America's largest group of unions thinks it knows why US wages aren't rising

Economists and top Federal Reserve officials often admit to being puzzled by low inflation and stagnant US incomes, even in the face of a rapidly falling unemployment rate that, at 4.4% in April, is close to its historic lows.

Here’s Fed Board Governor Lael Brainard in a May 30 speech: “There is little indication of an outbreak of inflation — rather, the latest data on inflation have been lower than expected. If anything, the puzzle today is why inflation appears to be slowing at a time when most forecasters place the economy at or near full employment.”

But William Spriggs, economist at the AFL-CIO and a professor at Howard University, isn’t surprised one bit.

“Economists seem puzzled that the unemployment rate is what appears to be a very low number and wage pressures are very low,” he said during a recent panel at a conference sponsored by the Minneapolis Fed. “I think is less puzzling to labour economists than it is to macroeconomists — we think macroeconomists have not been reading our literature.”

Spriggs’ theory, which bares out in practice, speaks to the age-old labour market adage: it’s not about what you know but who you know. Specifically, Spriggs argues that macroeconomic theory, which focuses on the relationship between inflation and unemployment and informs the Federal Reserve’s thinking on interest rate policy, disregards the importance of job networks in helping young workers direct their careers, and older ones to maintain them.

Moreover, he says, race and geography play a huge role in setting, and in some cases limiting, people’s opportunities.

“For most of the Great Recession, the unemployment rate for a white high school drop out was lower than for all blacks unless you had a college degree. That’s the extent of this gap,” he said.

Spriggs said the trend is especially acute among African-Americans but also applies to areas like Appalachia and inland California, which are plagued by low-wage labour and disconnected from larger companies and economic networks.

There’s still lots of slack in the labour market,” he said.

As unemployment keeps falling, “this is the region where those who have ineffective job markets kick in. We don’t get wage pressures. So in fact the black unemployment rate can continue to fall.”

From the audience, Dennis Lockhart, former president of the Atlanta Fed, had a question for Spriggs about the effects of outsourcing on wages:

“There’s an argument out there that relationship between wages and unemployment is driven by global effects of capacity around the world and therefore the reason wages have not responded is that in many industries, employers have options in sourcing, they can source offshore. What’s your thinking on that?”

“I definitely agree that is a huge source of pressures,” Spriggs responded. “In the unionized sector it is a real threat and it dampens collective bargaining. So models that envision forward-looking labour contracts that will get you escalating wage pressures? Not going to happen. That’s part of the reason I just don’t think it’s quite possible to replicate the stagflation of the late 1970s, early 1980s. I don’t think that’s possible. Because 6% of the private sector is unionized and that 6% is highly constrained by this phenomenon. And it’s real.”

So when the economy gets closer to full employment, Spriggs says, “you’re not going to see wage pressures you’re just going to see the deepening of these job networks and regions and groups that have been left out will just get better job networks. And it doesn’t produce wage pressures it’s just that these networks will be more effective.”

That’s an unusually hopeful note given so many economists and officials appear to have given up on the very notion of stronger growth and a more prosperous job market.

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