By Jon Hilsenrath
Federal Reserve and Biden administration officials say economic
inequality is bad and they aim their policies in part at helping to
reduce it. In the short run, at least, those policies might be
widening inequality, not shrinking it.
In recent months, inflationary pressures have caused the cost of
living to rise faster than paychecks, meaning a paycheck hasn't
been going as far as it did before. Consumer price inflation in
April rose 4.2% from a year earlier, while hourly pay for
production workers rose 1.2%, the Labor Department reported last
The department also said that, after adjusting for inflation,
wages of production workers and nonmanagers fell 3.3% in April from
a year earlier, the largest such decline since an inflation shock
and recession in 1980.
Economists, policy makers and many in the voting public have
differing views about income inequality, and the increasing
concentration of wealth in the top 1%. Some see inequality as a
sign of an unfair economic system that the government should
address; others say a healthy capitalist economy rewards its most
A fall in inflation-adjusted wages hits low- and moderate-income
households especially hard, because they dedicate a larger share of
their paychecks to covering daily living costs. The numbers might
be temporarily skewed, but if inflation persists and is fueled by
the Fed or the Biden administration's policies, it could raise
questions about the costs and benefits of those policies for
Economists describe inflation as a regressive tax -- meaning it
hits low-income workers hardest. "I don't see anything good
happening from an economic inequality perspective," said Karen
Petrou, a financial analyst and author of "Engine of Inequality," a
critique of Fed policy. "Most American households are living hand
Ms. Petrou said a decade of the Fed's low-interest-rate policies
have mostly helped the wealthy by pushing stocks higher. That
effect has accelerated recently. While inflation-adjusted wages
fell in April from a year earlier, the Dow Jones Industrial Average
was up more than 40% over the same period. The wealthiest 10% of
U.S. households own 88.5% of stocks, according to Fed data.
There are several reasons why April's unusual tilt in wages
might be an anomaly. Due to Covid-19, the economy in April 2020 was
like a patient in shock on an emergency-room table, with vital
signs moving wildly in different directions. The crisis drove down
prices of restaurant meals, hotel stays and airline tickets amid
nationwide business shutdowns, while broad measures of wages oddly
went up because low-wage restaurant and hotel workers were
That makes it difficult to make comparisons to April from a year
ago, as do other factors. Global chip shortages have caused
bottlenecks in new car production and pushed households to buy used
cars, driving their prices higher. Prices for oil, gasoline and
crops are also marching up.
On a month-to-month basis, real wages have fallen in three of
the past four months, though they are up from two years ago.
However measured, the recent drop in real wages points to a risk
should these trends be sustained. Government efforts to boost
economic activity and hiring -- through low interest rates and
trillions of dollars in new federal spending -- could widen
inequality if they lead to continued outsize increases in the cost
Mary Daly, president of the Federal Reserve Bank of San
Francisco, said she is comfortable with the central bank's
approach. She sees consumer price increases as temporary, driven in
part by the weird "base effect" comparisons to last year and by
temporary supply bottlenecks that will be resolved over time. In
the Bay Area, she notes, lettuce has been in short supply at
restaurants, which were locked down for months. She says eventually
the lettuce will start showing back up at restaurant kitchens and
restaurant salad prices will moderate.
"Demand is coming back with a bang and supply comes back with a
lag," she said. "These are transitory fluctuations."
Inflation will only become a sustained problem if suppliers and
workers embed price increases in longer-run contracts because they
see cost upticks as permanent, she said. So far, she doesn't see
that happening, a view she said markets affirm. In the Treasury
bond market for inflation-protected securities, called TIPS,
investors see inflation of 2.3% five years from now. That is only
slightly above the Fed's 2% goal and less than expected inflation
at other recent times, such as in 2011 and 2012.
Forty or 50 years ago, wages tended to go up automatically
because of cost-of-living adjustments in union and other labor
contracts, Ms. Daly noted. Such adjustments don't happen as often
now. There is a trade-off. The benefit of that is that inflation
tends not to go in upward spirals as it did in the 1970s; the bad
news is workers can take a temporary hit at times like now.
In the mind of many Fed policy makers, inflation has been too
low for too long -- undershooting its 2% goal. Most Fed officials
see low interest rates as a path to stronger wage growth: By
helping to boost demand and push the unemployment rate down, they
argue, they are giving workers bargaining power with employers to
demand sustainable pay increases that outstrip inflation. That is
what was happening in 2018 and 2019, before the Covid-19
Money pouring into the economy isn't just coming from the Fed. A
$1.9 trillion coronavirus-aid bill was signed by President Biden in
March that sent $1,400 checks to households, extended jobless
benefits and expanded child tax credits.
Jared Bernstein, a member of Mr. Biden's Council of Economic
Advisers, said the administration's policies also are creating
opportunities for low-wage workers by boosting demand. "We are
creating job and earnings opportunities for workers who have been
left behind," he said.
"It's important to separate transitory issues from the bigger
picture here, which is an economy back on the move," he said.
Inflation, he added, should be a temporary problem, while the
jobless rate is coming down fast.
Write to Jon Hilsenrath at email@example.com
(END) Dow Jones Newswires
May 16, 2021 10:14 ET (14:14 GMT)
Copyright (c) 2021 Dow Jones & Company, Inc.