No, We’re Not There Yet!: Why Full Employment is a Better Destination than Full Recovery
Earlier this week, I had the opportunity to present findings from my recent report, The Impact of Full Employment on African American Employment and Wages, at the Center on Budget and Policy Priorities’ Full Employment forum. This blog post is taken from my opening remarks, which you can watch on C-SPAN.
Talking about the labor market each month has become a bit like taking my children on a road trip—every couple miles one of them is asking, “Are we there yet?” In the case of the labor market, this question commonly refers to whether or not the economy has fully recovered. In both cases, my typical response is, “No, not yet.” If you’re familiar with either of these situations you know that answer usually leads to another question: “How much longer?” The answer to that question ultimately depends on the intended destination.
Clearly, going to a neighborhood park requires less time in the car and is cheaper than going to Busch Gardens. However, it’s also true that the payoff for these two destinations is not the same. Similarly, I would argue that full employment is a better destination with a better payoff than full recovery, and this is especially true for African Americans. The distinction is this: A full recovery is simply a return to pre-Great Recession labor market conditions. Whether or not that’s a good outcome depends on how well you were doing in 2007—while the national unemployment rate in 2007 was 5.6 percent, the black unemployment rate was 8.3 percent. On the other hand, full employment raises the bar to the point at which anyone who is willing and able to work at the prevailing wage rate can find a job.
Although there may be some debate about what the appropriate full employment unemployment rate is, we know from past experience that it’s possible to get to as low as 4.0 percent without triggering accelerating inflation. Following are the three main reasons why reaching full employment and staying there is critical to the economic recovery and prosperity of African American workers.
The first and most obvious benefit of full employment is that a lower unemployment rate means more people with jobs. On average, the black unemployment rate falls nearly 2 percentage points for every 1 percentage point decline in the national rate. With improvements in the labor market over the past year, African Americans had the largest increase in the share of employed adults and the largest increase in their labor force participation rate, translating to nearly 200,000 fewer unemployed black workers.
The second benefit of full employment is that a tighter labor market means a better chance for faster wage growth. Figure A shows that inflation-adjusted median hourly wage growth was fastest during the 1990s recovery, and more specifically, during the latter half of that recovery when unemployment dropped as low as 4 percent in 2000. During that time we also see that wage growth for African Americans outpaced that of whites. Recoveries on either side of the nineties were characterized by relatively stagnant or declining wages.
Average Annual Change in Median Hourly Wages During Last Four Recoveries, by Race
White | Black | |
---|---|---|
1982–1990 Recovery | 0.4% | 0.3% |
1991–2001 Recovery | 1.2% | 0.9% |
1995–2000 | 1.7% | 2.0% |
2001–2007 Recovery | 0.2% | 0.0% |
2009–2014 Recovery | -0.7% | -1.3% |
Source: Author's analysis of Current Population Survey Outgoing Rotation Group microdata.
In estimating the relationship between the unemployment rate and wages since 1979, I find that wages of black workers have been more responsive to aggregate labor market changes than those of white workers. So when the unemployment rate doubles, the median black worker’s wages decline by 8 to10 percent compared to a decline of 3 percent for the median white worker.
Finally, increased employment and higher wages improve living standards since most households get income through working. One of the most compelling results of achieving full employment in the late 1990s was the fact that the share of African American households in the middle 60 percent of the income distribution (loosely the middle class) expanded between 1995 and 2000 as unemployment reached exceptionally low levels and black wages grew exceptionally fast. This black middle class expansion was unique to that period and is not something that has happened in any other recent recovery (Figure B).
Change in the Share of Middle Income Households by Race, 1982-1990, 1995-2000, 2001-2007, 2009-2013
White, non-Hispanic | Black | |
---|---|---|
1982–1990 | 0.5% | -3.1 |
1995–2000 | -0.7 | 2.9 |
2001–2007 | -0.5 | -1.3 |
2009–2013 | -0.2 | -2.9 |
Source: Author's analysis of Current Population Survey Outgoing Rotation Group microdata.
So, going back to my road trip analogy and the question, “are we there, yet?” Whether we’re talking full recovery or full employment, at this point the answer is the same – no, not yet. With the Fed in the driver’s seat, their decisions about how fast and by how much to raise interest rates will determine where the car stops. It’s in the best interest of all American workers, and African American workers especially, to endure the longer ride and get to the destination where the payoff is greater. That destination is full employment.
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