Karl Marx used to say that unemployed people were capitalism’s reserve army. Though he didn’t invent the term, he meant that capitalism drew its strength from this army, standing at the ready to take a worker’s job if the current one didn’t like it. If unemployment levels are high enough, bosses can pay lower wages and treat workers poorly. If one of them quits, there are plenty more in reserve. But if the reserve army is depleted — if the economy is at full employment, and everybody who wants a job has one — then bosses can’t treat workers as disposable, and they can’t indulge their racism and sexism in the same way. A boss who treats women or people of color poorly, or refuses to hire them, is at a supreme disadvantage if there’s no reserve army. Think back to World War II, when unemployment evaporated in order to meet the demands of the war effort. Rosie the Riveter didn’t get her job as the result of a social movement on behalf of gender equity on the factory floor. She got it because factories needed bodies and had less ability to indulge their sexism. Full employment takes power out of the hands of bosses who use it to discriminate and gives power to workers to make demands — and if those demands aren’t met, they have the freedom to work elsewhere. That theory about unemployment in a capitalist economy is relevant to how analysts are pulling apart the two-day collapse of the stock market that began Friday, and its subsequent wild swings. Market watchers have said flat-out that the crash was triggered by a new jobs report released Friday that showed that wages, nearly a decade into the recovery, might finally be starting to rise. Now, when analysts say that the Dow Jones industrial average went up or down for this or that reason, they are often just guessing. What specifically moves a body as complex as the stock market is in some ways unknowable, but it is useful to explore the cause being ascribed to last week’s crash — rising wages — apart from its implications for the market. What it says about the way our economy is structured is much more profound. Start with the suggestion, which seems odd on its face, that the market crashed because wages were seen to be rising. Anybody outside the financial system would immediately see wages going up as a good thing. After all, it’s what every politician in every party says they want to see happen. But for market analysts, it’s a bad thing, because it is said to be a signal that inflation is around the corner. “Concern about inflation was most glaring on Friday, when stocks tanked after the January jobs report revealed the strongest wage gains since 2009,” reported CNN Money. “The immediate catalyst was the jobs report, which showed the strong United States economy might finally be translating into rising wages for American workers — a sign that higher inflation could be around the corner,” offered The New York Times.

Anybody outside the financial system would immediately see wages going up as a good thing.

And if inflation is coming, then the Federal Reserve is likely to raise interest rates to slow down the economy and cool off the inflation. When the Fed raises interest rates, bonds become more attractive, so people move money from stocks to bonds — and the stock market dives. It becomes harder to borrow, so businesses and homeowners have less capital to throw around. Profits get squeezed by high-interest payments. And as interest rates rise, the value of older bonds, which pay out a lower interest rate, goes down. So people are losing money all over the place. All because wages started to go up. Everything in the structure of the economy, then, is geared toward making sure that wages never rise. And for nearly half a century, this task has been accomplished. Wages haven’t budged since the 1970s. Capitalism’s reserve army has its ranks bolstered by a mechanism known as the “inflation target” or the “inflation objective.” The Fed currently sets the target at 2 percent, meaning that it doesn’t want to see inflation higher or lower than that. What it really means is that it doesn’t want to see inflation higher than that, as the economy hasn’t hit the 2 percent target in years. But the target itself has meaning, since any little sign of wage growth is taken to mean that inflation is around the bend, so the Fed taps the brakes to keep everything under that target. When the Fed hits the brakes, people lose their jobs. That’s not an unfortunate side effect of tighter monetary policy — it is the intended effect. But the 2 percent target, argue people who want to see real full employment, is too low. The Fed is throwing people out of work unnecessarily — or, at least, for no sound economic reason.

