This last year saw the pace of job growth pick up, a welcome development. Yet the economy remains far from healthy. In 2014 the twin issues of income inequality and stagnant wage growth for the vast majority of Americans took center stage. Better late than never.

EPI’s top charts of 2014 show why addressing inequality and spurring wage growth is so necessary–and so doable. Policy choices led to these trends, and different policy choices can reverse them.

The first policy choice should be based on the “do no harm” principle: the Federal Reserve should not try to slow recovery in the name of fighting inflationary pressures until wage growth is much, much stronger.

After this, policymakers should support those labor standards that can restore some bargaining power to low- and moderate-wage workers in coming years. That means policy actions such as passing a higher minimum wage, expanding rights to overtime pay, protecting the labor rights of undocumented workers, and restoring the right to collective bargaining.

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In 2014, rising income inequality became a front-burner political issue. This figure shows that the stakes of rising inequality for the broad American middle-class are enormous. In 2007, the last year before the Great Recession, incomes for the middle 60 percent of American households would have been roughly 23 percent (nearly $18,000) higher had inequality not widened (i.e., had their incomes grown at the overall average rate—an overall average buoyed by stratospheric growth at the very top). The temporary dip in top incomes during the Great Recession did little to shrink that inequality tax, which stood at 16 percent (nearly $12,000) in 2011.

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As 2014 comes to a close, there is a growing recognition that the root of rising American inequality is the failure of hourly pay for the vast majority of American workers to keep pace with economy-wide productivity (output produced in an average hour of work). When hourly pay for the vast majority tracked productivity for decades following World War II, the American income distribution was stable and growth broadly shared. Since the late 1970s, the link between typical workers’ pay and productivity has broken down and allowed capital owners (rather than workers) to claim a larger share of income and allowed those at the very top of the pay distribution to claim a larger share of overall wages. This growing “wedge” between typical workers’ pay and productivity is what needs to shrink if we’re to address rising inequality.

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The ability of those at the very top to claim an ever-larger share of overall wages is evident in this figure. Two things stand out: the extraordinarily rapid growth of annual wages for the top 1 percent compared with everybody else (and particularly the bottom 90 percent), and the fact that even workers in the 90th to 95th percentiles—a very privileged group in relative terms—only saw their wages grow in line with economy-wide average wage growth. This means that wage growth of workers in the bottom 90 percent of the wage distribution was actually below average.

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Over the entire 34-year period between 1979 and 2013, hourly wages for the bottom 70 percent of American workers grew less than 11 percent. Expressed as an annual average, this comes out to yearly wage growth of 0.3 percent or less. Furthermore, take a look at the late 1990s: Nearly all the wage growth of the bottom 70 percent of wage earners happened in that brief period when labor markets got tight enough—unemployment fell to 4 percent for a two-year spell in 1999 and 2000—to finally deliver across-the-board hourly wage growth.

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The most extreme wage disparities are between the heads of large American corporations and typical workers. This figure tracks the ratio of pay of CEOs at the 350 largest public U.S. firms and typical workers in those firms’ industries. In 1965, these CEOs made 20 times what typical workers made. But as of 2013, they make just under 300 times typical workers’ pay.

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While pay at the top of the labor market has outpaced nearly every labor market indicator for decades, pay at the bottom—the federal minimum wage—has severely lagged most. This figure shows the decline in the real (inflation-adjusted) value of the minimum wage since its high in 1968 as well as what the federal minimum wage would be today if it had kept pace with the growth of real hourly wages of production and nonsupervisory workers (who make up 80 percent of the workforce) or economy-wide productivity. Had the federal minimum wage kept pace with productivity it would be over $18 today. Though not shown, the federal minimum wage did keep pace with productivity in the 30 years before 1968.

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The widespread problem of stagnant hourly wages is not simply a problem of insufficiently skilled or educated workers. As this figure shows, a four-year college degree has been no guarantee at all of decent wage growth. In 2013, average real hourly wages of young college graduates were barely higher than in 1989!

