May 5, 2006 | WebMemo on Economy
Many Americans are getting conflicting messages about the current state of the economy. They know that their family's financial situation has improved over the past four years, but when they read the news or turn on the television they find stories about sub-par job growth and stagnant wages. Many commentators appear to agree that America's economic engine has stalled. These commentators are wrong. Beyond the headlines, the data reveal that America currently enjoys one of the strongest economies of the past three decades. Today, unemployment is at 4.7 percent, well below the historical average, and compensation for workers has risen faster than during the previous economic recovery.
Unemployment at Historic Lows
The current recovery has created jobs for virtually every American who wants one. Only 4.7 percent of Americans are unemployed, well below what economists historically consider the "natural rate" of unemployment. With the exception of the tech bubble economy of the late 1990s, unemployment has not dipped below 4.7 percent since the first quarter of 1970. (See Chart 1)
Those skeptical of America's current economic strength discount the low unemployment rate and point instead to the 4.8 million new jobs the economy has created since August of 2003-a relatively sluggish rate for a recovery.
What the Facts Say about Employment
Since the first quarter of 2000, many Americans have left the labor market. As a result, the fraction of the population in the labor force, also known as the labor force participation rate, declined. Critics argue that the unemployment rate masks the underlying weakness of the job market. The unemployment rate is low, they suggest, because jobless Americans are not seeking employment due to a lack of available jobs.
This explanation may make some sense intuitively, but the facts do not support it. The government asks people not looking for work if they stopped searching because they believed no jobs were available. For the past two years, the number of the "discouraged" workers dropped even as the unemployment rate fell. Fewer potential workers report not looking for jobs out of discouragement than at the same point during the recovery from the 1990-91 recession. The facts simply do not support the belief that poor job prospects have led workers to drop out of the labor force, thus artificially lowering the unemployment rate.
The evidence shows that labor force participation rates primarily fell because fewer young Americans want to work. Only teenagers, and to a lesser extent 20-24-year-olds, show a large drop in labor force participation rates. Chart 2 shows the decrease since 2000 in the percentage of Americans seeking employment by age group. The drop in youth job seekers explains almost eighty percent of the drop in labor force participation rates since 2000. Contrary to the image of a weak economy not generating jobs, more Americans over 55 work in jobs today than did six years ago.
In fact, researchers at the Federal Reserve Bank of Chicago found that a weak economy does not explain the drop in teenage participation rates. If it did, "we would expect to see that the industries that have traditionally hired teenagers had fallen on hard times, disproportionately impacting teenage work activity. However ... the top five industry employers of teenagers, accounting for almost half of all 16 year olds to 19 year olds employed in 1999, have together experienced employment growth well above the national average." Rather than being unable to find work the data indicate that increasing numbers of young Americans have decided to stay in high school or go to college instead of entering the workforce.
With unemployment at only 4.7 percent, employers have hired almost everyone looking for a job. This low rate demonstrates the underlying strength of the economy, not its weakness. The rate suggests that more Americans are delaying work and income until they leave school. This will lead to an even stronger economy in the future because education holds the key to opportunity in the knowledge economy
Workers Compensation Rising
In addition to downplaying low unemployment rates, many commentators argue that wages have not kept pace with inflation, and as a result American workers' spending power has fallen. A closer look at the breakdown of wage and compensation growth since 2000 tells a very different story.
To be accurate, workers' total compensation must measure other benefits such as health and dental care, sick leave, vacation time and holiday leave, as well as retirement and savings plans. Using wages as the sole measure of economic prosperity leads to incomplete conclusions. The facts do not support the popular notion that stagnating wages and increasing healthcare costs have lead to a "wage squeeze."
According to the Bureau of Labor Statistics' Employment Cost Index (ECI), workers compensation has clearly increased over the past five years. While real wages have only increased by one and a half percentage points, total paid benefits have increased rapidly. Employer provided benefits increased 14 percent between the peak of the last cycle and today, far more than the nine percent rate of benefit growth at this point in the recovery from the 1990-1991 recession. Overall, workers total compensation has risen five percent this cycle, compared to less than four percent during the last cycle.
Chart 3 clearly shows the added benefits being offered to employees by their employers. Workers now receive more paid vacation days, better healthcare plans, extra sick days and other forms of compensation that enhance their well-being.
Non-Health Care Benefits Also Rising Substantially
These increased benefits do not simply represent rising healthcare costs instead of additional benefits to employees. As a measure of labor costs, the ECI does not break down employer benefits into separate components. However, the Employer Costs for Employee Compensation data (ECEC) provide a more detailed breakdown of overall compensation and also controls for pay differences in newly created jobs. Unlike the ECI, the ECEC will report lower average compensation if the recovery primarily created jobs in low paying sectors of the economy.
A review of total benefits allocated to compensation shows that, even excluding health care, total employee benefits have risen substantially.
The ECEC shows
worker compensation rose even faster than the ECI did, indicating
that the recovery created significant numbers of jobs in
high-paying sectors of the economy. Total benefits paid to private
sector workers have increased 14 percent since 2001. Benefits
excluding healthcare grew by more than 10 percent during this
compensation excluding health benefits increased by almost five
percent-much stronger growth rates than during the recovery from
the 1991 recession. This recovery has left workers far better off
than the last cycle did (Chart 4).
The argument that wages are being devoured by rising healthcare costs bears little truth after taking a closer look at the numbers.
Now at the beginning of a fifth year of economic expansion, Americans have every reason to be optimistic about the future of the economy. Unemployment stands at only 4.7 percent while total compensation has risen at a faster rate than it did after the 1991 recession, even after accounting for higher health care costs. While labor force participation rates have declined, this is not the calamity that some pundits suggest. Instead, young Americans are now more and more willing to forgo immediate earnings and invest in their futures by remaining in school longer. Those cynics who argue that the current recovery is not benefiting the average citizen are off the mark. Congress should make permanent the pro-growth tax provisions of the 2001 and 2003 tax cuts to keep Americans working.
Hederman is Senior Policy Analyst, James Sherk is Policy
Analyst, and Samuel Hyman is Research Assistant, in the Center for
Data Analysis at The Heritage Foundation.
 The Bureau of Labor Statistics defines discouraged workers as individuals who are not looking for jobs because they believe no work is available for them, because they tried but could not find work, because they lack schooling, or because they face discrimination.
 Author's analysis of data from the Department of Labor, Bureau of Labor Statistics, "Employment and Earnings," Tables A-13 and A-22, May 5, 2006 at http://ftp.bls.gov/pub/suppl/empsit.cpseea13.txt and http://ftp.bls.gov/pub/suppl/empsit.cpseea22.txt (May 5, 2006). Calculations are available upon request.
 Daniel Aaronson, Kyung-Hong Park and Daniel G. Sullivan, "The Decline in Teen Labor Force Participation" Economic Perspectives, 2006
 Department of Labor, Bureau of Labor Statistics, "Employment Cost Index," Table 1, May 5, 2006 at http://www.bls.gov/news.release/eci.t01.htm (May 5, 2006). All series deflated using the Bureau of Labor Statistics Consumer Price Index Research Series. Dates compared are Q2-1990 to Q2-1995, and Q1-2001 to Q1-2006.
 Author's analysis of data from the Department of Labor, Bureau of Labor Statistics, "Employer Costs for Employee Compensation," March 16, 2006 at http://www.bls.gov/news.release/ecec.t01.htm (May 5, 2006).