How to Make Unemployment Fall and Wages Rise After the Pandemic

The oughts - the decade from 2000 to 2009 - were awful. After having created 18 to 22 million jobs per decade in the last three decades of the 20th century, the American economy destroyed one million jobs in the oughts.

Starting the new century with an excess pool of 20 million employees meant wage growth collapsed.

During the 1990s, median weekly wages grew $23.
4Q 1990: $312
4Q 1999: $335

Over the next fifteen years, weekly wages grew by just $1.
4Q 1999: $335
4Q 2014: $336

The oughts began and ended with a recession. After the 2008-9 crash, congress was pretty timid about deficit spending and the recovery was gradual. 

In the first half of the 2010s, unemployment came down; in the second half of the 2010s, wages began to rise. For the first time since 2000, unemployment fell below 4% and – as they had in the late 1990s - wages began to rise. They rose $31.
4Q 2014: $336
1Q 2020: $367

What do I make that mean?
1. When the unemployment rate is high, wage growth is low. You don’t have to offer good wages to hire people off the street.  When the unemployment rate is low, wage growth is high. You do have to offer good wages to people working at another company.

2. You can legislate a higher minimum wage. To raise the median wage, you need to aggressively lower unemployment.

Lowering unemployment in the 2020s is going to be tricky, though. Or, rather, the old tricks are going to be a problem.

Lowering interest rates encourages people and businesses to borrow (people borrow to shop and companies to hire). The problem now is that real interest rates are already negative. It’s easier to lower interest rates from 4% to 2% than it is to lower them from -1% to -3%. Monetary policy is getting more creative but it's harder to do in this age of negative interest rates.

Fiscal policy - running a deficit by lowering taxes and spending more - is also a proven way to lower unemployment. That’s easier to do when your deficit is $300 billion than when it is $3 trillion (as it was last year). Again, tricky.

The good news is that the expected drop in COVID cases and deaths this year should naturally lower unemployment. To get back to an unemployment of 4% or lower though – a rate that seems to effectively drive up real wages – could take some novel policies. 

Faithful readers will be unsurprised to hear me say that my recommendation is to pump billions and billions into startups. There are a variety of ways to do this but if we do, we will make workers scarce and jobs plentiful. What happens to the price of something scarce? It goes up.