The compensationless recovery
New York Times David Leonhardt argues that real wages are rising, so those resilient workers that remain employed will benefit from the bounce-back in “effective pay”. The problem with this insight is twofold: first, the expansion phase of real hourly compensation, a broader measure of total earnings, is falling; and second, sitting atop a mountain of consumer and mortgage debt, the aggregate economy cannot afford a compensationless recovery.
From the NY Times:
But since this recent recession began in December 2007, real average hourly pay has risen nearly 5 percent. Some employers, especially state and local governments, have cut wages. But many more employers have continued to increase pay.
Something similar happened during the Great Depression, notes Bruce Judson of the Yale School of Management. Falling prices meant that workers who held their jobs received a surprisingly strong effective pay raise.
Rebecca: The referenced “real wages” are the real average hourly earnings figures for production and nonsupervisory workers, 80% of the total nonfarm payroll. The broader measure of total earnings is real hourly compensation (see Table A and get the data from the Fred database). Real hourly compensation measures compensation for all workers, including wages, 401k contributions, stock options, tips, and self-employed business owner compensation. (You can see a comparison of the earnings/compensation series in Exhibit 1 here.)
Since December 2007, real hourly compensation has increased just 1.3%. Furthermore, the index declined four consecutive quarters through Q2 2010, a first since 1979-1980. If the NBER dates the onset of the expansion at Q3 2009 (the first quarter of positive GDP growth in 2009), real hourly compensation will have dropped .7% through Q2 2010! That’s pathetic compared to the average 2.5% gain during the first 4 quarters of expansion spanning the previous 10 recessions.
The table lists the gain/loss of real hourly compensation, measured by the BLS, during the recession and early recovery for the business cycle as dated by the NBER.
Here’s how I see it: the problem is not that real hourly compensation is falling during the the recovery, per se, it’s that real hourly compensation is falling during the recovery of a balance sheet recession.
In the context of wage and compensation growth, the NY Times article was misleading in its comparison of the Great Depression to the ’07-’09 Great Recession. Mass default during the Great Depression wiped private-sector balance sheets clean, no debt. But not this time around. We’re going to need a lot of income growth (the BLS measure of real hourly compensation includes measures of income at the BEA) to increase saving enough to deleverage the aggregate household balance sheet.
I’ll say it again: we can’t afford a jobless recovery. Specifically, we can’t afford a compensationless recovery.
Rebecca Wilder
Rebecca,
Amen! Wage growth though will not save the mile deep hole we have in personle debt. Foreclosure and BK are in a lot of peoples future.
BTW – This joker is getting lampooned across the blogosphere – left and right and everything in between. The best line, “If you have a job isn’t it great you got a raise! celebrate the economy is coming back!”
Can’t the NYT find someone,a nyone, who is better than this? Coberly you available? You obviously can phone it in so you won’t have to move.
Islam will change
Hi Rebecca:
Sure the economy started growing in 2004? And what did employment do? It remained the same and never climbed back to what it was after the 2001 recession. The recession for employment of the population has been on going since Oct/Nov 2001. I guess I am the Johnny one note in the crowd.
Without job and real income growth not dragged upwrds by the 1 percenters, we are in trouble.
run –
There doesn’t seem to be much good data on the “roaring” 20’s, but my impression, and I think there is a lot of anecdotal evidence to support the idea, is that the 20’s were like this: Roaring for the haves, malignering doldrums and a slow slide into oblivion for the have nots. Then the depression happened.
Since 1980, every hard lesson of the depression has been willfully and systematically unlearned.
Not being one od the top 0.5%, I am very pessemistic in the short, medium, and long term.
Alas,
JzB
run,
You are totally right; you’ve been talking about this for some time. If you look at the emp/pop ratio by age level, it’s pretty clear what’s going on. Each tier is crowding out the lower tier for jobs until you get to the 16-19 aged workers…emp/pop for that age group is like 25% (used to be 35%-40% in the last decade – see here http://www.angrybearblog.com/2010/07/another-illustration-of-struggling-us.html ).
And Zandi’s on the horn about the top income saving rate. It was low, even negative, during the very early parts of the recovery, but rising fast. They’ve started to cut back spending. We’re in for a very rocky ride.
http://online.wsj.com/article/SB20001424052748703988304575413432696177258.html
Rebecca
Do you have any links?
“The best line, “If you have a job isn’t it great you got a raise! celebrate the economy is coming back!” “
Link?
Thanks!
There is a lot of evidence that the Ag sector was in a sustained depression from 1920 onwards as Europe came back on line in Ag. (Prices were high during the war (WWI) as Europe and Russia had to buy rather than grow food). This was the movement that drove a lot off the farms before the great show them the rest of the world program called WWII. Interestingly parts of the country have not recovered from the 1920s ag depression yet, (drive OK highway 30 south from I 40, a lot of the downtowns look frozen at about 1914. (Interestingly US 83 40 mi west in Texas does not look as down as the Ok part) Although not written about the depression on the farms likley resulted in bad times in the small towns serving ag, particlarly the very small towns that essentially vanished as the auto meant that 20 miles was not a hard drive compared to doing it with horses.
I just love the way that we get to pick and choose which statistics we’re going to use at any one time.
When we want to talk about how the average guy, the median worker, hasn’t gained much if anything in recent decades then we go and look at wage income. At which point people like me say no, we should look at total compensation (crucially, including health care insurance) which has been rising strongly over that period. I’m then told to shut up because that’s not relevant.
Then, when we see that wage income for those in work are in fact rising, we’re told that no, we shouldn’t be looking at that, we should be looking at total compensation instead.
But, if it’s right and just that we should be looking at compensation now shouldn’t we in fact have been looking at compensation over the past few decades?
