A few days ago I posted this response the NYT’s list of reasons for the income slump. One of my main points was that full employment—i.e., its absence—is a major factor behind sagging incomes and high poverty rates, and as such it should have a prominent place of the NYT’s list.
David Leonhardt, one of brainiacs behind the NYT series, got back to me with this interesting response:
I understand why you argue that full employment — to be more specific, the recent lack of it — is a major reason that median household income has fallen since 2000. But I don’t think full employment deserves a place on our list of 14 potential causes of the income slump. Full employment is not a lever by which to change the economy, as are trade policy, education and the other items on our list. Full employment is an outcome (and one that many of the items on our list help determine). The question I’d ask is what economic forces not mentioned on the list have led to the lack of full employment. The way in which monetary policy has been conducted? Fiscal policy? Something else?
Part of this is semantic and I think David has a point: he thinks of full employment as a policy outcome, not a policy. If policy makers do X and Y, then we can achieve full employment. So X and Y should be on the list, not the outcome variable.
But I disagree and view full employment as a relevant area of policy the same way David, I think, views education. If “the slowdown in educational attainment” makes the list as a cause of the income slump, I don’t understand why “the absence of full employment” doesn’t qualify. David believes that the educational slowdown is hurting income growth and I suspect he would pursue policies to reverse it. I think the absence of full employment is a big factor here and want to pursue policies to address it.
And, yes, absolutely: monetary and fiscal policies are highly relevant and while both have been used to great effect in this regard in recent years, neither have been used effectively or consistently enough. Dean Baker makes a strong point here on the Fed’s now-formal commitment to 2% inflation (price stability) without a similarly explicit target for full employment.
In this regard, I asked David why at least monetary policy in the interest of full employment wasn’t on this list. He responded that it wasn’t clear to him that there’s a strong case that the Fed’s monetary policy was too tight pre-crisis.
But the income slump has been with us since at least the 1980s, and has basically persisted since then with one exception: a period in the latter 1990s when the job market was at…wait for it…full employment! So this isn’t just about G-span in the housing bubble or Ben B’s pedal to the medal in recent years. As Dean and I document here, the Fed was a staunch enemy of full employment in the 1980s.
As per today—and I’ve had good things to say about recent Fed actions and rhetoric—imagine that instead of unemployment north of 8%, inflation was up there. Don’t you think they’d be pulling out all the stops to attack it? I applaud Ben for talking about the need to do more as he did today (see last link), but they’re still holding back and thus if not full employment, as suggested below, at least monetary-policy-in-the-interest-of-full-employment should be on the list.
In upcoming posts, I’ll have more to say about how we can achieve full employment. Yes, it’s monetary and fiscal policies, but it’s also trade policy, workforce training, public investment, and more. And ultimately, I fear there may be significant, and perhaps growing, groups of workers who simply won’t find and keep steady employment absent either direct job creation by the public sector or subsidized job creation in the private sector.
So here: I’ll make it easy for David, who’s a very busy dude.
15. The absence of full employment: Monetary, fiscal, and other policies have allowed job creation to be too low and unemployment too high over much of the period of the income slump, leading to much diminished bargaining power and lower real wages for many in the workforce.