Without Federal Policy Action, Unemployment Would be Much Higher Today

Sep 02, 2010, 13:49 ET from Keystone Research Center

Still, more action is needed to close gaping jobs and wage deficits threatening economic recovery, according to think tank's State of Working PA report.

HARRISBURG, Pa., Sept. 2 /PRNewswire-USNewswire/ -- Absent the extraordinary federal policy actions taken in the wake of the Great Recession, Pennsylvania and the nation would be looking at double-digit unemployment rates today, according to a new report from the Keystone Research Center.

Economists Alan Blinder and Mark Zandi estimate the national unemployment would now be approaching 16% without the economic policy actions of the Federal Reserve, the Bush and Obama administrations, and Congress. The effect in Pennsylvania, factoring in population growth, would be an economy roughly 690,000 jobs short of full employment and a state unemployment rate above 14%.

"Our economy is a product of conscious policy choices," said Dr. Mark Price, Labor Economist for the Keystone Research Center. "Federal policy stopped the economic free fall. And policy choices at the national and state level will powerfully shape the future health of the economy for middle-class families."

In the center's annual State of Working Pennsylvania report, researchers note that the public debate has shifted from boosting the economy to closing the federal deficit. However, the report finds, two deficits of another kind are far more threatening to the economic recovery: a jobs deficit and a deficit in the buying power of the middle class.

"The federal deficit is the wrong enemy," said Dr. Stephen Herzenberg, Economist and Executive Director of the Keystone Research Center. "Our economy will recover only when we put Americans back to work and pay them a fair wage."

Federal Policies Avoid Second Great Depression but Challenges Remain

Federal policy actions taken in the wake of the Great Recession have worked by stabilizing an economy that was on the brink after the recession took hold, the report found.

Before passage of the American Recovery and Reinvestment Act (ARRA) in early 2009, Pennsylvania was losing nearly 30,000 jobs per month. By contrast this year, job growth has returned to the Pennsylvania economy, which added 64,000 jobs during the first half of 2010.

More recently, Congress' extension of federal Medicaid assistance to the states and additional school funding to preserve teacher jobs have averted the further loss of as many as 12,000 jobs in Pennsylvania.

Despite the success of ARRA and other measures, Pennsylvania's economy faces an enormous jobs deficit that requires further policy action. Current projections put the state's unemployment rate at a high 7.2% in 2014 - a full seven years after the recession started.

In July, Pennsylvania was nearly 300,000 jobs short of full employment and had an unemployment rate of 9.3%.  To close this jobs deficit by July 2015, the Pennsylvania economy would have to produce 7,900 jobs a month - a rate of job growth more than three times larger than the average job growth that occurred during the last economic expansion.

Middle-class families are also struggling with a deficit in buying power, after decades of stagnant wages, the report found. This deficit prompted many working families to borrow against their homes or take on risky loans that helped precipitate the Great Recession. When the housing bubble burst, it took $8 trillion out of the economy, prompting massive job losses.

The wage deficit is a product of decades of stagnant wages for working families. In Pennsylvania, over the past 15 years, productivity grew by 43%, while the inflation-adjusted hourly wages of college- and high school-educated workers barely budged.

Had wage distribution remained as equal as it was in 1979, full-time, year-round workers would be earning between $2,800 and $3,750 more per year today. Two-earner, middle-class families would be making between $5,600 and $7,500 more per year - more than most Pennsylvania families pays in state and local taxes.

A Need to Shift Focus

The jobs and wage deficits pose far more immediate problems for Pennsylvania families than the federal debt and deficit, which has dominated public discourse during this election cycle, the report concludes.

Despite the contributions of ARRA, economic growth has stalled again in recent months and unemployment remains stubbornly high. Cuts in state and local government are reducing economic demand that much further.

"We have reached a moment of truth," Dr. Price said. "Anything less than stellar employment growth over the next several years will be an unmitigated disaster for hundreds of thousands of Pennsylvania families. Our policymakers need to make averting this disaster Priority No. 1."

View the full report at: http://keystoneresearch.org/sites/keystoneresearch.org/files/state-of-working-pa-2010.pdf.

The Keystone Research Center is a nonprofit, nonpartisan research organization that promotes a more prosperous and equitable Pennsylvania economy.

SOURCE Keystone Research Center