Economic Recovery Part Two: We Need More Action on Jobs and Wages

Stephen Herzenberg
Publication Date: 
February 17, 2011


As we approach February 19, the second anniversary of the passage of the American Recovery and Reinvestment Act of 2009 (ARRA), this report updates analysis of the effect of the Act and other federal actions on the economy of Pennsylvania and its metropolitan areas. The report also considers the need for policymakers to take additional action to ensure a robust and sustainable recovery.

The Recovery Act Worked. A year ago, some economists and many pundits questioned the effectiveness of the Act. Today, the evidence is indisputable: aggressive action by the federal government to create jobs worked. The Recovery Act turned the nation and Pennsylvania around, from recession toward recovery.

As of December 2010, federal action on the economy saved 400,000 Pennsylvania jobs and prevented a rise in the state’s unemployment rate to 15%. (The body of this report contains full sources and methodological details for estimates in the overview.) Federal action saved 118,000 jobs in the Philadelphia metro area, 80,000 in the Pittsburgh metro area, and 10,000 to 30,000 in the Allentown-Bethlehem-Easton, Harrisburg-Carlisle, Scranton-Wilkes Barre, York-Hanover, and Reading metro areas.

Compared to two previous “jobless recoveries,” Pennsylvania is also adding jobs faster in the current economic expansion. Eighteen months after the end of the 1991 and 2001 recessions, employment in Pennsylvania had declined by roughly 35,000 jobs. As of December 2010, 18 months after the official end of the Great Recession, employment in Pennsylvania was up by 24,200 jobs.

As we documented earlier this month, recent job growth in Pennsylvania is also healthier than in most other states. Pennsylvania ranked third based on the number of jobs created in 2010, 12th by percentage job growth over the last year and 14th by percentage job change since December 2007.[i]

We Need More Action on Jobs and Wages. Despite some good news, the unemployment rate in Pennsylvania remains at 8.5%, and the state is still short of full employment by an estimated 300,000 jobs. While these figures do not imply that federal action was ineffective, they do illustrate that not enough has been done to replace the thousands of jobs lost as a result of the collapse of the housing bubble.

One of the reasons that the private economy will be slow to pick up the slack from the federal Recovery Act is the erosion of middle-class workers’ wages over the past three decades as much of the gains from growth have gone to a thin slice of the highest earners. Typical workers have lost $3,000 to $3,500 in annual earnings due the three-decade rise in inequality. Slow wage growth will continue to hold down consumption over the next several years, according to the Congressional Budget Office.

The compromise on tax cuts and the extension of unemployment insurance (UI) that President Obama and Congressional Republicans negotiated in December will boost the economy significantly this year, lowering the unemployment rate by a projected 1.2 percentage points. Even with this boost, the national unemployment rate will remain a projected 8.4% in 2012 and 6.7% in 2013, according to economist Mark Zandi. Moreover, House Republicans are now proposing $61 billion in spending cuts that will decelerate the economy, undoing some of the positive impact of the December compromise. These cuts are being proposed by legislators wrapping themselves in the mantle of deficit reduction, even though the tax cuts they insisted on for the wealthy in December cost $139 billion and will have almost no positive impact on the economy, according to Zandi.

In this still-fragile recovery, it is critical that policymakers not fixate on the wrong deficit. For Main Street families, the jobs deficit and the wage deficit matter a lot more than the federal fiscal deficit. Moreover, more action to address the jobs and wage deficits — eliminating the shortfall in jobs since the recession began and the shortfall in middle-class wages that has built up over three decades — is the best way to restore robust economic growth that will drive down America’s fiscal deficit.

Options for Pennsylvania Policymakers. Although Pennsylvania lawmakers are more constrained in their ability to create jobs than those in Washington, Harrisburg does have options.

  • The state should increase its bond-financed investments in infrastructure, transportation, schools, and energy efficiency retrofits. By ramping up construction projects now, the state will not only create additional jobs, it will also get much better value for money because bid prices can be as much as 20% lower when the industry is in the doldrums and contractors are desperate for business.
  • The state should modernize its unemployment insurance rules and capture $289 million in federal dollars still available for the low-income unemployed.
  • The state should join 17 other states by enacting a work sharing law that allows employers, on a voluntary basis, to permit their workers to claim part-time unemployment insurance benefits when those workers see their hours cut back because of the slow economy. This helps avoid layoffs and allows employers to retain workers with valued skills.
  • Fourth, the state should invest in innovative workforce and economic development programs that help strengthen Pennsylvania’s critical industries.
  • Fifth, to get started on the wage deficit, the legislature should raise the state’s minimum wage and enact an economic development accountability bill requiring companies receiving state business subsidies to pay market-based wages that are not near the bottom of their industry. The new administration and the legislature should also establish a “Task Force on the Pennsylvania Middle Class” to generate additional proposals for lifting wages and reducing income polarization in the private sector.

Along with using bond financing when it would save on project costs, and maximizing federal funds coming to Pennsylvania, the state could pay for expanded state-level job creation through a two-year temporary increase in the tax rate on capital gains and dividends. Recapturing some of the two-year extension of tax cuts for the wealthy that was part of the December federal compromise would take this money off the sidelines and put it to work investing in Pennsylvania’s future.

A smart, aggressive jobs plan enacted even in a tight fiscal year would position Pennsylvania to maintain and expand its job-growth and unemployment rate advantage on the rest of the country and on neighboring New Jersey.