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News from EPI High-pressure labor markets with sustained low unemployment can narrow racial gaps in wages and employment

Expansionary macroeconomic policies—which create “high-pressure” labor markets characterized by sustained periods of very low unemployment and rapid job growth—can narrow racial gaps in wages and employment, according to a new EPI report. The potential to close race-based gaps in the labor market should convince policymakers to increase the risk of inflation they’re willing to take on as they see just how low unemployment can go, report author and EPI Director of Research Josh Bivens contends. 

The report finds that a lower unemployment rate boosts hourly wages of typical (median) Black workers more than it boosts hourly wages of typical white workers. In 2019, the median Black worker was paid 32.2% less in hourly wages than the median white worker, up from 28.6% in 1973. Had the unemployment rate averaged 1 percentage point less annually from 1973 to 2019, the median Black–white wage gap could have declined to 18.0%. If the unemployment rate had averaged 2 percentage points less, then the median Black–white wage gap could have fallen to just 5.4%an 80% reduction in the size of this wage gap. These are not unrealistic goals for policymakers to aim for as labor market targets. 

Bivens also finds that reductions in the unemployment rate provide an even bigger relative boost for annual (as opposed to hourly) median Black earnings, by increasing both hours worked as well as hourly wages. In 2019, annual earnings of the median Black worker amounted to just 80% of annual earnings of the median white worker. If the unemployment rate averaged 2 percentage points less annually over the 1970–2019 period, the Black–white median earnings gap could have essentially closed. 

Further, the Black–white unemployment gap closes significantly when the overall economy has fewer idle resources (when potential output climbs closer to actual output, leading to a rise in the measured “output gap.”) The Black unemployment rate falls more than twice as much as white unemployment when the economy’s output gap rises by 1 percentage point.  

Sustained high-pressure labor markets may also have more power than we thought to close the Black–white unemployment ratio. For decades, the Black unemployment rate has been, on average, roughly twice the white unemployment rate, leading to much pessimism about what could reduce this ratio. High-pressure labor markets reduce it, according to the report. 

“Given the long history of structural racism in the United States and the intentional policy efforts that created these gaps, it’s incumbent upon policymakers to use every tool available to try to close them,” said Bivens. “While high-pressure labor markets by themselves are unlikely to fully erase race-based gaps in labor market outcomes, the potential to narrow these gaps significantly is an undeniable benefit of more-expansionary macroeconomic policy. The growing evidence that high-pressure labor markets can narrow these gaps calls for policies that test the absolute limits of how low unemployment can be pushed.”  

Macroeconomic policymakers frequently weigh the potential benefits of higher-pressure labor markets against the potential risks of running the economy “hot”, namely accelerating price inflation driven by excessively fast wage growth. Bivens explains that potential reductions in chronic racial gaps in labor market outcomes should convince policymakers to take on more inflation risk than they otherwise would have—including by waiting for actual and sustained, rather than forecasted, inflation to appear before raising interest rates.