Randy Cray column: Structural changes affect U.S. labor market

1:03 AM, Dec. 16, 2012  |  Comments
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The current economic expansion has drawn much criticism because of the slow improvement in the employment situation. Since the end of the recession new jobs have been created each and every month but, unfortunately, not at a pace that would greatly impact the official unemployment rate, which now stands at around 7.7 percent. An even better gauge of the nation's financial hardship is the unemployment measure that takes into consideration unemployed workers, workers who have dropped out of the labor force and part-time workers who want to work full time.

Near the end of the Great Recession, this measure of household financial distress was above 17 percent. The rate has been trending lower since late 2010 and it is now down to approximately 14.4 percent. This means that about 14 percent of working age people in this country are either unemployed, have dropped out of the workforce, or have part-time jobs.

Adding to the confusion about the economy is the puzzling disconnect between U.S. job creation and U.S. corporate profitability. Corporate after-tax profits stood at about $1.3 trillion before the Great Recession. As you would expect, corporate profits fell rather dramatically during the recession to $600 billion late 2009. This is a decline of over 50 percent. Since that time, corporate profits have increased dramatically, to about $1.7 trillion by 2011. This means corporate profits are nearly 25 percent higher than what they were before the recession, but we have not seen a commensurate rise in domestic employment.

Many people still think in terms of what ails the economy is cyclical in nature. In others words, a temporary situation and does not represent a fundamental shift in the economy. I hope I am wrong, but I think the employment-household income problem in the U.S. goes well beyond just getting our financial house in order. Even with the eventual reemployment of the workforce, a large percentage of those workers may never earn as much as they did before the Great Recession and medium household incomes in the U.S. will continue to stagnate as it has done for over a decade. Why?

Growth in international competition, the increasing prevalence of electronic automation, and the lessons learned during the Great Recession have caused a fundamental structural change in the U. S. economy. International competition is making it increasingly difficult for some American workers. People who have low levels of education and/or training are having a difficult time finding the jobs that would afford them a middle class lifestyle. We also see some evidence that white collar workers are also under pressure and being displaced by less costly foreign workers.

Further, it highly unlikely that the U.S. would risk a trade war over this issue. There are too many jobs in this country that are now dependent on foreign trade and corporations have a vested interest in not being shut out of foreign markets. Therefore, this is not going away and will be a fact of life for future generations. One of the great ironies of international competition is individuals with special talents or skills should be able to capitalize on a world market and earn huge returns. Some believe this has contributed to the record level of income disparity in our country.

In addition, the growing prevalence of electronics and automation also is contributing to the downward pressure on employment and median household income level. A lesson learned during the Great Recession was that workers can be replaced by technology. That in some instances, it is more efficient to employ capital than taking on the expenses associated with a new hire. This technology "genie" is never going to be put back into the bottle. So once again, I do not see an easy solution to this problem.

In the early 1900s, increased productivity on the farm displaced a large percentage of our labor force. Fortunately for this country, industrialization was also taking place in the cities and thus, these displaced workers were absorbed into our nation's factories. One wonders where today's workers will be absorbed and where they will be able to earn a middle class income. Will they find employment in the booming energy sector or the health sector? How will they fit into the new economic order? Despite what some politicians might say, no one has a convincing answer to these questions.

Randy Cray, Ph.D., is the chief economist at University of Wisconsin-Stevens Point's Central Wisconsin Economic Research Bureau.

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