This is what passes for good news nowadays: Middle-class households might finally be making more money, in inflation-adjusted, or “real,” terms, than they were in 1999.

That, at least, is what the latest numbers from the U.S. Census Bureau show. According to them, real median incomes increased 3.2 percent in 2016 to reach a new all-time high of $59,039. It’s the kind of thing that almost sounds good until you realize that this is only 0.6 percent better than it was 17 years ago. Average annual raises of 0.04 percent—or 4 cents for every $100—don’t really seem worth celebrating.

This, then, is both encouraging and disheartening news. But it turns out it might be even less encouraging and more disheartening than you think. That’s because, in all likelihood, middle-class incomes have not actually passed their previous tech bubble peak. In fact, they probably have not even passed their slightly lower housing bubble one. Why is that? Well, the Census changed its methodology a few years ago in a way that tends to make incomes look higher than they did before. So if you adjust for that, like the liberal Economic Policy Institute did, it turns out that real median incomes are still 1.6 percent below where they were in 2007, and 2.4 percent below where they were in 1999.

And the less you make, the worse this is. The bottom 20 percent of households, according to the adjusted figures, are still getting 9 percent less in inflation-adjusted terms than they were in 1999; the 20 to 40 percent are getting 2.6 percent less; and the 40 to 60 percent, 1.9 percent less. It’s really only the top 20 percent of households, as you can see below, that have made any progress in the last 17 years. Everyone else is still going on two lost decades.

But this isn’t about the top 20 percent versus everybody else. It’s about the top 5 percent. The numbers are noisy, but they’re the only group whose income growth doesn’t really depend on the unemployment rate despite the fact that textbook economics says it should. Wage growth, after all, is supposed to go up when unemployment goes down, and down when it goes up. The idea being that businesses only have to compete over workers by offering them a job when unemployment is high, but have to go a step further and offer them a raise when it’s low. Which indeed does seem to be the case for every group in the bottom 95 percent. Going back to 1996, when the numbers start, the relationship between real income growth and the unemployment is statistically significant for all of them.

But it’s not for the top 5 percent. Not even close. This might not be as surprising, though, as it sounds. While it’s true that a bad economy would be bad for their earnings to the extent that they’re paid in stock options or bonuses, it wouldn’t be if they just had a big base salary. So what do they care if unemployment is 5 or 6 or 7 percent as long as they have their jobs? They don’t. All they care about is that markets are going up.

Well, that and that inflation doesn’t go up. That, of course, is what everyone who has a lot of money worries about it — that it won’t be worth as much. And that’s actually been the most important policy battle of the last eight years: whether the Federal Reserve will set interest rates to help the investor class or the working class. Now, you’d think that there isn’t any difference between these, and technically you’d be right. What’s good for jobs tends to be good for stocks as well. The problem, though, is that’s not how a lot of wealthy people look at things. They care about how good a risk-free return they can get — think the interest rate on a U.S. Treasury bond — and would rather maximize that than maximize their total returns by risking higher inflation.

So even though inflation has only briefly been as high as even 2 percent the past five years, there’s been a pretty constant call for higher interest rates and an end to the Fed’s bond-buying. Higher unemployment, you see, isn’t a threat to the top 5 percent’s wealth. Higher inflation is. At least, that is, in their minds. So they don’t really care whether we get joblessness down from, say, 5 to 4 percent. They’ll be getting a good raise regardless. Instead, they care about keeping inflation down around 1 or 2 percent.

For everybody else, though, there’s nothing more important than getting unemployment as low as we can for as long as we can — especially for people at the bottom of the income ladder. They tend to be the last ones in and the first ones out of the labor market, the ones who are left behind by a short recovery and even just a short recession. It makes a big difference, then, if we can push unemployment down so far that companies have to hire them, because everybody else already has a job. Not to mention that, with unions being reduced to quasi-mythical status, this kind of tight labor market is the only bargaining power a lot of people will ever know. Which is to say that it’s no coincidence that the only two times the bottom 20 percent have actually gotten big raises the last 20 years — the late 1990s and today — were when the Fed ignored the inflation chicken littles and let unemployment get well below 5 percent.

In other words, the only thing the middle class has to fear is the fear of 3 percent inflation.



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