Racism and the Economy - Focus on Employment

According to the Center for Assessment and Policy Development, racial equity is the condition that would be achieved if one’s racial identity no longer predicted, in a statistical sense, how one fares.
In reality, statistical analysis often reveals that racial identity is a measurable, significant, and persistent predictor of labor market outcomes.  Let’s pause and think about that for a moment.  Why should racial identity—something as arbitrary and superficial as physical appearance (skin color)—be statistically correlated with one’s likelihood of being employed or how much they are paid for their labor?

As silly as that sounds, when we consider the origins of race as a social construct, the racial disparities we observe across any number of economic outcomes should come as no surprise.  Since this nation’s inception, race has been used to systematically exclude, marginalize, exploit, and generate unequal economic outcomes, while also being used to justify and normalize those unequal outcomes.

I’m going to start with a few graphical examples of what this looks like in the specific context of black-white inequality.  These images and statistics are probably familiar to many of you, so I’m going to run through them quickly in order to highlight a few key points.  Then, I want to spend most of my time talking about the historical context, policy relevance, and contradictory interpretations of racial disparity.  Finally, I’ll share what role I think the Federal Reserve and others play in addressing racial disparities in employment and wages.

• Black workers are far more likely to be unemployed than white workers – typically twice as likely.  Even at the historically low rates of unemployment reached in 2019, this was the case overall and at nearly every level of education.  In practical terms, this means that black workers are not just twice as likely to be unemployed as similarly educated white workers but are often more likely to be unemployed than less-educated white workers.

• Among the employed, black workers face large pay disparities relative to white workers.  These black-white wage gaps have grown over the last 40 years (1979-2019) and are largely unexplained by factors associated with individual productivity. In 2019, the average hourly wage of black workers was 26.5% less than that of white workers (dark blue line).  Relative to white workers with the same education, of the same age and gender, and living in the same geographic division, the gap was 14.9% (light blue line, regression-adjusted gap). In other words, less than half the observed black-white difference in average hourly wage is explained by the main factors presumed to determine pay.

• The intersection of race and gender imposes a dual wage penalty on black women. In 2019, black women (dark blue line) were paid 33.7% less than their white male counterparts, which was a much larger gap than that faced by either white women (25.7% – light blue line) or black men (22.2% -red line). This is even after the sharp downward trend in the gender wage gap that occurred throughout the 1980s and essentially stopped in the mid-1990s.

• There has been insufficient vigilance in fighting unemployment since the late 1970s – the same period of time that we have observed growing wage inequality overall and widening wage gaps between black and white workers.  This graph shows the actual rate of unemployment (dark blue) and estimates of the natural rate of unemployment (also referred to as the non-accelerating inflation rate of unemployment or NAIRU). Between 1979 and 2019, the actual unemployment rate exceeded estimates of the NAIRU by an average of roughly 0.8 percentage points each year.  I’m going to argue that the Fed’s monetary policy has been too contractionary in the decades since 1979 and this has had an adverse effect on closing the black-white wage gap. I’ll say more about this particular point later.

By now, we’ve all heard about the talk Black parents have with their children about how to conduct themselves during interactions with law enforcement.  This talk is based on the painful reality that being black means they are more likely to be judged as dangerous, suspicious or guilty, placing them at greater risk of suffering violence at the hands of police officers.

But there’s another talk that black parents have with their children. That talk goes something like this: You’re going to have to work twice as hard and be twice as good just to get the same recognition and opportunities available to your white colleagues. This talk is informed by painful first-hand experience with the outcomes shown in the slides.
The persistent racial disparities we observe in unemployment and wages arguably provide the most compelling evidence of structural racism in the labor market.

Unemployment disparities
One of the most defining features of the U.S. labor market is the large and persistent disparity in unemployment that exists between Black and white workers.  This disparity is well-documented in decades of official estimates from the Bureau of Labor Statistics, dating back to 1972 when the agency first began reporting rates of unemployment by race.  More than 45 years’ worth of data can be summed up in one simple ratio: 2-to-1.  It means black job seekers are about half as likely to secure employment during a consecutive 4-week period as are white job seekers.  This has been true across multiple periods of economic expansion and recession, and is observed for all age cohorts, at every level of education, and for men and women alike.

Over the last four and a half decades, only the most highly educated and most experienced black workers have approached anything near unemployment rate parity with their white counterparts, and only during periods of exceptionally low unemployment.
These empirical data are consistent with multiple field experiments revealing that black job applicants with equivalent, and sometimes superior, credentials to white applicants are less likely to receive job call back.

Wage inequality
Another defining feature of racial inequality in the labor market are the large disparities in pay between black and white workers.  I remind you that racial pay gaps persist even after accounting for factors commonly associated with individual productivity (education or skills) and have in fact gotten worse over the last forty years.  One of the most troubling aspects of growing black-white wage gaps is the fact that they have grown most among college-educated workers; those presumed to have done all the “right” things, yet still receive lower returns on their investment in higher education than their white counterparts.

In 1979, black bachelor’s degree holders were paid an average hourly wage that was 86.4% of what white bachelor’s degree holders were paid.  The ratio between black and white advanced degree holders was 89.9%.  Fast forward to 2019, and the ratio between black and white bachelor’s degree holders was down 8.9 percentage points to 77.5%; the ratio for those with advanced degrees was down 7.5 percentage points to 82.4%.