Federal Reserve Chair Janet Yellen speaks during her last news conference in office December 13, 2017 in Washington, DC. Photo: Alex Wong/Getty Images



Political activism on the left around monetary policy doesn’t have much infrastructure, but the Center for Popular Democracy, through a group called the Fed Up Campaign, has begun to change that. Progress on that front could be seen in a tangible way last June, when then-Fed Chair Janet Yellen was asked at a press conference to respond to a letter, organized by Fed Up and signed by two dozen economists, calling for her to raise the inflation target. She opened the door to it. “I would say that this is one of the most important questions facing monetary policy around the world,” she said. “This is one of our most critical decisions and one we’re attentive to evidence and outside thinking. It’s one that we will be reconsidering at some future time.” Because the language Fed chairs use is so important, here’s her entire answer: At the time that we adopted the 2 percent target back in 2012, we had a very thorough discussion of the factors that should determine what our inflation objective should be. I believe that was a well-thought-out decision. Now, at the moment, we are highly focused on trying to achieve our 2 percent objective and we recognize the fact that inflation has been running below, and it’s essential for us to move inflation back to that objective. Now we’ve learned a lot in the meantime and assessments of the level of the neutral — likely level, currently and going forward — neutral fed funds rate have changed and are quite a bit lower than they stood in 2012 or earlier years, and that means the economy has the potential where policy could be constrained by the zero lower bound more frequently than at the time that we adopted our 2 percent objective, so it’s that recognition that causes people to think we might be better off with a higher inflation objective. This is one of our most critical decisions and one we’re attentive to evidence and outside thinking. It’s one that we will be reconsidering at some future time. It’s important for our decisions to be informed by a wide range of views and research, which is ongoing inside and outside the Fed. But a reconsideration of that objective needs to take account not only of benefits — potential benefits — of a higher inflation target, but also the potential costs that could be associated with it. It needs to be a balanced assessment, but I would say that this is one of the most important questions facing monetary policy around the world in the future and very much look forward to seeing research by economists that will help inform our future decisions on this. In plain English, Yellen said that the decision the Fed made in 2012 — before she was Fed chair — may have been the right one at the time, but evidence since then suggests the rate could be set higher. “Wage growth since the recession has been anemic and labor share of corporate income is still nowhere where it needs to be,” Jordan Haedtler, campaign manager of Fed Up, told The Intercept. “If the Fed announced that it was willing to tolerate a higher inflation target or even adopt a wage target, maybe investors would treat the recent modest uptick in wages as the good news that it is, rather than panicking.”

“If the Fed announced that it was willing to tolerate a higher inflation target or even adopt a wage target, maybe investors would treat the recent modest uptick in wages as the good news that it is, rather than panicking.”

President Donald Trump, meanwhile, chose not to re-appoint Yellen, replacing her with Jerome Powell. The question for Powell, who took the reins at the Fed this week, will be whether to move in the direction that Yellen had hinted or to keep the boot on the neck of wages. Even assuming there is no employer-class ideology behind the current model, the trouble is that the relationship between inflation and joblessness has become less and less clear since the model was first drawn up in 1958 by A.W. Phillips, using data from 1861 through 1957. So if the Fed can’t say that it is throwing people out of work in order to stave off inflation down the road, then why on earth is it doing it, other than simply to keep wages down on behalf of companies? The current recovery in particular has shown that the economy can maintain significantly low unemployment — below the 5 percent “natural rate” — and not experience inflation. The term “natural rate” is itself a giveaway that the economics profession has ventured into guesswork territory; the idea that there is a “natural” unemployment rate in an economy built by people is silly on its face. It has also been disproven by events: Inflation actually kept up as unemployment spiked after the last recession, baffling the Fed. There also hasn’t been much of an empirical link between changes in the unemployment and inflation rates since the mid-1980s, as Matthew Klein of the Financial Times pointed out recently. The Fed hasn’t been able to reliably meet its 2 percent inflation target since it was set in 2012, undershooting it for 66 out of 72 months. Any worry about inflation on the horizon is mostly speculative. Central bankers may say and even believe the opposite, but if they move to raise interest rates in the next several weeks and months — as is widely expected — doing so will mainly serve to ensure that workers don’t claim too much bargaining power. “The link has broken between wages and inflation. It’s dishonest at this point for the Fed to be talking about higher wages as a cause of inflation,” said J.W. Mason, an economist at John Jay College of Criminal Justice and a fellow at the Roosevelt Institute. “But it fixes a lot of problems for them if they can make themselves think the inflation story is true.”