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Wage gap shows how far from full recovery we remain : Cumulative nominal hourly earnings and wage target, January 2007–October 2014 Actual average hourly earnings of all private employees Hypothetical, assuming 4% growth* Jan-2007 $20.6 Feb-2007 20.68 Mar-2007 20.77 Apr-2007 20.83 May-2007 20.88 Jun-2007 21 Jul-2007 21 Aug-2007 21.04 Sep-2007 21.07 Oct-2007 21.11 Nov-2007 21.16 Dec-2007 21.21 $21.21 Jan-2008 21.24 21.27943602 Feb-2008 21.31 21.34909936 Mar-2008 21.4 21.41899075 Apr-2008 21.42 21.48911096 May-2008 21.51 21.55946071 Jun-2008 21.56 21.63004078 Jul-2008 21.63 21.7008519 Aug-2008 21.73 21.77189484 Sep-2008 21.76 21.84317036 Oct-2008 21.81 21.91467922 Nov-2008 21.92 21.98642218 Dec-2008 21.98 22.0584 Jan-2009 21.99 22.13061346 Feb-2009 22.05 22.20306333 Mar-2009 22.08 22.27575038 Apr-2009 22.11 22.34867539 May-2009 22.12 22.42183914 Jun-2009 22.15 22.49524241 Jul-2009 22.19 22.56888598 Aug-2009 22.26 22.64277064 Sep-2009 22.26 22.71689718 Oct-2009 22.32 22.79126639 Nov-2009 22.37 22.86587906 Dec-2009 22.38 22.940736 Jan-2010 22.42 23.015838 Feb-2010 22.45 23.09118586 Mar-2010 22.47 23.1667804 Apr-2010 22.5 23.24262241 May-2010 22.54 23.31871271 Jun-2010 22.54 23.3950521 Jul-2010 22.6 23.47164142 Aug-2010 22.64 23.54848146 Sep-2010 22.68 23.62557306 Oct-2010 22.74 23.70291704 Nov-2010 22.74 23.78051422 Dec-2010 22.77 23.85836544 Jan-2011 22.86 23.93647152 Feb-2011 22.86 24.0148333 Mar-2011 22.88 24.09345161 Apr-2011 22.93 24.17232731 May-2011 23 24.25146121 Jun-2011 23.02 24.33085419 Jul-2011 23.11 24.41050707 Aug-2011 23.08 24.49042072 Sep-2011 23.12 24.57059599 Oct-2011 23.22 24.65103372 Nov-2011 23.2 24.73173479 Dec-2011 23.22 24.81270006 Jan-2012 23.25 24.89393038 Feb-2012 23.3 24.97542663 Mar-2012 23.37 25.05718968 Apr-2012 23.4 25.1392204 May-2012 23.41 25.22151966 Jun-2012 23.47 25.30408836 Jul-2012 23.52 25.38692736 Aug-2012 23.51 25.47003755 Sep-2012 23.58 25.55341983 Oct-2012 23.56 25.63707507 Nov-2012 23.64 25.72100419 Dec-2012 23.71 25.80520806 Jan-2013 23.75 25.8896876 Feb-2013 23.79 25.9744437 Mar-2013 23.81 26.05947727 Apr-2013 23.86 26.14478921 May-2013 23.89 26.23038045 Jun-2013 23.98 26.31625189 Jul-2013 23.97 26.40240445 Aug-2013 24.03 26.48883905 Sep-2013 24.06 26.57555662 Oct-2013 24.09 26.66255808 Nov-2013 24.15 26.74984435 Dec-2013 24.17 26.83741638 Jan-2014 24.22 26.9252751 Feb-2014 24.29 27.01342144 Mar-2014 24.32 27.10185636 Apr-2014 24.33 27.19058078 May-2014 24.38 27.27959567 Jun-2014 24.45 27.36890197 Jul-2014 24.46 27.45850063 Aug-2014 24.54 27.54839261 Sep-2014 24.53 27.63857888 Oct-2014 24.57 27.7290604 Nov-2014 24.66 27.8198381 Chart Data Download data The data below can be saved or copied directly into Excel. The data underlying the figure. Note: The graph depicts the wage target consistent with the Federal Reserve Board's 2% inflation target and 2% labor productivity growth assumption. Note: The nominal wage target of 4 percent is defined as nominal wage growth consistent with the Federal Reserve’s 2 percent overall price inflation target, 2 percent productivity growth, and a stable labor share of income. As an example, if trend productivity growth is 2 percent, this implies that nominal wage growth of 2 percent puts zero upward pressure on overall prices; while an hour of work has gotten 2 percent more expensive, the same hour produces 2 percent more output, so costs per unit of output are flat. Nominal wage growth of 4 percent with 2 percent trend productivity growth implies that labor costs would be rising 2 percent annually—and if labor costs were stable as a share of overall output, this implies prices overall would be rising at 2 percent, which is the Fed’s price growth target. Source: EPI analysis of Bureau of Labor Statistics Current Employment Statistics, public data series. Reproduced from EPI's Nominal Wage Tracker Source: EPI analysis of data from Bureau of Labor Statistics (U.S. Department of Labor) Current Employment Statistics program. Various years. Employment, Hours and Earnings—National [database]. Reproduced from EPI's Nominal Wage Tracker Share on Facebook Tweet this chart Embed Copy the code below to embed this chart on your website. Download image

Despite a falling unemployment rate and a stepped-up pace of job growth in 2014, the economy remains far from fully recovered. This is illustrated by the sharp slowdown in nominal wage growth (wages unadjusted for inflation) that has persisted in the recovery from the Great Recession. Given trend productivity growth (1.5–2 percent) and the Federal Reserve’s 2 percent inflation target, hourly wage growth could be twice as fast—around 4 percent—without spurring inflation. And wages could grow significantly faster than this for an extended period of time—say, 6 percent for six years—before they hit the healthy wage target set by 4 percent growth since 2007.

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The damage from our too-slow recovery can extend well into the future. As one example, in 2012 and especially in 2013, college enrollment rates among young adults fell sharply off trend and outright declined. If continuing economic weakness is behind this decline (and there’s plenty of reason to think that it is), this means that the scars of the Great Recession and attendant slow recovery could run deep.

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The year 2014 saw policy address one aspect of labor market dysfunction—the enormous erosion in employer-sponsored health insurance coverage. Like wage stagnation, this problem was not confined to non-college-educated workers. The share of young college graduates who have employer-sponsored health insurance coverage fell from 60.7 percent in 1989 to 30.9 percent by 2012. For high-school graduates, the decline was even steeper, from 23.5 percent in 1989 to just 6.6 percent in 2012. This rapid unraveling of employer-sponsored insurance, even for recent college graduates, was a key impetus for health reform in 2009, and 2014 was the first year that the coverage provisions went into effect.