October 11, 2014
Sometimes a question can be really annoying. Try asking a homeless person why he doesn’t have a nice apartment or Al Gore why he lost the election in 2000. David Leonhardt got in the game of really annoying questions when he speculated as to why wages aren’t rising this week. Is it really necessary to ask?
The economy is still way below potential GDP. If Leonhardt ever looked at the data from the Bureau of Labor Statistics or read his own paper, he would know that the employment to population ratio is still close to 4.0 percentage points below its pre-recession level. Even if we restrict the question to prime age workers (people between the ages of 25-54), to eliminate the issue of retirement, the drop is still 3.0 percentage points. The share of the workforce involuntarily working part-time is still more than 50 percent above its pre-recession level. In other words, there is still a large amount of slack in the labor market.
When there is slack in the labor market most workers are not able to get wage gains because they lack bargaining power. That was true in the 1980s, it was true in the 1990s, and surprise surprise, it’s still true in this decade. That was the main point of my book with Jared Bernstein.
With the answer right in front of him, like the French colonel in Casablanca, Leonhardt rushes to round up the usual suspects, naturally seizing on education. Unfortunately, the data refuse to cooperate with him. The unemployment rate for college grads is still almost 50 percent higher than its pre-recession level. The wages for recent college grads has fallen sharply since 2000. Believers in supply and demand would know that more college grads should put even further downward pressure on the wages of college grads. How does this help the wage story?
The obvious issue is that we need more demand in the economy. That can be most easily accomplished with more government spending. We could also get the trade deficit down by lowering the value of the dollar, making our goods more competitive internationally. Alternatively, we could go the path of Germany and try to reduce labor supply with work sharing, paid family and parental leave, and paid vacations.
But the real story here is about as simple as it gets. (Yeah, it might be complicated for economists who couldn’t see an $8 trillion housing bubble.) We can understand the need to create more jobs, but creating confusion about simple economic points is not a good make-work project.
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