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News from EPI The Federal Reserve Can Help Close Gender and Racial Wage Gaps by Pursuing Full Employment

With questions of race and inequality dominating the national dialogue and the Federal Reserve’s debate over interest rates heating up, a new report argues that the Fed has an opportunity and responsibility to close race and gender gaps in the labor market by pursuing full employment. In Mind the Gap: How the Federal Reserve Can Help Raise Wages for America’s Women and Men, the Center for Popular Democracy’s (CPD) director of strategic research Connie Razza and the Economic Policy Institute’s (EPI) research and policy director Josh Bivens recommend that the Federal Reserve pursue genuine full employment rather than be satisfied with steady job growth that consistently fails to boost wage growth. Better wage growth is crucial to ensure that gender and racial wage gaps close for the right reasons, with wages rising for all groups but more rapidly for groups currently disadvantaged in labor markets.

“Because the vast majority of American workers have seen near-stagnant wages even as economy-wide productivity growth has constantly risen, there’s ample space for wage gaps to close without anyone losing wages,” said Bivens. “The Fed has a powerful role in shaping labor market trends and raising wages—by pursuing full employment, it could help to close these wage gaps among workers.”

Over the past 35 years, the vast majority of workers saw wages essentially stagnate despite a 64.9 percent growth in productivity. The limited progress made toward closing the gender wage gap in this period is even more disappointing given the outright decline of men’s wages. Wage disparities between white earners and Latino or Black earners, meanwhile, have increased during this same period.

The past 35 years also shows a steady downward trend in price inflation, meaning that monetary policy has been contractionary over much of this period, contributing to the poor wage performance for most workers over this time period. The authors recommend that the Federal Reserve not consider an interest rate hike until indicators of full employment, particularly wage growth, have strengthened. To promote wage growth, the Federal Reserve should set a clear and ambitious target for wage growth, which can be tailored to the price-inflation target and pegged to increases in productivity.

“Failure to aggressively target and achieve genuine full employment by keeping interest rates low and setting a clear and ambitious target for wage growth explains a large part of why wages continue to stagnate,” said Razza. “There is increasing talk about raising interest rates, but it would be a terrible mistake for the Fed to do so. Raising interest rates too soon will slow an already sluggish economy and will disproportionately harm women and people of color.”