Inequality and unemployment: is there really a connection?

Lately I’ve been thinking about the connection between income distribution and unemployment, and I’ve started to question the prominent view among left-leaning economists that full employment is necessary to reduce income gaps.  Their argument is simple and understandable: during periods of high unemployment, workers’ bargaining power are reduced as there is a vast supply of workers willing to work at lower wages.  As a result, wages stagnate or decline among low and middle-skilled workers, while the owners of capital reap large profits.  Ok, that makes sense.  But take a look at the following two standard measures of income inequality and unemployment:


Notice something?  There seems to be little, if any, correlation between income inequality and unemployment.  The current standard definition of “full employment” among economists is an unemployment rate of between 5-5.5%.  Repeatedly during the past 30 years, the unemployment rate has dipped below this figure (indicating an economy operating at or above potential); yet the Gini coefficient continued its upward march.

Perhaps full employment is one of several different prerequisites for a narrowing of the income gap, assuming that is even a desirable policy goal.  However, I question the idea that it is an essential method to do so.


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