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Inequality and the Labor Market

By Matthew Yglesias on January 7, 2011 at 11:27 am

"Inequality and the Labor Market"


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I cooked up this model in my head whereby asymmetric time spans of slack and overheating labor market conditions would exacerbate inequality, but then I thought I might be wrong because normally I try to avoid espousing economic theories I haven’t previously read from someone with a PhD. Fortunately, Tyler Cowen does have a PhD and says this was cut from a draft of something he was working on:

A worker who wasn’t worth much sweeping up the back room is suddenly valuable when new orders are flowing in and he is needed to ship the goods out the door. And if all those new orders require keeping the warehouse open late, the company may need to bring in a new night watchman. To paraphrase a common metaphor, a rising tide eventually lifts most boats. When the economy’s expanding, a worker who previously was worthless will at some point become valuable again. But this means that workers at the bottom of the economic ladder will have to wait until the entire economy has mended itself before they have the chance to improve their lot: That can be a painstakingly slow and uncertain process.

But Cowen is a libertarian, so his way of phrasing this is kind of in the mode of “unemployed folks are going to have to gut it out.” But Google revealed a similar point in the 2003 edition of The State of Working America from Lawrence Mishel, Jared Bernstein (now of the vice president’s office), and Heather Boushey (now my colleague at CAP) from the Economic Policy Institute:

Monetary policymakers aim at maximum employment consistent with long-term price stability. In other words, an economy that avoids either an output gap or an overheating scenario. Both kinds of failure are bad, but the failures have different consequences for different types of people. Low-skill individuals and the working class suffer disproportionately form output gaps and benefit disproportionately from full employment. Elites—meaning not just 23 rich bankers and Fred Hiatt, but a much larger minority of the country—faces a different set of incentives.

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