Decades-Long "Income Gap" Is Finally Reversing
FORECASTS & TRENDS E-LETTER
1. February Jobs Report Stronger Than Expected
2. Fed Has Green Light to Raise Rates Tomorrow
3. Rich vs Poor “Income Gap” is Finally Reversing
4. What Is Causing the Reversal in the Income Gap?
5. Conclusions: Three Cheers For Closing the Income Gap
The mainstream media loves to talk about the so-called “income gap” – the fact that incomes have been rising faster for the rich than the poor in America for decades. Yet new independent reports find that this trend has reversed in recent years.
We all need to know about this remarkable reversal, since the mainstream media is not likely to report on it – so that’s what I will focus on today. In a nutshell, wages grew nearly twice as fast for the poorest 10% of Americans than the richest 10% in 2016. This is huge news!
Before we get to our main topic for today, let’s take a look at last Friday’s surprisingly upbeat unemployment report for February. And I’ll also address the likelihood of a Fed rate hike on Wednesday at the conclusion of the latest policy meeting – and President Trump’s likely reaction.
February Jobs Report Stronger Than Expected
The US economy added 235,000 new payroll jobs in February, many more than expected, and the unemployment rate dipped to 4.7%, according to the US Bureau of Labor Statistics report released last Friday morning.
The pre-report consensus was for 190,000 new jobs to be added in February, so the actual report was well above expectations. The Labor Department also revised its January new jobs number to 238,000 up from 227,000 initially reported last month.
The economy has added almost half a million jobs in the first two months of 2017, the best back-to-back performance since last summer. Wages also rose at the fastest annual pace, up 2.8%, of the nearly eight-year economic recovery – reflecting a tight labor market in which companies have to compete more aggressively for workers.
The widely-followed Labor Force Participation Rate ticked up from 62.9% to 63.0% last month. The “under-employment” rate, which represents workers in part-time jobs but prefer full-time work, fell to 9.2% in February from 9.4% the month prior.
Bottom line: The February unemployment report was better than expected all the way around.
Fed Has Green Light to Raise Rates Tomorrow
Friday’s jobs report is the latest in a series of strong economic data so far this year that have shown positive momentum in retail sales, consumer confidence, manufacturing activity and the housing market.
Because of that, Fed officials rushed to clarify their intentions about the path toward monetary policy normalization (ie – rate hikes). In a speech last week, Fed Chair Janet Yellen said: “A further adjustment of the Federal Funds rate would likely be appropriate” at the March 14-15 policy meeting.
The Chicago Mercantile Exchange’s Fed Funds futures, which reflect market expectations for changes in monetary policy, show a near 100% likelihood that the Fed will hike short-term interest rates by 0.25% at the conclusion of its two-day meeting tomorrow. Interestingly, just three weeks ago the odds of a rate hike were less than 30%.
In my view, the most interesting thing to watch tomorrow will be President Trump’s reaction if the Fed hikes interest rates. You may not remember, but candidate Trump criticized Janet Yellen repeatedly for keeping interest rates too low for too long. He also hinted that he might replace Yellen if elected president, although he’s been quiet on this topic since his inauguration.
In theory then, President Trump should cheer a rate hike by the Fed. Yet it will not surprise me if he finds a way to criticize Yellen if we get a bump up in the Fed Funds rate tomorrow.
Either way, I’ll probably have something to say about it in my Blog on Thursday. If you are not receiving my free weekly Blog, you should sign-up here.
The Rich vs Poor “Income Gap” is Finally Reversing
For decades, the income gap between the rich and the poor grew ever-wider as incomes increased faster at the top than the bottom. Wages have been rising faster for the top 10% than for the bottom 20% for nearly four decades.
Yet a new report from the left-leaning Economic Policy Institute found that a remarkable reversal in the income gap trend has occurred in the last few years. Wage growth has been rising more for the poor than the rich (as a percentage) over the last few years.
In 2016, with an improving economy, most workers at all income and educational levels finally began to see an increase in wages. The trend was particularly pronounced for poor white workers. The poorest 10% of white workers collectively saw a 5.1% pay raise in 2016, over twice as fast as the 2.0% growth among the richest 20% of white workers. This is huge news!
