On these very pages, I recently argued that the progressive economic agenda being debated by the Democratic presidential candidates is in sync with what ails us. While there are nuanced differences between them, their targets — excesses in finance, college affordability, income inequality, balancing work and family — are the right ones, especially compared with the big trickle-down tax cuts for the wealthy proposed by their Republican opponents. Such tax cuts will exacerbate inequality and, unless accompanied by massive spending cuts that will undermine government’s ability to do what we need it to do, blow a hole in the deficit the size of Trump’s ego.
But while I think it’s important, especially at this early stage of the debate, for candidates to tell us what they stand for, anyone who is paying attention to federal politics has to have the nagging feeling that political gridlock will prevent them from being able to legislate the agenda on which they are running (I’m talking about the D’s in particular). Elections can, of course, surprise you, but given what I expect to be the make-up of Congress in 2017, in my darker moments I hear Hillary Rodham Clinton and Bernie Sanders having an important, substantive argument over which is the best set of financial reforms or progressive tax plans that will never see the legislative light of day.
Again, I’m definitely not saying that these candidates should dial back their policy aspirations at this stage. To the contrary — it’s gratifying to see the response they are getting from significant portions of the electorate who recognize that the tilted structure of market outcomes requires significant interventions if growth is to reach those on the wrong side of the inequality divide.
But I’d also like to hear more about something that is inherently less partisan in nature, and that’s full employment, meaning labor markets characterized by a tight match-up between labor supply and labor demand, where most everyone who wants a job, has a job.
There are two facts you should know about full employment. First, as the bars in the figure above show, since the late 1970s, we’ve been at full employment only 30 percent of the time (see the data note below for an explanation of how this is measured). For the three decades before that, the job market was at full employment 70 percent of the time.
Second, the lower your wage, the more full employment helps you. In our book “Getting Back to Full Employment,” economist Dean Baker and I show that getting to tight labor markets raises the pay of low-wage workers 10 percent, middle-wage workers 4 percent and high-wage workers not at all. As you will note, that pattern is inequality-reducing, or equalizing.
The lines in the figure represent family incomes of low-, middle- and high-income families. Though there are many, many more moving parts influencing income growth than tight labor markets alone, it is not a coincidence that when incomes were growing together, the labor market was mostly at full employment and vice versa.
The mechanism in play here is as simple as it is elusive: Full employment boosts the bargaining power of less-advantaged workers. In contrast to the typical labor market these days, under full employment, employers have to bid up compensation of even their low-wage workers if they want them to stick around (yes, the measured unemployment rate right now is about 5 percent, but there’s considerably more slack than that number reveals). We haven’t seen those conditions since the latter half of the 1990s, and note how low- and middle-incomes accelerated in those years (circled in the figure).
But why would full-employment politics be any easier than say, progressive tax policy or regulating “shadow banks?” It might not be, but stick with me for a moment more.
To see why it might be possible for even today’s politics to promote full employment, you have to understand the difference between the primary and secondary distributions of income. The primary distribution is market outcomes — wages, incomes, and wealth before taxes and any government transfers kick in. The secondary distribution is what households have after taxes and transfers.
Now, these two distributions are obviously not as easily divisible as I’ve made them sound. Public policy hugely influences market outcomes.
But the political point here is that when you’re talking about a more equitable distribution of market outcomes, you’re not talking about redistribution. To be clear, I’m not afraid of that word, i.e., redistribution. We do a ton of it already, and it doesn’t just go one way, either. We’ve got both Robin Hood and reverse-Robin Hood policies in our economy.
But redistribution is a dog whistle, one that releases the hounds, if not the Foxes, in addition to lots of whining about “free stuff” going to undeserving people. That shouldn’t keep policymakers from promulgating fairness agendas, but if we’re going to push back on the fundamental forces driving inequality, we’ve got to target the primary distribution. Otherwise, we’ll be stuck asking Congress for more redistribution every few years. And that won’t work.
So I would urge candidates and policymakers to explicitly set full employment as a goal. In policy terms, that suggests numerous not particularly partisan actions. For example, get government dysfunction out of the economy: no shutdowns, no debt-ceiling madness, no short-term budget patches. It implies robust infrastructure investment in public goods, something that has long been accepted by both sides. It implies more balanced trade, something I’ve heard from both Donald Trump and Sanders, which is admittedly weird but economically correct.
It also implies leaving the Federal Reserve alone when it is using monetary stimulus to help get to full employment. That may invoke some libertarian discomfort, but most politicians agree that politicizing the Fed is a bad idea. And it implies spending money on direct job creation in areas of the country with persistently weak labor markets, even when national unemployment is low. That’s not exactly a conservative cause, but there’s more bipartisan support for it than you might think.
The point is that these are market-oriented solutions, designed to ensure that the private-sector economy is fully utilizing its resources, especially labor. Full employment isn’t left or right. It’s just smart economics, and we need to hear a lot more about that from those who would like to lead the nation.
Data note: To determine the amount of time the job market is at full employment, I compared the Congressional Budget Office’s measure of the “natural rate” of unemployment — their estimate of the lowest unemployment rate consistent with stable inflation — to the actual rate. Every quarter that the actual rate>CBO’s natural rate is a quarter we’re not at full employment.