Explanatory theories about why things happen in the economy are hatched in historical context.  Over time, conditions that supported a theory at one point in history may no longer work in another.  Here, we look at fundamental changes (irreversible, in our opinion) in the composition of employment, the labor force, declines in unionization as well as wages. While some economists (including at the Federal Reserve and its districts) yearn for the the historic connections among low unemployment, higher wages and inflation, in our view, dramatic changes over the last 50 years dampen those connections.

During the 1970’s, after the 1960’s  activism for women’s rights and black power, significant numbers of women entered the labor force and the employment/population ratio grew dramatically.  See Chart below.

Parsing these figures by gender and race highlights some details of these changes during this time period. Male employment/population declined while female employment grew. This pattern was true for both white and black women. Female employment/population tracked across race, while male black employment/population was consistently below that of white males. On the other hand, growth of both male and female black employment have accelerated since 2010 compared with growth of both male and female white employment. See chart below.

Second, from the 1970’s to the present there has been a steady “de-industrialization” of manufacturing in the US. (Yes, some of this has come back recently, but not at all to the levels in pre-1970’s US dominance in production.) The ability of companies to utilize global markets for production emerged over this time. Parts could be manufactured in one country, shipped to another for assembly and then shipped elsewhere for sales and distribution. Better development of the global workforce emerged, along with reliable energy resources, advances in communications, technology and transportation, with each factor contributing to the trend.

The table below highlights the shape-shifting that has taken place in the US labor force. We picked three points in time: 1969, 2010 and 2019 using April data. We chose to look at both the proportion of jobs and the employment/working age population by category. The latter picks up those that may be without employment due to job losses, discouraged workers, disability and retirement. It also gives an “impact” indication of the proportion of the population employed in the various job categories.

(Technical note: the categories of employment are from the BLS establishment survey while the corresponding population figures came from the household survey. As a result, the employment/population figures here will not exactly match those shown in the BLS charts above. However, to get the industrial categories with enough detail, the establishment survey was appropriate. Corresponding population figures for those dates are found in the household survey. Nevertheless, the trends are clear and track both surveys in substance. We confirmed this thinking with data analysts at BLS).

We highlight a number of changes. First, the US employment base more than doubled over the 50 years. Second, manufacturing fell from 26.5% of the workforce and nearly 14% of the working age population in 1969 to 8.5% of the workforce and only 5% of the working age population in 2019. Private, service providing employment grew from 50% of the workforce in 1969 to 71% in 2019. In terms of the proportion of working age people engaged in providing services, it was 26% in 1969 but 41.5% in 2019.

Among the services, leisure and hospitality jobs, one of the fastest growing areas, represented nearly 7% of the workforce in 1969 but just over 11% in 2019. Retail trade along with education and health have remained relatively constant proportions of the workforce at just over 10% and 13% respectively. On the other hand, professional and business services, which includes IT, systems, operations as well as corporate management, grew from 7.3% of the workforce and 3.8% of the working age population in 1969 to 14.2% of the workforce and 8.3% of the working age population in 2019.

While retail, leisure, hospitality and healthcare services tend to be lower paid jobs, professional and business services pay better, which we discuss further below. Together, those lower paid categories comprised 35% of the workforce in 2019 compared with 30.1% in 1969. We note that government employment has fallen in proportional prominence — mostly due to a decline in the proportion of federal employees. Government employment was 17.5% of total employment in 1969 but just shy of 15% in 2019.

Third, decline in manufacturing and other goods producing jobs coincided with declines in workers covered by collective bargaining. From the early days of industrialization, emergence of unions promoted higher wages, safety protections and a door to a middle income lifestyle. As we mentioned above, the fastest growing job categories today are (mostly) among the lower paid categories, and less supported by the forces of unionization. Today, much of the union activity is in the public sector, among transit, local education, police and fire and other municipal workers. See graph below.

Fourth, to reiterate in terms of changes in real wages over time, the categories that have historically been better paid, such as manufacturing, are being replaced by jobs in lower paid categories in retail, leisure and hospitality and so on. Professional and business services win out on wage gains and we expect these trends to continue. See chart below.

A Digression

Our astute municipal finance readers have likely noticed that this last table is missing government wages. While exactly comparable figures (e.g. establishment survey) are not available for average annual earnings, we present a comparison of wages and salaries comparing private and public state and local government employment. Further, some readers might suspect that compensation (e.g. public pension and retiree health benefits) differ significantly across these two employment groups, so we follow with a compensation graph as well. On a wages and salary basis, the private sector is a winner, pretty much across-the-board, whereas compensation for state and local government workers exceeded the private sector pre-recession and during the recession years, but has lagged private sector compensation growth at several times in recent periods. (Technical note: these graphs are three month changes and due to limitations in the WordPress software, one cannot hover over the chart to view data.)

Conclusions

  • We are not likely to return to the drivers that linked wages and unemployment with inflation. We are curious to see how the Federal Reserve handles these changes going forward, but believe we are not likely to see higher rates soon. We are also not convinced that further lowering of rates would stimulate job/wage growth. Jobs and wages have continued their steady pace of growth, albeit anemic by past standards, despite numerous FR rate hikes.
  • Pathways to a middle income lifestyle (aka “the American Dream” that were once available through manufacturing to those without higher education (read: males, union members) have been replaced with lower earning service jobs.
  • We fear that the fast growing leisure and hospitality and service jobs were, in part, promoted by demand from the “creative class” (college-educated, professional and business job-holders) and could be subject to cutbacks in a tighter or declining economy. Losses in financial markets could result in reduced discretionary spending on leisure and hospitality activities as well as retail trade — pushing those employed (companies and tourist locations too) at the lower end of the wage scale into distress.
  • State and local (and federal) income tax revenues are up, due in part to growth in jobs, modest growth in wages and salaries, but also due to taxes on financial market capital gains, interest and dividends.
  • Further to that point, we worry that a pull-back in financial markets would not only lead to lower federal, state and local income taxes, but would also affect pension fund returns, a potential “double whammy” — pushing deficits at all levels of government.

Finally

If you are still reading, we see two other key areas where conditions have changed for legacy assumptions. 

  • First, assumptions used by public pension and retiree healthcare plan sponsors – such as interest rates, market volatility and greater longevity — are different today than in the 1980’s and 1990’s.  From the beginnings of public pension plans up through the 1990’s, these assumptions  worked: lifespans were shorter and markets made it possible to earn higher returns with lower risk. 
  • Second, we see climate change as a significant and under-valued factor in the economy.  The frequency of flooding, wildfires, tornadoes, hurricanes is fundamentally different than yesteryear.  The size and shape of our public (and private) infrastructure were hatched in a calmer climate and frankly, are not strong enough in many locations to handle current conditions.  As more communities experience major storm damage, those assumptions are no longer adequate. 
  • Third, taken together, all of these trends intensify budget pressure and economic drag. One example is in the Midwest, where manufacturing losses were heavy. Today, Midwestern states have been hard hit with flooding, tornadoes, levee breaches, infrastructure impairment, delayed disaster aid and so on. Dare we pile on with mention of the opioid crisis that has sidelined too many working age adults in the Midwest (and elsewhere) — an undervalued economic cost to families and government social service and healthcare budgets.