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WebMemo #440 on Taxes

March 5, 2004

March 5, 2004 | WebMemo on Taxes

Employment, Unemployment, and the Puzzle of Payroll Anemia

Today's release from the Bureau of Labor Statistics, showing job gains of 21,000, reflects stability in the labor market but came in below most economists' expectations. Though by all other measures the economy is strong, job growth has been slower than expected over recent months. But is this really a "jobless recovery?" Or is a fundamental restructuring in several sectors of the economy changing the rules of game, for the overall benefit of most workers and consumers?

 

The Numbers, in Perspective

Today's numbers are below consensus forecasts, which expected about 125,000 new jobs to have been created. Employment increased by 21,000, and the unemployment rate held steady at 5.6 percent, which is low by historical standards. The average rate for the first quarter of 2004 promises to be about 5.6 percent, significantly below that of the fourth quarter of 2003. Looking at the big picture, trends in unemployment continue to move in the right direction.

 

While the economy is strong, even booming in some sectors, employment has only slightly increased. GDP growth in the fourth quarter of 2003 was 4.1 percent, strong by any measure. Business investment and exports surged in the quarter, up by 15.8 and 21.0 percent, respectively. Even pessimistic economists agree, the economy is anything but "stagnant."

 

Changing Times

So why has job growth been so slow? One factor may be that certain structures of the economy are changing. The sectors that have failed to rebound are in a period of a transition. For example, despite strong growth in manufacturing output, that sector will never employ the numbers that it once did. Strong productivity growth for several quarters is evidence of this fundamental shift. Still, this news is positive for most workers in America. The increase in productivity means lower prices and greater value for consumers; in other words, workers have greater purchasing power than in the past. Higher productivity often leads to higher wages, which have already increased by almost 1 percent since December. And because inflation is low, these gains are not nominal -- workers really are better off.

 

Reflecting these changes, the nature of unemployment has shifted, as well. Fewer workers are unemployed due to layoffs or downsizing. Most unemployed now are new entrants to the labor force and reentrants who have been out of the workforce for some time. It is also telling that the number of workers working part-time for "economic reasons," as the BLS puts it (that is, they are unable to find full-time work), has fallen by nearly 400,000 since November. While it may be tough for the unemployed to find new work, those working are less likely than before to lose their jobs and more likely to see their wages or hours increase.

 

The Bottom Line

As last month's strong GDP numbers show, the President's tax cuts are doing almost exactly what economists expected: business investment is booming, consumer demand and exports are strong, and the economy has grown considerably. What has been puzzling, though, is that these gains haven't translated into similarly rapid employment growth. Worth considering is whether some industries, such as manufacturing, have changed their patterns of employment. If this transition turns out to be the case, while some workers will experience hardships many more workers will benefit in the long-term.

 

What the government should not do is to make it more difficult for these industries to adapt themselves to the changing business environment. In terms of regulations, economic policy, and tax policy, firms need the greatest flexibility possible to make necessary changes, boost their competitiveness, and, ultimately, grow. One piece of this would be to make the President's tax cuts permanent, so that businesses face less uncertainty when they invest in new equipment, facilities, and workers. Another would be to cut the corporate tax rate or reform international taxation, both of which have been proposed as replacements for the FSC/ETI tax system.

 

Alison Acosta Fraser is Director of the Thomas A. Roe Institute for Economic Policy Studies, and Rea Hederman, Jr., is Manager of Operations of the Center for Data Analysis, at The Heritage Foundation.

About the Author

Alison Acosta Fraser Senior Fellow and Director of Government Finance Programs
Domestic and Economic Policy

Rea S. Hederman, Jr. Director, Center for Data Analysis and Lazof Family Fellow
Center for Data Analysis