Loss of Middle Class Jobs a Threat to Economy


The AEI ran an article about a study showing the share of middle-skill jobs has fallen in the past 34 years. They showed a chart where routine jobs declined 1.3% in the 1990 recession, 2.4% in the 2000 crash and 4.5% in 2008 which is about an 8% cumulative reduction in these jobs. They said this is unlikely to slow down, which implies underemployment for this group would get worse.

The big theme of the economy is several decades has been the fact that the jobs with moderate skills and moderate pay have been lost to Emerging Market countries. Even though some jobs are coming back that are non-tradable jobs (that must be done locally) such as real estate construction, not enough jobs are coming back. The theory of the “Platform” economy is that EM countries will do low paid factory work and U.S. designers will get the high paid domestic work. But that theory doesn’t help moderately skilled blue-collar workers with no college degree. Instead what has happened is the top 20% of the population got “real” inflation adjusted wage increases and the rest of the population have experienced a real pay cut since 1997. The “missing” workers in the middle-income level between poverty and the 80th percentile of income are needed to participate in creating demand for consumer goods. The combination of unemployment, underemployment and less secure employment means that on a risk-adjusted basis or a Sharpe ratio for job security basis that workers are not as well off as raw statistics would appear. The real estate bubble of 1997-2007 fooled consumers and workers into thinking they were still OK despite the fact that incomes in real terms have declined since 1997. After the crash of 2008 people realized they had been fooled by the bubble and that their real income was lower than expected.

The Wall Street Journal ran an article May 30 “Weak Wages Pose Threat to Liftoff for Economy” where they discussed the fact the job growth is not showing up as wage growth.

Thus demand for goods will continue to be suppressed by worker insecurity. It will also be suppressed by the massive amount of debt that reached record highs in the past 20 years and was only slightly reduced during the deleveraging after the 2008 crash.

The way companies are run includes using a hurdle rate for return on a project. If a project has a low forecasted return rate that is lower than the hurdle rate then it won’t be implemented. Thus if U.S. workers cost too much because of the economy entering into a full employment era then employers will simply put expansion projects on hold or move them to EM countries, unless they can pass on the costs to consumers. In modern times employers are reluctant to hire new employees, train them and then later cut back on staff with layoffs. Thus it may be quite a big leap for employers to not only cross the hurdle rate of profitability of a project that requires new employees but also hurdle of avoiding the problem of being stuck with unneeded workers. As a result I don’t expect employers will cave into worker’s wage demands with a bidding war.

I was a bit biased, being based in Silicon Valley where the nation’s most expensive housing means that there is a shortage of workers and those that are here can command good wages. For this local area, when the pendulum swings to full employment, then bidding wars happen for wages and houses. But in the rest of the country if an employer is threatened with a skilled labor shortage they may decide not to go ahead with a project or they may decide to use offshore labor.

Even though the economy is moving towards a full employment economy I think the “hidden” long term unemployed labor reserve of 3% of the population can be counted on to come out of the woodwork and accept employment. I suspect a lot of these people are financed by overspending their retirement portfolio or overstaying their welcome with supporting relatives so eventually the hidden unemployed may come back into the work force if it becomes a true full employment economy.

The combination of unreliable employment income for middle-skilled workers, excessive debt servitude, and lack of participation in asset market investments will mean that moderate income people will continue to suppress demand for goods and services. This will result in a low 1% or 2% GDP growth rate, and low inflation, thus justifying low interest rates.

Investors need independent financial advice about the risk of surprise economic weakness that can make stocks go down. I wrote an article “Low global growth rate justifies low yields”.



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About the author

Don Martin, CFP®

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