Stocks plunged as the Bureau of Labor Statistics reported that no new jobs were created in August, holding the unemployment rate persistently at 9.1%. The latest BLS jobs report, the worst in almost a year, confirms fears of a stalling recovery. Also affecting the markets was the news of major banks, including Bank of America, Goldman Sachs, and J.P. Morgan Chase, facing federal lawsuits concerning the securities sold duing the housing bubble. Friday’s markets closed with the Dow down 253 points, 2.2%
The news of both tumbling markets and a grim employment outlook breaks just after Gallup reports on the rising fears of being laid off. Job insecurities are double what they were in 2008. What does this mean for our recovery?
Consumer spending accounts for 70% of the American economy, which is encumbered by a flat-lining unemployment rate now compounded by rising fears concerning job security. In turn, employers aren’t hiring until they see a rise of consumer spending. It’s a vicious cycle and unlikely to correct itself for some time.
Now, public opinion is an interesting thing, and this latest Gallup poll is not to be taken as a presage of imminent mass layoffs. In fact, after spiking in 2009, the number of layoffs dropped precipitously in 2010 and are still declining today. However, it’s possible that such worries could become self-fulfilling prophecies if workers cut spending in anticipation of a job loss or cut hours – and the vicious cycle continues.
What could shake the cycle is a well formulated stimulus plan injecting an aggressive amount of capital in the system, though this is unlikely given Washington’s recent move to austerity. Even if we see more stimulus in President Obama’s jobs plan next week, such a plan would be met with resistance by Republicans in the House. While Congress struggles to reach compromise on a plan, in the meantime, Corporate America may actually be in a position to ease the concerns of their workers.
For starters, Corporate America shouldn’t forget the reciprocal nature they have with their employees. Yes, those on the payroll are workers, but they’re also consumers. Yes, they cost money because you pay them, but they also spend that money on your products. In other words, creative employers need to incentivize workers to consume more of their products. How can they do this? They could start by raising the pay of their workers – not only do they need it, they deserve it. Below is a chart from the Bureau of Labor Statistics illustrating the growing gap between productivity and compensation.
Hourly compensation hasn’t kept up with productivity. We have been producing more for cheap at the expense of our work force. Now would be a perfect time for Corporate America to play catch-up. In other words, while employers aren’t willing to invest in hiring new people, they could invest in the workers they already have. They can do this by promoting more workers to higher positions, raise salaries and hourly pay rates, increase bonuses by size and frequency, pay for more employee training programs, offer company discounts, etc. These measures could possibly mitigate some of the job related concerns felt by the workforce. Who should these measures target specifically? The middle class is the most worried. As the chart illustrates below, households earning $50,000 or less feel the most insecure about their positions.
Do corporations have the capital to afford this? Yes! They have been sitting on record profits sparing costs for an uncertain future. That, however, is an unstable situation as record profits can’t be sustained without the economy’s primary component – consumer spending. So, if business leaders want to stay in the black, they’re going to have to invest in their workers.
Now, let’s be careful not to suffer from optimism bias. This kind of proactive approach for businesses is, by no means, a panacea; nothing can jump start the economy better than a well formulated stimulus bill. While it’s evident that the Recovery Act of 2009 did work, ‘stimulus’ has become a dirty word. The President should continue to fight for a jobs bill and hopefully the plan he unveils next week will be ambitious. However, after an acrimonious debate over the deficit, Washington seems unable to act decisively in a time of crisis. That said, we need to think of what can done from all fronts. The private sector has some role to play, and while business owners possess no silver bullet, employers can work to ease the insecurities of their workers. After all, their workers are consumers too.