The US economy today borders on schizophrenic. To be sure, we are seeing signs of positive momentum. The last three months have delivered almost 250,000 new jobs per month on average. Great news, but at the same time, unemployment is growing and now exceeds nine percent. Both consumer confidence and small business confidence is higher than where they were last year. But confidence has been falling rapidly for the past few months.
Were Charles Dickens to show up as a commentator on the evening news, he would have a ready vocabulary to describe our current economic situation: This recovery is very much A Tale of Two Cities. After years of record low interest rates, multiple stimulus packages, and the expansion of tax cuts and credits, we are in the midst of a very real recovery, but it is a recovery characterized by asymmetry. Banks and major corporations are flush with capital — large businesses are recording record profits — but job growth is tepid, unemployment remains high and small businesses are struggling.
At first glance, the combination of record corporate profits alongside anemic job growth seems contrary, but the two are directly connected. The primary reason corporate profits are at record highs is that large companies learned to be lean and highly productive during the worst years of the recession. The profits generated through a reduced but more productive headcount has induced many large companies to continue this lean approach even as we emerge from recession. The result: record profits despite weak revenue growth, which leads to a lack of hiring.
The job growth problem is even more nuanced than that. It turns out that the hiring we are seeing is at the extreme ends of the spectrum. To ensure strong profits, corporations are cutting out the middle layers of management — the middle-class. In their place, they are hiring at the very low end and promoting at the high end. Senior management compensation is up nearly 25% this year ($9M for the average S&P 500 CEO), to levels higher than in pre-recession days, according to executive compensation research firm Equilar.
On the other side, we have job growth coming in at the bottom of the pyramid, mostly minimum wage and temporary positions. Take last month's job creation, for example. Out of the 260,000 jobs created in April, a whopping 60,000 jobs came from one company: McDonald's. There is nothing wrong with flipping burgers for a living, but it will not pull us out of a recession.
Meanwhile, middle-class jobs are declining at an alarming rate. Middle income jobs have been falling rapidly for some time and now represent well less than half of all jobs in the US. New numbers from the Bureau of Labor Statistics suggest that these middle income jobs have been replaced by low-income jobs. This has left 17 million college-educated Americans with jobs well below their educational levels. If the middle-class are filling the jobs available for the less educated, then the poorest Americans will largely be left jobless. The question we need to start asking is not "how do we add jobs to the economy?"; rather, it is "how do we create middle-class jobs to rebuild our economy?"
Without middle-class jobs, our society will enter into a "Stagnant Age" of two classes: rich and poor. And with two-thirds of our GDP coming from consumer spending — and most of that coming from the middle-class — we will be left with a shrinking economy.
This post originally appeared at Harvard Business Review.
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