Americans want higher wages.
Pay hasn’t budged in years. It’s a problem that goes far beyond those earning minimum wage and fighting for $15 an hour.
The middle class is stagnating too. American household income is just shy of $54,000. It’s barely moved from where it was 20 years ago.
In recent years, many economists and the Federal Reserve have said: Don’t worry! Wage increases are coming along with a better economy.
“The economy has been performing well. And we expect it to continue to do so,” Fed chair Janet Yellen, America’s top economic policymaker, said Thursday.
But Main Street Americans can hardly draw comfort from an economic improvement that hasn’t affected their pocketbooks.
“The Fed has consistently been optimistic about wages and inflation; still holding our breath on both,” tweeted Diane Swonk, chief economist at Mesirow Financial.
People even protested outside the Fed meeting last week holding signs that read “Good jobs now!”
The rosy outlooks from economic gurus stems from an economic theory known as the Phillips Curve, which says more jobs lead to better wages and higher inflation.
There’s a lot of math behind it, but the basic idea of the Phillips Curve is that as unemployment goes down, there are fewer people looking for work. That forces businesses to pay more to keep current employees or hire more. Inflation then starts to rise as businesses are able to lift prices because people have jobs and more money to spend.
Unemployment peaked at 10% in October 2010, its worst level in a quarter century. Now it’s 5.1%. Many experts said once unemployment fell to 5.5% — as it did in February — wages would pick up within months.
But the current economic cycle seems to have broken with that theory, even though some economists and the Fed don’t want to acknowledge it.
“[The Fed] just can’t seem to let it go. They are incapable of thinking outside that curve,” says economist Ed Yardeni of Yardeni Research.
In today’s global economy, companies can find cheaper workers abroad and Baby Boomers may not be demanding higher wages like they once did, explains Michael Block, chief strategist at Rhino Trading.
“Economic models don’t work in a vacuum like these guys [at the Fed] assume,” Block says.
It has been a slow recovery. Some people have been able to get better pay when they changed jobs, although those are often higher-skilled workers.
But we might be in some sort of “new normal” where wages and inflation don’t pick up.
That’s a much more frightening prospect — for Main Street, Wall Street and the Federal Reserve. It contributes to a growing sense of unease Americans have about their future and makes it harder to set economic policy.
For now, workers are doing OK because inflation is basically nonexistent. Prices rose a mere 0.2% in the past year (the Fed’s inflation target is 2%). Americans’ modest wage gains aren’t being “eaten up” by having to pay more for gas, groceries and rent.
“I challenge the notion that it’s as good thing to have inflation going up. A lot of inflation is rent inflation. Why is that good for consumers?” asks economist Yardeni.
Inflation is low because oil prices have plunged in the past year from over $100 a barrel to under $50 now. Health care costs have also moderated a bit, and the strong U.S. dollar makes imports cheap.
But the bottom line is Americans are still waiting for better wages — and investors are still puzzled by how the Fed will set economic policy if wages and inflation don’t improve.