Even before the World Trade Center tragedy struck a blow at the economy, thenational unemployment rate had begun to rise in recent months--and comments likethese began appearing in the press:
"The economy is moving to a more normal, sustainable unemployment rate after aperiod of rapid growth" (Neal Soss, chief economist at Credit Suisse FirstBoston, quoted in The Washington Post, May 5, 2001)."Unemployment, despite thousands of recent layoffs across awide range of sectors, is still well below the rate commonly associated withstable inflation and growth" (New York Times editorial, June 28, 2001).
And even though the recent rise to 4.9 percent was enough to frightenthe stock market and provoke calls for anti-recession measures, attention wasfocused more on the slow growth rate and stagnant corporate profits. Whereunemployment is concerned, the conventional wisdom is that 4.9 percent, ifanything, is too low.
Important policy-making institutions echo these sentiments. According to theCongressional Budget Office--the budget-battle scorekeeper for more than twodecades--the recent rise in unemployment is simply a return to normal. It viewsthe sustainable unemployment rate as being 5.2 percent, more than a fullpercentage point above the 3.9 percent low hit last year. The influentialOrganization for Economic Cooperation and Development takes a similar position.
The cost of taking these ideas seriously is terribly high, and itis a cost that falls disproportionately on working people. In fact, workingfamilies have no better ally in today's economy than full employment. Maintainingit should be our foremost goal. Those who advocate settling for unemploymentrates above the low and sustainable rates of the late 1990s are engaged, perhapsunknowingly, in a subtle breed of class warfare. In the next recovery, if wesettle into unemployment rates like those that prevailed over the 1980s and early1990s, we will be consigning middle- and low-income families to the raft ofeconomic problems that beset them over these years: stagnant incomes, fallingwages, and growing inequality. With a stimulus package now before Congress, let'snot forget that a prime benefit of restoring high growth is a return to fullemployment.
What Is Full Employment?
For our purposes, full employment means that virtuallyeveryone who wants a job has one. It doesn't mean that there are no unsuccessfuljob seekers or that the unemployment rate is zero. It allows for "frictional"unemployment--the reality that at any given time a small share of the workforceare between jobs. Aside from that, at full employment the number of workersseeking jobs matches up neatly with the needs of employers; the supply of laborand the demand for it are in equilibrium, and the available labor force is fullyutilized.
Even so, some disadvantaged persons experience persistently high"structural" unemployment. Their rates of unemployment are consistently manytimes that of the overall rate. These are the very persons helped the most byfull employment, because tight labor markets force employers to dig deeper intothe pool of job seekers. Based on the experience of the past few years, theeffective full-employment rate in the United States is certainly no higher than4.0 percent.
The labor market was slow to recover from the last recession. Officially, theeconomy bottomed out in March of 1991, but unemployment continued to rise untilmid-1992. It finally began to fall, and by January of 1996 it had leveled offmidrange between 5 percent and 6 percent, about where it was at the end of thelast recovery in 1989. Few expected it to fall much further.
But fall it did. In May of 1997, it fell below 5 percent for the first timesince 1973; and in September of 2000 it hit 3.9 percent, the lowest rate in threedecades. Consider some of the benefits that this low unemployment rate generated:
Great gains for minorities. While the overall rate of joblessness fell by 2.1percentage points between 1994 and 2000--from 6.1 percent to 4.0 percent--therate among African Americans fell 3.9 percentage points, from 11.5 percent to 7.6percent. The decline for black teenagers was particularly steep--from 35.2percent to 24.7 percent, a drop of more than 10 percentage points. For all blacksand for African-American teens, the 2000 rates were the lowest since datacollection on these groups began in the early 1970s. The same holds forHispanics.
While we judge these gains to be evidence for the importance of fullemployment, we don't want to lose sight of how high these rates remain. The factthat one-quarter of teenage black job seekers unsuccessfully sought work in the"best economy in 30 years" may seem to some a strange victory. Similarly, theratio of joblessness among blacks to overall unemployment was little changed.This suggests that structural problems persist. Still, though the unemploymentlevels faced by blacks are more than disconcerting, the trend over this periodwas very impressive.
Opportunities for the least skilled. Practically every labor-market analystargued that in the new economy the only thing that would help the least skilledwas for them to get more schooling. Yet unemployment rates fell faster forhigh-school dropouts over this period than for any other education group. True,their rates were the highest to start with, so they had more room to move; butthis is still a trend that deserves close scrutiny. Did skills suddenly rain fromthe heavens on them, or had the pundits forgotten about the demand side of theequation? Skills do matter, but evidently a tight labor market is the workingperson's best friend.
