Why Full Employment Should be on the NYT’s List of Reasons for the Income Slump

August 31st, 2012 at 6:27 pm

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.

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10 comments in reply to "Why Full Employment Should be on the NYT’s List of Reasons for the Income Slump"

  1. foosion says:

    Income is low because workers don’t have sufficient leverage to get higher income. Simple supply and demand should help demonstrate that if the available supply of workers is lower, wages should be higher.

    He includes global competition as a factor – that another way of saying a higher supply of labor without a corresponding increase in demand.

    Including computers and automation misses the point entirely. These raise productivity and national income. The problem is workers are not sharing, due to their lack of bargaining power in the face of increased supply of available labor (unemployment and global competition) as well as declining unions (also on his list)

  2. Robin Schulberg says:

    Jared: This is not strictly relevant to your post but it’s timely so I figured I’d send it anyway. I just got my electric power restored after Hurricane Isaac. Another way that society is going YOYO is that wealthy people in St. Tammany Parish (north of New Orleans) buy big generators which automatically power the house when the public utility power fails. After Katrina, it became the next new best thing. The rest of us have to wait until the public utility gets to us. And then of course the Republicans oppose Obama’s proposal for a stimulus project putting the power lines underground (as in western Europe).

  3. JimZ says:

    Jared you are so right. Where’s Leonhardt’s understanding of basic supply and demand? High unemployment should be at the TOP of his list of contributors to flagging household incomes. It is a breathtaking failure of policy and of social ethics that our leaders have summarily dropped full employment from the country’s list of policy objectives (all the nonsense political talk of “jobs” notwithstanding). When I studied econ. in the late 60’s-early 70’s, reaching full employment was considered job one. Now elected and appointed officials seem to bend over backwards to make excuses why to ignore that metric.

  4. Rima Regas says:

    David often looks at things from the vantage point opposite of the one he should be looking from. Paul K has often called him out on some of the same things you just did.

    You’re absolutely right. The lack of full employment is why factory orders haven’t gone way up. People are buying things, but only when they can or when they must absolutely have them. This goes for food, gas, personal items, all the way up to big ticket items.

    Then, as another poster mentioned, the unions have taken huge hits, especially in red states. The Obama administration helped lower the wages of Auto workers as a part of the bailout. While this might have been a necessity, and maybe even a prudent concession at the time, with today’s hindsight and looking at unionized labor as a whole, it probably wasn’t the smartest move.

    Lastly, and in support of your main point, the economy did add quite a bit of jobs in the private sector over the last four years. Had the states been given more help and not shed so many workers (teachers and other state workers), how much better off would we be right now?

  5. RayW says:

    The refusal to look at full employment as a cause rather than an outcome reflects a supply-side bias. Assuming that the supply-side creates demand is that foundational failure of the ideological basis of the whole republican party’s approach to the economy. The supply-side conventional wisdom that unfortunately the press, the democrats, and the administration also adhere to; is based in a socio-cultural illusion that only hard personal work creates our fortune.

    It is the view of a small animal that can only see its local world and does not grasp the larger system they live in. This is the same animal that created cargo cults and sacrifices to the sun.

    //so it goes

  6. Kevin Rica says:

    If wage growth is a policy goal, then full employment is the intermediate objective: the proximate cause of rising incomes.

    Just as Apple has “an app for that:” economists have an “equation for that.” What equation makes wages rise in graduate-school economics models? The “excess demand for labor” equation. “More jobs than workers” makes wages rise. “More workers than jobs” makes wages fall. So as long as you have “More workers than jobs,” workers’ incomes go down. Everything else in the model may influence the “excess demand for labor equation,” but without a positive “excess demand for labor,” wages never rise. Anything that causes jobs to increase faster than the number of workers may be an “ultimate cause” of wage increases, but only “more jobs than workers” can make wages rise. Of course, everything that causes the number of workers to grow faster than the number of jobs causes wages to fall.

    Leonhardt’s explanation of why the Times didn’t include “full employment” as an explanatory variable is fraught with obvious contradiction. His ostensible criterion, “Full employment is not a lever by which to change the economy, as are trade policy, education and the other items on our list” does not apply to several items on the list; an “demographic changes” (aging workforce), “changing family structures,” an “innovation plateau,” and “changing cultural norms” are not policy levers.

    And some of the 14 items have a very ambiguous effect on aggregate labor demand. “Improving labor productivity” (automation and computers) is usually considered a necessary precondition for wage increases. In fact, this is very well captured in the inconsistency of the NYT list of 14. Number 1 on the list is “automation and computers” and Number 10. “An innovation plateau.” So paychecks are decline in the NYT views both because of too much innovation and too little innovation.

  7. Kevin Rica says:

    Leonhardt will never admit it, but a rational, consistent approach to the question of income growth poses great difficulty to the policy choices advocated by the NY Times.

    If one approaches the problem as one of full employment or “excess demand for labor,” then it is hard to avoid casting a critical glance at the role of immigration, both legal and illegal. Since W was inaugurated in Jan 2001, the U.S. economy has not created any private sector jobs, but more than 10 million legal immigrants have entered the country and there are al least 10-20 million more here illegally. These people want jobs that aren’t being created and must therefore depress wages.

    This means that mass immigration, especially of unskilled workers, will conflict with other policy goals — such as increasing the incomes of American workers. The NYT will never say so outright, but they believe that America’s most important policy goal is the evacuation of Central America. They cannot admit that any legitimate policy goal would conflict with that.

    So Mr Leonhardt and colleagues may list immigration as one of 14 possible causes of lagging incomes, but they cannot deal with the issue honestly. The Times has its priorities.

  8. The Anarchist says:

    Greenspan told us in the 1980’s that high rates of unemployment increased financial assets (profits) of corporations due to downward pressure on wages. Bernanke continues this policy by claiming inflation is the imminent problem. nothing is further from the truth when U6 approaches 23% and core inflation is below 2%.

    This cynical approach to national economic policy is compounded by Congressional fear and demogogary on debt and deficits as opposed to serious consideration of sustainable economic growth. Yet, it is uncommon to read that deficit spending should continue until full employent is reached…4%-5%.

    We have a Congress and a White House over populated with economic illiterates. No one understands that public sector deficits equal to the penny net financial assets in the private sector.

    Here’s the full proof.http://wallstreetpit.com/8568-the-sector-financial-balances-model-of-aggregate-demand/

    As such, and most importantly, the economy’s financial flows are a closed system, so one sector’s deficit is another’s surplus, and vice versa.