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One of the most apparent impacts of the 2007-2009 global financial crisis on the United States economy has been high rates of unemployment and inflation. In recent years, the macroeconomic study of unemployment and inflation has revealed a startling trend within the United States economy. Unemployment rates have been on the decline and average wages have remained stagnant or have even declined. While this situation may well be temporary, it points to a bothersome possibility within the United States economy. The factors of globalization and of the defanging of organized labour bargaining has created a situation in which workers have no bargaining power whatsoever. To be sure, as this paper will demonstrate, this phenomenon is not isolated to the United States. The “backwards Phillips curve” has been present in multiple Western societies in recent years, and has even been evident in Nigeria. This paper will review four articles by prominent macroeconomists to examine the possible causes for this unprecedented economic phenomenon. As it would appear, globalization has created an economic situation in which low inflation and low unemployment does not equate to higher wages for workers.
In the May 19, 2017 Bloomberg article, “Unemployment in the U.S. is Falling, so Why Isn’t Pay Rising?”, the economist Peter Coy examines a strange phenomenon that has been occurring in the United States. While the overall unemployment rate in the United States has been in steady decline, it hit an all-time low of 4.4 per cent in April 2017 (Coy 2017). Wages have not kept pace, only rising an average of 2.5 per cent. In many regards, this phenomenon defies both economic theory and common sense. According to the Phillips Curve, when unemployment rates are low wages tend to rise. This is as employers must pay higher wages in order to retain workers and to recruit new talent to their labour pool. However, as Coy (2017) argues, there are several factors that would explain this economic anomaly.
While unemployment rates in the United States have fallen is excellent news, the fact that wages are not rising as a result is not as optimistic. For Coy (2017), many of the reasons behind this occurrence have to do with the fact that inflation is exceptionally low at this juncture in United States economic history. As the current inflation rate is at a historical low—2.2 per cent, to be exact—Coy (2017), posits that workers are simply content with their current wages. Not only do their current wages have reasonable purchasing power, but many of the current workers in the United States economy have lived through the Great Recession of 2008 and the subsequent years. This means that they are more likely to be simply grateful that they have a job. In short, American workers may be hesitant to “rock the boat” by asking their employers for more money.
That being said, even if American workers were dissatisfied with the present condition of their wages, they would not have much bargaining power if they wanted to demand higher pay. As Coy (2017) observes, the days of labour unions and collective labour agreements are long gone in the United States. This means that the average American worker is in a position where he or she has little choice but to accept the pay that their employer offers. Furthermore, with the advent of globalization, there are fewer jobs to go around. United States workers may well find that their jobs are simply outsourced to other nations should they demand higher wages for their efforts. As Coy (2017) observes, American workers are no longer competing with just one another for a slice of the pie. They are now also competing with equally skilled workers in nations such as China, India, and Brazil who are willing to work for a lower wage. In many regards, low inflation and the globalized economy have conspired to create a situation in which American workers are neither incentivized nor empowered to demand higher wages from their employers.
Indeed, the fact that wages are failing to rise even as the overall unemployment rate declines is an economic phenomenon that is very unusual, and is also highly concerning. However, as Coy (2017) argues in his article for Bloomberg, there are many rational explanations for this occurrence. To begin with, inflation is very low at this point in time. This means American workers are thus more likely to be content with the wages that they are receiving. Furthermore, American workers no longer have any bargaining power due to the disempowerment of labour unions and the emergence of a global economy.
In a 2014 article, “The Happiness Trade-Off Between Unemployment and Inflation was published in The Journal of Money, Credit, and Banking. The macroeconomists Blachflower, Bell, Montagnoli, and Moro examine the overall affect on people’s wellbeing of both unemployment rates and inflation rates. Quite predictably, the authors found that when either rate is exceptionally high, people tend to report considerably reduced rates of a sense of psychological and physical wellbeing. Blanchflower, Bell, Montagnoli, and Moro (2014) report that rates of poor feelings of wellbeing—what the authors have labelled the “misery index”—tend to peak when unemployment rates become 6 per cent, and when inflation rates hit 7 per cent. Blanchflower et al (2014), note that their study is highly subjective and that there is little empirical evidence for their contentions. The study nonetheless provides a plausible explanation for the current oddities that economists are witnessing in the United States job market. After all, with a current unemployment rate of 4.4 percent, and an inflation rate of 2.2 percent, the United States is currently well below the “misery index” that is indicated by Blanchflower, Bell, Montagnoli, and Moro on both measures.
