Workers are Benefitting from Low Unemployment and Higher Minimum Wages

December 02, 2019

Dean Baker
Truthout, December 2, 2019

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There are a lot of things — like high health care costs, unaffordable housing and crushing student loan debt — which are not going right for people right now. However, it is worth noting one important way in which things are going in the right direction. The low current unemployment rate, coupled with minimum wage increases in many states and cities, is leading to real wage gains at the middle and bottom end of the wage ladder.

The data on this are very clear. The weekly wage for the median worker, a worker in the middle of the wage distribution, has outpaced prices by just under 5 percent over the last four years, translating into an annual rate of real wage growth of 1.1 percent.

The weekly real wage for workers at the cutoff for the bottom tenth of the wage distribution has risen by almost 10 percent over the last four years, an average of 2.2 percent a year. The boost in minimum wages in states like California and New York clearly is a big factor in this rise, in addition to the tight labor market.

The story also looks good for disadvantaged workers. Average real wage growth over the last four years for the typical Black worker has been 1.5 percent. For the median Latino worker, it has been 2 percent.

These rates of wage growth aren’t spectacular, but in a context where we have gone more than four decades in which the typical worker has seen little benefit from economic growth, this is a positive sign. It also confirms the view that some of us have been pushing: that low rates of unemployment give workers the bargaining power necessary to secure real wage gains.

The only other period, since the early 1970s, of sustained real wage growth at the middle and bottom of the wage ladder was in the years between 1996 and 2001. This was also a period of relatively low unemployment.

It is important to remember that the low unemployment in recent years was the result of a deliberate policy choice. The Federal Reserve Board delayed raising interest rates, and was relatively cautious even when it did raise rates, allowing the economy to continue to expand and for the unemployment rate to fall.

There were many economists, including some at the Federal Reserve Board, who argued back in 2014, when the unemployment rate was still over 5 percent, that the Fed had to start raising interest rates in order to prevent inflation. Fortunately, then-Fed Chair Janet Yellen largely resisted the pressure for higher interest rates.

While the overall unemployment rate has fallen by close to 2 full percentage points since 2014, it has dropped considerably more for disadvantaged groups in the labor market. For Black workers, the unemployment rate has fallen by more than 5 percentage points from its 2014 average. For Latinos, the decline has been more than 3 percentage points. The unemployment rate for workers without a high school degree has fallen by 4 percentage points.

This history seems to bear out what Jared Bernstein and I have long argued: that low rates of unemployment benefit all workers, but they disproportionately benefit those at the bottom. It is therefore hugely important to the effort to reduce inequality and poverty to push the unemployment rate as low as possible.

Given the relatively healthy labor market of the last four years, it is worth asking whether Donald Trump deserves the credit he is claiming. The answer is, not really. This view is now widely accepted, including by Jerome Powell, the current chair of the Fed. He has committed the Fed to making low unemployment a top priority. That is a huge change from Fed policy in prior decades where preventing inflation was seen as the Fed’s main (if not only) job.

The unemployment rate had been on a downward path since 2010, as the economy was recovering from the Great Recession. The Trump tax cut almost certainly gave a boost to growth, and therefore lowered the unemployment rate but not for the reason given by the Trumpers.

So in terms of credit for the favorable labor market, Trump managed to come into office at the right time, just as unemployment was getting low enough to produce real wage gains. The best that can be said is that at least Trump didn’t screw things up. The tax cut was supposed to lead to a huge spurt of investment, which both increases demand, but more importantly, leads to higher productivity and therefore more potential output in the long run. As it turned out, investment has been weak in the period since the tax cut, even falling slightly over the last year.

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