The latest jobs report provides yet another data point that the U.S. job market is closing in on full employment. I don’t think we’re there yet, as the report revealed that wage growth is stubbornly stuck at about 2.5 percent. True full employment should yield more wage pressure than that, suggesting that workers’ bargaining clout is still too weak.
But that said, the report showed one of the benefits of tight labor markets, one I very much welcomed: The gap between white and black unemployment rates was the lowest on record, with data going back to the early 1970s. Moreover, there’s an important new paper out from staff economists at the Federal Reserve that sheds light on this important result. The gap, unsurprisingly, is sensitive to full employment, as black workers are disproportionately helped by tight labor markets and lastingly hurt by weak ones. That realization yields strong policy implications, which are explored below.
The figure shows the unemployment gap in percentage points between blacks and whites. It ranges from a massive 12 points in the early 1980s (when black unemployment was 21 percent, compared with 9 percent for whites) to a low of about 3 points last month (7.1 percent for blacks, compared with 3.8 percent for whites). But the figure reveals two important truths. First, the gap is highly cyclical, meaning black unemployment is more “elastic” to labor market tightness than white rates.
Second, the nature of this relationship has changed in recent recoveries. The recessions of the early 1980s led to a large widening of the gap, but when the recovery started, the gap responded. In the three subsequent recoveries — those of the 1990s, 2000s and the current expansion — it took a while for the gap to start closing. That’s a function of initial jobless recoveries in those expansions, but it means the extent of gap closure will depend on the length of the expansion, a realization that creates linkages between racial justice and macro policies.
The Fed report shows another reason tight job markets are so important: Job loss is particularly costly for blacks and Hispanics, because it’s often harder for them to get and stay in the labor market. Minority workers are more likely than whites to move from employment to unemployment, and then from unemployment to out-of-the-labor-market. The authors point out that the “job-separation rate … appears to be the most important driver of racial unemployment rate gaps and it also accounts importantly for increases in these gaps during recessions.” This dynamic helps explain the lasting damage imposed on minority workers by periods of weak labor demand.
Of course, racial gaps in jobs, incomes and wealth are born of many factors, not just macro ones. Education differences matter, and the Fed study looks into this. However, the study finds that education differences between blacks and whites explain only about 10 to 15 percent of the unemployment gap over the last few decades (for Hispanics, education is a bigger factor, largely because of the larger share of Hispanic immigrants without a high-school degree).
In fact, the share of the black-white unemployment gap left over after factoring in education, age, marital status and state of residence is about 75 percent. How to interpret that is a challenge, but there’s no question that discrimination is in the mix.
Which brings me back to the point about tight labor markets. Simply put, employers who would discriminate against minority hires don’t have the labor-supply cushion to do so when the jobless rate is very low. You either hire available workers, or you leave potential profits on the table.
The Fed study finds that for every percentage point that the economy strengthens (measured by movements in the “output gap,” or the difference between actual GDP and GDP at full employment), the black-white employment gap closes by about half a percentage point. That finding roughly fits the last recession, when the output gap grew by about 6 points and the black-white unemployment gap went from around 4 to almost 8 points, and it certainly comports with the historically low gap recorded last month.
Think about the politics of this finding. As Ben Spielberg and I argue in this new piece in the American Prospect, there are many progressive public policies that should be enacted to correct racial injustices, from higher minimum wages, direct job creation, and criminal justice reforms, to Ta-Nehisi Coates’s forceful argument for considering reparations. Especially these days, every one of these ideas would generate fierce partisan battles. But that’s much less the case for full employment. In fact, whenever I’m on Capitol Hill these days, politicians from both sides of the aisle routinely ask me: “What can I do to create jobs in my district for those who’ve been left behind?”
Clearly, the Fed’s monetary policy should support full employment. In this regard, it was comforting to hear Chair Janet L. Yellen suggest in hearings Wednesday that she’s okay with low unemployment right now, given that inflationary pressures are nowhere to be seen. In fact, the persistently low correlation between inflation and unemployment in recent decades gives the Fed space to upweight the racial effects of its policy choices. Concretely, this means expanding their comfort level to include unemployment rates that are lower for longer.
Even at full employment, pockets of joblessness will persist. That suggests a role for direct job creation, where the government creates public employment and/or subsidizes private jobs, often with a training component for workers whose skill levels don’t meet today’s skill demands. If that sounds outside-the-box, I assure you we’ve done a lot of that in this country, and the results have often been positive.
My sense is that many observers of these trends in racial gaps have concluded that nothing works and that there is a large and growing class of workers beyond reach. These results show such defeatism is clearly wrong. People across the racial spectrum will and do respond to opportunity. We just have to make sure the opportunities are there for them.