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A Tale of Two Workers
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Andrew Kositkun Senior FX Advisor
Yesterday, Federal Reserve Chair Jay Powell gave a speech in which he noted that the U.S. labor market is still “very far” from a strong labor market whose “benefits are broadly shared.” Chair Powell also remarked that “achieving and sustaining maximum employment will require more than supportive monetary policy.” Today, U.S. initial jobless claims backed up Powell’s assertions as 793,000 workers filed for unemployment benefits against expectations for 760,000 filings. Last week’s jobless claims were also revised up from 779,000 to 812,000.
The COVID-19 recession and subsequent recovery have been distinctly different from prior cycles. The cause of the COVID-19 recession was purely exogenous and led to one of the sharpest downturns but fastest rebounds in history. But this rebound also stands out due to its inequities, which have led some to dub it a “K-shaped” recovery. That is, some parts of the labor market rebounded quickly, as in the upward sloping leg of the “K,” while other parts continue to lag.
Low-income workers have been far more impacted by the pandemic than their counterparts. This was really an expected result, as consumer-facing workers in the hard-hit services industry didn’t really have the option to work from home. Data shows that workers earning less than the median hourly wage experienced significantly greater job losses at the start of the pandemic and have seen a sluggish recovery, putting employment 14% below pre-pandemic levels. Conversely, workers earning more than the median experienced a more modest decline in employment and have seen employment levels recover to around pre-pandemic levels. Granted, recessions normally impact low-wage workers disproportionately more than high-wage earners, but the magnitude of the job gap this time around is notable.
Another unique part of the current downturn is the fact that labor markets in metropolitan areas have been disproportionately hurt compared to nonmetropolitan areas. This is likely because dense regions have had to impose stricter restrictions to keep COVID-19 cases manageable, leading to stricter capacity requirements and longer shutdowns. Moreover, with many white-collar workers still working from home, businesses that rely on office workers have had to severely cut back on operations.
Labor market data also shows differences in labor outcomes across race. So far, minorities have experienced greater job losses than whites. As of January 2021, employment levels for whites are 5.2% lower than levels prior to the pandemic. Conversely, these levels are -7%, -6.2% and -7.2% for Blacks, Asians and Hispanics, respectively. There is a similar divergence in labor market participation rates, with non-whites more likely to leave the labor force than their white counterparts during the pandemic. This dynamic actually runs counter to patterns seen in prior business cycles in which labor market outcomes actually improved more for minorities due to a younger workforce driven by immigration and faster growth in the services industry.
So what does this mean for policy? The Biden administration is deeply invested in taking on inequality and has made it part of the core of policies coming out of the economic team. This desire to achieve equity for all Americans should put increased focus on the narrower measures of the labor market. This also holds true for the Fed. The Fed’s statement on long-run goals now reads, “The maximum level of employment is a broad-based and inclusive goal.” Additionally, Lisa Cook has the backing of several White House officials as a possible contender to fill the last governor vacancy at the Fed. Cook, who teaches economics at Michigan State and received her Ph.D. from Berkeley, is also a steering committee member of the Center for Equitable Growth. As such, expect the Fed to remain dovish and the Biden administration to continue to push growth, even if the headline labor market reaches full employment, if it isn’t evident that the same holds true across income and racial groups.
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