One of the overarching themes of the Obama presidency is the income and wealth inequalities between both low- and high-income Americans and
between black and white America. The solutions to these problems are complicated, but the place to begin is with a tight labour market, something that has been absent during the past five years.
President Obama gave one of the most important speeches of his presidency on Wednesday on the growing economic inequality in America. He reiterated his support for simplifying the tax code, streamlining regulations, shrinking the long-term deficit, creating a high-quality pre-school program, eliminating pay discrimination, and raising the minimum wage. What he spent less time discussing was how to get the economy back to full employment.
The president mentioned that job growth was a prerequisite to reduce inequality, but the policies he put forward were about future growth.
“[W]e can’t tackle economic inequality if the pie is shrinking or stagnant,” he said. “The fact is if you’re a progressive and you want to help the middle class and the working poor, you’ve still got to be concerned about competitiveness and productivity and business confidence that spurs private sector investment”
“That’s why from day one we’ve worked to get the economy growing and help our businesses hire.”
However, shrinking the deficit or creating a pre-school program will do little to help the millions of unemployed Americans looking for a job.
None of this is to say that the administration does not care about the unemployed. They have proposed numerous ideas – the American Jobs Act in particular – to help the recovery. But Obama didn’t outline those in his speech. Instead, he focused on policies that could have positive, long-term effects on growth
Those are important, but the best way to combat economic inequality right now is to get the economy back to full employment.
When labour markets are tight, workers can demand higher wages and better workplace conditions. They can quit one job and know that others are available. They have leverage over their employer. But when job growth is weak, that dynamic reverses itself. Now, employers have the upper hand. They know there are millions of other workers seeking jobs to replace any employee who demands a higher wage.
Jared Bernstein provides data to backup this theory. He uses two graphs, both shown to the right. The first, from the Center for Budget and Policy Priorities, shows the divergence in real income that occurred between low- and high-income earners starting in the late 1970s.
The second shows the non-accelerating inflationary rate of unemployment (NAIRU), which is a CBO estimate of the unemployment rate corresponding to stable inflation. When the actual unemployment rate is consistently under the NAIRU curve, this is a sign that the economy is functioning at full employment. Meanwhile, when the unemployment rate is above the NAIRU curve, that’s an indication of slack in the labour market. These are rough estimates, but provide a pretty clear picture. Many economists also believe that the NAIRU curve is in fact much lower than the CBO’s estimates.
As you can see, when real incomes grew together for most Americans in the 1950s-1970s, the unemployment rate was low. When income inequality increased in the 1980s, the opposite was true.
In the past 20 years, low- and moderate-income have seen their greatest wage growth during the late 1990s, also a time of tight labour markets. This economic history provides evidence that workers have the most power to fight for higher wages and reduce inequality when the economy is functioning at full employment.
The benefits of a tight labour market are not limited to economic inequality as well. They also extend to racial inequality.
In a controversial post this week, Jonathan Chait reflected on the movie 12 Years a Slave and the underlying racism still built into the conservative movement.
“Conservatives can transport themselves for two hours into the hellish antebellum world of 12 Years a Slave and experience the same horror and grief that liberals feel,” Chait argued. “What they cannot do, almost uniformly, is walk out of the theatre and detect the still-extant residue of that world all around them.”
In two pieces responding to Chait, Ross Douthat agrees that “conservatives often have a blind spot about race,” but expecting them to use the movie to reflect on the residual racism still prevalent in America is counterproductive. Moviegoers will see the film as a representation of how far America has come, not how far it has to go.
Douthat then lays out three main components of structural racism and examines how conservative policies can help ameliorate these racial inequalities. Douthat believes conservatives have a strong policy agenda to offer African-Americans in reducing the opportunity gap they face in trying to achieve the American Dream. By offering pro-growth policies that support opportunity and independence, conservative can help reduce this inequality.
But a more immediate way that conservatives can help ameliorate this opportunity gap is by proposing policies to get the economy back to full employment. No matter which political party has the best ideas for the long-term economic well-being of African-Americans, creating a tight labour market should be the starting point for each of them in developing policies to combat these socioeconomic inequalities.
The fact that full employment is a powerful tool to combat both economic and racial inequality is not surprising. African-Americans are more likely to be working low-paying jobs than white Americans are. When workers in those low-paying jobs have greater leverage due to a tight labour market, that helps narrow the economic divide both between low- and high-income Americans and between black and white America.
That’s where we should start our conversation about reducing inequality.
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