Full Employment Won’t Reverse Income Inequality

Mark ThomaThe standard take on employment and wages is that if employment goes up, so will wages. I countered a commenter just yesterday on that exact point. This is very simple supply and demand stuff. If employment goes up, workers will become more scarce. When a resource is more scarce, its cost goes up. And this is why I generally have a problem with the way the Federal Reserve operates: any time that the unemployment rate gets low enough to really cause some increase in wages, the institution puts the breaks on the economy. But in general, I believe that a low unemployment rate will lead to increasing wages.

And why do I believe that? There is a notable exception regarding the Fed always tightening the money supply just when employment really starts to take off: Alan Greenspan in the 1990s. But that was because he was a heterodox economist. He got unemployment low, and he kept it low. The results: wages did increase — if only modestly. The interesting thing is that he manage to bring unemployment all the way down to 4% for a whole year without causing inflation, yet today the conventional wisdom is that we must worry about inflation because unemployment is about to get as low as 5.5%. It’s unbelievable. But the fact remains that if only we could get unemployment low enough, wages ought to start rising.

Unfortunately, this may not be the case — or at least the effect may be so small that it doesn’t matter (wages for most people rose little in the 1990s). Full employment may be a necessary condition, but it is not at all a sufficient one. Mark Thoma discussed this today at The Fiscal Times, Full Employment Alone Won’t Solve Problem of Stagnating Wages. He noted, “The idea that market forces alone will increase wages sufficiently to offset increasing inequality is not supported by the evidence from these years [1979 – 2015].” Put simply, there is a whole lot more going on here than “market forces.”

In fact, there is really only one market force (Singular!) that is in effect. If markets were completely rational and completely flexible, wages would go down during a recession. In fact, this is a big part of what passes for conservative economic policy, “If only workers would take a 25% wage cut, the economy would be back to full employment right away!” It isn’t that simple, regardless; but you really have to wonder how many recessions it would take to return to the antebellum south. But because it is very hard to reduce wages, the theory goes, wages stagnate for a while until the the real free market value of labor is back up to where wages currently are.

I’ve always wonder about this theory. My main question is why such widespread reductions in wages wouldn’t throw the economy into deflation. Since the cost of labor would be cheaper, stuff would be cheaper. But then there would be less demand for the stuff because people wouldn’t have as much disposable income. So you end up with less demand but at cheaper prices. This in turn would cause another round of wage lowering. It sounds like a deflationary trap to me. Regardless, it is ridiculous to suggest that you can disassociate economics from sociology — wages simply don’t go down in a recession.

A bigger issue, I think, is the lack of union power. And along with that is the decline of the minimum wage so far that it is effectively useless. This is why I’ve become an advocate of a Basic Income Guarantee (BIG) where everyone is paid a living wage whether they work or not. That would do the same thing as the minimum wage did in 1968 when it was, adjusted for inflation and productivity, almost $22 per hour. That kind of minimum wage (or even BIG) today would not destroy our economy (as conservatives always claim); rather, it would building a strong middle class. After all, the economy was doing great in 1968.

But the power elite don’t even want such issues discussed, much less acted upon. Because this has nothing to do with the economy as a whole, and everything to do with who shares in the spoils of the economy. As Thoma noted “owners and managers of large firms are paid much more than their counterparts in other countries, an indication that something beyond market forces is at play.” The same thing can be said for doctors — a major reason why our medical care costs so much. But Thoma’s conclusion is extremely important:

So long as we continue to believe that market forces and the attainment of full employment will solve the problem of stagnating wages and rising inequality, so long as we fail to recognize that workers need a level playing field when bargaining over wages, inequality will continue to be a problem.

But I don’t think this is an accident. The society that we live in is the one that the power elites want. They’ve spent at least the last fifty years making a society in which issues like this are considered outside the Overton Window. But we liberals need to remember this stuff — and talk about it loudly. The market will not save us. The conservatives are crazy, evil, or both. The neoliberals are just wrong. The “free” market economy does not distribute resources justly and efficiently.

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About Frank Moraes

Frank Moraes is a freelance writer and editor online and in print. He is educated as a scientist with a PhD in Atmospheric Physics. He has worked in climate science, remote sensing, throughout the computer industry, and as a college physics instructor. Find out more at About Frank Moraes.

4 thoughts on “Full Employment Won’t Reverse Income Inequality

  1. The theories about wages adjusting to a recession a don’t bother to answer what labor does about it’s fixed costs of living. In particular, they were formulated prior to consumer debt being a common thing. And personal credit ratings are used to deny people housing and employment. Creditors large and small can extort their payment and penalty, weather or not they are truly owed. It takes a lawyer to fight back, and if you can afford one of those you don’t need help in the first place. Or, if favorable, they are the passport to easy financing and preferable treatment. I’ve experienced both. I understand the bankruptcy laws are really terrible these days as well. So, Mr Employer, I can’t accept a 25% wage cut to clear the labor market because I have a negative net worth. My house is no longer worth what I owe, as is my car. My personal property might be sold for five cents on the dollar of it’s purchase price. Perhaps I could raise some money by participating in medical experiments? I read recently that one of the great ironies of America is that luxuries are cheap and basic needs will drain you dry. Might have been Barbara Ehrenreich.

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