A return to the 1990s? Why outlook brightens for lower-wage workers.
Historically one of the best opportunities for low-wage workers to get pay raises is when the job market tightens. Often that 'late-in-the-cycle' phenomenon doesn't last long. This could be an exception.
Things have changed at Jewish Vocational Services in Boston. The number of people served by the JVS career center has plunged from 20,000 in the depths of the Great Recession to 12,000. And about a year ago, the staff began noticing that clients were starting to get multiple job offers.
“For folks in our career center, they can be a little more choosy,” says Mandy Townsend, vice president of employer engagement at JVS. “Our real focus is to get higher than minimum wage jobs” for clients.
Wages are rising because a booming economy has created a shortage of workers, forcing companies to pay more to fill jobs. On Friday, the Commerce Department reported the biggest one-month surge in employment in a year and half – 313,000 jobs in February – with hourly earnings up 2.6 percent over the past year.
The effect is especially noticeable for Americans at the bottom end of the pay scale. It’s not just rising wages. Some 806,000 people entered the workforce last month – the biggest monthly rise in 15 years – while the unemployment rate stayed at 4.1 percent, a 17-year low. That means that many sidelined Americans, who had given up on finding jobs, are now finding employment, boosting their income.
And that surge in jobs and pay has pushed the United States into one of those rare periods where the growth in the income gap between rich and poor Americans has slowed – or perhaps stopped altogether.
“That's what happens when the economy recovers,” says Diane Lim, principal economist at The Conference Board, a business membership and research group based in New York. “You see some collapsing of the inequality because the bottom comes up.”
Such periods typically don’t last long enough to reverse the long-term widening of the income gap. And they typically come at the top of an economic cycle, so that just as poor people are gaining jobs and earning more, a recession comes along and knocks them out of the workforce again.
But there are signs that this time, as in the mid-1990s, the poor may be able to continue to make outsize gains for a few more years before a recession hits. That would be a meaningful boost, and it would give policymakers and nonprofits more time to figure out ways to create more stable employment for those at the bottom of the income ladder.
From $12 to $14 an hour
Things are certainly looking up for Jammie (pronounced “Jamie”) Baker. Eleven months ago, she noticed an ad on a Boston subway for nursing assistant training. Now, instead of earning $12 an hour as a housekeeper, she’s making $14 an hour (and often $17 by working nights) as a certified nursing assistant at a local hospital.
“We will go out to Dave & Buster’s [a national restaurant and sports bar chain] just because,” says Ms. Baker, whose husband works as a housekeeper. For the first time they have begun paying a babysitter. With a second child on the way, she says, the extra income has taken away the financial stress of planning for a new baby. “That burden was definitely lifted.”
That dynamic is playing out around the country.
This past October, Target announced it would raise its starting hourly wage to $11 in its nationwide chain of stores. This week, it announced another raise to $12 an hour and reiterated its promise to push the minimum to $15 by the end of 2020. After Congress passed a giant corporate tax cut in January, a slew of corporations – from Starbucks to Walmart (the world’s largest employer) – also announced they would raise their starting pay.
Raises from big and small employers
It’s not just big corporations that are bumping up wages.
Americans for Tax Reform, a nonprofit that opposes tax increases, has listed hundreds of companies that are boosting wages, bonuses, and payments to retirement accounts, including small businesses in rural areas. Anfinson Farm Store in Cushing, Iowa, is handing out bonuses and raising pay 5 percent for its employees. AaLadin Cleaning Systems, an Elk Point, S.D., manufacturer, instituted a new starting pay policy March 1 and is giving bonuses to its more than 80 employees. Amarillo National Bank in Texas is boosting annual salaries by $1,000 for more than 300 employees.
One factor is the Trump tax cut, which this year will put billions of dollars into the pockets of businesses. A big question mark is how they will spend that windfall: how much on dividends and share buybacks that boost their share price, which helps middle class retirement accounts and wealthy share owners, and how much on raising the minimum pay and training, which tends to help the poor.
Another factor is the booming economy itself. Well before the tax cut, banks for example had been raising their minimum wages: Amalgamated Bank (2015), J.P. Morgan Chase and Bank of America (2016), and Wells Fargo (2017).
As a result of the growth in income, the gap between the rich and poor may be widening more slowly. From the end of the Great Recession in 2009 through 2014, the income of a household in the exact middle of the top fifth of US households grew by 9 percent. That was more than twice the 3.9 percent growth of income in the middle of the bottom fifth of US households. But in 2015, that situation reversed: the middle or “mean” income of the bottom fifth outgained the top fifth: 6.7 percent to 4.3 percent. It reversed again in 2016.
For the next poorest fifth of households, the percentage income gains have outpaced those of the top fifth for both years. (The Census Bureau numbers for 2017 aren’t out yet.)
The reductions in inequality have not been uniform geographically. During the 2014-2016 period, the Brookings Institution found that income inequality fell to a significant degree in eight of the nation’s top 100 cities (Charlotte, N.C.; Dallas; Jackson, Miss.; Jacksonville, Fla.; Kansas City, Mo.; Knoxville, Tenn.; Louisville, Ky.; and Salt Lake City) but rose in five others (Baltimore; Detroit; Omaha, Neb.; Rochester, N.Y.; and Washington, D.C.). By contrast, only eight metro areas (which include the suburbs) saw income disparity fall while 12 metro areas saw it rise.
How to help the gains persist?
Still, the broad trend now is rising incomes and more jobs, and economists widely see that continuing this year. The challenge is that any outsized income gains by the poorest Americans tend to be short-lived because they usually appear near the top of the economic cycle. The broad-based wage increases typically spur inflation, which causes the Federal Reserve to raise interest rates, and most often a recession follows. Then, those low-income and less-experienced workers are more likely to get fired and their income falls. That’s what happened in the past two recessions.
“It's the regularity of business cycles,” says Mark Zandi, chief economist of Moody's Analytics, a risk-management subsidiary of Moody’s Corp. in New York. “And the way that policymakers could or should address it is to invest in things that raises the productivity of the workforce, especially the lesser skilled, lesser educated worker.”
There have been years, such as 1995 and 2015, when the bottom fifth outperformed and a recession didn’t hit. The next 12 months could shape up to be another one of those years as government stimulus – through tax cuts and other federal spending – further gooses the economy and causes the unemployment rate to fall to between 3 and 3.5 percent, Mr. Zandi says. The last time unemployment was that low was 1969.
But moving beyond the boom and bust of the bottom fifth’s income will require more holistic solutions. One way is worker training. If workers at the bottom of the income ladder become more productive, then employers can boost their wages without sparking inflation.
In the JVS program that helped Baker, the hospital did the job interview and hired her before the nurse’s training and paid for the six weeks of classes. That assured the hospital of a trained employee while easing Baker’s worries about leaving a fulltime job with benefits and going six weeks without pay.
The new job has boosted her confidence and allowed her family to do “the little things that people take for granted,” she says. “It felt amazing to know that if I wanted to go ahead and take my son to the arcade, I didn’t have to say: ‘If I take my son to the arcade, what [bill] do I have to not pay?”