AT 128 MONTHS and counting, America’s economic expansion is the longest on record. Longevity did not come easily. The expansion continued despite global manufacturing slowdowns in 2016 and 2019, trade disputes and monetary tightening by the Federal Reserve. The recovery accelerated last year even as business investment slowed and investment in residential construction declined, supported by steady growth in personal consumption. The sustainability of spending reflects one of the most unusual characteristics of this expansion: faster wage growth for workers at the bottom of the income scale than for the top earners. Improving the fortunes of low-wage workers may, it seems, be an underestimated factor in the sustainability of economic booms.
Since the turn of the millennium, it is demand, and not supply, that has been the major constraint on economic growth. Quiescent inflation suggests that spending rarely hit the economy’s productive capacity during this period. Annual inflation was only 1.8% on average, compared to around 3.5% in the previous 20 years and 4.5% in the previous two decades. Economists have put forward several explanations for the chronic weakness in demand, from an aging workforce to a suppression of investment appetites caused by a slowdown in technological progress. Inequality is also believed to have played an important role.
Richer households are much more likely to save an extra dollar earned than poorer ones. The increase in inequalities, by increasing the income share of the better-off, thus tends to empty the economy of demand. Between 1979 and 2018, the real wages of workers in the 90th percentile of the income distribution rose 34%, according to recent analysis by Jay Shambaugh and Ryan Nunn of the Brookings Institution, a think tank. The wages of the tenth percentile, on the other hand, increased by less than 5%, and the wages of the fifth percentile fell. Expenses suffered as a result. In an analysis published in 2012, Alan Krueger, a labor economist, estimated that without the increase in inequality between 1979 and 2007, consumption in the US economy would have been 5% higher. This would add an estimated $ 700 billion stimulus to the current economy.
As more and more of the income generated by the economy went to thrifty households, the Fed found itself working harder and harder to coax enough spending to keep job growth and inflation from falling. . The average level of the Fed’s main policy rate, which was slightly below 10% in the 1980s, fell below 1% in the 2010s. who were most likely to spend, but through the provision of credit rather than higher wages. Household debt in America, GDP, roughly doubled between 1979 and 2007. It jumped almost 30 percentage points between 2000 and 2007 alone, when the flow of money from savers to spenders was turned into a gush by interest rates. low, soaring house prices and a collapse in mortgage standards. Without so much borrowing, the US economy could very well have stumbled into a state of permanent lethargy.
The recent recovery looks very different from the pattern established in the 1990s and 2000s. From 2014 to 2018, wages in low-wage sectors grew about as rapidly as in other sectors of the economy, according to an analysis recent from economists from Indeed Hiring Lab, a labor market research group. And over the past two years, wage growth at the bottom of the ladder has been significantly faster than that of the highest-paying industries (see chart). Raising wages for the low paid put more money in the hands of those most likely to spend, supporting consumption and helping the economy through a downturn. At the same time, household debt, which plunged immediately after the global financial crisis, continued to decline as a proportion of the GDP during the last years. Lower debt levels have in turn contributed to a more sustainable expansion, which is less likely to be stifled by changing credit conditions or higher borrowing costs due to increases in interest rates. , such as those imposed by the Fed from 2015 to 2018.
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The rise in wages reflects the gradual tightening of the labor market over the past decade. As the recovery continued, the unemployment rate fell to its lowest level in half a century, forcing businesses to search harder and harder to find the worker they needed. And as employment growth has continued, the share of working-age adults participating in the labor force has increased. People on the fringes of the labor market have been attracted to companies offering more generous wages.
However, much of the unusually rapid wage growth of low-wage workers is likely due to increases in minimum wage rates. Although the federal minimum wage has been stuck at $ 7.25 an hour for more than a decade, many state and local governments have passed increases in recent years that push the rate well above it. As a result Ernie Tedeschi, economist at Evercore ISI, a research firm, discovered in 2019 that the average person working minimum wage actually earns nearly $ 12 an hour. This effective wage, once corrected for inflation, has jumped by about a third over the past ten years.
The continued strength of wage growth for the low paid cannot be taken for granted. For now, companies are still eager to hire more staff. And political enthusiasm for minimum wage increases continues to grow. Most Democratic presidential candidates support a federal minimum wage of at least $ 15 an hour. But the forces pushing for greater inequality are persistent. An analysis released in December by the Congressional Budget Office projects that the share of pre-tax income going to the richest 1% will have started to rise again by 2021. Strikingly, and in part thanks to President Donald Trump’s tax reforms, income growth after taking into account taxes and transfers, should be even more skewed in favor of the rich. But politics can change. And the prospect of a strong and solid expansion should prove powerfully compelling. â
This article appeared in the Finance & economics section of the print edition under the title “Trickle-up economics”