From the standpoint of behavioural economics, it thus makes a great deal of sense that wages are not increasing, even as the overall unemployment rate decreases. After all, it is quite possible that the majority of American workers are quite content with the wages that they are currently earning, and have simply chosen not to make a fuss about it. In many regards, given the extreme economic precariousness that has existed in the United States for the last several years, many of the currently employed Americans probably simply feel fortunate to have a job at all. Furthermore, if these jobs provide solid benefits packages, employed Americans more than likely consider the sum of these benefits to be part of their overall compensatory packages. It has become apparent that the current Presidential administration in the United States is aiming aggressively at the Affordable Care Act of 2010, (aka “Obamacare”). They are seeking to replace it with a far inferior government-subsidized healthcare system. The majority of American workers are likely to greatly fear the consequences if they were to lose their jobs, or to simply leave a low-paying job without first securing another line of employment. As it appears, American workers can be made to become quite complacent with low wages, if the fear of negative consequences becomes all too great.
In 2015, an article by the economists Rusticelli, Turner, and Cavalerri, “Incorporating anchored inflation expectations in the Phillips curve and in the derivation of OECD measures of the unemployment gap,” was published in the OECD Journal. The authors examine the worldwide prevalence of the “backwards Phillips curve” that has been occurring in the last few years. To further elaborate, the “Phillips curve” is an economic graph that typically demonstrates that when unemployment rates decline, wages tend to rise. However, that has not been occurring in the last decade, and the authors examine the possible reasons for this phenomenon. In this article, Rusticelli, Turner, and Cavalerri (2015) make an original contribution to this literature by demonstrating that this “backwards Phillips curve” is not isolated to the United States, but rather has been an economic trend which has been occurring throughout the developed world. Indeed, as the authors demonstrate, nations such as the United Kingdom, New Zealand, France, and Italy have all been experiencing the phenomenon of declining rates of national unemployment, but generally stagnant or even declining wages.
As Rusticelli, Turner, and Cavalerri (2015) contend, the wage stagnation that the developed world is currently experiencing is the result of aggressive government policy measures. They have specifically targeted inflation through the adjustment of interest rates and other measures. In most cases, these measures have been successful in their goals of reducing the rate of inflation in their respective nations; as such, the authors argue that low inflation is responsible for wage stagnation throughout the developed world. When inflation is low, the national currency has more purchasing power. As such, workers generally tend to be more satisfied with their rates of pay, particularly if they have lived through a period in which unemployment rates have been high. Thus, the examination of the “backwards Phillips curve” by Rusticelli, Turner, and Cavalerri (2015) demonstrates that wage stagnation cannot simply be attributed to the complacence or fear of workers within a labour force. Nor can it be solely explained by the exploitative nature of a particular labour market within a certain nation. Generally speaking, workers do not tend to be so much concerned with their numerical rates of pay, but rather the purchasing power that such pay can provide them.
In a 2013 article for Economics, Management, and Financial Markets, the Nigerian economists Ogujiuba and Abraham examine the effects of low inflation and high levels of employment in the West African nation of Nigeria. In many regards, the circumstances that Nigeria faced in the wake of the global financial crisis were very similar to those that were faced by the United States. However, the Nigerian government undertook vastly different measures to deal with this matter. In the early 2000’s, the Nigerian government enacted several aggressive monetary policies aimed at defeating inflation within their nation, and these measures were successful. As the inflation rates began to decline within Nigeria, the rates of unemployment also began to decline. As has been the case with the United States and other developed nations in the last few years, Nigerians did not see a subsequent rise in wages. However, they also experienced their own “backwards Phillips curve.” For their part, Ogujiuba and Abraham (2013) stated that the presence of this backward Phillips curve within the Nigerian economy was a good sign, but only for the short term. Given that the measures that governments tend to take to reduce the rates of inflation are often extremely artificial. These controls can only last for so long, and inflation rates will begin to rise, despite the best efforts of a government.
Of course, when rates of inflation begin to rise, the purchasing power of the national currency begins to decrease. As such, should inflation begin to rise once again in the United States, it will be unlikely that American workers will remain as content with their low wages as they have been in previous years. However, it is unlikely that, should inflation rates begin to increase in the United States, many employers will decide to raise the wages of their workers. This is so that they may enjoy a standard of living equal to that of the period prior to the increase in rates of inflation. In such a scenario, several things are likely to occur. Given that unemployment rates are currently low, workers who are talented enough to find work elsewhere will do so. This may spur major employers within the United States to instigate an overall increase in wages. However, given the economic, social, and political climate of the past few years in the United States, this is highly unlikely to occur. While the temporary existence of a backwards Phillips curve may have proven to have done well by the Nigerian economy, it is possible that a prolonged existence of this phenomenon in the United States may well provoke unrest, and general discontent with the overall economic system.
