When Jerome Powell, the chair of the Federal Reserve, gives a press conference, Fed reporters and market analysts pore over every word, looking for hints about the Fed’s plans and what they might mean for the economy. So it was striking that a few of the more important and unusual comments from Powell’s presser last week went largely unnoticed. Allow me to correct that here.
First, a bit of context. A few weeks ago, Powell attended a “FedListens” conference in Chicago. It’s something of a listening tour for the Fed to help review its “monetary policy strategy, tools, and communications.” As part of the initiative, the central bank is holding numerous conferences throughout the year, during which it can hear from outsiders to help inform its review.
During one panel in Chicago, Maurice Jones, president of the Local Initiatives Support Corporation (LISC), a national organization that works with local partners to bring economic opportunity to places that have too little of it, was asked by the moderator, Boston Fed president Eric Rosengren, about the implications of tight labor markets — meaning low unemployment, such as we have at the moment — for the low-income communities that LISC serves.
“The best thing for them is prolonged, low unemployment,” Jones replied. “No question about it. … Businesses are coming to us … they were not coming to us before this period. ... From the standpoint of fighting poverty, the longer we can have low unemployment, the better, and that’s what we wish for.”
But the Fed has historically seen a prolonged period of low unemployment as a dilemma — it could lead to ever-higher inflation. And when that happens, the Fed might need to slam the brakes and raise interest rates, which could then lead to a recession. Given that the least advantaged get hurt the most by recessions, Rosengren asked Jones whether he worried about that potential scenario.
Jones was unmoved. “For the communities that we work in, recession has been a constant for years. They don’t fear recession. That’s their lives,” he said. “So the chance to have the opportunity to get work is the primary … they’ll take that risk.”
Now fast-forward to Powell’s press conference last week. Powell was asked to comment on the fact that even with unemployment at a 50-year low, the Fed is contemplating lowering, not raising, the benchmark interest rate it controls.
Powell’s response was noteworthy:
The reason why we say sustain the expansion is, you’re seeing now for the first time … communities that are being brought into the benefits of this expansion that hadn’t been earlier. You’re 10 years deep into this, and that’s something we heard quite a lot at the conference in Chicago on the review … it’s one of the reasons why we think it’s so important to sustain the expansion and keep it going, because we really are benefiting groups that haven’t seen, you know, this kind of prosperity in a long time.
A few questions later, he again referenced the panels in Chicago, saying that “for someone who does this work, [the panels were] very focusing and motivating too. … Some people recommended that we just talked to, you know, econ PhDs about this, but no, that’s not what we chose to do and we’re glad this is the choice we made.”
Now, this may sound like common sense — that people in elite positions with great economic power should hear about the impact of their actions on people whose economic opportunities depend on those actions. But such communication is as rare as it is important. That Powell not only sat and listened to these panels but also appears to have quickly incorporated the information into his thinking is a good sign.
It’s a tricky economic moment from the Fed’s perspective, as the jobless rate is well below levels that have historically signaled current or forthcoming price pressures. Historically, at such times the central bank has often raised rates preemptively, shutting down the possibility of a prolonged period of low unemployment to avoid accelerating inflation. Yet now, in part due to inflation dynamics I get into below, they’re re-weighting the classic trade-off between unemployment and inflation more in favor of low unemployment — and thus of less advantaged workers.
The benefits of high-pressure labor markets to the most economically vulnerable
There’s strong evidence behind the claims of the benefits of high-pressure labor markets — periods when the unemployment rate stays well below its historical trend — to those too often left behind. Recent research I did with UMass Boston sociologist Keith Bentele finds that in tight labor markets, the annual earnings of all low-income, working-age households grow 6 percent faster than in slack labor markets.
For low-income African Americans and single mothers, the differences are 8 and a whopping 13 percent, respectively.
Annual earnings combine the contribution of hourly wages and annual hours worked, and the latter is, much as Jones’s and Powell’s commentary suggests, a big reason for those earnings gains. The figure below on the left shows a clear, negative correlation between unemployment and annual hours worked for low-income, working-age households. In contrast, the random scatter of dots in the figure on the right shows that labor supply for high-income families is insensitive to the jobless rate.
This data carries important implications about the benefits of tight labor markets. First, as Jones asserts from firsthand knowledge, low-income people respond to tightening labor market conditions, which is one reason I’ve argued that the Trump administration’s efforts to add work requirements to anti-poverty programs are misguided.
Second, they show that because tight labor markets disproportionately help those with relatively low incomes, high-pressure labor markets have an equalizing effect. Economist Josh Bivens recently wrote that “excess unemployment may well explain more than a third of the rise in wage inequality since 1979, and likely contributed to the redistribution of income from labor to capital owners.”
Third — and this is particularly relevant to the Fed — by both adding hours to the schedules of those already working and pulling in more workers off the sidelines, high-pressure labor markets boost labor supply, providing the economy with more “room to run,” i.e., more non-inflationary growth.
The diminished costs of high-pressure labor markets
That said, as Rosengren asked, don’t we have to, at some point, worry about the inflationary costs of tight labor markets?
To answer that, consider the figure below. It shows (blue line) the unemployment rate falling and staying below the Fed’s estimate of the lowest unemployment rate consistent with stable inflation (red line). That should push inflation up, right? But the green line shows not only that inflation has remained low but also that it has been below the Fed’s target rate of 2 percent for most of the past decade.
If you’re thinking that’s because low unemployment hasn’t juiced wage growth, and thus producers haven’t needed to raise prices to offset higher labor costs, that’s not so. The yellow line shows gradual wage acceleration, which, for the record, is another important benefit of tight labor markets.
What this data pattern means is that the Fed can exploit the benefits of prolonged full employment for much longer than would be the case if the correlation between tight labor markets and inflation were stronger.
In other words, we have the collision between several powerful forces. Unemployment has fallen to levels most economists believed would be inflationary, and yet inflation remains tame. Such low unemployment is both lifting workers’ pay and helping people who’ve long been left behind to climb over steep barriers to labor market entry that hold them back in weaker labor markets.
And, perhaps most importantly, at least for now, a uniquely tuned-in Federal Reserve is responding by explicitly touting and supporting these dynamics. That’s good news for the beneficiaries of tight labor markets and, if we’re willing to learn these crucial lessons, for our understanding of how economies and labor markets function.
Jared Bernstein is a senior fellow at the Center on Budget and Policy Priorities and was the chief economic adviser to Vice President Joe Biden from 2009 to 2011.