Wages Are Growing: Contrary to What You Read in the Papers

October 16, 2017

Dean Baker
Truthout, October 16, 2017

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There is much to criticize about the US economy. There has been a massive upward redistribution of income over the last four decades. As a result, those at the top have gotten incredibly rich while the middle and bottom have seen almost nothing from the growth over this period.

The recent past has been even worse. Millions of people lost their homes in the collapse of the bubble, pushing the ownership rate to the lowest level in more than fifty years. For African Americans the ownership rate fell to the lowest level on record.

The Great Recession pushed the unemployment rate into the double digits, with the unemployment rate for African Americans exceeding 17 percent at its peak. The recovery has been long and slow. While the unemployment rate has finally fallen back to pre-recession levels, the employment rate for prime age workers (ages 25 to 54) is still 1.5 percentage points below pre-recession peaks and 3.0 percentage points below the peak reached in 2000. The weakness in the labor market led to a sharp falloff in real wages for those at the middle and bottom of the wage distribution.

But that was the past. In the last couple of years we actually have been seeing some reasonably good economic news. The tightening labor market has narrowed the gap between the unemployment rates for African Americans and Hispanics compared with whites. In 2014 the gap between the African American unemployment rate and the white rate was 6.0 percentage points. For the first nine months of the 2017 it has averaged 3.7 percentage points. For Hispanics the gap was 2.2 percentage points in 2014 compared with 1.3 percentages so far this year.

Tighter labor markets have also meant that wages are actually rising for those at the middle and bottom of the wage ladder. There had been essentially no change in average weekly earnings between 2008 and 2014 for the median worker. (Weekly earnings can rise both because of higher hourly wages and also more hours of work.) Wages had just kept even with prices over this six year period. For workers at the 25th percentile cutoff (25 percent of workers earn less), real wages had actually fallen by 3.0 percent over this period.

However things have turned around and are now moving in the right direction. Weekly earnings, adjusted for inflation, of the median worker have risen by roughly 5.0 percent since 2014. They have gone up about by almost 8.0 percent for workers at the 25th percentile of the wage distribution.

For African Americans weekly earnings for the median worker were still at their 2008 level as late as 2015. Earnings for workers at the 25th percentile were down by almost 4.0 percent. In the last two years earnings for median worker have risen by almost 5.0 percent, while they have risen by close to 9.0 percent for African Americans at the 25th percentile of the wage distribution. In the last three years, weekly earnings for the median Hispanic worker have risen by more than 10.0 percent.

This period of two or three good years does not come close to making up for the suffering of the Great Recession, much less the prior three decades of stagnate wages, but it is important to recognize that things are finally moving in the right direction. Workers are getting their share of the gains from growth and workers at the bottom are actually gaining ground at the expense of those at the top.

Getting this recent history right is important for two reasons. First, it means that the economy can deliver the goods for the bulk of the working population, if the unemployment gets low enough and the labor market tight enough. All the economy’s problems will not be fixed by a low unemployment rate, but it does make a huge difference, especially for those at the middle and bottom of the income distribution.

The other reason we need to get this history right is that the progress of the last two years is threatened by the actions of the Federal Reserve Board in raising interest rates. The Federal Reserve Board has raised interest rates five times in the last two years. Its goal has been to slow the economy and reduce the pace of job creation. This limits workers’ bargaining power and the risk of higher wages setting off an inflationary spiral.

While these rate hikes were arguably unnecessary, they were relatively modest given that the Fed was starting from a position of a zero interest rate. This could change if the Fed gets a new chair. The current chair, Janet Yellen, was the architect of this sequence of modest rate hikes. One person who is widely mentioned as a possible replacement is Kevin Warsh. Warsh is a former member of the Federal Reserve Board of Governors. In that position he repeatedly expressed concerns about inflation even as the economy was collapsing and the inflation rate was near zero.

If Yellen is not reappointed and Warsh is picked in his place, his imaginary fears of inflation may lead him to push the Fed to raise interest rates much further. If this happens, the period in which most workers are in a position to share in the gains from growth may quickly come to an end.

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