October 28, 2014
The NYT had a Room for Debate segment on whether the Fed should be concerned about inequality. While many good points were raised in the exchange, none of the participants made the point that lower rates of unemployment are associated with faster real wage growth for those at the middle and bottom of the wage distribution.
This is the main point of the classic book, Getting Back to Full Employment: A Better Bargain for Working People, that Jared Bernstein and I wrote last year. We showed that workers at the middle and bottom of the wage distribution only saw wage growth when the unemployment rate was at low levels. This is an essential condition for these workers to share in the gains of economic growth.
The Fed may not always be able to boost growth and reduce unemployment by as much as it might like, but it certainly can keep the unemployment rate from falling. This is the point of raising interest rates. The idea is that higher rates will slow the economy and the rate of job creation, thereby keeping the unemployment rate higher than it otherwise would be.
If the Fed keeps the unemployment rate higher than necessary, then it is preventing most workers from sharing in the gains of growth, thereby worsening income inequality. This was very much an issue back in the 1990s when most economists thought the Fed should have kept the unemployment rate from falling much below 6.0 percent.
Fortunately, Federal Reserve Board Chair Alan Greenspan did not share this view. He allowed the unemployment rate to fall far below this level, reaching 4.0 percent as a year-round average in 2000. As a result, there was strong wage growth for workers at the middle and bottom of the wage distribution. These workers also had the opportunity to work more hours, further increasing their income gains. And, because unemployment disproportionately hits those at the bottom of the income ladder, these people disproportionately benefited from the jobs created in these years.
These fundamental points should have been included in the debate on the Fed and inequality.
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