Best of all, this good news isn’t just the finding of a single think tank’s number crunching. The Atlanta Federal Reserve Bank’s data came to the same conclusion late last year. The Atlanta Fed found that the three-month moving average of wage growth reached a post-recession high in November of last year.
In addition, the Atlanta Fed study found that non-white minority incomes have recently been growing faster than that for whites, thus reversing yet another post-recession trend. And this might be the most surprising finding of all: Wages for high-school graduates are now growing as fast as those for college grads for the first time since 1998. Let that sink in.
What Is Causing the Reversal in the Income Gap?
As usual, I’ve read a number of articles on this topic since the Economic Policy Institute’s report came out on March 9. The report states: “The two leading factors are the tightening labor market and the state-level minimum wage increases.” The impact has been obvious: Wages for the poorest 10% grew two-times faster in states with minimum-wage increases.
The best analysis I read came from The Atlantic’s Derek Thompson. I’ll summarize it for you below. Mr. Thompson believes that this change in wage trends is based on several factors. He believes that the answer involves a mix of policy changes at federal and state levels and the accelerating growth of the US economy.
He also believes this is the result of minimum wage increases in many states in the last couple of years. Mr. Thompson points out: “The impact has been obvious: Wages for the poorest 10% grew two-times faster in states with minimum-wage increases” and offers the following chart:
But there’s a question here. Wage growth for the poor ticked up even in states without minimum-wage hikes. That’s because the falling unemployment rate is especially critical for pushing up wage growth for the poor. With each percentage-point fall in the unemployment rate, it’s the bottom 20% of wage earners that see the most wage growth at this point.
There are some easy lessons here.
First, as Thompson points out in his article, a low unemployment rate, as we have today, is a low-income worker’s best friend. Second, in the last two years, minimum-wage hikes in many states raised income for the poor without, at least for now, destroying jobs or raising the unemployment rate – as has often happened in the past.
Third, the US economy now seems capable of producing broadly-shared income growth, even at this late stage of the recovery cycle. This is despite the many well-founded fears that rich, well-educated workers are leaving their poorer, less-educated peers in the dust.
Thompson concludes his interesting analysis with some questions:
What nobody can say, however, is whether this happy trend is durable. Will a recession strike and wipe out these gains for the poor? Will minimum-wage increases prove to be a one-off moment of income growth for the poor? Will higher wages for low-skill workers ultimately accelerate the automation of their jobs, since employers get more labor savings from replacing an expensive job than a cheap one?
These are all very interesting questions. Thompson concludes his piece with the following answer to the questions above:
Nobody knows. But for now, wage growth for the poor is the happiest story nobody is talking about.
What he means by that is the mainstream media, for the most part, is not reporting this good news story. Normally, you would expect the media to be heralding the fact that low-income workers saw their wages rise twice as fast as upper-income workers last year.
That’s just not happening since it does not fit their liberal “class warfare” narrative which pits the rich against the poor.
Conclusions: Three Cheers For Closing the Income Gap
It is most refreshing to see that lower income workers are finally seeing a larger rate of wage increases than their higher income brethren. While many in the media offer conflicting theories as to why this is happening, the answer is really quite simple.
The US economy is finally gaining steam after years of below-trend stagnation. The unemployment rate is now down to 4.7% after a high near 10% at the height of the Great Recession. Employers are finally having to compete for new employees, and that means higher wages for low income workers.
This is not rocket science. It’s not difficult to explain. The labor market has tightened as the economy has gotten stronger, and employers are having to increase wages for low-income workers, more than for those employees at higher income levels.
It’s called supply and demand.
The only question now is, will this encouraging trend continue? The answer is that it depends on the economy. Will the accelerating economic expansion continue? Or will the good economic news of late peter out this year?
We all know that this economic recovery that began in 2009 is long in the tooth by historical standards. It has been quite remarkable given the anti-growth policies under the Obama administration over the last eight years.
Yet the economic recovery continued nevertheless. President Donald Trump, whether we like him or not, has a pro-growth, lower-tax agenda. If he remains serious about these commitments and follows through, I think there is a good chance that this economic recovery can continue.
That remains to be seen, of course, and there are lots of variables that can change.
But what is undeniable is that lower income wages are rising faster than upper income wages for the first time in almost 40 years. And that is a good thing. Let’s hope President Trump gets his pro-growth policies passed so that this trend will continue.
I could say much more on this topic, but I’ll leave it there for today.
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