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Outsourcing the Middle Class Amidst a Recovery

October 24, 2012 By Lee Egerstrom, Economic Development Fellow

An upbeat Minnesota jobs report for September, in which Minnesota’s unemployment rate dropped to 5.8 percent, camouflages data that show the middle class is still in a recession that began more than a decade ago. Prospects for improvement are uncertain.

In good news for the state’s economy, the Minnesota Department of Employment and Economic Development (DEED) announced Oct. 18 that Minnesota’s unemployment rate dropped 0.1 percent as employers added 5,900 jobs. The national unemployment rate also dropped slightly to 7.8 percent.

The not-so-good news comes with a closer look at losses for various job sectors. Government jobs declined by 3,600 positions in September; manufacturing jobs declined by 2,500. These two job sectors essentially define what is the working middle class in America.

Government job losses are mostly the result of ill-conceived conservative austerity measures by Congress and the Minnesota Legislature that spill over on local governments. This drag on the economy is correctable if voters consider the consequences of their actions when they go to the polls.

Manufacturing losses, however, are far more complex and reflect changes in the global economy that started long before the Great Recession of 2007-2009. They are not self-correcting in an economy that is statistically in recovery.

First off, it should be noted that tax breaks in place for most of the past decade have not led to manufacturing plant expansions and job creation by U.S. corporations. Foreign corporations, however, are generating job growth with investments here while previous American jobs are moving abroad.

Michael B. Likosky, director of the Center on Law and Public Finance at New York University, noted in a recent commentary that foreign direct investment (FDI) declined by 50 percent in the 2007-2009 recession. Most of the lost FDI (49 percent increase) returned beginning in 2010 with the U.S. economy in recovery and as the eurozone monetary crisis spread across Europe.

Some of this reflects European and Asian companies seeking a “safe haven” for investments given the euro problems and slowing economies elsewhere. Some of it reflects moving production to be closer to the large U.S. market. But not all of it goes into domestic U.S. consumption.

Likosky noted in his commentary sent to academics, think-tanks and government researchers that FDI now accounts for 13 percent of total U.S. manufacturing and 19 percent of U.S. exports. This is why several states have worked with the Obama administration to lure more foreign investments, he said.

Granted, some of these investments have a down side as well. Much of it is going into Southern “free rider” states that are tax dodges and where restraints on unions effectively undercut the Middle Class. If trends in the global economy continue, however, incremental manufacturing increases in previously depressed Southern areas will lead to improved pay and benefits for workers. Over time, this should stop deflating American household incomes.

That isn’t happening yet in Minnesota. Analysis of DEED data by the nonprofit, nonpartisan Jobs Now Coalition shows that we have statistically “recovered” from the Great Recession, but our manufacturing sector hasn’t recovered from the earlier 2001-2002 recession and hasn’t recovered from the supposed “recovery” that followed.

Kevin Ristau, education director for Jobs Now, said comparing statewide manufacturing job openings in 2004 at the height of the prior recovery with current data show how opportunities for employment in the sector have declined. There were 5,200 manufacturing job openings in the second quarter this year when DEED did its semi-annual survey of employers. That was 3,300 fewer than in the second quarter of 2004.

This is a decline of 39 percent. The current median pay for these jobs is $14.42 per hour.

In contrast, there were 8,500 job openings in Accommodation and Food Services companies, or 2,400 more openings than in the same period of 2004. That’s an increase of 40 percent in jobs where the median pay is $8 per hour.

Overall, there were 63,000 job openings when DEED did its survey, a 100 percent gain in three years. But that was 52,000 fewer job openings than in 2001 when the first DEED survey was conducted. Only 55 percent of all current job openings offered health care, 42 percent of all openings were part-time, and the median wage for all openings was $11.06 per hour.

That is insufficient for many Minnesota workers and their families, Ristau said. The median is only slightly above the $10.59 per hour that the federal minimum wage would be if it had been adjusted for inflation since the 1960s. And it is well below the $14.78 both working parents in a family household of four would need to make to meet basic family needs in the Twin Cities metro area, and the $13.04 each would need in Greater Minnesota.

With two weeks to go before the election, a qualifier should be made about jobs talk. We have not blamed President Obama for the slow recovery from the first Bush recession, or from Bush’s slow 2004-2007 recovery, or from Bush’s Great Recession. Nor will we suggest that a return to the economic policies of the 2000s will bring different results going forward.

All campaign nonsense aside, what should be clear is that structural change affecting American manufacturing is underway. This needs to be studied and addressed by people of good conscience and good will when the elections are over.          

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