The Middle Class Squeeze

August 20th, 2013
in Op Ed, syndication

Written by Gene Balas, with co-author, Steven Kaczmarek

The monthly employment report tabulates all jobs created in the US, but the numbers can be confusing. When it comes to the numbers, not all jobs are created equal. By this we mean, when a job is created, is it part time or full time? How much does that worker earn? What does the industry in which jobs are being created tell us about the economy? And most importantly, how is it that the economy is growing, but most workers don't feel like they are getting ahead at all? One would think that everyone would benefit from expanding economic output and more jobs being created, but we'll explain why broad economic conditions may differ from an actual worker's own experience.

Follow up:

Let's consider where jobs were lost during the recession and where they've been created during the recovery, starting with this portrait of a shrinking middle class:

Click to enlarge

Jobs lost during the recession were concentrated in middle-wage sectors, including construction, manufacturing, government and certain services. During the recovery, jobs were created in high-wage sectors, such as finance, information technology, and professional and business services. At the other end of the spectrum, there were plenty of jobs created in low-wage sectors, such as retail and leisure/hospitality (which includes food services).

There weren't many middle-wage jobs created, and those that were created tended to be in healthcare and education (not all healthcare workers are doctors, mind you), which tend to require specialized training and education. It might be difficult for, say, an unemployed construction worker to become a nurse overnight, so a logical choice for some of the unemployed is to seek jobs in retail and food service. These industries have little barriers to entry for new workers - but also offer the lowest wages of any major industry sector. And while those sectors have been hiring, it has not been enough to put all of these would-be clerks and food handlers to work.

Now think about this for a second: if there were so many jobs created in retail and leisure/hospitality, why haven't we been seeing consumer spending growing by leaps and bounds? It turns out that these jobs that were created tended to be part time. Both sectors report lower weekly hours worked per worker and both sectors report significantly above-average unemployment rates, as unemployed workers from other industries may seek jobs in these sectors that don't require specialized training.

That means that these jobs, despite so many being added, are not being filled by a few full-timers, they are being filled by many part-timers, suggesting a greater improvement in hiring than has actually been the case. That is one reason why the aggregate weekly paychecks for folks haven't expanded by much, especially in real terms. Real average hourly earnings rose 0.4%, seasonally adjusted, from June 2012 to June 2013. The increase in real average hourly earnings, combined with a 0.3% increase in the average workweek, resulted in a 0.7% increase in real average weekly earnings over this period. It is hard for households to increase their spending when their wages are stagnant after inflation.

That tells us about the plight of individual workers. However, to get a sense of broad economic conditions, one needs to look at the fact that more people are working, and consider their hours worked and hourly pay as well. We find these data in a little-followed metric of aggregate weekly hours and aggregate weekly payrolls in the monthly jobs report.

In the past year through July, the metric of aggregate weekly hours for workers on private payrolls has expanded by 2.1%. That is, of course, for most industries other than food service and retail, where the workweek decreased. The short workweeks of retail and food service likely reflect employers' desire to keep from providing health care coverage to their employees as would be mandated by the Affordable Care Act (also known as Obamacare) by limiting workers' hours to part-time status. In fact, part-timers account for nearly a fifth of our workforce.

Meanwhile, higher income workers are making more money, with information technology and finance being two of the top sectors for payroll gains. Wages did grow, but at a notably slower pace, in many other sectors from a year ago. In data from the jobs report that is not adjusted for inflation, we see that aggregate salaries and wages, economy-wide, are up nearly 4% from a year ago.

However, because that figure accounts for the fact that more people are working, note that an individual worker's weekly paychecks increased by a much smaller amount, 1.9% before inflation. (Add the 1.9% increase in workers' weekly paychecks to the 2.1% increase in the number of workers, and you reach that 4% increase in aggregate wages and salaries.) Recall that payroll taxes reverted 2% higher in January 2013 for most workers.

So, the employment picture varies according to your perspective. Paychecks are barely growing after inflation, but economy-wide metrics show that more people are working.

We conclude that the economy is growing slowly, but it isn't being felt by most Americans in the same way. Some have been doing better than others, and the middle class is still squeezed. That is why optimism remains subdued in a way that broad data on economic output can never quite capture.

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