Global Analysis from the European Perspective. Preparing for the world of tomorrow

Problems with the labor market and the shrinking middle class in the USA

Most economists are delighted with the situation on the labour market of the world’s largest economy and hardly want to hear about the vision of a recession. They believe that the unemployment rate below 4% (which has been around for over a year) and a sustained increase in new jobs are evidence of the strength of the economy.

They also rejoice because such low unemployment was achieved with moderate household indebtedness. Economists believe that the process if maintained should continue to encourage the optimism of most consumers and encourage them to consume. Until consumers fall into the euphoria of spending (which has always been a harbinger of a crisis or recession), there are still a few quarters of consumption growth ahead of us. The increase will not result from rising salaries, as at such levels salary increases are only possible at a moderate pace, but from the rising household debt, which would be willing to take out loans in such an economic environment.

But if you look at the latest economic data in more detail, there are already some warning signs that not everything looks so pink in the USA. First, in the first quarter of this year, the number of redundancies was 190,000, 35% more than a year ago. 1)United States Challenger Job Cuts, Trading Economics.So it was the worst quarter in 10 years. The labour market in the US is much more flexible than in Europe, making it easier for the economy to emerge from crises, but at the same time it ensures that the reduction in jobs at the end of an economic cycle is much more abrupt than in the old continent, which is immediately transferred to consumer sentiment. Secondly, the age structure of the increase in jobs since the last crisis also raises doubts.

The biggest beneficiary of the growth was the generation of so-called baby boomers (over 55 years old), as the employment rate in this group has risen by 36.3% over the last 10 years and the unemployment rate is only 2.7%. However, it is not the age group that likes to get into debt. These people became active because they learned from the previous crisis that their savings (including their indebtedness) will not be sufficient to make ends meet in retirement. They will therefore not continue to stimulate consumption, as they will not be willing to take out further loans. Moreover, the good times for the age group are probably also over, as their employment rate fell abruptly in March of this year – by 209,000 (the highest decline since 2015).2)Americans over 55 suddenly losing jobs at fastest pace in 4 years, CNBC 2019-04-05.

Thirdly, the age group between 40 and 54, which usually has a high credit rating, did not enjoy the increase in the last 10 years, as the number of employees in this group fell by 4%. It is, of course, also linked to demographic trends in the United States, with a shrinking white population.

This split in the American labor market does not fill with optimism. There is no reason to be optimistic about other data, such as the structure of unemployment. Indeed, only 3.4 of white people and only 3.1 of Asians are unemployed, but 12.8% of all young people and 6.7% of blacks and 4.7% of Latinos are unemployed.3)US Jobless Rate Holds Steady at 3.8%, Trading Economics 2019 März.If the replacement of the white population by blacks and Latinos is continued, consumption will not be boosted, as the population groups mentioned live from the transfers. If the government does not take measures to increase the fertility rate of white women, the labour market will not be saved.

Middle class disappears
Not even a process of growing inequality and stagnating incomes in the middle class can justify a positive description of the economic situation in the USA. The inflation-adjusted average annual income of full-time working men fell from an average of 54,030 dollars in 1973 to 51,640 dollars in 2016. The process of impoverishment of the supporting class of society is better illustrated by the lifelong average earnings graph.

According to an American study,4)Lifetime Incomes in the United States over Six Decades, Guvenen, Kaplan, 2017-04-21. a man who started working in 1967 at the age of 25 earned about $250,000 more dollars until his 55th birthday than a man who started working in 1982 at the age of 25 and had the same career. The purchasing power of middle-class Americans is declining steadily to this day, also taking inflation into account. The recent temporary increase in household incomes is not a sign of improvement, but a result of the transition to full-time work. In 2016, for example, around 2.2 million more adults than in the previous year were in full-time employment. Social inequality is therefore on the rise in America. For four out of five Americans, there is no real increase. The decline of the most productive stratum of American society will lead to the next crisis, as mainstream economists imagine.

References   [ + ]

1. United States Challenger Job Cuts, Trading Economics.
2. Americans over 55 suddenly losing jobs at fastest pace in 4 years, CNBC 2019-04-05.
3. US Jobless Rate Holds Steady at 3.8%, Trading Economics 2019 März.
4. Lifetime Incomes in the United States over Six Decades, Guvenen, Kaplan, 2017-04-21.

One comment on “Problems with the labor market and the shrinking middle class in the USA

  • “incomes of men” –> “The purchasing power of middle-class Americans is declining steadily to this day”

    This is not professional. The incomes of women exploded since the 60s, which caused overall increase in median household income. This is also somewhat responsible for the decrease in male incomes, as women took their jobs.

    So there was no stagnation in median household income starting the 60s. Median Household income continued to increase up to 2001.

    If you look at median household income in the US, it did stagnate, but only after 2001. And it is not declining yet.


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