Nam Y. Huh/AP Photo
For the past several months, we’ve seen economists, wonks, and observers engaged in a debate, not over the empirical statistics underlying the economy, but more about how people feel about it. Polling shows Americans as pessimistic about the economy as they have ever been since the Great Recession, despite historically low levels of unemployment and gross domestic product expanding at 5 percent in the last quarter. That worm could be turning a bit, as inflation continues to mellow out while other indicators remain strong. Consumer confidence surged yesterday to its highest level in two years.
One of the economists who has fallen on the positive side of this debate is Arin Dube, a professor of economics at the University of Massachusetts Amherst. Known as a minimum wage expert, Dube has been arguing forcefully about the benefits of the country enjoying the longest period below 4 percent unemployment in 50 years, and how it can help cure a host of ills in the economy, particularly the wage inequality that has sparked so much discontent over the past few decades.
I talked to Professor Dube about what a labor market at or near full employment can do, the role of the loss of pandemic welfare supports, where interest rates need to go, and the outlook for 2024. A lightly edited transcript follows.
David Dayen: There’s been this rolling debate about the state of the economy. If you were polled on this question, would you say the economy is good, and why?
Arin Dube: I would say that, after experiencing very high inflation that cut back purchasing power for many people, we have strongly rebounded. The economy is doing well. And not in an abstract aggregate sense. It’s doing well for folks in the middle and bottom of the income scale. Which is an unusual thing in America, if you take a longer view over the last 50 years. We have strong GDP growth leading to strong wage growth with folks in the middle and the bottom, leading to a really sharp reduction in wage inequality. And these are really promising things. At a core level, it’s being driven by a full-employment economy, or at least the closest to one that we’ve seen since the 1960s.
That to me is a really good thing. It does not detract from the pain folks have felt from high price increases. But the reason why people with low and middle incomes have done better than in other economies is that we’ve really focused on labor market tightness. We gave up on full employment in the 1980s. That was really a mistake that gave up a lot for American workers. It’s great to see that turn around.
I will say that there are things that are disappointing. We saw how much we could cut back on child poverty with the expanded Child Tax Credit, but we failed to continue it. We didn’t have the political strength to do that, with clear negative repercussions.
But I think the labor market is an important locus to understand well-being. We see something remarkable, especially at the lower wage strata. We’re seeing a rebalancing of the lower-wage economy that we’d grown accustomed to. Before the pandemic, we saw sharp wage increases at the bottom, but mostly because of minimum-wage increases at the state level, due to the Fight for $15. In the last three years, we’re seeing strong wage growth in places like Texas, which has no minimum wage. That has been helpful because we’ve failed to raise the minimum wage at the federal level [since 2009]. It shows that if we focus on a tight labor market, a lot of things that go wrong in this country can be fixed. It won’t solve all of our economic problems. It won’t get at what happened at the top end of the wage scale, that won’t immediately change. But it does have promise of putting substantially larger paychecks in the pockets of working families.
I want to follow up on so much of what you just said. You referred to the wage gains at the bottom, and I’ve seen elsewhere discussion of this moderation or even weakening on wages among the management class, the top 20 percent, relative to nonsupervisory and production workers. So is the reduction in wage inequality a result of lower-wage workers leveling up or higher-wage workers leveling down?
It’s both. And I really mean it’s both. The actual inflation-adjusted real wage growth at the bottom has been very strong, about 7 percent between January 2020 and November of this year. Compare that to the last 50 years, you’ll be hard-pressed to find that type of leveling up. What’s also true, those in the top 20 percent, the managerial class if you will, haven’t done as well. One wrinkle to that, some of that may reflect higher-income individuals taking compensation in work flexibility. There’s been a rise in working from home; some workers are OK with lower income if it gives them flexibility. Factoring that in means that we’re not seeing a complete immiseration of the managerial class.
As much as they don’t want to admit that.
Some people may find that disappointing or encouraging, depending on your viewpoint. But if you look in the last year, we have seen clear growth in real wages throughout the pay scale. It’s still somewhat higher at the bottom, but throughout the wage scale. As long as we don’t have a recession in the next year, we will see strong wage growth throughout. There’s still been a partial rebalancing of wages that will stay with us for some time at least.
One of the things you’ve calculated recently is the Black/white wage differential. How has this changed recently and what are the real drivers of that change?
When you are seeing this reduction in wage inequality, it’s taking on a variety of forms. Historically disadvantaged workers are doing better. When the labor market tightens, employers can be less choosy on who they hire. They maybe are less choosy on skills, or on discriminatory preferences. Employers are hiring folks from the margins of the labor market. That’s why historically, African American workers do better in a tight labor market.
The Black/white wage differential fell between 1940 and 1980 roughly, especially from 1940 to 1950, when we had the Great Compression. When you make wages less unequal, it will help groups at the bottom of the wage scale, like Black workers. In the 1960s and ’70s, you had further changes through the civil rights movement. All that wound down from 1980 to the pandemic: The differential not only stopped falling; if anything, it slightly rose. That signaled a major failure to deal with racial disparities.
In the last four years, we’ve seen a sizable reduction, to the point where it’s the lowest it’s ever been. It’s true for Black men, Black women. It’s pronounced and robust, and to a large part, driven by a labor market where lower-wage workers have more leverage. That has led to reductions in a variety of disparities, including racial disparities. We also see this with Latino workers.
Full employment can reduce many ailments in social and economic policy. Veering outside of my expertise, it’s critical to have a clear narrative for why those on the left have prioritized full employment for a long time, and when it happens, we have to recognize that. It won’t solve all of the problems of capitalism, but it makes a big difference on a route that folks on the left have aspired for, by increasing worker power. It’s a component of what a more just society should look like.
