Wages, full employment and reducing inequality

The Washington Monthly magazine earlier this week published their latest issue, which focuses on equitable growth across generations of families in the United States. Figuring out how inequality interacts with economic growth and how to promote equitable growth requires looking at how an individual’s economic decisions and experiences change over a lifetime. The issue looks at a variety of issues at different times along this generational arc, including early childhood, K-12 education, higher education, and retirement. A few of the pieces take a more overarching look at these issues, including the essay by Alan Blinder on raising wages. Blinder, a professor of economics at Princeton University and former Vice Chairman of the Federal Reserve Board, looks at the current state of wage growth in the United States. Unsurprisingly, the state of wage growth is not strong. From 1979 to 2012, inflation-adjusted wage growth for the median worker was only 5 percent. Compare that to wage growth at the 99^th percentile, the lower bound of the top 1 percent, which was 154 percent over that same period. How can we boost wage growth for a broad section of U.S. workers? Blinder proposes seven policy responses that would boost the productivity of workers, reduce the gap between productivity and wages, and raise net wages relative to gross wages. But one solution deserves a bit more inspection: a call for a high-pressure economy. Blinder shows the unemployment rate, as a measure of the tightness of the labor market, is strongly related to wage growth and income inequality. Reductions in unemployment are associated with stronger growth in wages and compensation. This relationship is known as the wage Phillips curve. Recent research has shown that the relationship is stronger for low-wage workers.

High levels of unemployment are associated with high levels of income inequality. Blinder charts the unemployment rate over the years against the change in the Gini coefficient, a common measure of inequality, for each year. He finds a positive correlation between the two. That is, inequality increases when unemployment is high. He also point out that data from 1968 to 2012 show inequality has rarely fallen when the unemployment rate is above 6 percent. As policy advice, “have a low unemployment rate” can seem just as unhelpful as “just get a job.” But Blinder’s call to promote full employment is important nonetheless. It is a framework for thinking about what successful fiscal and monetary policy should look like. If policymakers focused on getting unemployment as low as they could via stronger economic growth then wage growth would be stronger and inequality would be lower. The hard part will be getting more policymakers to share this mindset.