Workers’ Wages and the Fed

In recent weeks, several economists have attempted to answer a question that has been gnawing at our field for years: Why aren’t wages growing?

Although these analyses — in the New York TimesBloomberg and elsewhere — do seize on dire problems contributing to the overall rise in inequality, they ignore a recent development: Wages actually are growing.

It is true that, for most workers, wages have not kept pace with productivity growth. As a result, high-end wage earners — Wall Street traders, CEOs, doctors and other highly paid professionals — have won out at the expense of everyone else. There has also been a considerable shift from wages to profits over the last decade, further benefiting shareholders at the top.

But in the last three years, wages have started to grow. The tightening of the labor market has finally given workers, especially those in the middle and bottom half of the wage ladder, bargaining power to increase their wages. This growth can be measured in a variety of data.

The median pay of women has risen more rapidly than that of men. And the median pay of both African Americans and Latinos has outpaced inflation.

According to the Bureau of Labor Statistics, the weekly earnings of full-time workers in the middle of the income ladder have outpaced inflation by almost four percentage points in the last two years. During the same period, the pay of workers at the 25th percentile — those who earn more than 25 percent of workers — has outpaced inflation by more than five percentage points.

Weekly earnings can rise for at least two reasons: because workers are getting paid at higher rates, or because they are working more hours. As long as those working more hours are doing so because they choose to, both causes are good. But only higher wage rates produce sustained improvements in standards of living. Fortunately, we are seeing this phenomenon, too: Median wages are now rising at a healthy pace for nearly all groups of workers, according to analysis of Labor Department data by my colleague Brian Dew.

What’s more, the median pay of women has risen more rapidly than that of men. And the median pay of both African Americans and Latinos has outpaced inflation by more than five percentage points.

The least-educated workers are also benefiting significantly. Among women between the ages of 25 and 54 who have a high school degree or less, the median hourly wage has outpaced inflation by 2.6 percentage points over the last two years. For men in the same demographic, median wage growth has outpaced inflation by three percentage points. This is especially striking since these workers are thought to have been left behind by the modern economy.

Notably, all this wage growth took place as the unemployment rate fell to 4.2 percent, its lowest level in more than 16 years. Many economists said previously that the unemployment rate could not fall this low without causing inflation to spike. But the most recent data show that inflation remains well below the Federal Reserve’s target rate of 2 percent and that it has been falling for most of the last year.

The only other time in the last four decades that we saw consistent wage gains among middle- and low-income workers was during the late 1990s when the unemployment rate also fell below the levels that most economists consider sustainable.

President Trump is now threatening to reverse this headway. According to news reports, he may replace current Fed Chair Janet L. Yellen with one of two men who believe it was a mistake to allow unemployment to fall as low as it has. If instead of nominating Yellen to a second term Trump picks one of these other candidates — John B. Taylor, a Stanford University economics professor, or Kevin Warsh, an investment banker and former Fed governor — the Fed could end up raising interest rates, which would slow growth and job creation. This, in turn, would raise unemployment and eliminate the bargaining power that workers have enjoyed in recent years.

Two years of decent wage growth does not come close to offsetting the havoc wrought by the Great Recession, much less the previous three decades of stagnating wages. But it is important to recognize that, for now, things are going in the right direction. Let’s not reverse this progress by putting the wrong person in charge of the Fed.

This column originally appeared in the LA Times.

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Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.

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