- The Washington Times - Thursday, June 24, 2004

This spring’s burst of job creation brought to an end the first episode in modern history in which nearly a million jobs were eliminated during the first two years of an economic recovery.

But even as the expansion started churning out jobs as well as goods and services, as is usually the case, some questions have lingered about how well American workers will fare in a world in which new technologies as well as lower-paid foreign workers continue to threaten their well-being.

Average wage gains in the United States have dropped by half from 4.3 percent in 2000. And what gains in income workers are seeing are being eaten up by soaring prices for energy, homes, health care, education and other expenses, which this year are increasing at a 5 percent pace.

Kingsley Achikeh, a Silver Spring dentist, says his patients seem worse off than they were during the 2000 economic boom or even during 2001, when the economy was in recession.

Patients who three years ago would spend without hesitation on elective dental procedures like a $500 laser treatment for whitening teeth, today say they do not have the money to spare, he said.

“I’m not really seeing the improvement in the economy you hear about,” he said. Teeth-whitening patients this year have dwindled to one or two from eight to 10 in 2001.

Dr. Achikeh’s clinic in downtown Silver Spring serves people with low-paying jobs and no insurance. Many do not have money to spend on even basic dental work, he said.

The pinch that patients are feeling has made it harder for Dr. Achikeh to buy the new equipment he needs to offer the latest services, such as a $4,000 laser bleaching light for rapid tooth-whitening.

But he says he purchased the laser anyway, because it helps him save money by enabling him and his assistant to fill teeth in roughly three minutes rather than 40. That way, they can handle more patients.

Dr. Achikeh’s dental practice is experiencing the trends that Federal Reserve Chairman Alan Greenspan and other experts say are behind the prolonged job losses and weak wage gains that have made the current recovery unusual by historical standards.

Job losses, which are typical during recessions, continued into the recovery because of the extraordinary productivity gains brought about by new technologies that enable businesses to produce more with their existing work forces.

Today’s anemic wage gains are a legacy of the three-year recession in the job market. But analysts say the strong productivity gains should enable employers to increase wages again soon.

Workers short-shrifted

Mr. Greenspan noted in testimony before the Senate banking committee last week that, until recently, America’s 147-million-strong work force was getting the short end of the stick as wages got crowded out by increasing profits as a share of corporate income.

The result was wage stagnation during 2003, the first time workers did not see any real increase in their earnings, adjusted for inflation, in seven years. Mr. Greenspan said workers with less skills and education have been particularly hard hit.

But he noted that wage growth accelerated with job growth this year, and he predicted workers will be getting a bigger share of the pie as they traditionally have within one to two years.

Signs that the income drought is easing are seen in the Labor Department’s most recent jobs report, which showed that average wage growth shot up from a paltry 1.6 percent yearly rate at the beginning of the year to 2.2 percent in May.

That increase is still less than the increase in inflation, however, which in the last year has been running at 3 percent.

Jared Bernstein, analyst with the Economic Policy Institute, a union-backed think tank, is less optimistic than Mr. Greenspan that wage gains will pick up to healthy levels any time soon.

“Wage trends carry a lot of momentum,” he said. Wage growth does not usually accelerate until after the job market tightens significantly, just as it did not noticeably falter until after more than 2 million jobs were lost during the recession.

“It takes a long time — a year or longer” to see change, he said.

Mr. Greenspan suggested it is not “normal” for wages to be depressed so far into a recovery — to the point that companies in the last year devoted virtually all their growth in income to higher profits rather than wages.

With productivity growth, or output per hour, soaring close to 5 percent in the last two years, companies have produced more and accommodated modest sales growth without adding workers.

Part of the income generated from productivity gains usually goes to the workers because they helped create them.

Workers received a bigger share of the gains during the 1990s and even during the recession, making the 2001 downturn the first in modern times to see an increase in inflation-adjusted wage income.

Wages up during recession

The income growth during the recession was one important benefit from the productivity revolution, economists say, and it helped make the 2001 downturn one of the mildest in history.

Growing incomes enabled consumers to keep spending and buoying the economy. Aided by the low interest rates engineered by the Federal Reserve and tax rebates provided by Congress, consumers invested heavily in new homes and autos — creating booms in both sectors that in the past experienced busts during recessions.

The productivity boom had other significant benefits, enabling businesses until recently to hold price increases to the lowest levels in a generation. And it helped businesses boost profits at a critical time in the early stages of the recovery.

The return of profitability, while often vilified by politicians and the public, was necessary for businesses to regain the confidence and wherewithal to start hiring again, economists say.

Another change from previous cycles is seen today as the historic boom in housing and auto sales shows signs of winding down — a reversed role for sectors that in the past helped fuel recovery.

Since the productivity boom has been the secret ingredient that made the 2000s recession and recovery different in many ways, economists have sought to explain what is behind it.

They see two major trends. One, typical of boom-bust cycles, was the over-hiring of staff during the economic boom of the late 1990s, when corporations anticipated they would need more workers to handle sales that never materialized.

The second trend — technology-led productivity gains — was more unusual. A wave of new technologies, from computers and broadband to cell phones, laser and digital procedures, is enabling businesses to do more with less staff, as Dr. Achikeh discovered.

Mr. Greenspan says the technology-led gains, which emerged during the 1990s, could continue for years. He notes it often takes businesses and workers time to learn how to use new techniques in ways that bring efficiencies.

Important innovations in the past — the automobile and the airplane, for example — took decades to transform the economy. To the extent today’s technologies are capable of producing such sweeping change, they could continue to displace workers and nurture high productivity gains for a long time.

Richard Berner, chief economist with Morgan Stanley, said the robust, technology-led productivity growth of 4 percent during the 2001 recession was dramatically different from previous downturns, when productivity fell to close to zero.

But he says the period of hyperactive growth is ending because the “cyclical” increase in productivity since the recession, which mirrors past episodes, is largely over.

He expects productivity gains to slow to a 2.5 percent rate — still twice the rates seen during the 1970s and 1980s thanks to the ongoing technological revolution.

And that is good news for workers. “Companies have more than purged the labor excess,” he said. Now, “there is a pent-up demand for hiring.”

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