By Martin Wolk Executive business editor
msnbc.com
updated 8/5/2004 7:08:38 PM ET 2004-08-05T23:08:38

Now that the economy is creating jobs at a healthy clip, a fierce debate is raging over the quality of those new jobs.

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On Friday, all eyes will be on the monthly employment report, which is expected to show that about 220,000 jobs were created in July, an improvement over the relatively anemic 112,000 created in June. Several analysts believe the total could be higher, up to 300,000, especially after Thursday’s report of a drop in new claims for unemployment benefits. The unemployment rate is expected to remain unchanged at 5.6 percent, where it has been stuck virtually all year.

Several recent studies have concluded that most jobs created in the past year have been at businesses that pay below-average wages such as retail stores, restaurants and hotels. If so, even strong job gains over coming months might not be enough to lift consumer spending, which hit a troubling slow patch in June.

Concerns about job quality have become a political football, embraced by Democratic presidential candidate John Kerry and dismissed by President Bush and his allies. They point to sharply rising overall wages and after-tax income, as well as the steadily growing number of jobs, which is crucial.

Barring a disastrous employment report, the Federal Reserve is expected to raise its benchmark interest rate by another quarter-point next week when policy-makers meet. The Fed raised rates for the first time in four years June 30, saying the economy is growing rapidly enough that it no longer requires such unusually low interest rates to stimulate it.

The economy added nearly 1.3 million jobs over the first half of the year, a vast improvement over the job losses of the past three years, but only a bit over the number needed to absorb the nearly 150,000 people who join the work force each month. With so many people still looking for work, wage-based income growth is still “relatively anemic,” said David Rosenberg, chief North American economist at Merrill Lynch.

The brokerage published a study last month showing that 89 percent of private-sector jobs added to the economy over the past 10 months have been in the service sector, where average hourly wages are lower than in manufacturing and construction. Fully one-quarter of the 1.5 million jobs created in the period were in the retailing and leisure and hospitality industries, which includes restaurants, hotels and entertainment venues. In retailing, the average wage is $12.04 an hour, well below the national average of $15.65. Leisure and hospitality is the nation’s lowest-paying sector at an average $8.86 an hour.

Not everyone gets paid by the hour, of course, and overall wages and salaries are up 5 percent over last year’s levels, while hourly pay is up only 2 percent. This suggests that “high-salaried workers with quarterly or annual bonus payments are doing well,” said the report authored by Merrill Lynch economist Jose Rasco. Hourly workers, by contrast, are having trouble keeping up with inflation, he concluded.

A report by Mark Zandi, chief economist of consulting firm Economy.com, came to a similar conclusion. Of 1.4 million jobs created over the past year, 55 percent were in “low-wage” industries and about 35 percent in “high-wage” industries. (The remaining 10 percent were in industries that paid average wages.)

“There are good reasons why businesses remain reluctant to aggressively add higher-wage jobs,” Zandi said in the report. He said business confidence remains fragile, benefits are especially costly for higher-wage employees, and it may be hard to find workers in specialized jobs that offer better pay. “This would suggest that more higher-paying jobs should be created in the months ahead as businesses and more specialized workers find each other,” Zandi said.

Other economists dispute the view that most new jobs are paying below-average wages. Bill Dudley, chief U.S. economist at Goldman Sachs, says federal statistics simply are not precise enough to allow analysts to draw a conclusion one way or the other.

“If you look at it by job industry type, it looks like you’re adding jobs in lower-paying industries, but if you look at it by occupation, it tends to push it in the opposite direction,” he said. “We think the data doesn’t support the claim on either side.”

Federal Reserve Chairman Alan Greenspan agrees. He told a congressional panel last month that "we've not been able to find a significantly meaningful change in the quality of the jobs being produced" relative to those lost.

While Bush still has the weakest record on job growth of any president since Hoover, the totals are not nearly as bleak as they were at the beginning of the year, forcing Kerry to shift his focus to the quality of new jobs and the “middle-class squeeze.”

But Kerry may be overstating his case, according to the Web site FactCheck.org, a non-partisan project of the University of Pennsylvania’s Annenberg Public Policy Center. In an article published Wednesday, the group particularly took issue with Kerry’s stump speech remark that new jobs being created are paying $9,000 a year less than the jobs they replace.

“Even some Democratic economists say the economic numbers are simply too rough and contradictory to allow any conclusion about the direction of change, let alone about how much less or more the new jobs pay,” the article said.

Rosenberg, of Merrill Lynch, said he is not expecting to see a surge in wages anytime soon. A study released last week by the Bureau of Labor Statistics focusing on 5.3 million workers who lost their jobs after at least three years with the same employer found that 57 percent found new work at lower pay. And about a third of them suffered wage loss of 20 percent or more.

“The unemployment rate has not budged — there has been no tightening in the labor market whatsoever,” Rosenberg said. Even the relatively optimistic economists of the Fed do not expect the jobless rate to fall below 5 percent by the end of 2005.

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