I read a paper that you co-wrote where you attribute wage compression in part to labor market competition, what sometimes has been called the Great Resignation, though some people don’t like that term. Over the past six months, we have seen quits fall back to pre-pandemic levels, and job openings have reduced. Is there any concern there that this labor market competition is falling off?
It’s certainly true that in 2021 and 2022 we had particularly high rates of quits, and they were happening in particularly low-wage jobs. Since then, two things have happened. The quit rates have gone down to 2019, which was still a tight labor market but not like ’21-’22. But also, the wage distribution does not look like 2019. We don’t have the same number of low-wage jobs. Part of the reason quits are lower is we don’t have as many low-wage jobs, we have relatively more better-paying jobs. We do expect the labor market to move back to pre-pandemic levels, but part of that is because of better job quality, not continually changing jobs forever. But even though quits have fallen in the last year, it hasn’t led to a reversal in wage compression in any way. That’s very encouraging. I don’t expect an ongoing reduction in wage inequality, we will maybe still see some. But the inequality reduction that’s already happened isn’t going to go away. The bottom of the labor market is not there anymore.
A tight labor market is a direct route to a more competitive labor market. There’s a lot we can do on labor market power, things like antitrust enforcement, but in my view the biggest bang for the buck is pursuing a tight labor market. It’s harder for low-wage, low-productivity employers to recruit and retain workers, because there’s nowhere else to go.
One thing people have talked about in this debate is the rollback in pandemic welfare supports, things like the enhanced Child Tax Credit, higher Medicaid rolls, increased food stamp spending. Despite this, consumption has remained extremely strong. Part of that is the increase in labor market income. But given that transfers are lower, to what do you attribute this continued strength in consumer spending?
The biggest cash amount for transfers was through unemployment benefits. This is something I studied a few years ago. We had a successful unemployment insurance system during the pandemic. The reason we designed it this way, unlike our European peers and even Canada, [was that] we didn’t have the policy infrastructure to do a furlough plan where we paid employers to keep workers there. We had the PPP but that was smaller. So we used the system we actually had, the unemployment benefits system. We had challenges in fine-tuning payments to put in lump-sum add-ons. It was a very successful way of increasing purchasing power.
Most of that reduction would have happened because people took jobs. By the time it went away in 2021, the share of people receiving unemployment had fallen because people took jobs. Some of the reduction in transfers is built into the improved labor market. Having said that, it is very disappointing that we did not reform the unemployment insurance system. Without add-ons, the [income] replacement rate is just terribly low. We’ve done very little to fix that, so that’s disappointing. If we had a stronger political coalition in power, I would hope we’d do more to fix that.
During the pandemic, because of transfers and reduced consumption, people saved more. It hasn’t dissipated much because of rising wages. People have a bigger cushion, and that’s allowed consumption to be quite strong even though some programs have dissipated. That change from transfers to wage income is a normal aspect of the business cycle. That doesn’t mean we shouldn’t be upset that we haven’t reformed UI, that we didn’t keep the CTC, which led to a huge reduction in child poverty. I hope we can we do that down the road.
Do you think the resumption of student loan payments could play a role down the road? A report this week shows that half of all students haven’t started to make monthly payments, but that means 20 million have, and that’s a new addition to their budgets. As more begin to pay, could that start to depress consumer spending?
It depends on additional changes the administration is trying to make after their plans got thrown out. It’s too soon to know how that plays out in terms of spending. It’s certainly a real issue. Reforming the payment system will be the important thing. I’m encouraged by some changes being considered. Fundamentally we need a bigger change, and I’m not sure about that happening without legislation.
To what extent do you think interest rates are depressing the economy by keeping mortgage and auto finance rates high, as well as the cost of capital for things like clean-energy manufacturing construction?
I think that we have been lucky, or that it turned out better than some people have feared. The higher interest rates have not led to significant reductions in consumption and investment. They could have in principle, and still can. The narrative around the soft landing, most people attribute the reduction in inflation to what the Fed has done. I think it’s more likely that changes during the pandemic have unwound themselves. The Fed increases played some role. But they were supposed to increase the unemployment rate, people were hoping that would happen. The hard-landing folks have been proven wrong, we were able to get an immaculate disinflation. I supported some degree of tightening as an insurance policy. But it’s pretty clear that’s not what did most of the work.
Higher interest rates now do increase the risk that something will go wrong. I certainly hope the Fed starts paring back on interest rates. They have signaled that they will, I hope they do it faster. It is the case that higher rates can have impact. Not only on new mortgages, but on housing construction. We saw an uptick very recently, but if we maintain a high interest rate for a long time, it could go wrong and be self-defeating.
The Federal Reserve is promising rate cuts in 2024, mortgage rates are softening, with rents there are reductions that haven’t caught up in the data. Do you see tailwinds for the economy next year?
As they say, predictions are hard, especially about the future. What I can say [is that] every indicator to me shows things going in the right direction. We have seen sizable reductions in the inflation rate. We’re seeing good job growth and wage growth. Wages have some catch-up to do and that’s a good thing. All going in the correct direction for keeping consumption high. Investment could start worsening but I haven’t seen that. We are seeing increases in business creation. If the economy was so sour, we wouldn’t see business creation at record rates.
So that’s all good. But there’s the big unknown; what is the shock out there? The conflict in the Red Sea and shipping could lead to delays. It’s maybe not big enough to throw the economy into a downturn. There are bigger possible risks out there; what they are I cannot say.
Based on what we do see, I’m optimistic about where things are. I think fundamentally, an economy that does well not just for a few but most has been elusive in America for some time. I don’t want to say we’ve got it now, but we’re closer to that than we’ve been in my adult lifetime and I think that’s encouraging. An economy that adds jobs and keeps wages strong is really good to keep going.
