A Bad Jobs Report Is Not a Reason to Spend More Money
(Bloomberg Opinion) -- The U.S. saw a gut-wrenching decline in new jobs created in August: just 235,000, down from an average of more than 1 million in both June and July. Quite aside from what it means for the future course of U.S. economic policy, one political consequence of the disappointing employment report seems clear: House Democrats will be emboldened in their demands that Senate centrists support their $3.5-trillion budget plan.
Manchin is right. Yes, the job numbers confirm that the economy is slowing down. At the same time, there is no reason to think a further boost in spending will help — and there is a distinct possibility that it could make things worse.
To see why, consider two crucial numbers in the report: average hourly earnings and the prime-age labor-force participation rate. The former grew at a 6.5% annualized pace last month, enough to cement an overall growth rate of 6% for the second quarter of 2021. Wages haven’t grown that fast quarter-over-quarter since the fall of 1981, when Fed Chair Paul Volcker was fighting stagflation.
That doesn’t mean that the U.S. is necessarily on its way to stagflation. But it is a strong signal that demand is no longer the problem.
Younger economic analysts and some members of Congress have spent their entire working lives in era of stagnant wages and persistently sluggish demand. It’s natural for them to see more spending as an answer to a slowing economy.
This is where the prime-age labor-force participation rate, the percentage of adults who have or are looking for a job, comes in. In January 2020, it stood at 83%. By April 2020, as most of the U.S. was in lockdown, it was down to 79.8%. By June 2020, when there was still hope for a “V-shaped recovery,” it was back up to 81.5%.
Where is it now? Despite two more spending packages and the most rapid increase in private-sector wages since the early 1980s, in August it stood at just 81.8%. That means that millions of workers who left the labor force when the pandemic struck are simply unwilling or unable to rejoin the labor force.
Essentially all of the net job growth in this recovery has come from people who were either furloughed or on unemployment but actively looking for a job, and teenagers. The former source has been tapped out. The latter isn’t big enough to sustain rapid job growth.
For nearly a year, politicians have been debating what’s keeping Americans out of the job market: Overly generous government benefits? The inability to obtain child care? Excessive social-distancing policies? Fear of Covid? All of the above?
The only true answer, frustrating as it may be, is that it’s hard to say. What does seem clear, however, is that increased government spending is not likely to directly address any of these causes. Centrists are right to be skeptical of trillions in new spending.
This excludes distortions in the data produced by the spring 2020 lockdowns, during which relief funds kept many workers on the payroll even though they were not allowed to work.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Karl W. Smith is a Bloomberg Opinion columnist. He was formerly vice president for federal policy at the Tax Foundation and assistant professor of economics at the University of North Carolina. He is also co-founder of the economics blog Modeled Behavior.
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