October 7, 2004

October 7, 2004 | WebMemo on Economy

Framing the Economic Debate

The U.S. economy has displayed a remarkable resilience following the bursting of the Internet bubble and the 9/11 terrorist attacks that struck at the heart of American business. The economy's strength was such that the 2001 recession is among the weakest on record. Today, business investment continues on an unprecedented expansion and more Americans are working than ever before. Still, myths are rampant. This paper presents a basic statistical overview of the American economy and prosperity that Americans today enjoy.

 

I. Jobs, Employment, and Income

 

There are three main indicators that inform the issue of employment in America. First is the overall growth of jobs. Naturally, a net increase in employment is seen as progress, but this statistic really only matters if the population is growing. Economists have long believed that the key measure of employment is the percentage of people who are employed out of the entire population of potential workers. Many citizens simply don't want to work in the formal labor force, either because they are studying for advanced degrees, retired, or caring for other matters in the home. Thus, the unemployment rate is the best way to assess economic health. And another indicator to watch is labor compensation, which represents the quality of jobs for many observers.

 

Jobs: Payroll or Household?

The government provides many measures of job creation, but the two best known come from the Bureau of Labor Statistics payroll survey and the Census Bureau household survey. As widely reported, the two surveys are telling opposite stories.

 

  • Since January 2001, when President George W. Bush was sworn in, payroll jobs have declined by millions and recovered by millions, but still remain 900,000 jobs below their peak. (Source: Bureau of Labor Statistics)
  • On the other hand, the household survey reports a record high level of working Americans, with 1.8 million more jobs since January 2001. (Source: Bureau of Labor Statistics)

Ironically, both surveys may be correct because they count jobs differently. The household survey counts all jobs, including a growing but hard to define class of new economy workers such as part-time consultants, eBay entrepreneurs, and even real estate agents-people who are not on payrolls. The payroll survey's name says it all. What it doesn't say is that payrolls provide a vast sample size, which some see as a sign of its unmatched accuracy. But the real question is whether its sample quality is clean, and in August, the BLS acknowledged that the survey has sample problems: it counts workers twice when they change jobs, which may account for between 400,000 and one million of the job difference between the two surveys. (See BLS, "Effects of Job Changing on Payroll Survey Employment Trends.")

The Worst Job Record Since Hoover?

 

Unemployment and the Recession

  • Unemployment, a lagging indicator, remained mild throughout and after the 2001 recession, peaking at 6.3 percent. In contrast, unemployment peaked at 7.8 percent following the 1990 recession. (Unemployment exceeded 6.3 percent for 40 months following the 1990 recession). And unemployment peaked at 10.8 percent following the 1980 recession. (Source: Bureau of Labor Statistics)
  • An unemployment rate of 6.3 percent, the peak following the 2001 recession, is lower than the average unemployment rate for the 1980s and less than one point higher than the average unemployment rate for the 1990s. (Source: Bureau of Labor Statistics)


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Dissecting the Unemployment Rate

The unemployment rate is the preeminent measure of the intensity of labor demand. When the rate dips below what economists consider the "full-employment" rate of around 5 or 5.5 percent, then the labor market is likely overheating, driving up inflation.

 

But some critics contend the current low rate of 5.4 percent is a mirage because it neglects to include all the discouraged workers. The problem with that argument is the fact that BLS counts discouraged workers and even publishes an alternative "underemployment rate" called U-4, which is barely higher than the official rate. There are no more discouraged workers today then there were in the mid-1990s.

