“Economy does not lie in sparing money, but in spending it wisely” – Thomas Huxley.
How then does the bleak job outlook for the millions of Americans unemployed affect the growth and prosperity of businesses? By now we’ve all seen the figures showing that corporate profits are at an all time high, while the minimum wage and medium household income are near all time lows. This, however, is only one component to a marginalized tenet of the American economy: Economic prosperity is borne by the spending power of the American public. According to the Bureau of labor statistics, wages have increased by a marginal 1.9% over the last 12 months. With such stagnant wage increases, consumer demand can hardly be expected to rise, let alone drive businesses to growth and expansion.
As of April 2014, 7.5 million part-time workers are working part-time due to economic conditions compared to April of 2006 with 3.9 million. The number of people forced into part time positions has nearly doubled since The Great Recession. How much spending power do these part time workers have? Because of their deficient earning power, they have a diminished spending power. After their most basic needs are met, these individuals are largely unable to patronize service industry businesses such as restaurants, and hotels or buy luxury items like computers, smart phones, or new cars. The consumer sentiment index, by Thomson Reuters and the University of Michigan, supports this trend by showing much lower confidence than pre-2008 levels.
The housing market fares no better. According to the National Association of Home builders and Wells Fargo Housing Market Index, builder confidence in the market hovers around 45 points. So, not only is the consumer commodities market suffering, but people are much less inclined to buy new houses. This in turn has a trickle down effect, causing demand shortages for construction companies, electricians, lumber companies, and others who rely on a thriving housing market. As seen in the chart, the level of new homes has a long way to go to reach pre-recession levels.
So, given the reduced spending power of full time and part-time workers, coupled with the stagnant housing market, both small and large businesses are faced with a marked reduction in sales volume. In turn, those same businesses, suffering the stagnant consumer market are forced into reduced hours for employees or outright layoffs. This is the question at the center of economic growth: If the economy, while still below pre-recession levels, has shown improvement in the last couple of years, why aren’t businesses expanding? Why are businesses not creating jobs? Figures show that small business confidence in the market, while improved somewhat since 2009, has not nearly reached levels seen before 2007. This lack of confidence directly relates to expansion and job creation. Small businesses, which are responsible for 64% of net new private-sector job creation, are unwilling or unable to expand, or create new job opportunities. Here we come to a chicken-or-the-egg situation. Small businesses are unable to create new job due to lack of demand, and low market confidence, and consequently unemployment levels remain the same or rise, and further add to the overall problem. This is the cycle through which we’ve descended since 2007, and while our economy has shown improvement in the developing years, the problem of joblessness and quality employment still remains a focal point of our ailing economy. When unemployment is low, labor force participation is high, and workers have good, stable employment, the economy will not only heal its wounds, but prosper, and give back the chance for a flourishing economic future.
This post was contributed by Derrick Miedaner