Income inequality, driven largely by anemic wage growth for the vast majority of households and manifesting as an increasing share of national income being captured by the top 1 percent, is a widely agreed upon economic challenge for American policymakers. At the same time, economic observers have become increasingly worried about “secular stagnation”—or a chronic shortfall of aggregate demand—fearing that this shortfall will constrain American economic growth in the years ahead. In a new paper, EPI Director of Research Josh Bivens argues that the problem of secular stagnation can be solved, in part, by addressing income inequality.

“For the past decade, the primary constraint on economic growth has been too-slow spending by households, businesses, and governments,” said Bivens. “Beyond raising households’ incomes and standards of living, there is clear evidence that raising wages for the vast majority would jump start economic growth by boosting growth in aggregate demand.”

Holding all else equal, Bivens argues, by shifting income away from low- and middle-income households—who have a lower propensity to save—to high-income, high-saving households, inequality has reduced consumer spending, negatively affecting aggregate demand. In recent decades, this demand shortfall has led directly to slower economic growth. Bivens notes that a substantial portion of increased savings by richer households is not captured by conventional measures of personal savings rates. His analysis reveals that much of the savings by high-income households in recent decades has taken the form of unrealized capital gains spurred by corporate stock buybacks. This constitutes a large increase in wealth, but is not captured by the most commonly referenced measure of economy-wide personal calculated as part of the national income and product accounts (NIPA).

“Fighting inequality by giving working people a raise would not only be good for their living standards, it would create a healthier economy overall,” said Bivens.

To achieve this healthier wage growth for the vast majority, Bivens recommends a mixture of policies that would increase workers’ bargaining power in the labor market, including more progressive taxes as well as substantially higher minimum wages.