Explaining Low Economic Growth And A “Strong” Job Market

Explaining Low Economic Growth And A “Strong” Job Market

One question that has been puzzling many policy makers is that the United States has reasonably strong job growth (averaging 200,000 plus per month) in combination with an official growth rate of only 1.4 percent. Traditionally, for companies to be hiring in such strong numbers, economic growth should be much larger. Now, however, the economy is adding jobs but economic growth has remained largely stagnant.

Explaining Low Economic Growth And A “Strong” Job Market

The Federal Reserve’s official line is that many companies were probably too aggressive about down-sizing during the 2009 Financial Crisis and fired too many people. Now, they are playing catch up and trying to staff their companies at normal levels. This explanation makes a lot of sense. If companies fired too many people during the recession, they may find themselves understaffed even if the economy itself is not growing.

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Factors That Can Explain Growth in Job Market

Another factor that could explain high job numbers with low GDP growth, however, is that the job numbers are coming primarily from low wage jobs. Numerous organizations and researchers have found evidence that suggest that job growth is being primarily driven by low wage jobs. In fact, Department of Labor statistics shows that 37,000 jobs were added in the retail trade were added in June 2013. An additional 75,000 jobs were added in hospitality services. Health care accounted for only 20,000 additional jobs while business and professional services accounts added 53,000 jobs.

In many cases people are working in jobs that they are overqualified for. The Department of Labor found that 284,000 college graduates are actually working in minimum wage jobs. And consider this, higher-wage jobs represented about 60 percent of all jobs lost during the recession, while making up only 22 percent of gains since the end of the recession. Past studies have also suggested that as many as half of all recent college graduates are employed in jobs that do not utilize their skills or education.

What is GDP?

The Gross Domestic Product is a combination of Government Spending + Business Investment + Consumer Spending + (exports – imports). In an ideal situation, as the economy recovers, businesses will start to invest more. This investment should expand payrolls and as more people are employed, consumer spending should rise. As consumer spending rises, businesses will invest more and the cycle should, in theory, repeat itself and create strong economic growth.

If job growth is concentrated in low wage jobs, however, consumer spending will not rise. Why? Because people simply will not have enough money to spend. Workers in low wage sectors generally have low levels of discretionary income and instead spend their money on basics, such as rent and utilities. Without enough income to spend, people are unable to purchase consumer goods. And if the above data and reports from the Department of Labor are correct, many of the jobs being created are indeed low wage. People may be employed, but the could be lacking the money necessary to really drive the economy forward through consumer spending.

Of course, none of this should be taken in black and white. The economy is adding high paying jobs, but many qualified people are still searching for employment opportunities. Until business investment rises and payrolls expand with higher wage jobs, economic growth may remain stunted. Figuring out how to encourage companies to add these high paying jobs, however, has been vexing the government and economists in recent years.

Until the private sector adds higher paying jobs, GDP growth rates are likely to remain low even if the number of people employed rises. Worse, with housing costs remaining high, college tuition sky rocketing, and health care costs continuing to grow, people will be more and more pressed for cash. In the long run this could slow economic growth and eventually lead to push backs from civic society.

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