The Broken Labor Market

One of the theories behind the destruction of the Middle Class is that as productivity skyrocketed in the 80's and 90's, while wages failed to keep pace. With productivity creating supply and wages driving demand, this created an imbalance in our economy. In order to fill in the shortage of demand (i.e. wages), the Federal Reserve dropped interest rates to loosen the credit market and banks started to offer attractive home equity lines of credit. So according to this theory, the crisis that we are in occurred because the American consumer hit his/her credit limit, causing demand to plummet and grinding our economy to a halt.

But why do I mention this? According to the Labor Department, wages have grown by 1.8% over the past year, the lowest increase ever recorded. Looking at 2009, wages increased by only 0.3% in the first quarter and 0.4% in the second. Comparing those stats to the productivity gains seen over the same quarters shows that we are doing nothing to "fix" the fundamentals of our economy, i.e. mismatched supply and demand. According to Bloomberg:

The productivity of U.S. workers grew in the second quarter at the fastest pace in almost six years as employers slashed payrolls to bolster profits. Productivity, a measure of how much an employee produces for each hour worked, rose at an annual 6.4 percent pace, more than forecast, after a 0.3 percent gain the prior three months, Labor Department data showed today in Washington.

What does this mismatch between productivity and wages mean to business? Bloomberg goes on to say:

The productivity report showed labor costs decreased at a 5.8 percent pace, the second consecutive fall and the biggest since 2001.

So if you're curious as to how the stock market can be hitting new highs even though none of the fundamentals of the economy have changed, in my opinion, you have to look no further than this report. Companies are increasing their profitability by shedding labor costs, not by increased sales/business.

So when you hear the term "jobless recovery," realize that there is no such thing. Until wages have risen enough, or prices deflate enough, there will still be a mismatch between supply and demand and our economy will continue to sputter along. I just hope we don't end up like Japan and their "lost decade"