- The Washington Times - Tuesday, September 16, 2003

Will the state of the economy and the labor market help or hurt President Bush’s chances for re-election next year?

As economic events unfold, economists are raising their forecasts of economic growth. Real gross domestic product (GDP), which rose at modest 2.6 percent average annual rate in the current economic recovery through the first quarter of this year, perked up to a 3.1 percent annual rate in the second quarter. A pickup to an average of 4 percent to 5 percent over the next five quarters now appears to be a realistic possibility. If such growth is achieved, will it be enough to satisfy voters?

Economic growth can take different forms and affect different groups in different ways.

In the recovery that started in fall 2001, economic growth has been driven by productivity. (Productivity is output per hour of work and is a measure of the economy’s efficiency.) In the long run, rising productivity is unambiguously desirable and lifts everyone’s standard of living. But next year’s presidential election is not long run. In the short term, productivity both hurts and helps. When it increases faster than the overall economy, working hours fall or workers are displaced. But growing productivity also lowers costs, increases profits and raises wages, salaries, and benefits.

Nonfarm business productivity has been unusually strong during the present recovery, rising at an average annual rate of well above 4 percent and outrunning economic growth. Consequently, employment has not risen. For those with jobs, however, real compensation per hour has risen, though only moderately, and unit labor costs have dropped. Profits have improved, which has spurred the stock market.

If productivity remains strong in the quarters ahead, it is unlikely employment will show much improvement. But those with jobs should enjoy better pay and benefits. Though the employed far outnumber the unemployed, this scenario would still be bad news for Republicans. The Democrats would blame President Bush for a dual economy of haves and have-nots, and workers could fear for their jobs and possibly rein in their spending.

But if productivity growth drifts back to a more normal 3 percent or less as the recovery ages, with GDP growth at 4 percent or better, employers will have to increase hours and hire new workers to satisfy production demands. With manufacturing employment in a secular decline, the new job creation would likely be in the nonmanufacturing sector and would provide opportunities for displaced factory workers as well as other job-seekers. This scenario of rising employment would be a big plus for the president and Republican candidates generally, enabling them to say the latest Bush tax cut created jobs as promised. The Congressional Budget Office supports this outlook. Their recent forecast shows productivity growth slowing and employment rising over the near term.

However, the addition of new jobs would likely be delayed. Employers would need to be confident rising demand was sustainable. They would first increase the weekly hours of their existing workers before hiring in order to postpone the comparatively high fixed costs of taking on new workers. Politically, there is less mileage to be had from longer working hours than from more new jobs.

The national unemployment rate is a potent political number, which many economists are predicting won’t decline in the quarters ahead. In a 4 percent to 5 percent growth economy, continued strength in productivity will put a floor under unemployment. Even with slightly slower productivity growth, it would still be difficult to reduce unemployment because of continuing population additions to the labor force. Also, during the job-shortage years of recession and recovery, a large backlog of inactive unemployed has built up outside the labor force. With news of an improving economy they can be expected to re-enter the work force and compete with the active unemployed for jobs. A consequent rise in the labor force participation rate could offset the effect of any employment gains on the unemployment rate, at least for a time. High unemployment makes headlines, and Democrats would make hay with that.

All told, the slower-productivity and rising-employment scenario is the president’s best hope. Real incomes would continue to rise, and with increased job security the employed would likely be contented voters. The hours worked job-delaying subscenario could be a problem, albeit temporary. The high-productivity scenario without a job recovery would make a strong issue for Democrats, although some employees with better-paying jobs and employers who are doing well might turn a deaf ear.

Also, many workers and a majority of voters have a stake in the stock market, either in their personal holdings or pension plans. A GDP-stoked rise in the market that restored a large part of the equity lost in 2000-02 would be a big boost for the president.

Alfred Tella is former Georgetown University research professor of economics.

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