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Expanding America’s Expansion

Having undergone its longest expansion on record, the US economy appears to be thriving. But behind the headline numbers is a more complicated story: wages are growing, but not as fast as they should be; and inequalities based on place, race, gender, and other factors remain unacceptably high.

BERKELEY – The United States is enjoying the longest economic expansion on record, surpassing the decade-long growth run between 1991 and 2001. And yet, while most standard indicators – the unemployment rate, growth in non-farm payroll jobs, the number of job openings – imply a vibrant labor market, for too many Americans, the good times don’t feel particularly good. Wage gains for most workers have been stubbornly disappointing, barely keeping up with the cost of living; and more than 4.3 million workers who want full-time positions can find only part-time jobs.

To be sure, as labor markets have tightened, nominal wage growth for nonsupervisory and production workers has accelerated, averaging slightly over 3% year on year in recent months, with some of the strongest gains going to low-wage workers in the 20th and 30th wage percentiles. The problem, as US Federal Reserve Chair Jerome Powell acknowledged in recent congressional testimony, is that wages are not growing as rapidly as in previous recoveries. Standard models linking the unemployment rate to wage growth and inflation have broken down, confounding macroeconomists and complicating the Fed’s job. Annual nominal wage growth would need to be at least 3.5-4% or more to be consistent with the Fed’s 2% inflation target, 1.5% productivity growth, and a stable share of national income for labor.

In fact, this past May, average real (inflation-adjusted) weekly earnings for the bottom 80% of production and nonsupervisory workers – a widely used measure of the “typical” worker – were about the same as they were in 1974. And if 45 years of wage stagnation were not bad enough, the average obscures growing wage inequality. For decades, wage growth has been heavily concentrated in the top quintile, while real wages in the bottom quintile have actually fallen, further exposing persistent differences that are strongly correlated with ethnicity, race, and gender.

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