The Financial Crisis

Economists at The New School bring a non-mainstream analysis – known within the field as 'heterodox' - to the fallout of the Great Recession. Their work focuses on the prospects for a more progressive economic order to emerge. This blog shares policy proposals to address short-term needs while placing current events in a long-term economic context. This includes an analysis of the monthly employment report by SCEPA Faculty Fellow Rick McGahey. 

CNN.comSCEPA Faculty Fellow Rick McGahey published an opinion piece on today, Where are the Good Jobs?" McGahey explains why the recent job growth has not led to wage growth. The 'weak wage growth puzzles economists. After all, as the labor market improves, workers should be able to get raises as employers compete for a tighter labor force.' McGahey lists four reasons for the suppressed wage growth:

  1. People are still out of work. In March labor force participation was 62.7%, the U.S. hasn't experienced a labor force participation this low since 1978.
  2. Job growth is too slow. It took 6 ½ to regain the jobs lost in the Great Recession.
  3. The jobs created pay worse that the jobs lost during the Great Recession.
  4. The suppressed wage growth is due to the long-term failure to share productivity gains between workers and businesses.

McGahey recommends that 'we won't see higher wages without two important policy changes: more government stimulus to create jobs, and changes in labor market rules to rebalance power between business and workers.'

Rick McGaheyby Rick McGahey, SCEPA Faculty Fellow

Read Rick's comments in today's International Business Times, "Unemployment Report: Six Years After The Great Recession, Are The Good Jobs Ever Coming Back?"

This morning's employment report for February continues the story of this recovery: job growth trending upward, but still lots of slack in the labor market, and no signs of inflationary pressure. Jobs are growing, but wages and hours are not, and many of the jobs are low-wage.

295,000 jobs were added in February, in line with the three-month average of 288,000. Over the past year, job growth has averaged 266,000 per month. The unemployment rate ticked down slightly to 5.5% from 5.7 in January; over the past year, the rate has fallen by 1.2%, so we are seeing an improving labor market. But the labor force participation rate remained essentially unchanged, and is stuck at its lowest level in 37 years.

Wages and hours also remain flat, tempering any interpretation that we have a booming labor market. Average hourly wages were up by three cents, and have only risen by 2% in the past year. And average hours worked also remained flat—in February 2015 hours were 34.6, only two-tenths more than one year ago.

So we are seeing some job growth. But it isn't very strong, and the jobs aren't very good. Labor force participation, wages, and hours all are signaling a labor market with a lot of slack, and no significant upward cost pressures. The Federal Reserve should not be considering raising interest rates when faced with these numbers.

rick mcgaheyby Rick McGahey, SCEPA Faculty Fellow

Employment for the first month of 2015 continued the steady growth from last year. 257,000 new jobs were added, and although the unemployment rate ticked up one-tenth of a percent to 5.7, that resulted from people entering the labor force to look for jobs—what economists call "labor force participation." Participation in December was at an historic low, so there's a long way to go to restore healthy levels there. 

Average hourly wages in January rose to $24.75, up half a percent from December (December's average wage rate actually declined). But wages are only 2.2% higher than one year ago. Weekly hours worked, however, were flat, at an average of 34.6 hours per week, the same as December, and virtually unchanged from last January's level of 34.4.

So jobs are being added at a steady pace—260,000 per month in 2014, the highest average monthly level since 1999. But the wage and hour data are not signaling any huge economic rebound or inflationary pressures. Make no mistake, this is still a lukewarm economy and labor market, and we are now 67 months into the recovery, above the 58-month average for recoveries since 1945. 

The weak wage and hour data are part of a longer running economic trend—declines in the "labor share" of GDP. The share of gross domestic income going to employee compensation peaked in 1970 at 58.4%, and has been on a steady decline since then. In recent years, that share rose to 55.3% in 2008, just before the Great Recession, falling to 52.1% in 2013. A weaker labor share means weaker overall consumption and consumer demand, and the economy will not grow strongly.

There are various theories about why the labor share has declined. Some blame technological substitution, especially the spread of information technology into all sectors of the economy. Other scholars emphasize the loss of good-paying jobs to trade and corporate outsourcing (NSSR Dean Will Milberg's recent book with Deborah Winkler makes a strong case for this). Labor share also is reduced by declining union power, and economic "financialization," as businesses retain profits, hoarding cash, buying back stock and paying dividends instead of making new productive investments. 

But all these factors pull in the same direction - a continuing shift in power towards business and away from labor. These longer-term forces are undercutting workers' bargaining power, so the steady job growth we are now seeing is not translating into higher wages. We need greater government investment to compensate for weak overall demand, and the Federal Reserve should not raise interest rates, as annual wage growth is very modest and well within their already conservative inflation targets.

rick mcgaheyby Rick McGahey, SCEPA Faculty Fellow

This morning's release of the November employment report is one of the strongest we have seen for some time. But a closer look at the underlying numbers, especially in historic context, shows a continuing weak labor market, with the labor share still playing second fiddle to profits and corporate dominance.

