To Fault Wage Rigidity for Our Economic Problems is Simply Backwards
The most recent jobs report shows more job growth than expected, with an unemployment rate of 3.8 percent. By all measures, this should be taken as a good sign that the economy is healthy on at least a peripheral level. And yet, the inflation rate is 3.67, which is still above the target 2 percent. Prices, however, remain high. Consequently, we can expect the Fed to continue its policy of raising interest rates in its bid to rein in inflation.
Another way to read this, at least for some, is that not enough workers have been thrown out of their jobs, and that if the interest rate hikes had been doing what they were supposed to, fewer jobs would have been added, unemployment would be higher, but the inflation rate would be lower. It seems a bit peculiar that economic policy in the name of fighting inflation would celebrate workers losing their jobs.
Then again, the global economy assumes that growth rests on worker flexibility — the willingness to accept lower wages in the name of competitiveness. Low unemployment is often taken as a sign of inflationary pressure. After all, a tight labor market means that workers can be more rigid in their wage demands and as their wages increase and they increase their demand for goods and services, the result will be inflation.
We have long recognized that wages in the U.S. have been stagnant over the last four decades. Politicians often campaign on platforms of generating growth and lifting wages. The reality, however, would appear to be that we don’t really want wages to rise because it would conflict with other priorities, mainly larger corporate profits and dividends to shareholders. Therefore, it is time to recognize that the Fed does not serve the interests of main street, but those of the banking industry.
Congress too bears much responsibility here because it has sought to absolve itself of responsibility for making decisions by deferring to the Fed. Congress, after all, has to answer to the voters, whereas the Fed does not. It is effectively an independent regulatory agency whose governors, once appointed by the president and confirmed by the Senate, cannot be removed. The result? We don’t have a policy that serves the interests of ordinary workers. It certainly does not serve their needs.
Economic policy for too long has been driven by a desire to achieve growth in a global economy. This means increased profits and value for shareholders. It has also meant that in order to be competitive, workers would need to be flexible when it came to wages, a position easily reinforced by capital mobility and the ability of firms to invest in areas with low wages and little regulation. Growth, however, is not the same as economic development.
Economic development, on the other hand, entails investment in people and their communities. This would entail the creation of good jobs, like manufacturing, where workers could expect to earn good wages and become members of the middle class. Wages need to rise, and policy needs to be focused more on wages. Without decent wages, workers don’t have purchasing power, and without purchasing power they cannot demand goods and services in the aggregate.
Lowering interest rates during a recession to spark investment isn’t going to create jobs if there is insufficient aggregate demand for goods and services. And raising interest rates during inflation only succeeds in hurting those who have already been hurt as a result of stagnant wages and the pressure to accept even lower wages for the sake of continued growth in the global economy.
Congress, of course, could pursue fiscal policies, but they require that Congress have the courage to actually do something. It has been easier to absolve themselves of responsibility by deferring to the Fed. Moreover, increased inequality and the bottoming out of the middle class has only emboldened wealthier interests who are able to get Congress to enact economic policies that are more conducive to their interests at the expense of workers.
Sometimes the solution is obvious, but in our zeal to address what appear to be complex problems, we ignore the obvious in the search for what we think is a more sophisticated policy response. But at the end of the day, income indeed does matter. Policy intended to make a difference would focus more on workers and labor market institutions that would serve to bolster wages.
As wages have been stagnant, so too has the minimum wage with labor unions in decline. This is no accident, and they are very much related. Previous administrations have launched a war on workers. Anti-workers policies have been pursued in language similar to the liberty of contract arguments made at the beginning of the Twentieth Century. Today, they are couched as a matter of worker liberty and the “right-to-work.” But “right-to-work” laws only make it more difficult for workers to join unions. Moreover, previous Republican administrations stacked the National Labor Relations Board with people who were pro-business and antagonistic to labor.
It has long been argued that with increases in productivity workers’ wages will rise. But with increased productivity, wages have not risen. On the contrary, companies have pocketed ever more profits with more dividends going to shareholders. In order to have economic policy that will benefit the middle class, it is essential that wages be part of the equation in addition to traditional fiscal and monetary measures.
To assume that wages are less important, or worse that they hinder growth because they threaten flexibility, is to miss the essential ingredient in aggregate demand. Moreover, it gets policy backwards. European countries, especially those that follow a more corporatist model whereby wages are determined through negotiations between big government, big business, and big labor, understand that rising incomes are an essential part of a healthy economy
Even Milton Friedman assumed that along with tight monetary policy, incomes would rise on average 3 percent a year. Without a sound wage policy, the economy cannot be said to be inclusive. It has long been understood that a healthy economy, as well as a healthy democracy, requires a strong middle class. To maintain the middle class, policy needs to focus more on wages and labor market institutions that support them. Income, in short, matters.