Salaries: Dim Light, Long Tunnel. by Gary North

MarketWatch ran an article on the lack of optimism for the American job market. It offered no analysis of why the market is bad, but it made it clear that it is not likely to get better anytime soon.

The article focused on the job market since 2008. It included a chart on salaries since 1980. It has three categories: college graduates, high school dropouts, and total. The chart reveals that there has not been much improvement for a decade. The flat-lining of salaries began a decade ago, not in 2008.

Conclusion: things are a lot worse than the article reported.This flat-lining is not simply a result of the recession of 2008-9. It is a long-term condition.

The salaries of workers have not changed much. The number of laborers employed has. There are six million fewer people employed today than in 2007.

 

It gets even more curious. The largest number of job losses has been mainly in the middle-range of salaries. The early recovery phase saw increased employment for low-wage workers.

In a free market, unemployed resources are a huge opportunity. They are like dollar bills floating down a gutter. Why don't people scoop up the bills? Are they blind?

Entrepreneurs do not remain blind to opportunities? They buy low and sell high. The critics of capitalism complain about capitalists' greed. By this, they mean "buy low, sell high through exploitation." But letting a valuable resource float down the gutter is not exploitation. It is either ignorance or else an awareness of hidden costs.

HIDDEN COSTS

Why don't wages fall across the board? There are 13 million unemployed people in the United States, plus an additional 8 million working part time because they had lost their full-time jobs, plus 3 million who had not searched for work in the previous four weeks, but wanted work. This is a huge number of people who are unable to get full-time jobs. For these people, this labor market is a disaster.

Why won't businesses hire them?

Simple: they cost too much. They are not dollar bills floating down the gutter. They are liabilities.

At some price, the economist says, there will be buyers of scarce resources. Of all resources, labor is the most flexible. A specialized machine can be used for whatever it was designed to do or for scrap metal. A human being can do a wide variety of tasks. With training, the number of these tasks grows remarkably. So, of all resources, labor is the least likely to remain unemployed in a free market.

There is clearly something fundamentally wrong with today's labor markets. Unemployment is too high. This was what called classical economics into question in the 1930s. It is again raising doubts.

Classical economics could and did explain long-term unemployment: government laws that prevented prices and wages from falling. The markets did not clear. The Austrian School economists have continued to point this out from the 1930s until today, but there were few of them in 1930 and fewer in 1940.

Major figures defected: Lionel Robbins, Gottfried Haberler, and Fritz Machlup. They retained their positions at the prestigious universities that hired them. No Austrian School economist who blamed the government for the Great Depression has ever taught in an economics faculty at an Ivy League university or comparable high-prestige university. Hayek was blackballed by the economics department of the University of Chicago. He was hired to teach in an obscure department, the Committee on Social Thought.

Murray Rothbard's book, America's Great Depression (1963) returned to this theme. Rothbard was unable to get a job in a college that had an economics department until 1984: the University of Nevada at Las Vegas. The only major historian to agree with him is Paul Johnson, whose Modern Times (1983) relied on Rothbard's book. But Johnson had no university position.

Once again, economists should ask: Why do wages not fall?

There are many reasons. Some are internal to the firm. Others are imposed by the government

RESISTANCE INSIDE THE BUSINESS

Lowering wages across the board lowers morale. When a company starts cutting wages, word gets out fast that there is a crisis. The best employees start looking for escape hatches. So, businesses do their best to keep wages stable. They just stop giving raises.

They could cut some people's wage. But then envy takes root. The losers resent the winners. They are tempted to sabotage the system. They find ways of non-cooperation.

Companies do not like to fire people. Fired people draw state-mandated unemployment insurance. This can raise a company's monthly payments into the fund. There are cases where fired people sue the employer, claiming discrimination of some kind. That gets expensive: lawyer fees. Firing people lowers morale among the still employed. Rumors fly about the company's future prospects.

Then there is the usual pain of firing old colleagues. Nobody wants the job. There is a movie about this: Up in the Air. Companies hire specialists who come in and fire people. It's more impersonal this way. But it costs money to hire the decapitator. Businesses do not like to waste money.

So, the tendency of a business is to keep wages stable, keep the number of employees stable, and let normal attrition take over. Some people leave. They are not replaced. Others in the company are asked to take over whatever the departed people did.

This is a functional reduction of wages. The company demands more work for the same wage. Under normal circumstances, this leads to more attrition. But in a recession, it doesn't. Workers grin and bear it.

The chart on salaries indicates that the attrition strategy began around 2001. Businesses stopped giving raises, other than whatever it took to keep up with price inflation. Workers grinned and bore it.

In 1999, the labor force as a percentage of the U.S. population peaked. It had grown steadily since 1970.

This is a fundamental break in the recent history of the United States. Something changed around 2000 that took people out of the labor force.

PICKING UP THE SLACK

Existing businesses do not like to cut wages or fire people. This is why they tend to get less competitive. This is a form of stagnation.

Historically, the businesses that hire people are small businesses. Small businesses account for the bulk of all employment. This Wikipedia summary is accurate.

