Labor Market Wages and Income Inequality Essay

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…

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…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…