You may be surprised to find, Tim, that there are more people in the world than just a) Tim, and b) Not Tim. Not Tim is made up of billions of people, many of whom have different opionions and make different arguments.
Tim,
It’s not about the statisics used, per se, it’s about the leverage and the private-sector desire to save. The real problem is the mass unemploymet coupled with overwhelming leverage. I don’t care if remaining workers (80% of the remaining employed not including self-employment income and when the employment to population ratio is just 58.4%) are seeing real average hourly earnings rise due to strong productivity gains, they’re also seeing their 401k contributions slashed. It all matters for saving.
All of the nominal income statistics paint the same picture: income growth is stagnant; and where there are gains, it’s not enough to prevent slow consumption growth during the deleveraging process. More default and a “sluggish” recovery.
Rebecca
Tim,
It’s not about the statisics used, per se, it’s about the leverage and the private-sector desire to save. Specific to this recession, the real problem is the mass unemploymet coupled with overwhelming leverage. It’s all about the aggregate, not the average worker (again, that’s just 80% of the remaining employed not including self-employment income and when the employment to population ratio is just 58.4%). For the economy as a whole rising real average hourly income for the average worker is not very meaningful if they are seeing the 401k contributions slashed. It all matters for saving.
All of the nominal income statistics paint the same picture: income growth is stagnant; and where there are gains, it’s not enough to prevent slow consumption growth during the deleveraging process, more default and a “sluggish” recovery.
Rebecca
Isn’t there a composition problem with a lot of the wage and compensation data? In the same way that productivity is skewed higher by sending low-productivity jobs to low-wage countries, median wage data can be skewed by laying off the least skilled workers and hoarding the most skilled. The median wage goes up faster than most individuals’ wages go up, because the lower part of the curve gets emptied out.
There aren’t enough question marks in what I wrote. Think of that as a long question.
The single measure of income that has the most power to explain consumer spending is real income excluding transfers. The y/y change in this measure just turned positive for the first time since 2008 and the current reading is still 4% below its 2008 peak. The bottom, in October 2009 was 5.3% below the 2008 peak.
P.S. the previous record drop in real income excluding transfers was 4.1% in 1974, and by early 1976 it was up 5.7%. That 5.7% gain is roughly the first year of recovery and we are now near the first year of recovery with a 0.26% gain
Rebecca,
I couldn’t find that line again. But here is a nice rant with a similar slant:
Linky: http://jammiewearingfool.blogspot.com/2010/08/first-there-was-funemployment-now-its.html
Good quote here: “What’s next, the New York Times saying that all the empty houses are a good thing because it cuts down on traffic for everyone else in the neighborhood? Or how about an article saying that folks being broke and unable buy food is a good thing because then the grocery store lines are shorter for the rest?”
Islam will change
“
According to data compiled by Lebergott and published in the Historical Statistics of the US real wages of employed workers fell sharply in the depression.
According to him the real earnings of full time workers changed this way:
………..real
……….earnings
1930….-8.6%
1931….-9.4%
1932….-15.7%
1933….-5.2%
1934…..+8.4%
So it looks like Leonhardt’s claim about real wages of people who kept their jobs in the 1930s is wrong.
Remember there is a libertarian school that blames the depression on Hoover’s attempts to convince large firms to not cut wages. They believe that wages did not fall enough to end the depression.
Rebecca, maybe you ought to tell us more about what
Richard C. Koo,the Chief Economist of Nomura Research Institute,has to say.
Tim:
You are right that health care insurance premiums have been rising along with the benefits.
Unfortunately, they seem to be crowding out employer retirement and savings contributions which are half of the medical care employer contributions.
With family median income around $55,000 and family group premiums around $13,000, they are running almost 25% of income.
It’s like having a second mortgage.
Don Levit
buff, rebecca, this the article you’re thinking about?
For Those With Jobs, a Recession With Benefits
The index of real compensation per hour of private nonfarm workers reached 122.2 in the first quarter of 2007. In the first quarter of 2010 it was 122.0, for three years of no growth.
It rose 2.1% in 2009, but that was not enough to offset the drop in 2008.
Good point! Basically, monetary policy is useless because we are recovering from a balance sheet recession. Big fiscal policy is necessary to fill the hole of private sector demand. If fiscal policy is not big enough, the recovery teeters on the route of Japan. We’re almost there, not yet, though: Congress extended unemployment benefits and allocated $26 billion to states. No true austerity yet.
Here’s a good YouTube video of Koo presenting at the INET conference I attended in April 2010.
Here’s Koo in response to the Economist.com question on whether the structural unemployment rate is rising:
When the deficit hawks manage to remove the fiscal stimulus while the private sector is still deleveraging, the economy collapses and re-enters the deflationary spiral. That weakness, in turn, prompts another fiscal stimulus, only to see it removed again by the deficit hawks once the economy stabilises. This unfortunate cycle can go on for years if the experience of post-1990 Japan is any guide. The net result is that the economy remains in the doldrums for years, and many unemployed workers will never find jobs in what appears to be structural unemployment even though there is nothing structural about their predicament. Japan took 15 years to come out of its balance sheet recession because of this unfortunate cycle where the necessary medicine was applied only intermittently.
The real impediment to a sustained recovery from a balance sheet recession therefore is the inability of orthodox academics and policy makers to accept the fact that the private sector is minimising debt and that their aversion to fiscal stimulus based on the assumption that the private sector is maximising profits is unwarranted. If Japan had known that it had actually contracted a different disease and kept its fiscal stimulus in place until the private sector balance sheets are repaired, it would have recovered from the recession much faster and at a much lower cost than the 460 trillion yen or $5 trillion it eventually took to cure the disease.
Thanks for the data! Rebecca