Me­dian house­hold in­comes are at an all-time high, but there’s a catch

The Washington Post - - ECONOMY & BUSINESS - BY MATT O’BRIEN

This is what passes for good news nowa­days: Mid­dle-class house­holds might fi­nally be mak­ing more money, in in­fla­tion-ad­justed, or “real,” terms, than they were in 1999.

That, at least, is what the lat­est num­bers from the U.S. Cen­sus Bureau show. Ac­cord­ing to them, real me­dian in­comes in­creased 3.2 per­cent in 2016 to reach a new all-time high of $59,039. It’s the kind of thing that al­most sounds good un­til you re­al­ize that this is only 0.6 per­cent bet­ter than it was 17 years ago. Av­er­age an­nual raises of 0.04 per­cent — or 4 cents for every $100 — don’t re­ally seem worth cel­e­brat­ing.

This, then, is en­cour­ag­ing and dis­heart­en­ing news. It turns out, the less you make, the worse this is. The bot­tom 20 per­cent of house­holds, ac­cord­ing to the ad­justed fig­ures, are still get­ting 9 per­cent less in in­fla­tion­ad­justed terms than they were in 1999; the 20 to 40 per­cent are get­ting 2.6 per­cent less; and the 40 to 60 per­cent, 1.9 per­cent less. It’s re­ally only the top 20 per­cent of house­holds that have made any progress in the last 17 years. Ev­ery­one else is still go­ing on two lost decades.

But this isn’t about the top 20 per­cent vs. ev­ery­body else. It’s about the top 5 per­cent. The num­bers are noisy, but this is the only group whose in­come growth doesn’t re­ally de­pend on the un­em­ploy­ment rate, de­spite the fact that text­book eco­nomics says it should. Wage growth, af­ter all, is sup­posed to go up when un­em­ploy­ment goes down, and down when it goes up. The idea be­ing that busi­nesses only have to com­pete over work­ers by of­fer­ing them a job when un­em­ploy­ment is high, but have to go a step fur­ther and of­fer them a raise when it’s low. Which in­deed does seem to be the case for every group in the bot­tom 95 per­cent. Go­ing back to 1996, when the num­bers start, the re­la­tion­ship be­tween real in­come growth and the un­em­ploy­ment rate is sta­tis­ti­cally sig­nif­i­cant for all of them.

But it’s not for the top 5 per­cent. Not even close. This might not be as sur­pris­ing, though, as it sounds. While it’s true that a bad econ­omy would be bad for their earn­ings to the ex­tent that they’re paid in stock op­tions or bonuses, it wouldn’t be if they just had a big base salary. So what do they care if un­em­ploy­ment is 5 or 6 or 7 per­cent as long as they have their jobs? They don’t. All they care about is that mar­kets are go­ing up.

Well, that and that in­fla­tion doesn’t go up, which, of course, is what ev­ery­one who has a lot of money wor­ries about it — that it won’t be worth as much. And that has been the most im­por­tant pol­icy bat­tle of the last eight years: whether the Fed­eral Re­serve will set in­ter­est rates to help the in­vestor class or the work­ing class. Now, you would think that there isn’t any dif­fer­ence be­tween these, and tech­ni­cally you would be right. What’s good for jobs tends to be good for stocks, as well. The problem, though, is that’s not how a lot of wealthy peo­ple look at things. They care about how good a risk-free re­turn they can get — think the in­ter­est rate on a U.S. Trea­sury bond — and would rather max­i­mize that than max­i­mize their to­tal re­turns by risk­ing higher in­fla­tion.

So even though in­fla­tion has only briefly been as high as even 2 per­cent the past five years, there has been a pretty con­stant call for higher in­ter­est rates and an end to the Fed’s bond-buy­ing. Higher un­em­ploy­ment, you see, isn’t a threat to the top 5 per­cent’s wealth. Higher in­fla­tion is.

So they don’t re­ally care whether we get job­less­ness down from, say, 5 to 4 per­cent. They’ll be get­ting a good raise, re­gard­less. In­stead, they care about keep­ing in­fla­tion down around 1 or 2 per­cent.

For ev­ery­body else, though, there’s noth­ing more im­por­tant than get­ting un­em­ploy­ment as low as we can for as long as we can — es­pe­cially for peo­ple at the bot­tom of the in­come lad­der. They tend to be the last ones in and the first ones out of the la­bor mar­ket, the ones who are left be­hind by a short re­cov­ery and even just a short re­ces­sion. It makes a big dif­fer­ence, then, if we can push un­em­ploy­ment down so far that com­pa­nies have to hire them, be­cause ev­ery­body else al­ready has a job. Not to men­tion that, with unions be­ing re­duced to quasimyth­i­cal sta­tus, this kind of tight la­bor mar­ket is the only bar­gain­ing power a lot of peo­ple will ever know. Which is to say that it’s no co­in­ci­dence that the only two times the bot­tom 20 per­cent have got­ten big raises the last 20 years — the late 1990s and to­day — were when the Fed ig­nored the in­fla­tion Chicken Lit­tles and let un­em­ploy­ment get well be­low 5 per­cent.

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