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Labor Force Participation

The fallback critique is that labor force participation has declined from a peak of 67.2 percent in January 2001. That's true, but most of the decline was due to 9/11, not the recession. It was 66.8 percent in October 2001, then 66.0 percent in August 2004. Analysts need to consider the reality that labor supply has changed, not just labor demand. Two other points illuminate:

  • First, the participation rate of women over 20 is the same as it was in 1997 and higher than every year prior. (Source: Bureau of Labor Statistics)
  • Second, the decline in total participation rates since 2001 is largely driven by the unprecedented dropoff in teenagers aged 16-19 who are willing to work, from 52 percent in 2000 to 43 percent in 2004. (Source: Bureau of Labor Statistics)

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Unemployment Claims

  • Initial claims announced this week were at 335,000, and the 4-week moving average is 348,500. (Source: Bureau of Labor Statistics)
  • The 25-year average of initial claims is 380,520. (Source: Bureau of Labor Statistics)
  • The Wall Street rule of thumb is that any level of claims below 400,000 signifies labor market strength. (Source: The Wall Street Journal's Career Journal)

Real Earnings

Worker pay is a sign of job quality. The Labor Department's measure of real hourly earnings is one of many pay statistics and includes all monetary compensation but not benefits. It only counts earnings for non-executive workers, unlike other measures.

  • During the 1980 and 1990 recessions, real hourly earnings declined. (Source: Bureau of Labor Statistics)
  • But even during and after the 2001 recession, real earnings have risen-by 2 percent since the recession began in March 2001. (Source: Bureau of Labor Statistics)
  • Real earnings are higher now than at the height of the dot-com boom in 2000. (Source: Bureau of Labor Statistics)

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Manufacturing

  • Jobs in manufacturing are on the decline worldwide, due to new technology, increasing productivity, and strong competition. From 1995 to 2002, worldwide manufacturing employment declined 11 percent-which matches the decline of manufacturing employment in the United States over that period. (Source: Alliance Capital Management)
  • Even in China, employment in the manufacturing sector has fallen-by 15 percent from 1995 to 2002. (Source: Alliance Capital Management)
  • Regardless, manufacturing in the United States has rebounded strongly of late. Production is rising quickly, and employment reversed its decline in February of this year and is now expanding.

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II. Economic Growth

 

  • The economy, as measured by real Gross Domestic Product, grew at a 3.3 percent rate in the second quarter of 2004, following a high 4.5 percent growth rate in the first quarter. (Source: Bureau of Economic Analysis)
  • Growth in 2003 was similarly charged, coming in at a 4.4 percent annual rate.
  • The average growth rate during the 1990s was 3.26 percent, just under the last quarter's rate of growth and well below the growth rate for 2004 so far.

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Tax Cuts and Business Investment

The 2003 tax cuts reduced taxes on business investment. When businesses invest in facilities, equipment, computers, software, and other inputs, they make clear their belief that future growth will be strong and they create the preconditions for economic expansion and job creation.

  • Business investment contracted at a 1.14 percent annualized rate over the 14 quarters prior to the 2003 tax cuts. (Source: Bureau of Economic Analysis)
  • Business investment grew at a 13.03 percent rate over the 3 quarters following the 2003 tax cuts. (Source: Bureau of Economic Analysis)

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III. Outsourcing and Insourcing

 

  • Forrester Research estimates 3.5 million outsourced jobs between 2000 and 2015. (Forrester Research)
  • Over the past decade, 7.71 million jobs, on average, are lost every quarter as part of the normal flux of the economy. Forrester's estimate would account for less than one percent of the jobs lost each quarter, on average. (Source: Department of Labor, Business Employment Dynamics Data Series; Forrester Research)
  • Today, more than 5.4 million jobs in America are the result of insourcing-that is, they have been outsourced from abroad into the United States. (Source: Organization for International Investment)
  • Annually, these insourced jobs account for $307 billion in wages and salaries. (Source: Organization for International Investment)
  • Insourced jobs pay, on average, 19.1 percent more than the average job in the United States. (Source: Organization for International Investment)
  • In the first quarter of 2004, just 4,633 workers were laid off as a result of offshore outsourcing due to mass layoffs-about 2 percent of total mass job layoffs. (Bureau of Labor Statistics, "Extended Mass Layoffs Associated With Domestic and Overseas Relocations")
  • In terms of the industries affected and positions potentially at risk, the use of outsourcing has changed little over the past five years. In other words, this is no rapidly accelerating trend. (Source: Government Accountability Office, "International Trade: Current Government Data Provide Limited Insight into Offshoring of Services")
  • The United States exports more business, technical, and professional services than it imports (and offshore outsourcing of service work is synonymous with importing those services). In 2003, the trade surplus for these services was $27.0 billion. (Source: Bureau of Economic Analysis, "Survey of Current Business")

