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The new economics of Labor Day

(Lynne Sladky/AP)

What do you think of when you hear the words “Labor Day?” A day off from work? A backyard barbecue? A day to honor workers? A day to reflect on the battles waged by the union movement to help workers get a fairer slice of the pie their labors helped bake?

I’ve been thinking about all the above, along with something else: big changes in a key corner of economic policy that are having a profound and positive effect on the most economically vulnerable worker. I’m referring to developments in monetary policy as practiced by the Federal Reserve that are facilitating tighter labor markets, which, in turn, are helping to boost living standards for working people.

To be clear, I’m not here to sugarcoat the outlook for American workers, who face blustering head winds from a set of trends that have broken against them. Any pro-worker, policy agenda must ameliorate those factors (I suggest how below). But it’s a lot better to have that fight with unemployment at 4 percent vs. 6 percent.

It’s still the case that the best, most direct way to raise the bargaining power of middle- and lower-wage workers is through union coverage, and the share of the workforce covered by unions is down from its peak of about a third in the mid-1950s to about a tenth today. Importantly, it’s not that people don’t want to be represented by unions: Just last week, Vox reported “support for unions is about as high as it’s been in 50 years.”

Why doesn’t increasing support for unions translate to increased union membership? Because the power base in this economy has shifted strongly to forces that aim to suppress labor costs and boost corporate profits. As shown in a recent analysis by Heidi Shierholz, the rise and fall of unions over the past century is strongly, and negatively, correlated with the fall and rise of income inequality (the correlation is, in fact, -0.9, where -1 is a perfect, negative correlation). We’re all correctly taught that correlation does not equal causation. In this case, however, I’ll confidently assert that the causal linkages are real.

The surest way to meet the demand for more union coverage is to pass the Protecting the Right to Organize (PRO) Act, a smart, comprehensive measure that, if enacted, has real potential to reverse the negative trend in union membership. It’s worth noting that among the Democratic candidates for president, former vice president Joe Biden (full disclosure: my former employer), consistent with his long track record of pulling hard for more union power, strongly supports the PRO Act.

But while unions are the most direct source of bargaining power, there’s an indirect force that can still be tapped to help workers: full employment.

When the job market gets tight and stays tight, a lot of good things happen to workers that don’t occur in slack labor markets. By definition, tight labor markets mean low unemployment, so more job seekers find work. But such conditions are a big plus for the much larger group of incumbent workers, as well. Those wanting (or needing) to move from part-time to full-time work can more easily do so. As the unemployment rate fell about six points from its peak in this expansion (from 10 percent in late 2009 to just below 4 percent now), the share of involuntary part-timers fell four points and is now, at 2.5 percent, near its historical low point.

Wage growth also accelerated in tight labor markets, as workers have options they lack in weaker periods, forcing employers to pay more to get and keep the workers they need. That’s one reason quit rates (voluntary separations), now at their highest point in this expansion, go up in recoveries. After a union, there’s no more powerful bargaining chip than the opportunity to leave a bad job for a better job.

The figure below shows how nominal hourly wages of middle-wage workers respond to slack: They decelerated until the job market tightened up, at which point they started to climb. Again, no sugarcoating: The gains have been choppy, and when we adjust for inflation, as wage analyst Elise Gould shows in a new paper, the current tight job market is delivering less to workers than the last time we closed in on full employment in the latter half of the 1990s. (One reason is that productivity growth — output per hour — was faster back then, so employers could raise wages while shaving less off their profit margins.)

Still, both of these high-pressure labor markets shared a critically important characteristic: The Federal Reserve accommodated the tightening. It sounds simple and obvious — why wouldn’t the central bank do so? The answer is that the Fed, which moves its benchmark interest rate up and down to slow and speed the economy, has a mandate to balance the trade-off between tighter labor markets and higher inflation, i.e., the negative correlation between unemployment and inflation.

The problem with that formulation is that ever since the 1990s, that correlation has diminished, and labor advocates like me have argued for “lower-for-longer”: Let the labor market run hotter for longer so its benefits can reach those left behind.

What’s so notable about the current moment is the top officials at the Fed are explicitly making these connections. In a speech just over a week ago, Fed Chair Jerome H. Powell emphasized how the high-pressure job market was reaching people in “low- and middle-income communities,” and how it was leading employers to train “workers who lack required skills, adapting jobs to the needs of employees with family responsibilities, and offering second chances to people who need one.” In words particularly germane to Labor Day, Powell argued that the Fed’s “challenge now is to do what monetary policy can do to sustain the expansion so that the benefits of the strong jobs market extend to more of those still left behind …”

To be clear, the Fed’s leaders haven’t punted on their mandate to carefully monitor inflation, nor should they. It’s just that they’re not letting the phantom menace of price pressures that aren’t in the data lead them to shut down a job market that’s finally delivering some bargaining clout to those who need it more.

So here’s my Labor Day message. There’s no question that strong forces have long aligned against workers in this country. But these forces can be reversed by a potent combination of tight labor markets and growing unions. Together, they are a one-two punch that can knock out even the deepest-pocketed adversary who stands between working America and economic justice.