When I talk to friends and family, one of the most common concerns they tell me about is their frustration over the current economic recovery—with the slow pace of job creation and the relatively high number of unemployed keeping a tight lid on wages.
According to Sentier Research, the current median income in June of 2013 was $52,100. This represents a drop of 4.4% from June of 2009, when the recession officially ended, and 6.1% below the December 2007 median income, prior to the Great Recession. (Source: “Household Income on the Fourth Anniversary of the Economic Recovery: June 2009 to June 2013,” Sentier Research LLC web site, August 21, 2013.)
While we’ve seen job creation pick up over the past couple years, it is still not enough to increase wages. While the economic recovery will produce approximately two million new positions this year, job creation has been primarily in the low-wage-paying sectors.
Plus, with the massive disturbance that the recession caused, the economic recovery is significantly different than anything we’ve seen before, causing job creation to increase while wages stagnate.
I believe the bubble we experienced over the past decade was artificially inflated—and this is why the recession ultimately burst. The reason people feel uncertain about this economic recovery is that they expect the job creation will resume at the pace we saw a decade ago—and that’s just not going to happen anytime soon.
This is a new economy, and I think the structural situation is significantly different than in the past. There is still much uncertainty, especially with new healthcare rules and regulations, which are creating impediments to job creation.
Because the economic recovery has been so slow, this has left people with no choice but to take any position and remain willing to jump at a moment’s notice when a better job pops up. What this means for job creation is that there are millions of people who are willing to work for less money, which is causing a ceiling in the level of net income.
Looking at it through the basic principles of supply and demand, there’s far too great a supply of labor. Because job creation has been slow during this economic recovery, there is still an abundance of workers in most fields. And when supply is in abundance, we all know that means demand isn’t up.
Talk that the nation’s wealth has been rebuilt is referring to asset prices, not income. Both the housing market and the stock market have strongly rebounded, but the economic recovery has not led to enough job creation; this is why we’re not seeing an increase in wages.
Most people don’t have a majority of their wealth in the stock market. Because of the uncertainty in the economic recovery, many people have barely any excess capital to invest.
So, what’s the solution? More needs to be done by the federal government to alleviate concerns by business owners when it comes to hiring people. We need more job creation to help boost the economic recovery, and that comes from small- and medium-sized businesses.
If you are a small-business owner, would you really think about hiring 10 more employees ahead of so much uncertainty regarding changes to health care and new regulations? I know I would be very tentative.
The goal should be to increase the growth rate of the economic recovery, yet the federal government is hammering small businesses with costly rules that are hard to interpret, causing significant hesitation when it comes to job creation instead.
As an investor, I would suggest that you focus on wage growth. We need to see higher wages in addition to job creation for the economic recovery to really start improving significantly.
Courtesy: Investment Contrarians
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