Labor Day And The Economy

Maybe it’s because I’ve been insulated from the outside world ever since I’ve started law school, but I’m quite surprised that I haven't been hearing more about the labor and employment issues in the middles of the biggest economic recession in recent history. In light of the fact that it’s Labor Day tomorrow, I thought I’d share my thoughts on US labor and the economy.

The latest employment figures came out September 4th, and the numbers are staggering. According to surveys, job losses continue to reach record levels -- from 9.5% in July to ~9.7% now. Concurrently, merit increases have been frozen. In most industries, 4.0% pay increases have long been the standard … until now. Over the past year or so, wage growth has been closer to 0.5% and in some industries has flatlined at 0%. I saw these changes happening firsthand in my last consulting role, where more than half of my Fortune clients froze their merit increase pools, and nobody received salary bumps.

The unfortunate thing is that this number only represents those who still have jobs, and it doesn’t factor in that companies are decreasing worker's hours, not paying bonuses, reducing 401ks, and demanding that employees go on furloughs (requiring workers to take unpaid vacations or to take one day off per week). I suspect about 20% of companies are employing these furloughs now, and at least to 50% of government companies. When I worked at the Attorney General’s Office this summer, the vast majority of people there were on the Friday Furlough plan. The US Post Office has requested that some employees take indefinite furloughs and they are offering incentive plans for people to retire as many as 10+ years early.

With all this in mind, I’m pretty surprised that I’m not hearing more about the economy or about the state of employment, especially this weekend. One explanation is the fact that “visible compensation” levels of the business class have not dramatically fallen. What I mean by “visible compensation” is the compensation numbers that make the Wall Street Journal or the news—CEO salaries, severance payments, number of stock options, and “expected” bonus levels.

But take caution in what you hear. From extensive experience studying the topic, I argue that these numbers are not representative of the American story. For the business class, what people don’t know is that cash compensation is usually a smaller fraction of a total pay package. Executives are usually highly reliant on “actual” bonuses and the appreciation value of stock options (not the delivery of options) as part of their paycheck. In fact, these often account for 50%-90% of their compensation packages. And despite Goldman’s recent record-breaking bonus payout this past summer, most firms are not handing out cash. Also, despite the thousands of stock options that executives are still receiving as part of their compensation arrangements, many of them are completely worthless. This is because option value for executives is based on the appreciation of the company, and in this economy companies are not appreciating. So despite popular perception and media frenzy about CEO pay, executives are also taking a huge cut in pay. That said, at least they can keep their heads above water with their 6-figure salaries even when everything else has gone awry.

For me, the real story is the middle class and the poor. The unemployment rate for these folks is a staggering 10%-16%, with African Americans and Hispanic Americans at the high end of the range. This is 2x to 3x higher than that of executives. The only outlier here is in the finance industry where everyone’s jobs and compensation are at risk.

Aside from job loss, the middle class’ portfolios are also declining. 401k plans have been dipping for the past year, health care plans are becoming more expensive, and the stock they do have is not performing well. But more important than that is the residential real estate bust, since homes are the primary assets of those in the middle class. Having spent a large amount of my life in two of the biggest real estate markets, California and Arizona, I’ve seen this first hand. In Arizona, the average decrease in home value is 35%-40%, the highest in the US. When I drive down the street of Arizona, I continuously notice homes for sale at 50% last year’s value and homes that have been foreclosed by the bank. On many streets, it's half the homes. And California is no different. Home depreciation is hovering around the same range, even in nice neighborhoods like Berkeley, Santa Monica, and San Jose.

If so many Americans are losing their jobs, not getting increases in wages, loosing value in their homes, and subsequently in panic mode, what is going to incent people to spend money? I don’t know the answer, so I’ll leave that question to the economists working on it. What I do know is that that there needs to be a more focus on restoring the labor force in the middle class and because there hasn't been most business are not safe. The one exception seems to be universities, especially top tier universities, where demand remains high, especially today as students hope to become more competitive for theses “odd” economic times. This is especially true for JD and MBA programs.

As I’ve mentioned in a couple of posts, I'm definitely fortunate to be headed back to school now. While here, I plan to take labor and employment classes at the law school as well as human capital and labor economics classes at the business school. I hope to be involved in these issues at the policy level one day down the line.