September 2, 2005

September 2, 2005 | WebMemo on Economy

Labor Day Review: In Katrina's Wake

Hurricane Katrina destroyed one of America's largest cities, and the economic damage to the national economy is bound to be severe. Americans can be thankful that the storm hit when American economic strength is at a peak, as today's new employment figures from the Labor Department attest. The natural disaster is unlikely to become an economic disaster, unless Congress overreacts with efforts to control prices or otherwise manage the economy. With more Americans working than ever before and unemployment declining to its lowest rate in 4 years, 2005 is proving to be a year of tremendous strength. The year 2005 is also full of milestones, which we review here as part of a Labor Day recap.


Expanding Labor Force - Unlike many advanced industrial economies, the U.S. workforce is continuing to grow dramatically. In the years of the 21st century, the size of America's labor force has grown from 143.3 million to 149.8 million, a net increase of 6.5 million workers, or 4.5 percent. In the last year, the labor force has grown by 2.2 million, while total employment is up 2.8 million.


The Jobs Data Controversy - The Labor Department offers two main indicators of job creation, as we have discussed many times.[1]This month, the payroll survey shows a net increase of 169,000 jobs. Repeating a common pattern of recent years, the household survey's measure of total employment growth is twice as high, at 373,000. The 3-million-job creation gap between surveys that has appeared in recent years defies explanation, according to the Bureau of Labor Statistics and many other experts. But it is clear that the more positive numbers are supported by other data: (1) high GDP growth rates, (2) higher than expected tax revenues, (3) low jobless claims, (4) the declining unemployment rate, and (5) surging net jobs in the new Business Employment Dynamics series.


Disintegration of the AFL-CIO - This summer, on the 50th anniversary of its union, the AFL-CIO suffered a sharp break in its ranks. Two major unions, the SEIU and Teamsters, divorced themselves from the larger coalition. This break comes on the heels of news that less than 8 percent of the private sector U.S. workforce is unionized, and a majority of non-union workers polled declared no interest in ever joining a union. Union membership remains compulsory and coerced in many states, but the unions' power is waning. The interesting cause of organized labor's demise is perhaps earlier victories-the vast majority of Americans are now empowered and skilled to the extent that they do not need collective bargaining. Roughly 98 percent of U.S. workers earn more than the minimum wage, while health care, savings plans, stock options, and profit sharing are common. The challenge to organized labor, newly diversified, is not about marketing their old policies or organizing better, but rethinking what workers really want. One hopes such thinking will foster a rebirth of unions to better reflect the modern, entrepreneurial workforce.


The False Alarm of Outsourcing - The mania of outsourcing as a destroyer of jobs was a major story in 2003 and 2004, but after years of increasing employment figures, that mania has proven to be a paper tiger. Outsourcing as an aspect of globalized trade and investment is indeed a real phenomenon, but it is neither a large or harmful phenomenon. And so far, no one is complaining about the foreign companies that employ Americans.


Overtime Reform a Success - A year ago, on August 24, 2004, the Department of Labor's streamlined overtime regulations became law. Amazingly, the media has been silent on the actual effect of the law, after running many stories quoting the Economic Policy Institute's prediction that "six million workers would lose overtime eligibility."[2] One year later, where are those six million aggrieved laborers? In fact, the simplification and updating of the law meant better guarantees of worker protection and fewer opportunities for frivolous lawsuits.


States Experiment with Minimum Wage - Congress has bravely refused to raise the minimum wage for 9 years now, passing on a 41 percent hike that Senator Ted Kennedy (D-MA) proposed earlier this year. Congressional inaction is motivated by the fact that average pay has been rising during the last nine years, poverty is down, and a broad consensus of economists agree that the existence of the minimum wage causes higher unemployment among lower-skilled workers. Seventeen states have taken the matter into their own hands and raised minimum wages locally, and so the relative performance of those states in the next few years is likely to confirm their folly. One question nags, however: Why does the law grant states the freedom to raise the minimum wage but deny the freedom to lower it?


These milestones should not obscure other long-term trends that are gently reshaping work. Manufacturing employment continues to ebb, even as industrial output rises to new heights. National wealth surges, but economic anxiety remains high. Consumer confidence, already rattled by a summer spike in oil and gas prices, is likely to become even more rattled in the aftermath of hurricane Katrina. Congress will be under increasing pressure to raise barriers against foreign trade and foreign labor and probably to control prices in a wrong-headed effort to prevent gouging and find stability. These misguided responses must be resisted, or else a natural disaster in 2005 will trigger an economic disaster in 2006.


Tim Kane, Ph.D., is Bradley Research Fellow in Labor Policy in the Center for Data Analysis at The Heritage Foundation.

[1] See, e.g., Tim Kane, Ph.D., "Diverging Employment Data: A Critical View of the Payroll Survey," Heritage Foundation Center for Data Analysis Report No. 04-03, March 4, 2004, at

[2]See, e.g., Stephen Greenhouse, "Overtime rules dispute is a numbers game," The New York Times, August 31, 2004, p. A12.

About the Author

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