The stock market is jittery from one day to the next because nervous investors want to know when the Federal Reserve will start raising interest rates again. When it does, there is widespread fear that the inflated stock prices might crater. Savvy players would like to get out just before the music stops.
But the Economic Policy Institute, a Washington think tank whose economists like to focus on broader public concerns, has asked the Fed quite a different question. When will wages start rising for working people?
The fragile recovery has been terribly lopsided so far. Improving economic activity is generating new jobs at a healthier clip and corporate profits are robust. But wages are still stuck in recessionary doldrums. Perhaps that is why Middle America remains so gloomy. Its battered finances are not recovering—and in some ways things are getting worse for many families.
“It’s really unbelievable,” said Josh Bivens, an EPI macroeconomist. “The economy and the labor market are still too soft to be thinking about raising interest rates. We are six years after the recovery and we still have labor market slack and we are still almost nowhere on wages. At the moment, we are still on a path that really doesn’t look like a sustainable economy.”
Household savings, he pointed out, increased at first during the Great Recession when families abruptly curbed their spending. But now, in the absence of increasing incomes, family indebtedness is on the rise again. The American economy will not gain a firm foundation, Bivens warned, until families are once again paying for increased consumption out of healthy wage incomes instead of borrowing more.
Bivens has proposed a modest solution in which the central bank could become a discreet agent in encouraging stronger wage gains. The Federal Reserve, he explains, should formally target wages as an important indicator in its complex policymaking processes.
Instead of monitoring only variables like price inflation or unemployment levels or GDP growth, Federal Reserve governors should also base their decisions on the condition of labor-market wages. If wage levels are flat or falling, as they have been for many years, that would suggest a need for looser monetary policy to stimulate the economy—lower interest rates or other government measures that could directly boost labor incomes.
For average Americans, this may sound like a technical fix from an obscure governing institution they know little about—and it is. But alarmed conservatives would denounce the Bivens proposal as radical heresy. In a sense, that is right too.
In the 100-year history of the Federal Reserve System, one its core functions has been to blunt rising wages and prices whenever Fed economists decide the “good times” are out of control and might cause inflation. The central bank puts on the brakes by raising interest rates—slowing the economy or even causing full-blown recession. That puts lots of people out of work and collapses any pressures for raises.