“It’s dishonest at this point for the Fed to be talking about higher wages as a cause of inflation.”

This has to do with something called the non-accelerating rate of unemployment, or the NAIRU. The theory is that changes to the rate of inflation can be traced back to how far the actual unemployment rate strays from a theoretical level, the NAIRU. If unemployment is lower than that rate, inflation can be expected to rise. The Fed operationalizes this theory via its dual mandate to moderate prices and maximize employment through its interest rate targets, a process which — by the logic of NAIRU — tends to treat the latter as a means to the former, maintaining the so-called natural rate of unemployment around 5 percent. In Europe, central bankers have in recent years become more blatant about their role on this front: keeping wages from getting too high and (via interest rate targets) triggering a rise in unemployment when wages spike beyond their liking. The European Central Bank has even started to use a different, most honest term: the Non-Accelerating Wage Rate of Unemployment. In practice, they tend to mean the same thing — that only so many people can be employed before inflation rises, and the job of a central bank is to find and maintain the magic balance.

Traders signal offers in the S&P options pit at the Cboe Global Markets, Inc. exchange on February 6, 2018 in Chicago, Illinois. Photo: Scott Olson/Getty Images



Still, there are plenty of reasons for markets to balk at high wages. In a tight labor market in which demand is high, employers have to make a better sell to workers to either stay on the job or take one in the first place, since it’s easier to find something that either pays better or is offering better working conditions. It’s also harder for companies to find people to work for them, as there are fewer people looking for jobs. In that context, bosses sweeten the deal, promising perks like higher pay, bonuses, and vacation pay — in all, shelling out more money to entice and keep the workers they need. “As all employers are doing this,” Mason said, “they’re competing with each other and bidding up the price of labor. Competition leads capitalists to act in a way that contradicts their collective interest.” plenty of reasons for markets to balk at high wages. In a tight labor market in which demand is high, employers have to make a better sell to workers to either stay on the job or take one in the first place, since it’s easier to find something that either pays better or is offering better working conditions. It’s also harder for companies to find people to work for them, as there are fewer people looking for jobs. In that context, bosses sweeten the deal, promising perks like higher pay, bonuses, and vacation pay — in all, shelling out more money to entice and keep the workers they need. “As all employers are doing this,” Mason said, “they’re competing with each other and bidding up the price of labor. Competition leads capitalists to act in a way that contradicts their collective interest.” That’s where the Fed comes in, he added, to “protect businesses from their own worst impulses of giving workers higher wages.” It’s also what we’re likely to see the Federal Open Market Committee — the Fed’s policymaking body — do over the next several weeks as it moves to raise interest rates. For the first time since the late 1990s, the share of corporate profits being devoted to wages and benefits appears to be rising consistently. It’s still not high, comparable to where it was just before the recession. But it’s enough to make shareholders nervous. “It’s not irrational if you’re somebody that receives profits to feel concerned that profits are going to workers instead. That really is happening,” Mason told The Intercept. The response from the Fed, to “cool down” the economy by raising interest rates, could be disastrous for workers. By disincentivizing investment, higher interest rates make it less likely for firms to hire more workers. That’ll mean more people out of work overall, creating a feedback loop whereby people spend less money because their paychecks are less certain, in turn leading companies to make less stuff and hire fewer people. That all serves to give bosses the upper hand. In a tight labor market, workers can demand more since it may well be easier for them to find a new job than for their boss to find a new employee. A looser labor market flips that dynamic, raising the risks for employees of getting fired — especially so given the 40 years’ running assault on organized labor.

The burden of interest rate hikes fall disproportionately on the more vulnerable workers — namely women and people of color — who constitute the vast majority of today’s working class.