Wages hold steady as Americans take more McJobs

The joke going the rounds in pre-election America is that Bill Clinton has created 10 million jobs - and three of them are mine. On the face of it, the joke is past its sell-by date. The "Help Wanted" signs are a common feature in store windows in the nation's capital, Washington DC, so it is no surprise that the US unemployment rate has been falling for four years to become one of the lowest in the industrial world.

Figures out last week showed that household income rose last year for the first time since 1989, and the proportion of Americans living in poverty fell for the second year running.

Yet there is little sign of the rising wage rates that would be the normal effect of increasing demand for labour. This is why two weeks ago Alan Greenspan, the chairman of the Federal Reserve, decided there was no need to raise interest rates. Since he is the man who has been more right about the US economy more times than anybody else, it is worth paying attention to his view that something has changed in the American labour market.

Some of the clues about why this might be true are hidden in those income and poverty figures.

According to the Census Bureau, the median household income rose to $34,074 in 1995, a 2.7 per cent increase. (Top incomes rose by more - good news for the one in five delegates to the Republican Party convention in San Diego who makes more than $1m a year.)

It was the first increase in median incomes for six years and the biggest increase for a decade. Most of the rise was in the Mid-West, a region with a long way to bounce back from the impact of recession in its manufacturing industries.

However, earnings for full-time workers, both men and women, declined. In other words, for household incomes to have risen, either more people within the household have been working or they have been working at more than one job. In fact, a comparison of the employment figures and job creation figures suggests that for every four new jobs, roughly three additional workers have got employment. So the joke does have its truth.

The implication is that wage rates might even have fallen, if people are having to hold down more than one job to make a living. There is perhaps something in the charge that many of the new jobs for which President Clinton claims credit are McJobs. On the other hand, this does not seem to square with the Census Bureau's poverty figures.

They showed a significant decline last year. The number of people living in poverty fell by 1.6 million to 13.8 per cent of the population, down from 14.5 per cent in 1994. Poverty rates for blacks and the elderly reached historic lows. The proportion of the elderly living below the poverty line dropped to 10.5 per cent, compared to 35.2 per cent in 1959.

Last year was the first time it had been lower than the rate for those of working age. And for the first time, the poverty rate for blacks fell below 30 per cent, whereas more than half the black population lived in poverty in 1959.

Hispanics, rather than blacks, now form the most deprived group in the US population, with a poverty rate above 30 per cent. Hispanics' median income fell by a sharp 5.1 per cent last year, compared to a 2.2 per cent increase for whites and a 3.6 per cent rise in the earnings of black households.

It is the worsening position of the Hispanic population that might square the circle. Jeffrey Williamson, an economic historian at Harvard University, has compared the trend increase in income inequality in the US between the late 1970s and late 1980s with the parallel growth in inequality in the late 19th century.

Both episodes took place in a context of a globalising world economy and rapid technical change, the two factors usually blamed for falling wages at the bottom end of the scale.

Neither turned out to be entirely responsible for 19th century inequality, however, according to Prof Williamson's research*. Although technology played an important part, the key culprit was mass immigration.

Immigration is on the US political agenda with a vengeance, particularly illegal immigration from Mexico - from behind the Tortilla Curtain, as novelist T Coraghessan Boyle has put it.

The farewell legislation from Congress, before Representatives left Washington at the weekend to tend to their re-election campaigns, included new restrictions on immigration, although a bid to bar incomers who could not prove they had a job paying an income of one and a half times the poverty level from bringing their families to join them ultimately failed.

The current Mexican wave of immigration, although much smaller than 19th- century migration to the great American cities, is precisely the kind of influx that might explain falling incomes in the segments of the labour market in which Hispanics are concentrated, whether regions like Texas and California or low-pay service sector jobs.

And in fact, new restrictions on assistance to legal immigrants who have not yet become citizens will mean further falls in Hispanics' median income from this year.

There are other forces that could explain why a US unemployment rate as low as 5.1 per cent has not yet triggered any sign of wage inflation.

The Labor Secretary in the current Administration, Robert Reich, has put forward two reasons for thinking that the "non-accelerating inflation rate of unemployment" - in other words, the rate below which inflation will climb - is below the conventional estimate of 6 to 9 per cent. The range demonstrates just what an imprecise concept it is anyway.

But Mr Reich adds that companies' power to pass on higher costs as higher prices has been permanently limited by increased competition.

The increase in competition has come about because there is less advantage to bigness these days, thanks to new technologies, so small firms have moved into niches of markets formerly cornered by big firms.

Furthermore, he argues that the composition of the "value added" in goods and services is increasingly composed of knowledge or skill, and decreasingly composed of raw materials and energy. Thus final goods prices are less vulnerable to commodity price inflation than they used to be.

Be that as it may, keeping inflation low will still mean that wages must increase only slowly. So far there has been little sign of rising wage costs as the US recovery continues.

But the financial markets will continue to watch the earnings figure released with the monthly jobs and unemployment statistics. The next batch is due tomorrow. Wall Street has fallen sharply five times this year on the publication of these crucial numbers.

No matter what the structural changes in either goods markets, as Mr Reich argues, or in labour markets, as the immigration debate highlights, there will come a point at which an additional drop in unemployment sets US inflation on an upward path.

* "Globalization and Inequality Then and Now", National Bureau of Economic Research Working Paper no. 5491, March 1996.