Total payroll employment grew by a very robust 321,000 jobs, with gains in virtually every major sector of the economy. The "diffusion index" which measures how growth is spread across sectors was 69.7 percent (50 percent would show half of all industries gaining jobs, and half declining). And the September and October jobs numbers were revised upwards by a total of 44,000, so we now have a three-month average jobs increase of 278,000 per month.

Average hourly earnings also rose, by nine cents per hour, to $24.66, the biggest monthly increase since June 2013. In the past twelve months, hourly earnings have risen by 2.1 percent. The only lagging jobs indicator is average hours worked, which at 34.6 hours per week is essentially unchanged from a year ago.

The unemployment data, based on household surveys, is less exciting. The unemployment rate (5.8 percent), labor force participation (62.8), and employment-to-population ratio (59.2 percent) were all essentially flat. In the next few months, if job and wage growth continues, we should see improvements in all three of those ratios.

Is it time to declare victory?

On October 3, 2014, SCEPA hosted a discussion with economist and author Thomas Piketty (included in economist Brad DeLong's blog as a "Must Watch"). Piketty's best-selling book, Capital in the Twenty-First Century, serves as a watershed example of the dual contradictions of capitalism and proves that the last century was characterized by a sharp divergence between social classes. He warns that the main driver of inequality—the tendency of returns on capital to exceed the rate of economic growth—threatens to generate extreme inequalities that stir discontent and undermine democratic values.

Much like Piketty's work, economists at The New School for Social Research strive to analyze the dynamics of capitalism using historical and empirical analysis and, through SCEPA, its policy implications. Following Piketty's remarks, New School Professor Anwar Shaikh and Executive Director and Chief Economist at the Washington Center for Equitable Growth Heather Boushey presented their own comments and joined in a panel discussion to answer the question, where do we go from here?

Speaker Presentations:
Thomas Piketty, Capital in the 21st Century
Anwar Shaikh, Inequality and Social Structure: Comments on Piketty
Heather Boushey, Comments on Piketty

by Rick McGahey, SCEPA Faculty Fellow

Rick McGaheyThis morning's May employment report continues the trend of slight improvement but subpar overall economic performance.  The unemployment rate stayed stuck at 6.3 percent while jobs increased by 217,000. So far in 2014, job creation has averaged 214,000 per month, and if that rate continues for the entire year, it will be the strongest year since 1999.

But it is still not a great number. True, if May’s job performance continues, then the Atlanta Fed predicts we will reach 5.5 percent unemployment in ten months. But any lowering in the unemployment rate is driven in part by weak labor force participation, which remains near its lowest level in over thirty years.

Heidi Shierholz at the Economic Policy Institute points out how weak our recovery remains, noting that we are six-and-one-half years away from the Great Recession’s start. If you take population growth since then into account, we still are short around 7 million jobs.

The ongoing weakness of the job market also can be seen in data on wages and hours worked. Over the last year, average hourly earnings have increased by 2.1 percent, virtually the same as the low two percent growth in overall inflation. And the average hours worked each week hasn’t increased at all in the past year. A tighter labor market should see increasing wages and hours, but we don’t have that, underscoring that many people still lack work, and employers aren’t hiring at a vigorous rate.

This month, we mark the five-year anniversary of the Great Recession’s technical end. Five years is a long time for an expansion; the eleven U.S. business cycle expansions in the post-World War II period have averaged 58.4 months, although more recent expansions have lasted longer. And other data point to macroeconomic weakness. Real GDP growth in the first quarter of 2014 actually fell by one percent, making the relatively consistent job gains this year harder to understand.

But policy makers feel no urgency for further economic stimulus. We are in danger of accepting slow job growth, wage stagnation, and inequality as a “new normal.” The U.S. should be borrowing more with today’s very low interest rates, creating jobs in infrastructure and public services, but instead we drift along with slow growth, low wages, and a lack of shared prosperity.

Rick McGaheyby Rick McGahey, SCEPA Faculty Fellow

April’s employment report is a strong one on its own terms. The unemployment rate dropped by almost half a percentage point, from 6.7 percent in March to 6.3 percent in April; this is the lowest rate since September 2008, when the economy was plunging into the Great Recession. And payroll employment leapt up by 288,000, the biggest gain since January 2012. So all is good, right?

