Quelle Surprise! Underemployment is Hurting the Economy

The New York Times, in “Workers Get Fewer Hours, Deepening the Downturn,” presents data and anecdote that indicate that low unemployment masks a deteriorating labor market. Some employers are cutting their workers’ hours; the self employed are finding less demand for their services.

While this article provides some useful insight into the state of the economy, it fails to acknowledge that underemployment is a problem separate and apart from the economic slowdown. There is often perilous little difference between being self employed and unemployed, but that distinction is rarely captured. As I have mentioned before, a large number of people in my peer group are either retired but would prefer to be working full or part time, or have their own businesses but are less busy than they would like to be. In this narrow sample, underutilization has been widespread since the dot com bust.

From the New York Times:

Not long ago, overtime was a regular feature at the Ludowici Roof Tile factory in eastern Ohio. Not anymore. With orders scarce and crates of unsold tiles piling up across the yard, the company has slowed production and cut working hours, sowing worry and thrift among its workers.

“We don’t just hop in the car and go shopping or get something to eat,” said Kim Baker, whose take-home pay at the plant has recently dropped to $450 a week, from more than $600. “You’ve got to watch everything. If we go to town now, it’s for a reason.”

Throughout the country, businesses grappling with declining fortunes are cutting hours for those on their payrolls. Self-employed people are suffering a drop in demand for their services, like music lessons, catering and management consulting. Growing numbers of people are settling for part-time work out of a failure to secure a full-time position.

The gradual erosion of the paycheck has become a stealth force driving the American economic downturn….While official unemployment has risen only modestly, to 5.1 percent, the reduction of wages and working hours for those still employed has become a primary cause of distress, pushing many more Americans into a downward spiral, economists say.

Moreover, this slippage is a critical indicator that the nation may well be on the verge of a recession, if not already in one.

Last month, the hours worked by those on American payrolls dropped, compared with six months earlier, according to an index maintained by the Labor Department. The last time the index moved into negative territory was February 2001, when the economy was on the doorstep of recession. A similar slide emerged in August 1990, one month into what proved an even more severe downturn.

From March 2007 to March of this year, the average workweek reported in the private sector slipped slightly to 33.8 hours, from 33.9 hours, while overtime for manufacturing workers fell by a larger margin.

At the end of last month, more than 4.9 million people were working part time either because they could not find full-time jobs or because their companies had cut hours in the face of slack business, according to a Labor Department survey. That represented an increase of 400,000 since November.

And on Wednesday, the government reported that average earnings slipped in March after accounting for the rising costs of food and fuel — the sixth consecutive month that pay failed to keep pace with inflation.

As people bring home paychecks that do not go as far, they are forced to economize, eliminating demand for goods and services that once captured their dollars, spreading pain to providers like auto dealers and lawn care providers. They, too, must trim their outlays on pay, shrinking working hours more and furthering the slowdown

“It means spending slows going forward,” said Robert Barbera, chief economist at the trading and research firm ITG.

Paychecks are diminishing just as millions of Americans are finding their access to credit constricted as well. Borrowing against the value of real estate — a crucial artery of household finance in recent years — has been pared back as home prices have plummeted and as banks have tightened lending standards in the aftermath of the collapse of the housing bubble.

“At this point, those avenues are blocked,” said Jared Bernstein, senior economist at the labor-oriented Economic Policy Institute in Washington. “Consumption going forward is going to be in large part a good old-fashioned function of paychecks and incomes.”

Even before the rollback in working hours, pay was barely keeping up with the rising costs of gas and food. From February to September of last year, the average hourly earnings for workers in the private sector was still growing at a slightly faster clip than the pace of inflation, according to the Labor Department. But from November through March, as employers began to scale back in a variety of ways, wage growth fell below the pace of inflation, meaning that paychecks were effectively shrinking.

Now, work opportunities are themselves declining, as the downturn snuffs out business.

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  1. Anonymous

    Re: … a crucial artery of household finance in recent years — has been pared back as home prices have plummeted and as banks have tightened lending standards…

    Sorry to dump an OT, but…

    In a prepared statement, Wells Fargo said, “The industry is dealing with difficult challenges caused by unprecedented events the past few months in the auction-rate market. … We’re doing what we can to support our customers who hold these securities.”

    Piper Jaffray declined to comment Thursday about what could prove to be a lawyers’ holiday.

    “We are in the first act of the dance of a thousand veils,” said Terry Fruth, a veteran securities lawyer who is meeting with prospective clients and other lawyers. “One thing these auction-rate securities are not: a money-market sort of fund.”

    http://www.startribune.com/busin…s/ 17879239.html

    “The Wall Street houses and banks want to minimize more capital-eating write-offs. Some are lending to their customers and letting them use the auction-rate securities as collateral.”

    >> Not only are Auction rate securities nice for last second window dressing, but you can loan them out or rent them!

  2. Yves Smith

    Yes, the story’s up on Bloomberg and I was just reading the WSJ coverage. I’m not certain it’s post-worthy yet, not that it isn’t a legitimate news item, but I don’t have much to add to the official reports (but perhaps some readers do).

    Having said that, the Wells Fargo quote is a priceless example of corporate-speak.

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