The Saeculum Decoded
A Blog by Neil Howe
Aug 052009

This interesting article in the New York Times describes how hard-hit the self-employed are in today’s economy.

As a generation, Generation X (born 1961-1981) has hugely expanded the relative share of the workforce that is self-employed–and even, for the employed, the share of total income consisting not of “wages,” but of commissions, tips, bonuses, stock options, etc. This is the type of employment and income that goes up fastest when the economy is booming and falls fastest when the economy is contracting. It is all at the margin.

As usual, Gen X makes the market economy function, by taking the punishment while the rest of the economy adjusts. Keep in mind that the old saw during the Great Depression, “it didn’t hurt if you had a job,” was literally true. Because prices fell during the 1930s, and because most wages (esp for large manufacturing and public agencies) cannot be cut in nominal terms (“sticky downward” say economists), most wage earners experienced rising real incomes throughout the Great Depression. Indeed, the very fact that employers could not cut their wages–but simply had to lay them off when their marginal product was no longer worth the wage–gave rise to Keynesian “macroeconomics” as a new field with a new set of rules.

Ironically, most economists now say that the humanitarian appeals by Hoover (especially) and FDR to businesses not to cut their wage rates were completely wrongheaded. At a time of falling demand and monetary supply, cutting wage rates is the one thing that might have kept workers employed. Telling businesses not to cut wages forced them to simply fire workers instead, which directly reduced production and deeply exacerbated the cycle of demand collapse.

As the free-agent share of the workforce rises, the economy should be more resistant to the kinds of demand collapse that characterized the Great Depression. And over the last two decades, many economists attributed the economy’s “great moderation” (the tendency of recessions to become milder and shorter) to the growth of flexible non-wage labor income. Of course all talk of a great moderation is dead now, since we found out we could have really bad recessions for other reasons, like debt bubbles and the collapse of financial institutions.