|President Barack Obama talks in a hallway with British Prime Minister David Cameron following their bilateral meeting at the G7 Summit in Brussels, Belgium, June 5, 2014. |
Dr Peter Morici: Friday, the Labor
Department is expected to report the US economy added 213,000 jobs in May. This is
line with the pace so far this year and stronger than in 2013, and the Federal
Reserve is likely to follow through with plans to raise interest rates. The
labor market remains slack; however, recent consumer price reports indicate
inflation is picking up. The Fed will phase out purchases of Treasury and
mortgage-backed securities by the end of this year, and feel considerable
pressure to raise short-term interest rates in 2015.
These moves will push up rates for mortgage, auto
and other consumer loans. However, upward pressure on interest rates should not
be enough to derail the bull market for US stocks.
The unemployment rate likely will remain close to its current 6.3%. Well below
the 10% recession peak, it largely reflects a lower adult participation rate.
Were the same percentage of adults working or looking for work today as before
the financial crisis, the unemployment rate would be 10.4%.
Baby boomer retirements are not driving down adult participation—32% are in the
labor force today, as compared to 23% 15 years ago. Rising life expectancies,
the loss of benefits-defined pensions, and the disappointing performance of most
individual investment accounts are all motivating more elderly to work.
Rather, decent employment opportunities for prime working age adults have not
kept pace with population growth. The percentage of Americans ages 25 to 54 that
has a job is down to 77% from 82% 15 years ago, despite a larger share of women
in paid employment.
Shrinking opportunities, especially in manufacturing and the building trades,
have hit men hard. One out of six between the ages of 25 and 54 is without a
job, and many of them have few prospects for finding desirable employment.
Nineteen million Americans over 25 are working part-time. More elderly in the
workforce supplementing retirement savings, and the structure of government
benefits and regulations contribute to this phenomenon. For example, ObamaCare
and the Earned Income Tax Credit (EITC) encourage low wage employees to work
part-time to avoid losing benefits, and some employers are limiting workers to
less than 30 hours per week to avoid tougher health insurance coverage mandates.
The loss of manufacturing and construction jobs, and growth in part-time
employment reflects a broader shift in the economy to low wage jobs and lower
Although the economy has restored all the jobs lost during the financial crisis,
businesses in industries paying average wages in the bottom third of all
employers have added 1.9 million jobs, about the same number as jobs lost in the
top two-thirds. Consequently, since 2007, annual inflation-adjusted median
household incomes are down about $5,000.
The root cause of poor jobs creation and falling real incomes is slow economic
growth that has bedeviled both the Bush and Obama administrations. Whereas
during the Reagan-Clinton era GDP growth averaged 3.4%, since 2000 the pace has
slowed to 1.7%.
After GDP contracted 1% in the first quarter, forecasters’ growth expect it to
rise at a 3% rate the balance of this year. However growth in the range of 4 to
5% would be needed to provide the 350,000 jobs required each month to bring
unemployment down to pre-financial crisis levels over 3 years.
Holding back growth are the trade deficits with China and Japan and on oil,
which sap demand for domestically produced goods. Those gaps stem from trade
agreements that have exposed US manufacturers to less-expensive imports without
opening comparable opportunities abroad for more competitive US enterprises, and
the US policy of not developing most of its off-shore oil and gas resources.
Altering those policies to cut the trade deficit in half could easily add
another one percentage point to growth.
Additionally, new business regulations—such as Dodd-Frank and the above
mentioned disincentives to work full-time and hire imposed by ObamaCare—higher
taxes on entrepreneurs, and now new regulations to reduce carbon-emissions raise
business costs, slow investment and reduce growth.
Balancing growth with other social and environmental goals is always difficult,
however, the choices voters and politicians have implemented in this century are
profoundly suppressing the number of jobs the economy creates and wage levels.
Additional stimulus from the Fed can’t overcome those constraints and create
jobs, and inflation heating up will require it to raise interest rates by