new ideas permeate one's field. Many of the long-term unemployed who do get jobs may find work in a different field and their previous skills and experience are no longer as relevant. In essence, they start out back at the bottom rung of a new career ladder. Older workers, those aged 55 or older, and those with more specialized knowledge, particularly those with college degrees, suffer most in this regard.

What about the effects of decreased earnings – broadly and even over the long term – across the entire economy? The most encompassing measure of unemployment, the U-6 rate, is 16.2%.  This measure includes the headline unemployment rate, plus discouraged workers who have completely given up their job search, involuntary part-timers and others who are marginally attached (who may have decided to go back to school or stay home with the kids until the economy improves). 

In numbers, there are around six million people who have been out of work longer than six months and nearly a million who have given up their job search for now, even though they would like a job. They are competing with the millions of people who enter, or reenter, the labor force, but do not yet have a job, but who may possess recent, relevant college degrees or the most up-to-date training. Another 8.8 million would like a full-time job, but are working part time, and employers may add hours to these people's workweeks before hiring new staff members.

As such, employers also don't need to offer as competitive of starting salaries to those new hires they do make.

All of this point to lower wages and that can equal lower consumer spending power. We see in data from the Bureau of Labor Statistics that real (inflation-adjusted) weekly earnings fell by 0.8% in August alone, and are down by 2.2% from October 2010. As I note above in data for individual workers, this loss of income potential can persist for years. Once a worker has made a career transition into a new (and perhaps lower-paying) field, they may never go back to their prior career again, either by default or decision. And they may not be as productive in a different field, with less experience and training, than they may have been before, which can also lower the growth potential of the economy, even over the longer term.

Across the broader economy, lower real incomes can hinder growth in consumer spending in the same way that had been the case in decades past, even after the economy will (hopefully) get to full employment again. Workers in a new job, especially in a new field, may lack confidence in their employment to spend freely until they have been on the job for some time. Meanwhile, creditors may be reluctant to grant credit to recent hires as well, and a persistent lack of credit can also lower consumer spending trends relative to that in prior decades.

One overlooked area of the vexing problem of unemployment is that, while necessary to provide employment for the millions without work, it alone is not sufficient for the economy to continue on the trajectory it had been before, at least with respect to labor income. While many workers will be unaffected by decreased earnings power, much of economics hinges on changes on the margin. As such, we might need to rethink the longer-term growth potential of the economy for years to come. 

The final, and important, caveat, of course, is that the U.S. economy is innovative and creative. Right now, many of the unemployed have gone back to school to learn new skills to adapt to change.  New technologies create new opportunities, and new opportunities create new jobs and new sources of income in fields we may not even be aware of now. So, while depressed wages are a cause for concern right now, we might not necessarily need to fret that this condition will persist on into eternity.

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