There’s no denying the strength of these numbers, but several factors caution against a full-blown celebration just yet. First, the dramatic drop in the unemployment rate is due not only to job growth, but to continuing declines in the labor force. The measured labor force fell by 806,000 people between the March and April household surveys (the source of the unemployment rate), while that survey actually showed slightly lower total employment in April than in March.

So, based on the household survey alone, the drop in the unemployment rate was almost entirely due to the lower labor force. BLS Commissioner Erica Groshen says their analysis shows the lower seasonally adjusted rate mostly due to “fewer people entering the labor force than usual…” but that still underscores that April’s lower unemployment rate is more a function of fewer people looking for jobs than it is of vigorous job creation.

But what about that strong payroll employment number?

A recent study by SCEPA Faculty Fellow Willi Semmler and the Centre for European Economic Research's Frauke Schleer analyzes dynamics between economic downturns and financial stress for several euro-area countries.


Using a newly constructed financial condition index that includes banking variables, the authors examine leadership changes in countries that have high and low levels of financial stability and the ripple effects on the economy. They found that strong rippling effects appear to be related to large, but rare events, such as the financial crisis, and to a short business cycle. Prior to the financial crisis, economic shocks could be self-adjusting, even if the financial sector shock took place during a time of instability. 

As countries continue to struggle with the consequences of the 2007-2008 recession, the debate surrounding national debt is at the forefront of economic and foreign policy discussions. What is too much debt? Does debt inhibit a state's ability to recover from the recession?

In a recent SCEPA Policy Note on the impact of national debt on economic growth, Economists Christian Proaño, Willi Semmler and Christian Schoder discovered that at low levels of financial stress, when investments in banks and stocks carry low risk and the financial market is stable, national debt does not impact economic growth. Rather, they found that debt impacts economic growth when there are high levels of risk and uncertainty in the financial sector. Therefore, economic growth depends first on financial market stability, and is only affected by debt if financial markets are unstable. These findings contradict the highly cited 2010 Reinhart and Rogoff study - now identified as having coding errors - which posited that despite all other factors, economic growth will decline if debt is 90% of a state's GDP.

Rick McGaheyby Rick McGahey, SCEPA Faculty Fellow

After two months of very weak employment data, today’s report for February is a little more encouraging, or at least doesn’t continue the negative trend. The economy added 175,000 jobs, better than the consensus forecast of 149,000, and the unemployment rate bumped up slightly to 6.7 percent. The January jobs number also was revised upward, so the rolling average of the past three months now stands at 126,000 additional jobs per month.

But just to put these numbers in perspective, even we get 175,000 new jobs every month, it will take slightly over two years to reach a relatively full employment rate of 5.5 percent unemployment. And those 175,000 jobs in a month is lower than the average monthly figure for all of 2013, so it isn’t a number that should satisfy policy makers.

So this is not a strong employment report, especially at this stage of the business cycle. The bottom of the Great Recession was reached in June 2009, and we are now over four and a half years into a very weak and slow recovery.

One persistent factor that is holding growth back, and will continue to hold it back, is contracting government spending. The original federal stimulus in response to the Great Recession was never large enough to address the problem; at the time, several economists, including analysts at Goldman Sachs and elsewhere, were calling for a stimulus two to three times higher than we actually got. And even that federal spending was partly offset by state and local government budget cuts.

Throughout this anemic recover, the debate in Washington has been driven by the right-wing Tea Party faction of the Republicans, who insist on continuing budget cuts rather than stimulus and expansion. And they have been winning.

President Obama’s just-released budget for fiscal year 2015 starting in October noted that the budget deficit is coming down, to a projected 3.7 percent of GDP, the lowest figure in five years. But that deficit reduction is part of our economic problem, especially because it has been achieved mostly by cutting spending, which slows the economy.

Since 2009, federal spending has shrunk by 4.1 percent, while tax revenues increased by 2.2 percent from economic growth and some recapture of the Bush tax cuts for the wealthy. As the Washington Post points out, “To put it another way, there have been nearly $2 in spending cuts for every $1 in revenue increases. On the surface, it would appear that the Republicans won the budget wars.”

The Tea Party’s grip on policy isn’t just budgetary. Although Obama is now arguing strongly for federal policies to attack inequality, there is no prospect that he will get legislative support for those, whether it is significantly higher infrastructure spending, a long-overdue increase in the minimum wage, expanding the earned income tax credit for low-income people, or increase education aid from preschool to college. Paul Ryan, one of several potential Republican candidates for President, dismissed Obama’s budget as “a campaign brochure,” signaling another round of seemingly endless Washington budget battles.

While the Tea Party holds sway in Washington, the budget fight will continue to be about further reductions, not stimulus or investment. That means little or no federal stimulus for our anemic economy. And that very likely means slower economic growth, lost output, higher unemployment, slower wage growth, and unnecessary hardship for millions of Americans.