Labor Market Wages and Income Inequality

Abstract
This paper looks at the concepts of the labor market, wage growth and income inequality in the U.S. and discusses them in terms of inflation (caused by the injection of $4 trillion worth of liquidity into the financial markets by the Federal Reserve after the global economic crisis threatened to derail capitalism). It describes what has been written in three news articles in recent years and months, and discusses them with a view to showing that the “best economy ever”—as it is described by President Trump—should not be dependent upon a rate-cutting Fed. A good look at the labor market, wage growth and income inequality may help to explain why the president is so worried about the central bank maintaining loose monetary policy.
Introduction
While President Trump has often insisted that this is the best economy ever (BBC, 2019), there are signs that this might not be true—and those signs can be seen in terms of how one interprets labor market data (unemployment vs. labor participation rate), wages vs. inflation, and income inequality. Since the Federal Reserve along with the other central banks of the world engaged in unconventional monetary policy aka quantitative easing in response to the global economic crisis of 2007-2008, asset prices have increased exponentially—whether one is looking at the S&P 500, housing costs, healthcare costs, education costs, or even precious metals (which are known for tracking inflation). Now, with the President calling for rate cuts and the Fed responding with a 25 basis point mid-cycle cut at the end of July, the same issues of wage growth, income inequality and labor market participation remain. This paper will look at those issues and discuss them.
Literature Review
Cox (2019) states that the current labor market shows signs of tightening as small businesses are showing signs of slowing down: “Hampering job growth are labor shortages, layoffs at bricks-and-mortar retailers, and fallout from weaker global trade.” In other words, the takeover of commerce by Amazon is resulting in traditional retailers being put out of business, and the Trade War launched by Trump is resulting decreased business abroad. The fact that the majority of new jobs being added is in the services sector (146,000 jobs in the latest print), indicates that the work is impermanent, not high-skilled, and may be the result of a lowering of standards among labor force participants. In the past the labor force participation rate has been defined by the type of jobs that laborers are willing to accept—and if those jobs are not available, workers do not actively seek employment elsewhere and thus are not counted in the rate. Today, the fact that manufacturing and high-skilled labor jobs are not coming back and instead are being shipped overseas or being replaced by robots, suggests that workers are now willing to take what they can get in the services industry.
This sentiment is echoed by Harwood (2019), who states that the reasons income inequality is such an issue today are that technology (robots) have bounced workers from the labor market and globalization has increased competition and thus corporations to pay lower wages (which widens the gap between the rich and the poor—especially since the wealthy can simply buy the S&P 500 year after year and see their wealth grow by 20% thanks to the central bank always being there to backstop the markets). Harwood’s (2019) argument is that income inequality is an issue in America now that politicians want to address by raising the minimum wage and increasing workers’ rights. However, Trump’s base believes like him that this is the best economy ever with unemployment hitting multi-year lows and job growth improving under his administration.
Bernstein (2019) takes a different position on the top labor market, however. He states that ‘n an economy with too little worker bargaining power and too much inequality, the benefits of closing in on full employment are powerful and equalizing” (Bernstein, 2019). The author claims that most American workers simply do not have the means of bargaining for better wages and that because union membership is down (as jobs that used to be associated with unions—i.e., manufacturing jobs—have been sent overseas where corporations can hire cheaper labor) there is no organizing force that workers can turn to for help in getting better wages. This leads to no wage growth and the central bank’s role in inflating asset prices leads to the widening of the income inequality gap. Yet, low unemployment should be leading to a rebalancing of power in the favor of workers, according to Bernstein (2019).
Discussion
The problem with the theses of these authors is that there is no real room for explaining the lack of wage growth, income inequality and the labor market without examining the effects of central banking intervention since 2008, the effects of offshoring in a globalized economy, and the reasons for income inequality in the first place. The problem of stagnant wage growth over the past few decades is that the Phillips Curve is not really an effective tool at predicting the relationship between interest rates (inflation) and employment (wage growth), as Milton Friedman famously argued. The problem of wage stagnation is one that has stemmed from globalization and the fact that corporations are now fiercely competitive as a result of the widening markets: now American and European companies are competing with Asian companies and in order to compete prices are being slashed. To keep margins intact, the companies have to resort to hiring cheap labor. This means offshoring for Americans, which decimates the labor market in the U.S. and Europe as jobs are shipped to Asia, where wage slaves work for pennies on the dollar much in the same way prisoners in the U.S. work for pennies on the dollar for corporations who outsource labor to the prison industrial complex.
The problem thus is one of corporate governance and corporate social responsibility. Corporations have a duty to protect the communities around them and when they offshore their labor, they do their communities a major disservice that has real economic consequences. A lack of labor opportunities over time means that individuals, many of whom are graduating with a college degree, will not be able to find work in the fields for which they have been trained. With debts such as student loan bills and car or house payments to service, they take what work they can get eventually and end up in the services industry—which explains why all the new jobs added in recent months can be found in services: there is simply no other real work available in the U.S. Automation has overtaken what remains of many low-skilled jobs (and the rest have been offshored), which means unless one is entering into a highly-skilled industry that has not yet been taken over by robots, one is unlikely to have many other options than entering into services.
And while the cost of services has increased over the years, wage earners have not seen much of an increase in wages because companies are still basically competing at such a high level that they cannot afford to increase the wages of their workers. Thus, whenever minimum wages are raised in states, there is blowback from both small and large businesses in terms of laying off employees. If workers are going to be paid more, more is going to be expected of them and they will be required to do more work that was previously done by more employees.
However, as the central bank has chosen to backstop the markets so that pension funds, mutual funds, insurance funds and sovereign wealth funds can best be ensured of getting some sort of return (which is needed to keep the promises alive), those with wealth can simply invest in the markets and see their returns flood in. Those who have no savings or little savings (but cannot depend upon any ROI from a savings account offering 0.05% return) cannot possibly match the ROI gained by the upper class, which can afford to buy inflated assets across the board. This leads to further income inequality. At the same time, zombie companies emerge, created by low interest rates which incentivize over-leveraging. Stocks hit all-time highs at the same time corporate debt does too. If rates go back up, investors will flee the market and the whole scheme collapses—which is why Trump bemoans any possibility of raising rates under his watch.
Conclusion
Today’s economy is one that really has no life left in it. It has been gutted by years of offshoring and now corporations are addicted to easy credit and cannot tolerate any raising of rates because they will not be able to service the debts they have taken on. They are like the U.S. government in that sense. Wages will remain stagnant unless minimum wage laws force hikes. However, forcing wage hikes will only lead to more layoffs and the greater implementation of automation. Income inequality will remain so long as the central bank remains the buyer of last resort. The labor market will continue to offer mainly jobs in services, as this is all that will be left after offshoring and automation have accomplished what the owners of the means of production intended.
References
BBC. (2019). US economy under Trump: Is it the greatest in history? Retrieved from https://www.bbc.com/news/world-45827430
Bernstein, J. (2019). A tight job market is a potent force against inequality and wage stagnation. Retrieved from https://www.washingtonpost.com/outlook/2019/02/01/tight-job-market-is-potent-force-against-inequality-wage-stagnation/?utm_term=.0a531cf24efb
Cox, J. (2019). Private payroll growth tops estimates as job market shows signs of tightening. Retrieved from https://www.cnbc.com/2019/07/31/private-payrolls-up-156k-in-july-vs-150k-est-adpmoodys.html
Harwood, J. (2019). 5 reasons why income inequality has become a major political issue. Retrieved from https://www.cnbc.com/2019/06/05/5-reasons-income-inequality-has-become-a-major-political-issue.html