One of the striking facets of the economic downturn that started in 2008 and the "recovery" that has continued until today is the unprecedented slack in the American labor force. While on its face "unemployment" has dropped to pre-recession levels, labor force participation remains strikingly low. Wages have remained stagnant – with consequential effects on consumer demand and economic growth.
There was once a time when labor was the engine of the American economy. In fact, with Labor Day coming up fast, we are reminded that at one time, labor was the most important commodity in the country. Labor Day – or the "workingmen's holiday" – stands as a testament to the fact that around the dawn of the 20th century, America was fully employed. Many workers complained – not because there were too few jobs, but because they were overworked to the core. Seven-day workweeks and 12-hour shifts were the norm. Labor capacity was so stretched that even children were recruited to work in the factories and farms.
This stands in stark contrast to today. Labor force participation as of July sits at a dismal 62 percent, a 38 year low. Many people who lost their jobs during the height of the Great Recession have subsequently dropped out of the labor force, or struggle to find meaningful work that provides life-sustaining income. The middle has been largely sucked out of the employment landscape, creating a barbell-shaped workforce with expanding opportunities at the lower and higher skill levels.
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This new normal is reflected in America's debate over immigration. On the one hand, the surging battle over immigration reform has focused largely on the exclusion of Americans from low-skilled jobs in the service and agricultural sectors. In the latter, non-citizen immigrants (whether legal or illegal) constitute more than half the workforce. Many economists argue that Americans either can't or won't take those jobs – as dishwashers, lawn keepers and farmhands – and that immigration reform would thus have a deleterious effect on the U.S. economy in terms of making domestically produced goods and services too expensive for the average consumer. But still the tension remains and is reflected in passionate political debate over the status of an estimated 11.2 million undocumented immigrants in the workforce.
At the other end of the spectrum there is concern that America's skilled technical workforce is underwhelming the global competition. The tech industry has pushed the U.S. government to institute labor law reforms that would increase the number of H1-B visas for highly skilled technical workers by heavily recruiting from countries like India and China – which currently lead the world in the number of new engineers produced each year. In fact, labor in the technical sector has led to the ascendancy of the tech worker. Those workers with competent skills in that arena remain in high demand and among the most sought after in the U.S. Meanwhile, U.S. firms say that a shortage of these workers is hindering U.S. global competitiveness.
And then there is the economy as a whole. The Federal Reserve Board of Governors met in late August at Jackson Hole, Wyoming, to discuss the state of the economy and whether economic growth warranted the Fed raising key interest rates that have remained at historically low levels since 2009. One of the key drivers of the interest rate debate is the true nature of the employment story. Federal Reserve Vice-Chairman Stanley Fischer, in his speech before the governors Aug. 29, noted, "Although the economy has continued to recover and the labor market is approaching our maximum employment objective, inflation has been persistently below 2 percent." This rather dry sounding statement is about as close to a sigh of frustration as you'll hear from the Fed, which has tried to manage economic growth using monetary policy for much of the duration of the recession. The situation the Fed is perplexed about is how there can be full employment and yet still shrinking consumer demand for goods and services. The two have almost always risen in lock-step throughout the history of the U.S. economy. Declining commodities prices are largely to blame, according to the Fed. Even though they are not directly included in the consumer price index, commodity prices, particularly oil prices, affect the prices of almost all other goods and services.
The Fed has also been paying close attention to the U.S. dollar. The dollar is hyper-strong against other leading currencies, which has a direct effect on the competitiveness of U.S. exports. By the Fed's analysis the dollar's rise in strength by almost 17 percent percent since last August has made imports cheaper and American exports more expensive. Thus, while the consumer appears to be purchasing at least the same volume of goods, the price they pay for those goods has declined, putting further downward pressure on economic growth.
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But above all, the Fed is signaling that despite the top line numbers, there is still significant room to grow in terms of robust employment for Americans. As Fisher noted, "While thinking of different aspects of unemployment, we are concerned mainly with trying to find the right measure of the difficulties caused to current and potential participants in the labor force by their unemployment." This is very interesting. For the first time, the Fed seems to be noticing that the economy is affected not just by the overall numbers of Americans working, but the type and nature of newly created jobs. The Fed is finally realizing what so plain to see for the average American. When it comes to work, quality counts.