Full Employment Proves to Be the Best Weapon Against Inequality
(Bloomberg Opinion) -- Tax reform early this year was expected to bring a windfall to corporations and the wealthy, but we’re finding instead that 2018 has been great for workers and, on some measures, the worst year for investors in decades.
While it may be a few years until we get detailed data, early indicators point to inequality falling this year, through a combination of an acceleration in wage growth and losses for both stocks and bonds. The lesson for anyone looking to reduce inequality is that the best policy is full employment.
While we were all distracted by the midterm election and stock market volatility, wage growth really has picked up in a meaningful way. Between 2013 and the first quarter of this year, wage growth for production and nonsupervisory workers was in a consistent range of 2 to 2.5 percent — this despite anecdotes of labor shortages in various industries since at least 2015. Yet since February, wage growth on a year-over-year basis has accelerated from 2.5 percent to 3.2 percent, a new high for this expansion. The last four monthly reports have come in at an annualized rate of 4.9 percent, 3.2 percent, 3.2 percent and 3.7 percent, suggesting that in the short run we’re continuing to accelerate.
A skeptic would point out that November’s 3.2 percent reading still is not as high as peaks in the prior two cycles, but as Jason Furman, former chairman of the White House Council of Economic Advisers, wrote in August, the difference in wage growth between this cycle and the prior two cycles can be explained largely by lower productivity growth in this cycle. With the uptick in wage growth we’ve seen since then, one can now argue that adjusting for the lower level of productivity growth in this cycle, wage growth is currently outpacing the levels of the late 1990s.
That might explain some of the turbulence in markets over the past few months. Corporations and financial markets can handle faster wage growth more easily if it’s caused by higher inflation or faster productivity growth. But if that wage growth is instead caused by a tight labor market, it’s coming at the expense of profits, and that’s going to put a strain on employers and investors.
What’s remarkable is this isn’t how policy makers intended for 2018 to play out. Because of the way the Tax Cuts and Jobs Act was structured, corporations and investors were supposed to reap a windfall, and then over time as businesses invested some of that windfall it would trickle down to workers. The stock market spike in January was investors betting on exactly this.
But a fiscal stimulus coming at a time of full or nearly full employment — no matter how that stimulus is structured — will find its way to workers. This is an important lesson for Democrats as they think about economic bills in the House, and as their presidential candidates shape their policy platforms. Policies that lead to and ensure full employment are the best way to help workers and to reduce inequality.
This isn’t to say that more targeted efforts don’t make sense as well. By all means, think about tax credits for workers, a higher minimum wage, parental leave and child-care benefits. But it’s the labor shortages brought about by full employment that get Walmart to shift from a laggard to a leader on pay. It’s what gets Starbucks to beef up its worker benefits. It’s what gets Amazon to become a vocal proponent of a $15-an-hour minimum wage.
It’s also an argument for Congress to become a little more involved in the direction of the Federal Reserve. People get queasy whenever legislators or the president criticizes the Fed, but Congress is a part of the operations of the Fed. The Fed chairman formally reports to Congress twice a year. There’s nothing stopping Congress from telling the Fed to make full employment a weightier part of its mandate than inflation. Experience may eventually show it’s the best course of action.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Conor Sen is a Bloomberg Opinion columnist. He is a portfolio manager for New River Investments in Atlanta and has been a contributor to the Atlantic and Business Insider.
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