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.