There are approximately 154.4 million employed individuals in the US. Government is the largest employment sector with 22 million. Small businesses are the largest employer in the country representing 53% of US workers. The second largest share of employment belongs to large businesses that employ 38% of the US workforce. The private sector employs 91% of Americans. Government accounts for 8% of all US workers. Over 99% of all employing organizations in the US are small businesses. The 30 million small businesses in the USA account for 64% of newly created jobs (those created minus those lost). Jobs in small businesses accounted for 70% of those created in the last decade. The proportion of Americans employed by small business versus large business has remained relatively the same year by year as some small businesses become large businesses and just over half of small businesses survive more than 5 years.

Yet even this is not enough. The category "small business" is too broad. The crucial factor in the creation of new jobs is start-up businesses. A report from the Corporation for Enterprise Development reveals the following.

Of the 27.5 million businesses in the United States, 99.9% are defined as small businesses with fewer than 500employees. 9.8 million self-employed individuals – nearly two-thirds of all self-employed people – are operating business startups: unincorporated businesses less than five years old that are still in their developing stages and feature just one employee, the business owner himself.
Without business startups, there would be no net job growth in the U.S. economy. Startups in their first year of existence create an average of 3 million jobs per year. On average in a given year, about one third of the annual job creation rate is a result of startup businesses.
The notion that businesses bulk up and create more jobs as they age is, in the aggregate, not supported by data. Nearly all net job creation since 1980 has occurred in small business startups less than five years old.

So, the place to begin looking for the change after 1999 is start-up businesses. Something has kept them from entering the labor markets to hire newcomers into the labor markets. They are not hiring people who have lost their jobs.

REGULATION AND CAPITAL MISALLOCATION

The first decade of the twenty-first century accelerated the federal deficit to levels never seen before. It ratcheted up again after 2007. This money did not go into businesses. It was absorbed by bureaucracy and the beneficiaries of government largese.

The growth of the federal government has extended the system into the economy. The deficits have allocated capital away from the private sector. The recent burden of Obamacare has increased uncertainty for those hiring workers.

The reluctance of businesses to hire workers since 2007 is obvious. The recovery is the slowest in post-World War II history. But the problem in the labor markets is much deeper than the recession. It began in 2000.

If businessmen fear taxation, regulation, the business cycle, monetary policy, and foreign competition, they will not be aggressive. They will not start new projects. They fear all of these factors.

The bubble of 2001-7 led to capital allocation into real estate. That bubble has burst, and nothing has taken its place.

But, again, this shift began in 2000. The recession of 2001 did not last long, because the Federal Reserve pumped money into the economy. The bubbles began. But the percentage of people in the labor force declined.

We are seeing the end of the Keynesian experiment. The first doubts came in the 1970s. After the USA went off the last traces of the gold standard, Federal Reserve inflation produce price inflation. Unemployment rose. This was not supposed to happen, according to Keynesian theory.

It took tighter money policies from late 1979 until early 1982 to reverse price inflation. That caused two recessions. The FED reversed its policies on the weekend that Mexico threatened default and the nationalization of American banks in Mexico: August 13, 1982. A stock market boom began and continued into March 2000. Then it popped. The S&P 500 today is lower than in 2000, and the dollar's purchasing power is down by 30%. Something fundamental took place in 2000 that ended both the stock market's prospects and labor's prospects.

Keynesian economic theory cannot provide cogent explanations for this two-part setback. The government grew. The monetary base grew. Regulation grew. The textbook solutions to the problem in the labor markets ceased to work.

Keynesians are now reduced to invoking the traditional explanation of policy-makers whose policies have failed: without them, it would have been worse.

The economy is just starting its jobs recovery, and it will take years for the full impact of the current administration's policies to manifest in the labor market in areas such as health care and infrastructure, said Lawrence Katz, an economist at Harvard University. While Republicans deride President Barack Obama's record, the economy would be worse without federal stimulus, Katz contended. "We probably have several million more jobs today than we would have had," Katz said. "Given the direction that things were going, I think the administration's policies played an important role in preventing something that looked like the Great Depression. No matter how bad things are now it wasn't as bad as it could have been."

Whenever you hear that one, you can be sure that the old paradigm is under assault. The time of questioning has begun.

It is clear that younger college graduates in the social sciences and humanities cannot get the kinds of jobs that were available as recently as 2007. Middle managers who lost their jobs are locked out of the markets. The old entry points into productive employment are taking the brunt of the wage competition.

There is no indication that any of this will change.

CONCLUSION

Nothing is working. The annual deficits are at $1.3 trillion. There is no sign of relief. The job market is in the pits. The Establishment economists' explanations no longer explain the persistence of the problems. The Keynesians call for more government. Europe is moving into recession. Another war looms in the Middle East. If oil goes to $150 or more after an attack on Iran, the world economy will head back into recession.

The Establishment got us into the mess. It is unable to get us out.

This creates opportunities for rival explanations with rival solutions.

The best explanation is Adam Smith's: too much government. The solution is laissez faire.

The problem is convincing voters, half of which are recipients of government payments.