Allow me to connect some of my favorite economic dots between exciting new findings, timeworn historical relationships, and racial inequities – all in the interest of adjusting economic policy in ways to help those who have long struggled to get ahead.
Here are the ingredients of this recipe:
1) Start with the generally accepted idea that tighter job markets are correlated with faster inflation. Important new research, however, shows this correlation to be very weak now, such that the cost of lower unemployment is but a tiny uptick in inflation. A year of low unemployment might raise the inflation rate by a tenth of a percent or even less (the number from the study is actually three one-hundredths of a percent!).
2) A recent paper by economist Valerie Wilson points out that a percentage point less of overall unemployment translates to a 1.7 point decline in African American unemployment (compared with 0.9 for whites).
3) One of the benefits of full employment I’ve long emphasized is that tight labor markets disproportionately boost the pay of the lowest-paid workers (they’re also the ones who catch pneumonia when the economy sniffles). Wilson shows that the wage bump from lower unemployment is more than twice as large for blacks as for whites.
Okay, let’s put this all together. The overall unemployment rate when last seen was 4.9 percent, and the most recent rate for blacks is 8.8 percent (putting their ratio — 1.8 — about where Wilson said it is over time).
The Federal Reserve thinks that’s about the lowest jobless rate consistent with stable inflation, meaning that if we go below it, they think inflation will accelerate. I disagree about our ability to reliably identify this “lowest-you-can-go” unemployment rate (and the new research cited above backs me up), but let’s assume the Fed is right about this. Even so, they decide it would be really helpful to low-wage, black workers to let the unemployment rate fall another point, to slightly below 4 percent.
That one-point decline should correspond with about a 1.7-point decline in black unemployment, taking that rate down to 7.1 percent, the lowest since the last time the job market was at truly full employment in the late 1990s.
The figure below plots the 20th-percentile wage for blacks in recent years, using data from the Economic Policy Institute (this is a good proxy for low-wage work; 80 percent of blacks earn more while 20 percent earn less). In 2015, as the tightening job market finally gave them a smidgen of bargaining power, these workers’ wages were finally starting to trend up (low inflation helped, too).
According to my calculations from a database of African American wages that spans numerous decades, a 20 percent decline in the unemployment rate (from about 5 to 4 percent) could boost the 20th-percentile real wage by almost 3 percent. As the figure shows, that would help keep the recent trend moving in the right direction.
And at what cost in terms of inflation? “Bupkis,” that’s how much (a Yiddish word derived from — you should forgive the expression — goat droppings). Core inflation — the Fed’s preferred metric — is running at about 1.5 percent. Add in the extra inflation implied by the new research cited above and you’d get 1.53 percent.
Even if the new work is off by a significant factor, the conclusion is the same. What if price growth sped up to 2 percent? Actually, that would mean the Fed would finally hit its inflation target, the one it’s been missing on the low side for years. That, in turn, would lower the real interest rate and perhaps help stimulate investment.
So let’s review. Until recently, growth in this expansion has been a spectator sport for many disadvantaged workers. One way to help them is for the Fed to accommodate very low unemployment. That could conceivably trigger inflationary concerns, but based on how weak that correlation is these days, lower unemployment seems an extremely favorable trade-off to the low-wage workers who would benefit disproportionately in terms of faster wage growth.
Of course, life is more complicated than these relatively simple connections imply. It will take a lot more than just the Fed holding off on interest-rate increases to generate true racial economic justice. Getting there will also require, as a basic starting point, both criminal justice reform and direct job creation in neighborhoods that have historically been left behind (even when the rest of the country is at full employment).
But especially given the quantitative evidence, it would be a real advance for economic policy makers at the highest levels to heavily weight the concerns of these and other low-wage workers in ways that have been far too rare in the past, as Washington Post reporter Ylan Mui pointed out earlier this week.
The bankers have been doing pretty well for a while now. Let’s see what we can do to help the rest.