The Quality of Jobs: The New Normal and the Old Normal

Laura D’Andrea Tyson is a professor at the Haas School of Business at the University of California, Berkeley, and served as chairwoman of the Council of Economic Advisers under President Clinton.

Since the Great Recession of 2008-9, the labor market has recovered at an agonizingly slow pace. Despite 42 consecutive months of gains in private-sector employment, the unemployment rate is still at 7.3 percent; in December 2007 it was only 4.6 percent. The current unemployment rate is higher now than in 2007 across all age, education, occupation, gender and ethnic groups.

That’s despite the fact that about four million workers have left the labor force, driving the labor force participation rate to a historic low, at least a percentage point below its long-run (downward) trend, according to the Council of Economic Advisers.

Both hiring and quit rates remain significantly below their pre-recession peaks. Although the share of the long-term unemployed has fallen from its peak of 45 percent in 2011 to 38 percent today, it is still far above its 2001-7 average. And about eight million people are working part-time for “economic reasons,” a euphemism for those who would like a full-time position but cannot find one.

The weakness of the labor market is manifest not only in the number of jobs created and the number of unemployed but also in the quality of jobs. Here the news is also bleak.

During the recession, employment declined across the board, but 60 percent of the net job losses occurred in middle-income occupations with median hourly wages of $13.84 to $21.13. In contrast, these occupations have accounted for less than a quarter of the net job gains in the recovery, while low-wage occupations with median hourly wages of $7.69 to $13.83 have accounted for more than half of these gains. Over the last year, more than 40 percent of job growth has been in low-paying sectors including retail, leisure/hospitality (hotels and restaurants) and temporary help agencies. Many of these jobs are not only low-wage but also part-time for economic reasons.

According to a recent analysis at the Federal Reserve Bank of Atlanta, low-wage jobs usually account for 40 to 50 percent of job gains during recoveries. Based on history, what’s distinctive about this recovery is its sluggish pace, not the composition of its jobs. The economy’s growth rate has been less than half the rate of previous recoveries and the employment losses in the Great Recession were more than twice as large as those in previous recessions. The employment hole is much deeper, and it is taking much longer to get out of it.

Prolonged labor market slack has meant falling real wages for most workers. According to a recent study by the Economic Policy Institute, between 2007 and 2012 average real hourly wages for all private-sector workers grew by a paltry 1.2 percent. But this average obscures differences among workers at different skill and pay levels: real hourly wages fell for 70 percent of the wage distribution, with larger losses for those holding lower-wage jobs. During the year ended in mid-2013, real wages finally began to increase a bit for workers between the 50th and 70th percentile but continued to fall for those below.

In contrast, real wages have increased, albeit at a much slower clip than before the recession, for those in the top 30 percent of the wage distribution since 2011 and are up over the entire 2007-12 period.

Again, these patterns are not surprising. High unemployment harms wage growth across the wage distribution with the negative effect getting larger as one moves down the distribution. What is distinctive during this recovery relative to earlier ones is the growing disparity in wages across sectors, a trend that was apparent long before the Great Recession.

Between 2000 and 2007 real hourly wages increased 2.6 percent for the median worker, 1 percent for workers in the 20th percentile of the wage distribution and 4.6 percent for those in the 80th percentile. Over the entire 2000-12 period, real hourly wages were flat or declining for the bottom 60 percent of the wage distribution - and that’s despite productivity growth of nearly 25 percent during the same period.

According to economic logic, wage growth should reflect productivity growth. This was the case until the late 1970s. Since then, however, wage growth has fallen far short of productivity growth, and that’s true for workers regardless of education, occupation, gender or race.

The wage distribution has become considerably more unequal over the last 30 years, with top earners capturing a large share of overall productivity gains. The real median earnings of full-time workers aged 25-64 have stagnated after peaking in the late 1970s. There are many interrelated causes of wage stagnation and increasing wage inequality, including a drop in the real value of the minimum wage, disappearing unions and changing norms of fairness in pay. But technological change and the globalization it has enabled have played major roles, and these driving forces have probably strengthened during the recovery.

The Hamilton Project, from the Current Population Survey Sample includes all full-time workers ages 25-64. Full-time workers are defined as those working 40 or more weeks. Earnings are adjusted for inflation using the CPI-U-RS.

Jobs that are routine, that do not involve manual tasks and that do not need to be done near the customer are being replaced by computers and automation or are being outsourced to low-cost workers in other countries. Many of these jobs are middle-income and middle-skill jobs.

At the same time, technology is increasing the demand for workers who perform nonroutine tasks that complement automated processes or perform nonroutine, manual tasks that cannot be automated. Such tasks lie at opposite ends of the skill and wage distribution - from retail sales clerks and restaurant workers at the bottom to software programmers and engineers at the top.

The result is “polarization” of employment with job growth concentrated at the high and low ends of the wage and skill distribution and the disappearance of jobs in the middle.

These trends are apparent in most developed countries but are most pronounced in the United States. Recent data indicate that polarization has continued through the recovery: job growth has been stronger at the top and bottom ends of the wage distribution than in the middle.

The bifurcation of job opportunities has been a major contributor to growing wage inequality and that in turn has been a major contributor to the historic rise in income inequality that began in the 1970s. The deep recession and weak recovery have exacerbated these trends.

According to the recent Census report, the real income of the top 5 percent of households has recovered from recession losses and was about the same in 2012 as it was in 2007. In contrast, the incomes of the bottom 80 percent of families have not recovered to pre-recession levels. Median real household income in 2012 was still below its pre-recession level and about 9 percent below its all-time high in 1999.

According to another study, the top 1 percent of households captured 65 percent of real family income gains (including realized capital gains) between 2002 and 2007 and 95 percent of the gains between 2009 and 2012. In 2012, the top decile claimed more than 50 percent of income, the highest share ever.

The trends of disappearing middle-income jobs, stagnating wages and growing income inequality predated the Great Recession and are likely to persist even after the labor market has fully recovered, as measured by the quantity of jobs and the unemployment rate.

Without significant institutional and policy changes, supported by changes in social norms about wage inequality, the “new normal labor market” could feel a lot like the “old normal labor market” in terms of job quality for a large number of American workers.