The State of Working Pennsylvania 2009

Stephen Herzenberg
Publication Date: 
September 5, 2009


Just six months ago, the U.S. and Pennsylvania economies appeared to be plunging off a cliff, spiraling down at a rate unmatched since the 1930s. Now, these economies have pulled back from that cliff. Unemployment has stopped rising as rapidly and the number of jobs has stopped falling so fast.

The reason is simple: The actions by the federal government to stimulate the economy are working. That is one bottom line of this report: Whatever qualms you may have about the details of federal economic policy this year—and we have our share of qualms—decisive government action has slowed our economy’s free fall. Looked at through the lens of history, economic policy makers have taken to heart the failure of their counterparts—the Federal Reserve and the Hoover Administration—to act decisively to counter the collapse of the private sector economy at the beginning of the Great Depression. Both federal and state governments need to keep their feet on the economic accelerator at least this year and next, because it will take at least that long for private-sector demand to rebound.

The second theme of this report is that the government has not yet taken decisive action on a longer-run challenge that lies just below the surface of the current recession—the erosion of the middle class that helped trigger the economic crisis by leading families to finance their consumption through unsustainable debt (sometimes in the form of subprime mortgages). This report documents that wages for the broad middle class in Pennsylvania are now falling, in some cases quite rapidly. In the 1930s, in addition to stimulating the economy through increased public spending, the government took decisive action to build the middle class so that middle-class consumption could keep the economy growing for the long term. That second part of the New Deal, needed today to rebuild the middle class, is not yet on the radar screen. It needs to be.

Government to the Rescue . . .

The economic news of the last few months suggests that the federal government’s response to the financial market crisis that began in September 2008, while far from perfect, pulled the national economy back from the brink, transforming what might have become the Great Depression II into the Great Recession.

•    While job loss in Pennsylvania averaged 31,067 per month from February 2009 to April 2009, it has averaged “only” 9,200 per month in the last three months.
•    The unemployment rate in Pennsylvania climbed two percentage points in the five months from October 2008 to March 2009, but “only” 0.7 percentage points in the four months between March and July 2009. 
•    National data reveal quite clearly why job losses fell and unemployment rates stopped rising so quickly. Increases in public spending and middle-class tax cuts, direct results of the American Recovery and Reinvestment Act (ARRA), helped slash the decline of Gross Domestic Product (GDP) from 6.4% in the first quarter of this year to 1% in the second quarter. Goldman Sachs and Mark Zandi of estimate that without ARRA GDP would have fallen by 3.2% to 4% in the second quarter.

…But the Great Recession Has Still Hit Pennsylvania Hard

While government action slowed the decline in economic activity, this recession is already quite severe and is also far from over.
•    Since the start of this recession in December 2007, the Pennsylvania economy has lost 192,300 jobs, a decline of 3.3%. In the same period, the national economy has shed 6.6 million jobs, a decline of 4.8%. 
•    As of July 2009, there were more than half a million unemployed people in the Commonwealth.
•    The Pennsylvania underemployment rate reached 14.1% in the second quarter of 2009. While below the U.S. rate of 16%, this is still one out every seven workers. (The underemployment rate includes all those who cannot find the amount of work that they want, as a share of the employed plus the unemployed.)
•    To bring the share of the employed working-age population back to its level in Pennsylvania at the start of the recession would require another 230,000 jobs.
•    Most economists expect the unemployment rate to continue to rise over the next 12 months.

Middle Class Wages Fell in the Last 12 Months…

Now we come to the second theme of our report: the struggling middle class. The essential fact: Inflation-adjusted wages have fallen for most Pennsylvania workers in the last year.

•    In the 12-month period ending June 2009, inflation-adjusted hourly earnings for the typical Pennsylvania worker (the median or 50th-percentile wage earner), who now earns $15.65 per hour (about $33,000 per year for a full-time worker) fell 2% compared to the previous 12 months.

•    Wages fell even for Pennsylvania workers above the median—at the 60th, 70th, and 80th percentiles. Workers at the 80th percentile saw their wages plunge by over 4%, more than a dollar per hour, or $2,000 per year for a full-time, full-year worker.

…After a Decade in Which Wages and Income Grew Only at the Top

Recent wage declines come on the heels of a period since 2000, including the entire economic expansion from 2001 to 2007, in which wages for most workers stagnated.

•    From 2001-2002 to 2008-2009, virtually all Pennsylvania workers up to the 95th percentile (workers earning more than $42 per hour in 2008-09) experienced a decline in inflation-adjusted wages.

While earnings for most workers stagnated during the past decade, the income of the very wealthiest Pennsylvanians surged to new highs.

•    In Pennsylvania, the incomes of the richest 1% increased by 37% between 2001 and 2006 (the latest year for which data are available), and the income of the wealthiest 0.01% (1 out of every 10,000 taxpayers) rose by 50%.

•    Income inequality in Pennsylvania in 2006 and 2007 increased to its highest level since 1986 (the earliest date for which comparable data from the Pennsylvania Department of Revenue is available).

•    In the United States, income inequality in 2007 also exceeded that in any year for which data exist—in this case since 1917.

•    The top 1% of Pennsylvania earners captured 68% of the total growth in Pennsylvania personal income between 2001 and 2006.

What Economic Trends Mean for Policy:
Keep the Pedal to the Metal and Rebuild the Middle Class

In the early 1930s, once President Franklin Roosevelt came to power, the federal government responded in two broad ways to the Great Depression. First, it stabilized financial markets and used deficit spending to get the economy moving again. Second, U.S. policy makers directly countered the stark risk in inequality of the 1920s.

More specifically, the federal government enacted four structural reforms to strengthen the middle class and restore growth in middle-class consumption: They established the federal minimum wage and passed a law protecting workers’ right to form unions, and they established unemployment insurance and social security, thereby ensuring that jobless and retired workers could sustain their purchasing power The result of these structural changes: nearly four decades of broadly shared prosperity.

So far during the current recession, U.S. policy makers have taken actions analogous to those taken by the Roosevelt Administration in 1933 and 1934 to address the short-run economic collapse. The banking sector has been stabilized and government spending has risen to stabilize the labor market. As it did in the 1930s, the economy today has responded positively.

Looking forward, the experience of the 1930s suggests two guidelines for policy makers. The first guideline is that policy makers need to keep using government spending, at both the state and federal level, to pull the economy out of recession. When the Roosevelt Administration made the mistake of contracting spending in 1937, the U.S. economy sputtered again, growth fell and unemployment climbed. With unemployment likely to rise for the next year, and wages already falling (in Pennsylvania), government must remain the primary source of increasing economic demand. If government retrenches, the chance of a “double-dip” economic recession increases. An immediate priority for policy makers in Washington is an extension of unemployment insurance benefits for the 61,000 Pennsylvania workers estimated to exhaust their unemployment insurance benefits over the next three months.  Another component of sustained federal and state economic stimulus should be continued investment in the green economy—from energy efficiency to renewable energy to more environmentally sustainable manufacturing, agricultural production, and transportation systems.

The second guideline is that today’s policy makers need to take to heart the second lesson of the New Deal—the need for structural reforms to, in this case, rebuild the middle class. So farin the Great Recession, however, the idea of structural reforms—to strengthen the middle class and to ensure growth in consumption and private investment once the federal government no longer runs large deficits—has not under consideration. Without such structural reforms, many U.S. and Pennsylvania families will remain income-constrained and unable to increase their consumption. Without a prosperous middle class, the long-run health of our economy remains at risk.