The nation celebrated an important economic milestone recently when the Labor Department reported that the economy had recouped the 8.7 million jobs lost in the Great Recession.
With the addition of 217,000 jobs in May, payroll employment exceeded the pre-recession peak of 138.5 million jobs for the first time in nearly five years of economic recovery. But there was a hitch: The lost jobs were much better paying jobs than those that replaced them.
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While it is no secret the recession wiped out millions of higher paying jobs and forced many former middle class workers into second-rate jobs, the longer term effects of this phenomenon could pose obstacles to continued economic growth, enhanced consumer confidence and increased consumer spending.
The jobs that vanished in manufacturing, construction, retail trade and other sectors paid an average annual wage of $61,637, according to a new U.S. Conference of Mayors analysis. By contrast, the replacement jobs, in health care, the food and hotel industry and the service industry, pay on average $47,171 per year, according to the report.
This means that millions of Americans who lost their jobs and struggled to find new ones are now accepting a lower standard of living – but there could be even more profound implications in the long run. The 23 percent “wage gap” documented in the new study amounts to an estimated $93 billion of lost wages – a substantial chunk of change and nearly double the 12-percent gap during the 2001-2002 recession.
“While the economy is picking up steam, income inequality and wage gaps are an alarming trend that must be addressed,” said Sacramento Mayor Kevin Johnson, president of the U.S. Conference of Mayors.
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The numbers are troubling. Average household income declined by 3 percent, while median income fell 5.5 percent between 2005 and 2012, according to the mayors’ report.
The study forecasts that middle income households “will continue to fall behind as higher income levels capture a greater share of income gains.” Median household income is projected to increase by 2.5 percent in nominal dollars in 2014 and then by 3.8 percent per year between 2015 and 2017, according to the study. But average income will rise at a slightly higher pace, adding to the growing income inequality.
James Diffley, senior director of IHS Global Insight and chief author of the new report, said in an interview that even with the economy and job market showing steady improvement, “households are more cautious” and consumer spending is “still weaker than one would expect” because of the impact of yawning wage gap.
“We recovered all those jobs, but they’re at lower incomes so consumer spending is lower,” Diffley said. “So it contributes to the slow pace of recovery compared to the typical rate of recovery.”
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Consumer spending has been erratic over the past year or two, though it increased at a relatively robust 0.4 percent in June on a seasonally adjusted basis following slower increases of 0.3 percent in May and 0.1 percent in April, according to the Commerce Department.
Harry J. Holzer, professor of public policy at Georgetown University and a former chief economist at the Department of Labor, said today, “If the wage gap were only limited to the formally unemployed, I wouldn’t worry about it too much, and it might not even last, because as the recovery gains strength we might see more people in [better paying] full-time jobs.
“But we might well be talking about a bigger phenomenon, a long-term phenomenon affecting the entire labor market,” he added. “We know there are these wage gaps – growing gaps between high school graduates and everyone else, and that’s a much bigger cause for concern.”
Left unabated, the wage gap, moreover, will continue to pose serious budget problems for states and the federal government, as families relegated from the middle class to lower income rely on social services and tax breaks to make ends meet. “If a big chunk of these [new] jobs are either low-wage jobs or let’s say involuntary part-time jobs, then yes, the government often provides those folks with earned income tax credits, sometimes food stamps, sometimes Medicaid,” Holzer said.
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The growing disparity in wages and household income have become grist for Democrats, including President Obama and New York Mayor Bill de Blasio, who are championing an increase in the minimum wage, more spending on job training and early childhood education, and tax reform to achieve what they say would be a fairer distribution of wealth.
The median income for U.S. households in 2012 – the latest year for which detailed income distribution is available from the U.S. Census – was $51,017. That is the lowest in real terms since 1995, according to the study. Median income had peaked at $56,000 in 1999 and totaled $55,627 in 2007 before the recession. It has declined in each subsequent year.
“The inequality crisis facing our cities is a threat to our fundamental American values,” said de Blasio, chair of the Mayors’ Cities of Opportunity task force. “As mayors, we are on the front lines and we must act now.”
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