IV. Health Care

The Uninsured

  • According to the U.S. Census Bureau, 44.9 million Americans went without health insurance for some part of 2003.
  • The typical family that loses coverage is uninsured for 5.6 months on average. (Source: U.S. Census Bureau, "Dynamics of Economic Well-being: Health Insurance 1996-1999")
  • Only 3.3 percent of all Americans went without some kind of health insurance for four or more years. (Source: U.S. Census Bureau, "Dynamics of Economic Well-being: Health Insurance 1996-1999")
  • In 1996, some 8.8 percent were without health insurance for the entire year, a figure that dropped to 8.0 percent by 1999. (Source: U.S. Census Bureau, "Dynamics of Economic Well-being: Health Insurance 1996-1999")
  • 78.2 percent of all Americans had health insurance for the entire year in 1996, which rose to 80.4 percent by 1999. (Source: U.S. Census Bureau, "Dynamics of Economic Well-being: Health Insurance 1996-1999")
  • Medicaid enrollment has grown in recent years but is undercounted by the Census survey of the uninsured. Census counts 18 million fewer enrollees than the Centers for Medicare and Medicaid Services. (Source: U.S. Census Bureau and HHS program data)

Health Savings Accounts

  • Health Savings Accounts (HSAs) were enacted as part of the Medicare Modernization Act of 2003. They came into effect on January 1, 2004.
  • The majority of HSA enrollees pay between $51 and $100 a month for coverage, far less than for other types of individual insurance.
  • Early experience shows major cost-savings for small businesses. Some small businesses have been able to cut their health coverage expenditures by 20 percent using HSAs, while holding employee out-of-pocket expenses steady and actually improving the level of care.

V. Poverty

 

The 2001 Recession

  • The poverty rate for 2003 was recently published and stood at 12.5 percent, which is higher than in recent years, but still better than the poverty rate in 1998 of 12.7 percent and the poverty rates of the fifteen years prior. (Source: Census Bureau)
  • Poverty always rises with recessions, but the increase in poverty stemming from the most recent recession was about half the increase from each of the previous two recessions. (Source: Census Bureau)
     
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In previous recessions, child poverty increased significantly, but the most recent recession affected child poverty little. The 1980 recession caused a 5.5 percentage point jump in child poverty. The 1990 recession caused a 2.7 percentage point jump in poverty. The 2001 recession, in contrast, caused only a 1.6 percentage point rise in child poverty. (Source: Census Bureau)
 
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Poverty in America

  • More than half of all poverty "spells" (time spent in poverty) last less than four months, and about 80 percent last less than a year. (Source: U.S. Census Bureau, "Dynamics of Economic Wellbeing: Poverty 1996-1999")
  • Very few people-only about 2 percent of the total population-are chronically poor in America, as defined by living in poverty for four years or more. (Source: U.S. Census Bureau, "Dynamics of Economic Wellbeing: Poverty 1996-1999")
  • About 13 percent of poor families and 2.6 percent of poor children experience hunger at some point during the year. In most cases, their hunger is short-term. Eighty-nine percent of the poor report their families have "enough" food to eat, while only 2 percent say they "often" do not have enough to eat. (Source: U.S. Department of Agriculture, "Household Food Security in the United States")
  • About 38 percent of all households in the lowest income quintile (that is, the bottom 20 percent of earners) rose to a higher quintile within three years. An almost equal percentage (34 percent) of all households in the top quintile fell within three years. (Source: U.S. Census Bureau, "Dynamics of Economic Well-being: Movements in the U.S. Income Distribution 1996-1999")

