Mike Konczal has a good post about the goal of “full employment” and how it should be a focus on tonight’s SOTU address.
Generally, higher unemployment is associated with lower wage growth and vice versa, although the relationship is not as strong as I would have thought. I think the proper context in which to think about this is one in which wages are at least partially determined by bargaining power.
In some of my work, I have focused on the long-term effects of union membership in the private sector and an increasing reliance on offshoring. Lower union membership and higher imports reduce the bargaining power of labor and lead to lower wage growth of the bottom 90%. But in the short term, the unemployment rate is likely to be equally important.
When there are lots of unemployed workers to choose from, firms will not be forced to pay higher wages. When the unemployment rate is very low, firms will have to bid against each other for workers, pushing wages up.
That said, we should keep in mind that wages for the bottom 90% have been fairly stagnant for the last 40 years. Years in which the unemployment rate has bounced around a fair amount. The only time we saw a strong increase in wages for the bottom 90% was in the late 1990s when the unemployment rate was very low.
That said, I think Konczal’s argument is even stronger than he makes it. There is value in work and there are significant costs associated with unemployment. If we can successfully focus on full employment, there will be benefits beyond the economics.
Of course, higher wages mean lower profits, so you can expect any full employment program to be fought tooth and nail.