Economy & Business

Unemployment Is Down, Yes, but So Are Wages

Some carrots and sticks to help American workers recover a decade’s worth of economic progress

The unemployment rate has fallen from a high of 10.0 percent in October 2009 to just 5.6 percent today. And, in what news reports called an “astonishing performance,” the U.S. economy created over one-quarter million jobs in January. And yet, by a nearly two-to-one margin, Americans in mid-January in an NBC/Wall Street Journal survey said that the nation was heading in the wrong direction. This lingering pessimism reflects not how far we have come since the depths of the Great Recession, but how far we yet have to go before broadly shared economic prosperity is restored.

Administration officials are basking in the falling unemployment rate, even as critics call the measure misleading or —  in the words of Gallup CEO Jim Clifton — “a lie.” These critics are technically wrong but qualitatively correct: The unemployment rate misses the 92 million Americans who have given up looking for work; the 7 million others who are involuntarily working only part-time; and the millions more who cannot find jobs whose skills and pay match their educational attainment.

But there is a single number that captures all these factors: total wages and salaries, which is nothing other than the number of U.S. workers multiplied by the number of hours worked multiplied by their hourly wage rate. Both the Congressional Budget Office and the Social Security Administration track total earnings, which are the base for Social Security taxes and are used in calculating retirement and disability benefits. And this single figure tells us of a lost decade in the labor market.

Back in 2006, the year before the economic downturn, total wages and salaries of U.S. workers equaled about $6.0 trillion, in today’s dollars. At the time, the CBO projected that, by 2014, real earnings would rise by 27 percent, to $7.5 trillion. In reality, earnings grew from 2006 to 2014 by only 4 percent, to $6.2 trillion, despite rising productivity and a growing working-age population. Simply put, the vast majority of that projected increase in total economy-wide earnings just didn’t happen.

But isn’t the labor market adding jobs while the unemployment rate falls? Sure, but figures like the unemployment rate or the monthly job numbers provide no idea how much farther we have to go. According to the CBO’s projection, it will take until 2025 before U.S. workers’ total wages and salaries reach the level that the agency previously had forecast for 2014. In other words, when you combine low levels of employment, shorter working hours, and low hourly wages, American families have lost a decade’s worth of economic progress.

And these losses are not mainly financial but social. Today, 16 percent of prime-working-age men are not working. Men without jobs are poor prospects for marriage and poor parents for their children. And the longer joblessness extends, the greater the erosion in job skills and social mores necessary to return to productive self-sufficiency.

These figures cry out for solutions that will move the ball today, not years in the future.

For inspiration, we should look to one of the few labor-market success stories during the Great Recession: older workers, who increased both their labor-force participation rates and their average earnings even as labor supply plummeted among younger workers. These successes were built not on government programs but rather the searing motivation of older workers to rebuild their battered 401(k)s in the few years available to them before retirement.

Motivation to work is everywhere an aid to re-employment, yet government policies often undermine incentives to get back into the work force. For instance, most states continue to exempt able-bodied and childless food-stamp recipients from work requirements. That must end. Likewise, applicants for Social Security disability benefits must be required to undergo work-oriented rehabilitation before they go on benefits, not after. Work requirements for Temporary Aid for Needy Families should be improved and the states required to enforce them.

But there are carrots as well as sticks. For instance, the earned-income tax credit currently provides childless workers with only a small fraction of the benefit that working parents can receive. EITC benefits, which have been shown to encourage work, should be enhanced. Our presidential hopefuls should scrub federal policies for ways to increase both requirements for work and rewards for work. When more Americans return to the job market, they can rebuild their job skills and, in many respects, their futures.

Data on total wages and salaries explain why Americans remain dissatisfied. They are happy to see job gains, but citizens know — in ways that pundits who focus solely on the unemployment rates or job numbers cannot — that Americans remain far, far behind where they thought they would be just a few years ago. What Americans need from policymakers isn’t the Pollyannaish insistence from some Democrats that the job market is back on track or airy policy goals from Republicans that could have been written decades ago. What citizens need and deserve is specific policies designed and proven to put Americans back to work.

— Andrew G. Biggs is a resident scholar at the American Enterprise Institute.


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