South-Western College Publishing - Economics  
U.S. Earnings Gap Widens
Subject Job Pay
Topic Employment, Unemployment, and Inflation
Key Words

Employment, Wages, Job Creation and Recovery

News Story

In the present U.S. economic recovery, firms are not hiring back as many laid-off workers as was the case in past recoveries. Historically, the manufacturing sector would hire back most workers affected by previous lay-offs. In the present recovery, the manufacturing sector has added only 91,000 jobs in 2004--after eliminating over two million jobs since 2001. Some manufacturing jobs were "lost" to cheaper workers overseas in what economists have come to call "offshoring."

The two million manufacturing jobs lost to overseas workers tend to be factory jobs, which tend to pay above-average wages. In fact, most U.S. job losses in the last three years have occurred in factory settings. The new jobs offered in the U.S. tend to pay at the lower end of the scale in occupations that are relatively easy to enter, such as service sector jobs.

"Since employment peaked, we've lost many more higher-paying jobs that lower-paying jobs," said Mark Zandi, chief economist at Economy.com. "In recovery, we've created more lower-paying jobs than higher paying jobs." Both of these trends tend to widen the earnings gap.

Daniel Aaronson, a senior economist at the Federal Reserve Bank of Chicago, identified two possible solutions to the widening earnings gap. Mr. Aaronson stated, "We shouldn't be concerned about short-term wiggles in the data, but on the bigger issues of increasing productivity and increasing worker education."

In the long run, worker education will be an important factor in raising the average wage and narrowing the gap. Professor Frank Levy of the Massachusetts Institute of Technology, cites two job markets in his analysis. "The market for college-grad jobs over the last four years has been expanding, but the market for high school graduates has been deteriorating, with production and clerical jobs shrinking and being replaced by lower-paying service sector jobs."

This widening earnings gap is likely to become a political issue in this presidential election year. Even though job creation has strengthened so far in 2004, it has weakened again lately. Overall, the nation still has around 1.2 million fewer jobs than when President Bush took office. Given the weakness in job creation and the apparent weakness in high-paying jobs in the current recovery, the U.S. job earnings gap is likely to continue its trend of the last 30 years.

(Updated October, 2004)

Questions
1.

Discuss the normal trend of hiring in the manufacturing sector during an economic recovery.

2. This article identifies at least two solutions to the widening earnings gap. What are they?
3. Why do you think the manufacturing industry is not hiring back as many workers as in past recoveries?
Source Edmund L. Andrews, "It's Not Just the Jobs Lost, but the Pay in the New Ones," The New York Times Online, August 9, 2004.

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