Discussion: (0 comments)
There are no comments available.
The public policy blog of the American Enterprise Institute
View related content: Economics
The startling reality about this month’s lower-than-expected employment report is that the report should not be at all surprising.
The U.S. economy added jobs at a slower pace in March than it has in nine months, and the fall in the unemployment rate, to 7.6 percent, was mostly attributable to people giving up their search for work. The 88,000 new jobs created last month undershot the consensus view that the economy would grow by 200,000 jobs, and since the U.S. economy needs about 120,000 new jobs per month just to keep up with population growth, Friday’s report is an unmitigated disappointment.
Employment growth was so bad in March because demand has fallen across the economy. When demand for goods and services falls, the demand for labor falls too, and businesses create fewer jobs as a consequence. In March, Congress and the American consumer conspired to create a toxic cocktail for job creation.
The simple problem is that Americans are spending less because they’re earning less. It’s hard to convince people they should spend more money when they are earning less of it, and personal disposable income has been on a downward trajectory since mid-2012. Consumer spending habits have followed suit.
With less money to spend, people are shopping less, causing a decline in demand for normal spring purchases like clothing, garden supplies, electronics, and appliances. With businesses earning less, they’ve been hiring less. In a sense, March’s employment numbers are a simple supply and demand problem – there’s less demand for goods and services, so there’s less demand for labor.
This is the chicken-and-egg problem of the jobs numbers. Fewer jobs means less take-home pay for workers, which in turn means less spending on goods and services, which translates into fewer jobs. Historically, Americans have eschewed this line of thinking, spending consistently even when job growth is anemic because they maintain a reasonably high level of disposable income.
But when the start of 2013 ushered in a rise in payroll taxes to 6.2 percent, capped deductions for high earners, raised taxes on wealthy families, and introduced a Medicare “surcharge” on investment, it reduced after-tax income for many Americans. When combined with higher fuel prices, Americans will have about $275 billion less available this year to spend. That’s a huge drop in demand, and a huge problem for job growth.
Notably, the sequester, which reduced government demand, passed into law without taking a toll on job growth. Virtually none of the markets affected by the sequester were changed in March. Manufacturing, mining, state government, financial services, transportation, and local government all maintained the status quo. Federal employment fell, but mostly in response to changes at the postal service. Excluding postal workers, federal employment actually rose by 5,000.
Since sequestration was cuts to future growth in government and not to present outlays, this makes sense. While Uncle Sam might hire fewer workers over the coming months than it would have otherwise, we shouldn’t see the U.S. government downsizing.
If Congress wants to get serious about jobs creation, it can start by creating a tax system that increases tax-home pay. Raising taxes is a good way to get people to stop shopping, and the reality is that higher taxes and higher fuel prices are much more to blame for the poor jobs numbers than anything else. To careful observers of the U.S. economy, March’s employment report was not a surprise – it was the natural response to shrinking demand, falling income, and poor decision making in Washington.
There are no comments available.
1150 17th Street, N.W. Washington, D.C. 20036
© 2014 American Enterprise Institute for Public Policy Research