These patterns are consistent with the fact that relative to their white counterparts, college-educated black workers are less likely to be employed in positions and industries that have seen the most wage growth in recent decades.  Only 3 percent of all chief executives are African American, and a disproportionate number of them are employed in the public or private nonprofit sectors, where salaries are lower and more likely to be capped than they are in the private for-profit sector where CEO pay has soared in recent decades.1  Moreover, in 2019, Black workers with a college or advanced degree were more likely than their white counterparts to be underemployed based on their skill level—almost 40% were in a job that typically does not require a college degree, compared with 31% of white college graduates.

Unlike unemployment rates that are characterized by a nearly constant 2-to-1 ratio, there have been 4 distinct periods of change in black-white wage inequality. These periods of change have often been consistent with distinctive shifts in policy.
For example, the narrowing of the gap from the late 1960s through the 1970s can be traced to the passage of important Civil rights legislation, and active enforcement of anti-discrimination and affirmative action policy which also contributed to narrowing of the educational attainment gap between Blacks and whites.

On the other hand, the widening of the gap since the 1980s is associated with retrenchment on anti-discrimination policy, in combination with policies and practices that fueled growing wage inequality, including failure to increase the federal minimum wage as the cost of living rose, a decline in union representation, and weaker macroeconomic conditions.

Since the 1980s, there has only be one very brief period of when the gap narrowed, and that occurred during the last five years of the 1990s economic boom.  Notably, the unemployment rate was consistently lower than the natural rate of unemployment for almost 4 years during that time, and without runaway inflation.

Since 2000, the black-white wage gap has widened amid sluggish economic growth, two jobless recoveries, the Great Recession and subsequent recovery that was needlessly hampered by premature fiscal austerity. Fiscal austerity has been especially harmful to black workers who are a disproportionate share of those employed in the public sector where they have historically been drawn by better job opportunities and greater pay equity.

I want to take a moment here to connect black-white wage inequality with the Fed mandate to maximize employment. 
Between 1979 and 2019, the ratio of Black to white median wages fell by 8 percentage points (from .83 to .75). Recall that in the last slide I showed, the actual unemployment rate exceeded estimates of the NAIRU by an average of 0.8 percentage points each year during the same time.

In forthcoming work, we use a Phillips wage curve to estimate the relationship between wage growth and the level of unemployment and find that the coefficient for median Black wages is roughly 0.3 percentage points larger (in absolute value) than for median white wages. This indicates that relative wage growth for Black workers would have been roughly 0.25 percent higher each year over that time if, on average, the actual unemployment rate had been equal to the NAIRU instead of above it.  In other words, tighter labor markets (less contractionary monetary policy) could have stopped the deterioration of the Black-white median wage gap. If estimates of the NAIRU are actually too-conservative, and unemployment could have averaged 1 to 2 percentage points lower than that over the 1979-2019 period, the Black-white median wage ratio could have actually gone up, extending the progress made in narrowing the gap during the 1960s and 1970s.

We are now on the heels of the longest period of economic expansion in history. Yet, the ever-present legacy of racism and economic inequality continue to impose a needlessly heavy burden on the backs of black workers during the COVID-19 crisis.
One of the structures contributing to such racially disparate impacts is occupational segregation, characterized by overrepresentation of black workers, and especially black women workers, in low-wage occupations, and underrepresentation in higher-wage occupations. The COVID-19 crisis has popularized the term essential worker, drawing attention to the fact that black workers occupy a disproportionate share of lower-wage jobs in major frontline industries, often with unpredictable work hours (thus, unpredictable pay) and without paid leave or employer-provided health coverage.

Conclusion
In my view, these patterns of persistent racial inequality in the labor market are analogous to horrific videos capturing blatant disregard for black lives. Let me be clear. While losing a job comes nowhere close to losing a life, both are symptoms of the kind of racial injustice that sparked national and international protests this past summer.
Unfortunately, what should be overwhelming evidence of racial injustice gets filtered through our own experiences, perceptions and biases.  In other words, it is our interpretation of the evidence that determines if and how we respond.
Do we recognize these patterns as racial discrimination, and seek to dismantle the structures that assign a relative advantage to being born white and relative penalty to being born black? Or do we seek some other explanation that points to failure on the part of the individual with unfavorable outcomes?

I started with a definition of racial equity as the condition that would be achieved if one’s racial identity no longer predicted employment outcomes.

I want to end with this definition of racial justice. According to the Applied Research Center, racial justice is the proactive advancement and reinforcement of policies, practices, attitudes and action that produce equitable power, access, opportunities, treatment, impacts and outcomes for all.

• Government institutions, and individuals each have a role to play in facilitating racial justice.
• The Federal Reserve can create a stronger, more stable labor market through consistent full employment.
• Institutions, such as labor unions, can help workers to have a stronger, collective voice with which to advocate for higher pay, better benefits, training and promotional opportunities, as well as protections against discrimination and harassment.
• Lawmakers can pass a robust set of labor standards that supports those objectives, and advance fiscal policy that centers racial equity in employment.
• Businesses can work in partnership with the EEOC to provide greater transparency in hiring, promotion and pay decisions, and to proactively comply with anti-discrimination laws.

In closing, if I could leave you with a simple takeaway, it would be this: Racial justice demands action. Racial equity is the goal. Passivity is not an option.