A recent Wall Street Journal feature article reported on furnituremanufacturing in the Carolinas, where the local unemployment rates abruptly rosefrom under 4 percent to over 7 percent. Managers were delighted. They could stopraising wages to attract employees; they could say no to demands concerningworking conditions. This shift had nothing to do with skills and everything to dowith the looser labor market.
Higher wages. The most important result of all this labor-market tightening isthat these employment gains translated into higher wages and incomes for broadgroups of working-class families who had seen their incomes stagnate over theprevious few decades.
The real hourly earnings of low-wage male workers fell at an annual rate ofabout 1 percent between 1973 and 1995--a 20 percent cumulative loss. They thenreversed course and grew at a rate of 1.5 percent per year from 1995 to 2000. Forlow-wage women, wages were flat over the earlier period but grew at a rate of 1.8percent annually in the latter half of the 1990s.
The real wages of high-school dropouts grew 1 percent per year post-1995,after falling at about that rate from 1973 to 1995.
After dropping 0.6 percent annually over the 1980s and early 1990s, the realincome of the poorest 20 percent of families grew by 2 percent per year from 1995to 1999 (such data are available only through 1999). In real 1999 dollars,low-income families were $400 worse off in 1995 than in 1989. By 1999 theiraverage yearly income had increased by $1,000.
These wage increases led to dramatic declines in poverty rates, especially forAfrican-American families, whose poverty rates fell 5.7 percentage points between1995 and 1999, while the overall rate fell by 2 points. (By 1999 the blackpoverty rate was 23.6 percent, compared with 11.8 percent for the overall rate.)
More people employed. In some ways, employment rates--the share of thepopulation employed--are more revealing than unemployment rates, because theformer also capture how a tight labor market draws in people who were formerlynot even looking for work (and thus not counted among the unemployed). Between1995 and 2000, employment rates grew fastest for the least skilled, increasing 4percentage points, while the rates for other education categories were fairlyconstant. Employment rates among whites increased by 1.3 points over this period;rates among blacks by 3.7 points. To appreciate the impact, you have to look at aparticularly disadvantaged group: young African-American women who didn't finishhigh school. Their rates of employment rose from 23 percent to 37 percent--awhopping 14-point increase. The fact that this large increase partly reflects thework requirements in the 1996 welfarereform law only underscores the importanceof full employment in enabling poor women to move from welfare to work.
Greater equality. Finally, the tight labor market and the resultant increasein the bargaining power of low-wage workers led to a clear slowing in the growthof inequality. The long-term trend hasn't reversed course--most measures ofincome or wealth inequality remain at postwar highs. But over the 1980s and early1990s, inequality's growth seemed inexorable--an unwelcome feature of the neweconomy. Many argued that this was the predictable outcome of technologicalchanges, which offered huge rewards for the computer literate and punishedeverybody else. Now inequality's upward trek appears to have been at least partlya function of too much slack in the labor market.
How do we get back to 4 percent unemployment or less? Monetarypolicy plays a key role: If unemployment is above 4 percent, the Fed chairmanshould say why we're not at full employment and what the Fed plans to do aboutit.
The other instrument is fiscal. While inveighing against publicspending may send valued political signals of fiscal rectitude, it is pretty muchnonsense from the standpoint of economics. Keynes imparted lasting lessons aboutgovernment's role in stimulating demand when the private-sector economy slows andunemployment rises. Similarly, investment in needed public infrastructure--fromroads and mass transit to the development of airline security measures and humancapital--can help to boost economic production and lower unemployment.
Rough times are ahead as the economy recovers from recent excesses in thestock market, business overinvestment, high levels of household indebtedness,and now the September 11 attacks. But the lessons of the late 1990s must not belost.
The unemployment rate fell to levels that very few economists thought wereobtainable just five years earlier, and there was no increase in the inflationrate. The 4.0 percent unemployment rate reached in this period should be thebenchmark against which the economy is measured in the future. If anything, weshould be looking to push the unemployment rate even lower, not throwing peopleout of work because of a questionable economic doctrine. This will require acontinued commitment from the Federal Reserve Board to support economic growth bymaintaining low interest rates. And given the slowdown, lowering the unemploymentrate may also require expansionary fiscal policy, even government deficits. Thereis simply no policy that offers as much benefit to the country, and especially tothe disadvantaged, as does genuine full employment.