Income Inequality

  • By the uncorrected Census numbers, the top 20 percent of earners, or top quintile, appear to have $14.20 of income for every $1 of income that the bottom 20 percent earn. (Source: Census Bureau, Current Population Survey for 2002)
  • But the Census figures do not account for benefits-employer- and government-provided-and taxes, differing household sizes between the quintiles, and differing work habits between the quintiles.
  • Accounting for benefits and taxes, the income ratio between the top and bottom quintiles drops to $8.60 for every $1. (Source: Census Bureau, Current Population Survey for 2002; Center for Data Analysis)
  • Accounting additionally for household sizes, the income ratio between the top and bottom quintiles drops to $4.21 for every $1. (Source: Census Bureau, Current Population Survey for 2002; Center for Data Analysis)
  • Finally, accounting additionally for hours worked (that is, making the assumption that all non-elderly adults work equal amounts), the income ratio between the top and bottom quintiles drops to $2.91 for every $1. (Source: Census Bureau, Current Population Survey for 2002; Center for Data Analysis)
     
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Poverty and Taxation

  • Households in the top income quintile provide one-third of all labor in the economy. (Source: Census Bureau, Current Population Survey for 2002)
  • Households in the top income quintile pay 82.5 percent of total federal income taxes and two-thirds of federal taxes overall. (Source: Congressional Budget Office, "Effective Tax Rates Under Current Law")
  • Households in the bottom income quintile pay 1.1 percent of total federal taxes. (Source: Congressional Budget Office, "Effective Tax Rates Under Current Law")
  • Nearly forty million tax filers, about one-third of the total, pay no income taxes. Nearly all of these zero-tax filers are low-income individuals and families. Many of them actually receive money for filing taxes, through the child tax credit or the earned income tax credit. (Source: The Tax Foundation)

VI. The Tax Cuts

 

  • The expanded child tax credit, which was recently extended by Congress and the President, benefits the parents of over 47 million children. (Source: Center for Data Analysis)
  • In 2001 and 2003, Congress and the President cut taxes on married couples to reduce the "marriage penalty"-the premium that married couples paid in taxes above what the couple would have paid had they filed separately.
  • Congress and the President extended the marriage penalty fix in 2004, benefiting 33 million joint-filing couples-mostly couples in which both spouses work and the second earner contributes at least 30 percent of total income. (Source: Center for Data Analysis)
  • In 2001, Congress and the President created a new 10-percent tax bracket for low-income workers, reducing their marginal tax rate from 15 percent. In 2003, Congress and the President expanded the 10-percent bracket, and in 2004 Congress and the President extended the 2003 expansion, which was due to expire. That extension will benefit 80 million taxpayers. (Source: Center for Data Analysis)
  • The Bush tax cuts, even if made permanent, return the tax burden to its historical level as a proportion of the economy. (Source: Congressional Budget Office)

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  • Allowing the Bush tax cuts expire would raise the tax burden to historically unprecedented levels. (Source: Congressional Budget Office)

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VII. Conclusion

 

The economy has added more than 1.5 million payroll jobs over the past year and nearly 2 million jobs on the household survey. Most indicators point towards continued growth. Output is booming, the manufacturing outlook is positive, business confidence is high, and productivity continues to set records. Even such favorites among economic pessimists like data on long-term unemployment, manufacturing employment, and worker discouragement are showing marked improvement. Unfortunately for the pessimists, these are the facts that frame the debate on the economy today.

 

Tim Kane, Ph.D., is Research Fellow, Rea S. Hederman is Senior Policy Analyst, and Kirk Johnson, Ph.D., is Senior Policy Analyst, in the Center for Data Analysis at The Heritage Foundation.

About the Author

Tim Kane, Ph.D. Visiting Fellow
Center for Trade and Economics (CTE)

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

Kirk A. Johnson, Ph.D. Visiting Fellow
Center for Data Analysis