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For a change, America grows more equal
The poor really have benefited from economic growth and income support
The pandemic has served up a reminder, as if any were needed, of how deeply unequal America is. Billionaires have seen their wealth explode over the past year and a half thanks to a huge stockmarket rally, especially in the tech sector. At the opposite end of the spectrum, millions of mostly low-wage workers have lost their jobs, while also facing a higher risk of death from covid-19. But against this gloomy backdrop, there is some good news: the incomes of poor Americans have grown more quickly than those of richer ones.
The earnings out-performance for poorer Americans started in 2018. JPMorgan Chase Institute, a think-tank within the bank, parsed data on more than 7m households. Early in the 2010s, as the American economy recovered from the global financial crisis, the top quartile of income earners reaped the fastest income gains and the bottom quartile brought up the rear. However, a few years ago, their positions flipped. And over the course of the pandemic the gap has widened, such that, by May, incomes for the lowest earners were growing by about 7% annually, compared with 4.5% for the highest earners (see chart).
What explains the shift in fortunes? Some of the credit goes to policymakers’ willingness to run a hot economy in the years prior to the pandemic. Traditionally, economists have worried that if growth booms, unemployment may dip too low, pushing up wages and, by extension, inflation. But the pre-pandemic evidence is that the “too low” level of unemployment may be considerably lower than previously assumed. Even with jobless rates below 4%, inflation remained subdued. At the same time, wage growth was most pronounced at the lowest rungs of the income ladder (given an additional boost in some states by higher minimum wages). This relationship was first observed by Arthur Okun, an American economist, in a paper in 1973 about how “high-pressure” economies tend to promote upward labour mobility as companies pay more for workers.
The onset of the pandemic led, almost overnight, to a low-pressure economy. Unemployment soared, which would normally be expected to depress wage growth. And without any help from the government, that is exactly what would have happened. But thanks to an expansion of unemployment insurance as well as a series of stimulus cheques, the reality was very different. The poor have been the main beneficiaries, with far fewer suffering precipitous drops in incomes than would have otherwise been the case.
This good news should not be exaggerated. A few years of stronger earnings growth for poor Americans barely begins to narrow the chasm between them and their rich fellow citizens. Nevertheless, it is proof that ever-widening inequality is not an immutable law of a modern economy. ■