By Ambrose Evans-Pritchard

LONDON, England - July 4, 2010 - The U.S. workforce shrank by 652,000 in June, one of the sharpest contractions ever. The rate of hourly earnings fell 0.1%. Wages are flirting with deflation.

"The economy is still in the gravitational pull of the Great Recession," said Robert Reich, former U.S. Labor Secretary. "All the booster rockets for getting us beyond it are failing."

"Home sales are down. Retail sales are down. Factory orders in May suffered their biggest tumble since March of last year. So what are we doing about it? Less than nothing," he said.

California is tightening faster than Greece. State workers have seen a 14% fall in earnings this year due to forced furloughs. Governor Arnold Schwarzenegger is cutting pay for 200,000 state workers to the minimum wage of $7.25 an hour to cover his $19 billion (£15bn) deficit.

Can Illinois be far behind? The state has a deficit of $12 billion and is $5 billion in arrears to schools, nursing homes, child care centers, and prisons. "It is getting worse every single day," said state comptroller Daniel Hynes. "We are not paying bills for absolutely essential services. That is obscene."

Roughly a million Americans have dropped out of the jobs market altogether over the past two months. That is the only reason why the headline unemployment rate is not exploding to a post-war high.