As the above analysis has demonstrated, many of the world’s nations are emerging from the Great Recession, and are now enjoying low rates of unemployment within their nations. Furthermore, many of these same nations are benefiting from the fruits of aggressive monetary policies that have slowed the pace of inflation, and have thus witnessed some of the lowest rates of economic inflation that they have seen in years. However, it appears that the workers of the world are not reaping the benefits of a renewed global economy in equal measure. While this is mostly prevalent in the United States, wage stagnation and wage depression continue to occur around the world, even in the midst of buoyant economies. While this situation—which economists refer to as a “backwards Phillips curve”—may be temporary, it signals a definite paradigm shift in wage politics throughout the world.
If the current United States President, Donald J. Trump is to be believed, the United States is making its way toward a full-blown economic recovery that will take place in 2018. To be sure, the economy was one of the deciding factors in the 2016 presidential election, and so candidates from all parties had substantial motive to lie or exaggerate about a pending recovery, which of course, only their party is qualified to navigate. Presidential candidate swagger aside, there are indications that the American economy is slowly beginning to recover from the aftermath of the 2008 meltdown. As reports from the last few months of 2018 are beginning to indicate, the employment situation in the United States is slowly improving, and consumer confidence has risen. However, it is questionable how long this momentum will continue. While the current Presidential administration and executive leadership at large companies are loudly proclaiming the advent of a pending economic recovery, the average American is, understandably, sceptical. One of the more troubling aspects of this possible economic recovery is that it seems to be driven, in large part, by consumer spending, which is a notoriously mercurial behaviour. From all indications, the United States economy will experience a recovery in the near future, but it will be a modest recovery, and the gains will be enjoyed mostly by those who occupy the higher rungs of the socio-economic ladder in the United States.
According to Akin Oyedele (2014) the supposed economic recovery of 2016 was not a fairy tale that was being presented by Presidential candidates in order to gain leverage for their campaigns. Drawing up data he retrieved from United Business Systems, Oyedele (2014) reports that “The firm projects that real GDP growth will be at 2.8% in 2016. It forecast 2.9% for 2015, revised downward from 3.2% because of the potential impacts of a stronger dollar and lower foreign growth.” As with any economic recovery, the first indicator that economists look at is the growth of the national GDP, or Gross Domestic Product. While the, admittedly, modest growth of the national GDP is fairly promising, one aspect of the UBS report that is troubling is its report of decreased economic growth worldwide. In this increasingly globalized and interconnected world economy, economic trouble in China, Germany, or Brazil could just as easily spell trouble for the United States down the road. However, the complete recovery of the United States economy that was promised for 2016 did not truly materialize. In addition, while the recent growth of the United States’ GDP looks somewhat promising, it is not enough to predict that the nation is headed for a full-blown recovery in 2018.
Another indicator that the economy of the United States is improving is the gain in jobs, and a corresponding drop in unemployment insurance claims, that was reported by many media outlets in September 2017. According to Casselman (2017), the September jobs report indicated a net gain of 142,000 jobs nationwide. While at first glance, this number does indeed look promising; it is a very small number considering the numbers of Americans who need jobs. Additionally, many of these jobs gains were in the low-paid service and manufacturing sectors, and often include part-time jobs. In the wake of the 2010 Affordable Care Act, many employers are opting to turn what were once full-time positions into multiple part-time jobs. This was in order to get around the ACA mandate that all employees who work 30 hours or more each week are offered employer-sponsored health care plans (Staff, 2015). When diagnosing a potential economic recovery, one should refrain from jumping to the conclusion that any job is a good job. While low-paying positions keep previously unemployed Americans busy, when one factors in the expenses these individuals must undertake in order to maintain the job—transportation, work clothing, and meal expenses—sometimes these positions are not very profitable for the worker. When people feel that they are simply scraping by in order to keep their heads above water, they are far less likely to spend whatever disposable income they have on non-essential goods, and consumer spending seems to be what is driving the current trend of economic growth.
Ben Casselman (2017) reports with regards to the alleged economic recovery, asking; “The key question now is, how long consumers can keep powering the economy? Wage growth remains weak: hourly earnings rose 2.2 per cent in September from a year earlier, faster than inflation, but weaker than most economists would like to see at this stage of the recovery.” If consumer spending is the key to the economic recovery of 2018, then the United States is in trouble. Not only are the majority of jobs that are replacing positions lost in the 2008 meltdown in the “low-skills, low-wage” category, but also there is another economic storm looming on the horizon that could severely set consumer spending and economic recovery back. Student loan debt is at an all-time high, and consumers are defaulting on these debts in record numbers. When the average consumer has to budget a large portion of their monthly disposable income to service a debt that is less money they have to spend on goods and services. Furthermore, the money that services student loan debts goes directly to the banks that made the loans, and typically does not create new jobs, except perhaps for student loan debt collectors. Additionally, student loan debt often hurts the credit rating of the creditor, and that person is often unable to obtain financing for a home, or for a new car. As it would seem, the economic recovery of the United States may very well have been be a clever joke by their Presidential candidates.
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