Perspective on Labor Market Angst
While the U.S. economic expansion hasn’t been “jobless” for the past six months, employment gains have been puny nonetheless. The 360,000 jobs added over that time amount to what one might expect in six weeks under more normal circumstances. This, in turn, has inflamed angst and prompted some to question the economy’s prospects. A closer examination, however, reveals why this recent experience of modest labor market gains neither threatens the expansion nor is likely to persist.
For starters, one must recognize that meager job gains are notthe consequence of a weak economy; real GDP advanced at a 3.6% pace over the past two years and a 6.1% pace over the second half of 2003 – respectable has been held down by spectacular gains in labor productivity that hit a 50-year high last year. The distinction is important because of a simple economic equation: output equals income. As long as output is rising respectably, as it has, so too must income.
Labor Productivity
To be sure, income gains thus far have disproportionately accrued to capital as profits, which surged 40% over the past two years. Labor compensation posted a comparatively tepid 6% over the same period. But the profit resurgence still deserves credit for providing sustenance to the economy. It enabled businesses to step up investment spending and boost dividend payments to shareholders. Rising profits also figure prominently in the 50% equity market rebound since 2002 – and its related $3.7 trillion gain in household wealth – that stimulated consumer spending.
Subdued hiring due to strong productivity gains should also encourage us to believe that job gains are likely to improve going forward. The reason is that productivity gains are notoriously cyclical; the biggest gains come during the first two years of an economic expansion, which we’ve only recently finished, giving way to more modest gains thereafter. This happens because management tends to view the early stages of an economic expansion with heightened skepticism. And until their confidence is firmly rooted, a reluctance to build payrolls weighs on hiring decisions.
Hiring Plans & Employment
It’s quite possible that this cyclical aspect of productivity growth has been even greater than usual during the past two years. After all, 9/11 the Washington, D.C snipers, anthrax-laced letters, two wars, egregious accounting scandals and an overdone stock market crash would give pause to even the staunchest of optimists. A world fraught with such peril is hardly conducive to risk-taking, which includes hiring workers.
But if the calamities of the recent past abate, as appears to be the case, confidence – and hiring – will return to normal. According to various business survey research, this return to normalcy is now unfolding. The Business Roundtable’s march Economic Outlook Survey, for example, posted its best reading since its 2002 inception. More to the point, Manpower, Inc’s Employment Outlook Survey for the second quarter posted results consistent with stronger job gains than have been seen in years. And so, with the sentiments of decision-makers turning decidedly upbeat, more robust employment gains shouldn’t be far behind.
