Wednesday, May 27, 2020

Economic recovery policies must focus on income inequality rather than on GDP growth

Vijay K. Mathur

Policymakers, following economists and media in general, have traditionally focused on implementing policies to increase growth in GDP (Gross Domestic Product). However, beginning in the early 1970s, increasing income inequality shows that all Americans have not shared the prosperity generated by economic growth. Isabel Sawhill, in her book "The Forgotten Americans," raises this issue very cogently.
Sawhill primarily addresses the economic plight of the white working class between the ages of 25 and 64. Since the ’70s, labor force participation has been decreasing and wage and salary income has been stagnant for this group, even with the increase in productivity. The same holds true for most Americans. The labor force participation rate peaked at 67.3% in early 2000 and has since declined to almost 63% percent, per the Bureau of Labor Statistics. Most productivity gains have gone to Americans in the top of the income distribution. Hence, income inequality has increased, and its incidence is harder on low- and middle-income Americans with an inadequate social insurance system.
Congressional Research Service reported July 23, 2019, that cumulative percent change during 1979-2018 in real wages for households in the top 10% of the income distribution was 37.6%, while for the middle- and low-income households it was 1.6% and 6.1%, respectively. Men in the middle and low income lost and women gained real wages. Household income for the top 1% increased 229% while the bottom 90% gained only 46% for the years 1979-2015 (Economic Policy Institute (EPI), March 27, 2019). Wage inequality is the driving force for income inequality. Using census data, Utah Workforce Services reports that Utah’s income inequality index (Gini coefficient) declined during 2014-2017 but has increased since 2017.
The capitalist system, supported by technological revolution and globalization, lately has not generated an economic system where all Americans have shared in private sector prosperity and growth in productivity. Real wages have diverged from productivity since the ’70s. EPI reports that cumulative percentage change in productivity from 1979 to 2017 was 70.3%, while hourly compensation grew only 11.1%. It is the responsibility of the government and the private sector to ensure jobs’ growth, with wage growth commensurate with increase in productivity. The gig economy, with more part-time workers and contract workers, and more self-employed (not by choice), is not a healthy sign of a growth economy, higher standard of living and happiness.
Involuntary unemployment surprises many economists, especially conservative politicians and policymakers. They would argue that a rational individual should be willing to accept a job, even if wages paid are below his or her expectations. However, as Nobel Laureate Professors George Akerlof and Robert Shiller argue in the book "Animal Sprits," the answer lies in efficiency wages. Effectiveness and efficiency of work effort in a job depends upon the wages paid. Employers cannot monitor their workers' efforts perfectly in doing their jobs. Employers’ preference for lower wages may backfire in lack of motivation, reduced work effort and productivity.
The COVID-19 pandemic has further worsened the economic well-being of low- and middle-income Americans. Their employment prospects look dim even after the emergence of a virus treatment and vaccine. Policymakers have to implement plans for education and training programs to prepare the labor force for emerging technologies. Utah has done better than many other states during the epidemic. Reduction in unemployment claims in Utah is a healthy sign for a quicker recovery. However, attention must be given to shared prosperity.
The growth rate of the economy is essential, but the focus must be on its distributive aspects — i.e., how it affects working Americans whose main earnings and standard of living is determined by labor market participation. Income is based upon education and training in the technologically sophisticated economy. I hope that our policymakers and politicians are wise enough to foresee the upcoming challenges.

Mathur is former chairman and professor of Economics, Department of Economics, Cleveland State University, Cleveland, OH. He blogs at

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