Last week, Chair of the Federal Reserve Jerome Powell announced a major change in monetary policy. For nearly a decade, the Fed’s stated long-term inflation goal was an annual two percent. However, we have consistently undershot that goal. In a speech sponsored by the Federal Reserve Bank of Kansas City, Powell promised more aggressive measures by the Fed to increase inflation in the coming months and years.
Powell fully acknowledged that, to many, it is counterintuitive that the Fed would want to push up inflation. After all, more inflation means less purchasing power for a given sum of currency. But he was right in saying that inflation that is persistently too low can destabilize a country’s control over its inflation rate, and can hobble the use of interest rate manipulation to boost employment when the economy is in a downturn.
What Powell failed to address in his recent speech is why inflation has so consistently fallen below the Fed’s stated target in recent years. As the unemployment rate gets lower, inflation is supposed to increase. In a strong labor market, employers are supposed to be desperately competing with one another for workers, leading to increased wages. The higher wages are supposed to increase the cost of production for businesses, which increases the costs of goods and services (meaning we all get less bang for our buck than we once did), which in turn leads to workers demanding even better wages to maintain their standards of living.
But that didn’t happen over the past decade. Following the Great Recession, the civilian unemployment rate peaked at about ten percent in October 2009. From there, the unemployment rate fell consistently, reaching prerecession levels of about 4.7 percent by the time Donald Trump took office. After Trump took office, the unemployment rate continued to fall, albeit at a slower pace, until it skyrocketed to nearly 15 percent earlier this year for the month of April.
And what was wage growth doing during more than a decade of job growth? Stagnating or declining. Prerecession, in late 2008, all nonfarm employees could expect an average year-over-year increase in their hourly earnings of about 3.6 percent. As the recession hit, that figure tanked, then hovered at around two percent for most of 2010 and 2012 — had the Fed met its two percent inflation target, workers would have been treading water or losing purchasing power over this period. But as the labor market began to surge, average earnings failed to follow suit. By the time the unemployment rate reached its prerecession level, average year-over-year increases in hourly earnings were still more than a full percentage point below their prerecession highs.
Analysts like to use the passive voice, saying things like, “There are many reasons why wages failed to grow,” as though wages have agency in whether they grow or not. Wages haven’t increased more over the past decade because employers didn’t increase them. Simply put, businesses didn’t pay their workers more because they didn’t have to. They wanted to keep more money for themselves.
The decline of unions has resulted in workers ceding more of their bargaining power, allowing labor’s share of the income produced by an enterprise to decrease significantly. Corporate consolidation has led to too few employers competing for the same workers locally, a problem that is exacerbated by the fact that Americans are less willing than they were in decades past to move elsewhere to pursue a better job. And then there’s just regular old greed.
As Trump’s Fed Chair seeks to boost inflation using monetary policy, maybe we should all keep in mind one of the big reasons why inflation is troublingly low in the first place: it’s because employers decided not to increase their workers’ pay, because no one made them do it. Permanently loosened monetary policy is a Band-aid that isn’t going to fix stagnant wages, the real underlying problem.
Jonathan Wolf is a litigation associate at a midsize, full-service Minnesota firm. He also teaches as an adjunct writing professor at Mitchell Hamline School of Law, has written for a wide variety of publications, and makes it both his business and his pleasure to be financially and scientifically literate. Any views he expresses are probably pure gold, but are nonetheless solely his own and should not be attributed to any organization with which he is affiliated. He wouldn’t want to share the credit anyway. He can be reached at [email protected].