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Economist predicts more jobs, stagnant wages
An upswing is evident throughout much of the American economy, but some fundamental changes have occurred as a result of the Great Recession, a prominent economist said at the University of Wisconsin – Superior Friday.
The job market is recovering, but more slowly than following previous recessions, and due to the overabundance of workers, wage growth is almost stagnant, said Chris Farrell, host of the nationally-syndicated public radio program Marketplace Money.
“I think the job market is going to come back. The private sector numbers are actually pretty good. A lot of what is holding it back is layoffs at the state and local government levels. Next month, we’ll probably see layoffs in the federal level due to the sequester,” he said, adding “it could take a long time for the wage market to rebound.”
While that’s not considered a good development, there have been some unintended benefits. Wage stagnation, combined with technology-related productivity improvements, have made North America’s manufacturing climate “very competitive.”
Nonetheless, not everyone can benefit, as the recession has shown. A post-secondary education is more valuable than ever, Farrell said. From June 2009, when the recovery began, until 2012, more than two million jobs were created. At the same time, there were 250,000 fewer jobs available for high school dropouts or those having only a high school degree.
“All the growing sectors of our economy require some form of educated workforce. Post-secondary education will really pay off over a lifetime. Of course, you really want to minimize how much debt you take on to get there,” he said.
Impacts from the downturn have been far reaching, Farrell observed, and have prompted people to change their financial behavior.
“It’s pretty hard to find a household that hasn’t been affected by unemployment, underemployment, benefit cuts and underwater mortgages,” he said. As a result, the median household income for working-age people declined by 12.5 percent during the past 12 years.
But in response to adversity, many have paid down their debts. After personal debt peaked in 2007, it subsequently returned to the lower levels prevalent during the 1980s. That road, however, had some speed bumps. Many reduced their debt “due to mortgage foreclosures, credit card defaults and yanked credit card accounts,” Farrell explained. “Nevertheless, the household really is improving its balance sheet.”
Further, “Corporations have strong balance sheets, and the government’s balance sheet is going to improve,” he predicted.
Farrell disagrees with conservative economists who argue the growing national debt could severely harm the recovery and perhaps trigger an even-worse downturn.
“For all the talk about everything that’s been going on in Washington, the government’s balance sheet has been improving,” he contended. “During the great recession, the deficit as a percent of GDP had been a little over 10 percent. More recently, it’s down to 6.9 percent” and will decline to 5.3 percent this year.
Further pursuing that philosophy, he defended Washington’s handling of the Social Security Trust Fund.
“The whole theory that Social Security is in crisis is fundamentally wrong. It’s the most successful social policy the U.S. enacted during the 20th Century. It’s not going to go bankrupt or collapse. It will be shored up in certain ways – some kind of mix between raising the (retirement) age and raising the tax.”
Farrell also defended federal government borrowing practices, saying “Those who lived through the inflationary period in the 1970s … learned you can borrow as much as possible because it can be paid back with depreciated dollars.”
Eventually, he warned, the Federal Reserve will need to recover the money it infused into the economy.
“When using the stock market as a weather vane, this will be an incredibly volatile period of time. The Fed will make some mistakes while withdrawing liquidity. I’m not real worried about sustained inflation such as during the 1970s, because central bankers have a larger tool kit today. I’m more worried we could end up like Japan. When interest rates don’t go up, you end up with deflation. So I really want to see interest rates go up,” Farrell said.
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