Why no recovery for the working class?

A Federal Reserve governor recently credits the central bank with inflating asset prices since 2009 through its QE3 program.  Housing prices have also risen thanks to the Fed; the median single-family home price was reported up 37.3% through August after hitting bottom in January 2012.  The Fed is also trying to take credit for creating jobs via its monetary stimulus policy. 

Yet that obscures the other side of the coin in the recovery.  While housing starts and housing prices are up, construction jobs are not.  As Ed Yardeni points out in his latest blog posting, “Housing starts are up from a low of 478,000 units during April 2009 to 891,000 units through August of this year. Yet residential construction jobs are up only 162,000 since they bottomed during January 2011, to 2.1 million in August. They are still 38% below the record high during the spring of 2006.”

 “So far, the so-called ‘wealth effect’" hasn't created too many construction jobs,” Yardeni observed.

Why has the pace of recovery in the job market been so sluggish compared with the recovery of asset prices?  Chalk it up to the underlying dynamics of the 120-year cycle of inflation/deflation.  That cycle is down for one more year and until it bottoms there will always be a cyclical cross-current of deflation no matter how much artificial inflation the central banks of the world try to create. 

The working class is still in the process of unwinding the debt and excess from the “party years” prior to the credit crisis.  Wages for the average worker, moreover, haven’t kept pace with the increase in retail food and fuel prices of recent years.  Until this dynamic changes – which means either prices have to come down or wage go up – and until the Great Deleveraging has completely run its course, economists have no reason to expect anything to change anytime soon.