A lot has been made of the growing gap between upper and lower income segments of the U.S. economy. Basically, the story has been about a shrinking middle class – as the rich get richer and the poor get poorer. Explanations included the movement of manufacturing jobs to other countries, an education system that was doing a poor job of educating the next generation of workers and inconsistent immigration policies. The fact is, wages have grown faster for the top 5 percent than the poorest 20 percent almost every year in this century.
It turns out that we may be in the midst of a reversal. Research from the Economic Policy Institute and data from the Atlanta Fed indicate that wages grew faster (as a percent) for the poorest 20 percent of Americans than it did for the richest 20 percent over the last few years. In fact, the research shows that in some segments, incomes for the poorest workers increased at a rate of 2 times faster than those of the richest over the past year.
What’s driving this change? Employment. Recent numbers from the Department of Labor show that February jobs increased by a healthy 235,000. That follows a recent run of increasing job growth that has put pressure on employers to raise incomes in order to attract and keep workers. This is demonstrated by the fact that, for the first time since at least 1998 (when the Atlanta Fed started tracking such figures), the income growth for high school graduates has matched the rate of growth for college grads.
More workers with higher incomes means more tax revenue for the government and the potential for more consumer spending. Ultimately, this could allow the government to act on some of the tax reform initiatives that it has been talking about without reducing its current revenue. In essence, the government would get a smaller slice of a bigger pie. If tax reforms happen, that could further boost spending and the economy.
The Federal Reserve has already indicated they anticipate raising interest rates to help hold inflation in check. Expect rates to move up at a moderate pace if the economic revival continues. Rising interest rates could, in the short term, pull investment in larger purchases like houses and cars for consumers and buildings and equipment for companies, forward for a period of time.
Of course, things can change quickly. For the time being, indications are that we are moving in a positive direction with Americans at all ends of the economic spectrum benefiting.
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