It’s too obvious. It would be like asking how to reduce military spending, and including on the list “achieve world peace”.

This would be why wages continued to increase during the stagflation of the 1970′s when unemployment was high.

So that means it isn’t as easy to show with a chart divided into two historical periods but the relationship between high employment and wage growth still exists, after all that’s why the concept of the ‘natural rate of unemployment’ exists at all since in economics it is thought that inflation is only good when it leads to higher employment and (real) “growth”.

Paraphrasing:

In the 80′s, a higher share of GDP began to move to capital and away from employee compensation.

This was to explain why after thirty or so years of average family income following close to the GDP line on the graph, it began to flatten in the 80s, 90s, and 00s.

I recall in the 70s we received a couple letters a week asking for jobs as reporters, and we hired folks at minimum wage with no raises for a year. They were happy, because so many were looking for experience to put on their resume for the next job up the ladder.

Thirty years later, nobody seems anxious to get into the newspaper business, and so there are no requests for jobs, and we actually have to pay a living wage. Smaller labor pool once again equals higher remuneration.

On the other hand, it used to be tough to get ad sales reps. Now, they are a dime a dozen – because it is a lower skilled job that nearly anyone can learn (up to a point).

Fewer factories have also diminished the number of good, lower skilled jobs, and destruction of unions has allowed replacement workers at lower wages.

Thus if they pick too low an inflation target we will end up having too much unemployment. Hence my question: Is a 2% inflation target too low to consistently reach full employment? And thus is the success of the FED in hitting this target at least partly to blame for the rise in inequality?

* In my field (mechanics) there are force and displacement: you get to specify one and then the system deformation tells you the other one. Apply a force, see what displacement you get; or make a displacement and see what force is needed. If you try to specify both you only get what you want if you happen to know exactly how the system will deform already. The multiple solutions possible in a nonlinear system like the economy complicate this somewhat but there are similar issues.

Maybe this region will recover in 30 or 40 years. Maybe.