Full Employment, African American Employment and Wages | EPI

The Impact of Full Employment on African American Employment and Wages | Economic Policy Institute.

By Valerie Wilson | March 30, 2015

This paper is part of the Full Employment Project of the Center on Budget and Policy Priorities. It was presented by Valerie Wilson on Monday, March 30, 2015, as part of a forum entitled “Full Employment: How Can We Get There and Stay There? Why Does It Matter?”.

By the end of 2014, the U.S. economy had experienced 58 consecutive months of job growth, and the unemployment rate had fallen to 5.6 percent from a high of 10 percent in October 2009. In fact, 2014 was by far the strongest year of the recovery, with job growth averaging over 246,000 per month, the highest monthly rate since before the recession. Economic growth also picked up, with gross domestic product rising at annual rates of 4.6 percent and 5 percent during the second and third quarters, respectively, following a first-quarter decline of 2.1 percent.

Last year’s solid job growth proved to be especially beneficial to communities of color, whose unemployment rates rose well above 10 percent during the worst years of the recession. In particular, after reaching a high of 16.8 percent in March 2010, the African American unemployment rate fell to 10.4 percent in December 2014. Between December 2013 and December 2014, African Americans had the largest increase in the share of adults with a job and the largest increase in their labor force participation rate,1 translating to nearly 200,000 fewer unemployed black workers.

Despite this progress, the labor market is nowhere near a full recovery, much less full employment. For African American workers in particular, much is at stake in whether the economy is allowed to reach a full recovery and full employment, as evidence from the last four recoveries strongly suggests:

  • On average, the black unemployment rate is more volatile with respect to aggregate labor market changes than the white rate. Between 1979 and 2014, the average annual black unemployment rate changed by 1.7 percentage points for every 1 percentage-point change in the national unemployment rate, compared to a change of 0.91 percentage points for whites.
  • Wages of black workers are more responsive to aggregate labor market changes. Doubling the national unemployment rate is estimated to reduce real hourly wages by at least 8 percent for the median black worker compared to 3 percent for the median white worker.

In the five-year period between 1995 and 2000, during which the annual unemployment rate dropped to 4 percent:

  • The black unemployment rate fell to 7.6 percent, the lowest rate on record and the closest it has ever been to the white rate (within 4.1 percentage points) during a period of economic expansion.
  • Real wage growth for African Americans narrowly exceeded that of whites, as median hourly wages of black workers grew by 2 percent per year compared to 1.7 percent per year for whites.
  • The African American middle class expanded more than in periods of economic recovery when the economy was further from full employment. The share of African American households in the middle 60 percent of the income distribution increased 3 percentage points between 1995 and 2000, while it declined during the recoveries of the 1980s and the 2000s as well as during the current one.
  • The fact that all of these positive developments occurred without setting off an inflationary spiral suggests that policymakers should be willing to experiment aggressively with low rates of unemployment in order to bring the benefits of a full recovery to African American households.

As the Recovery Builds Steam, Critical Labor Market Weaknesses Persist

The good news about the fall in the unemployment rate since its 2009 peak is tempered by the fact that labor force participation continued to decline sharply even after the recession officially ended. A better measure of labor market strength is the prime-age employment-to-population ratio (EPOP), which measures the share of adults between the ages of 25 and 54 who are working. The prime-age EPOP declined 4.8 percentage points between 2007 and 2010 (peak to trough), and the average for 2014 remained 3.2 percentage points below the pre-recession rate. The employment gap for prime-age African Americans is even wider: Having declined 8.1 percentage points between 2007 and 2011 (peak to trough), it remained 4.2 percentage points below the pre-recession rate.

Another key indicator of remaining slack in the labor market has been slow wage growth. Real wages have been essentially flat since 2009, and even with the recent drop in inflation wages in 2014 grew at a slightly slower pace than wages in 2013.2 Wage growth is as an important signal of inflationary pressure that the Federal Reserve considers as it sets interest rate policy. But as Bivens and Gould point out, as long as nominal wages grow at or below the rate of productivity growth plus the Fed’s price inflation target, there is no risk that excess labor market tightness will push inflation above that target.3 If this is the case, then with productivity growth averaging 1.5 to 2 percent and nominal wage growth sitting at 2 percent over the last year, wage growth could essentially double without putting any pressure on the Fed’s 2 percent price inflation target.

In spite of the gains in employment, for most workers slow and stagnant wage growth continues to challenge any sense of confidence about the economic recovery. History strongly suggests that full employment provides the best chance for American workers to experience wage and income growth. Baker and Bernstein show that incomes have grown faster and more equally when the economy was at or near full employment, notwithstanding other factors that influence wage growth.4 They also show that lower-income and African American families suffer greater income losses during periods of slack labor markets and faster income growth when labor markets are tighter.

Click here to read the rest of this paper on the Economic Policy Institute website.

Black Unemployment