Pay for performance

Obama: As President Barack Obama kicks off his run for a second term, the economic battlefield may be shifting. Although job growth is slowly returning, worker wages are still stagnant at best. As a result, income growth may emerge as a hot-button issue in the 2012 race for the White House.

Unemployment improvements are helping the Obama administration. The March jobs report showed the headline jobless rate ticking down to 8.8 per cent. Economic adviser Austan Goolsbee noted the full percentage-point decline over the past four months was the largest such drop since 1984. That year, President Ronald Reagan won 49 of 50 states despite the economy suffering a nasty recession early in his term. The White House must hope next year’s electoral results will echo that political dynamic.

Republicans will try to shift the story. They have made unemployment the focus of their assault on the president, zeroing in on optimistic stimulus forecasts that failed to materialise. But now the GOP can seize on the work of political scientists who reckon the overall jobs picture matters only to the extent it influences worker pay. After-tax income is the important measure. Strong growth in real disposable personal earnings led to huge victories for Reagan in 1984 and Richard Nixon in 1972. Weak or negative growth sank Jimmy Carter in 1980, George Bush in 1992 and John McCain in 2008. Wages were the dark spot in last week’s employment number and have grown at just a 1.8 per cent annualised rate over the past three months, according to the Economic Policy Institute. With inflation running a bit higher, it means the average American is slowly falling behind.

Blame a combination of so-so-economic growth and higher gas and food prices. Goldman Sachs estimates output expanded at just a 2.5 per cent pace during the first quarter. During that three-month period, Obama's average approval ratings fell to 47 per cent from 51 percent despite the improving jobs situation. A rating of 48 per cent or less has doomed every incumbent since 1940.

The outlook isn't great either. JPMorgan expects real income growth will remain “tepid”. Of course, Obama doesn't need a Reaganesque landslide to keep the job. Wages may be his Achilles' heel, economically speaking, but probably won't slow him up enough to be caught.