Speech

Prosperity: Just How Good Has It Been for the Labor Market? InvestingPublicFundsinthe21stCenturySeminar Co-sponsoredbytheMissouriStateTreasurer,theMissouriMunicipalLeague,GFOAofMissouri, theMissouriSchoolBoardsAssociation,andtheMissouriCountyTreasurersAssociation JeffersonCity,Missouri September27,1999 Almost everyone is familiar with the Beforeproceeding,Iwanttoemphasizethat strong economic performance of the theviewsIexpressherearemineanddonotnec- UnitedStatesoverthelasteightyears. essarilyreflectofficialpositionsoftheFederal Consider the highlights: Since 1992, ReserveSystem.Ithankmycolleagues—especially growth of real per capita GDP has averaged 3.7 HowardWall,whoisaco-authorofthisspeech— percent per year, compared with an average attheFederalReserveBankofSt.Louisfortheir growthrateof2.6percentovertheprior20years; comments,butIretainresponsibilityforerrors. the unemployment rate has fallen to its lowest Ibelievethatthebalanceoftheevidence level in almost 30 years; and employment has showsthatthereislesstoworryaboutthansome grown steadily, so that today about 18 million havedescribed,andthattherehavebeenstrong more people have jobs. To top it off, this fine employmentandwagegainsformostbroadcate- performance has been achieved during a period goriesofthepopulation.Infact,somegroupsthat inwhichinflationhasbeenatorbelow3percent. begantheperiodintheworsteconomicshape, The state of Missouri has shared in this growth. includingteenagersandthoseatthebottomend Itslatestunemploymentratewasevenlowerthan oftheeducationandincomedistributions,have forthecountryasawhole,3.3percent,andthere enjoyedsubstantialgains.Sustainedprosperity are 276,000 more people employed here than hasbroughtgreateropportunitiesforgroupssome- there were in 1992. timesexcludedfromemploymentand,inthe Despiteallofthisgoodnews,manyarestill process,hastransformedlabormarkets.Perhaps worriedthatgainsfromthisremarkableexpan- themostremarkableofthesetransformationshas sionhavenotbeendistributedverybroadlyand beenincreasedemploymentopportunitiesfor thatsignificantsegmentsofsocietyarebeingleft blacksandwomen.Infact,thesharesoftotal behind.Highonthelistofconcernsareincreases employmentforbothgroupsarehigherthanthey inwageinequalityandstagnantorfallingwages havebeenformanyyears. forsomegroupsatthelowendofthewage Theeffectsofcontinuedprosperityonlabor distribution. marketsarebestillustratedbypresentingand Ournatureinthiscountryistobeunsatisfied dissectingsomeoftheaggregateemployment withwhereweare,andthatisgood.Allofuswho numbers.Indoingso,I’mgoingtopresentapic- studytheseissuesarewellawarethatthebenefits tureofaneconomicexpansionthat,intermsof ofprosperityarefarfrombeingequallyshared. fallingunemployment,greateremploymentoppor- Still,weneedtobecarefulnottomischaracterize tunitiesandrisingincomes,hasbenefitedabroad thesituation.WhatIwanttodiscusstodayiswhat cross-sectionofthepopulation. exactlyourlabormarketsituationlookslikein Ihopeitwillbeapparentthatsustainedreal theUnitedStates. economicgrowthisimportantifwearetocon- 1 ECONOMICGROWTH tinueimprovingthelabormarketsituationfor thestrongbutshorter-livedgrowthofthe1980s, allsegmentsofsociety.Onceyouareconvinced teenageunemploymentdidn’tfallbelow15per- ofthat,IwouldalsoliketooutlinewhyIbelieve cent,alevelthatthisexpansionachievednearly thattheonlywaythattheFederalReservecan twoyearsago.Blackandwhiteteenageunemploy- assistinensuringthatthesegainspersistinthe mentarebothattheirlowestlevelsin30years, longrunistoremainvigilantaboutinflation. althoughthewhiteteenageunemploymentpicture isstillmuchbetterthanthatforblackteenagers. Well-educatedworkers,ofcourse,continue UNEMPLOYMENT RATES tobesoughtafterbyemployers.Nevertheless, theless-educatedhaveclearlyreapedmanyof Becauseitisthemostwidelyusedindicator thebenefitsofeconomicgrowthinthe1990s.In oflabormarketperformance,letmestartdissect- Augustofthisyear,theunemploymentratefor ingthedatawiththeunemploymentrate.Since thoseolderthan25whodidnothaveahighschool peakingat7.8percentinJune1992,theunemploy- diplomawas7.1percent;thisratehadbeen12.2 mentratehasfallensteadily,reaching4.3percent percentinmid-1992.Forthosewithahighschool inDecember1998,whereithashoveredever diplomabutnocollegetraining,unemployment since.Whenwedisaggregatetheseunemployment wasat3.5percentinAugust,adropfrom7.3per- numbers,itbecomesapparentthattheexpansion centinmid-1992.Thesedatamakeveryclear hasbeenverybeneficialforgroupsthatbeganthe thetremendousimportanceofimprovingthe periodintheworstsituations:blacks,teenagers, educationofourcitizens.Hereagain,wehavea andtheless-educated. greatchallengeforthefuture. Theemploymentpictureforblackswasgrim Itappears,then,thatdespitetheconcern in1992,whentheunemploymentrateforthis thatanincreasinglyhigh-techeconomywillleave groupaveraged14.2percent.Thatratehassince theless-educatedbehind,theeconomyhasfound fallento7.8percent,andtheaverageratefor1999 roomfortherelativelyunskilled.Whathashap- lookslikeitwillbeevenlowerthanlastyear, pened,asanyonecanconfirmbytalkingto whenitwaslowerthanatanytimesince1972. employers,isthattheshortageofwell-qualified Thecontinuingfallinblackunemployment—one workershasledfirmafterfirmtohireless-educated fullpercentagepointduringthepastyear—con- workers,andworkerswithpooremployment trastswiththeunemploymentrateforwhites, histories,andtrainthem.On-the-jobtraininghas whichhasbeenmostlyunchangedfor18months. assumedincreasingimportanceintheUnited So,althoughtheunemploymentrateforwhites States,andtheresultsaregratifying.Firmsfind continuestobelower,continuedeconomicgrowth thatnoteveryonehiredworksout,butmanydo. hasmeantthattheunemploymentgapbetween Asaresult,theU.S.economyisnotonlygener- whitesandblackshasbeennarrowing.Andthere atingemploymentformanyleftbehindinearlier isgoodreasontobelievethatongoingeconomic years,butalsohelpingtheseworkersdevelopnew growthwillnarrowthegapevenfurther.The skillsthatopenupopportunitiesforthem. declineintheblackunemploymentratefrom 14.2percentto7.8percentbetween1992and todayisameasureofournation’sprogress,but EMPLOYMENT/POPULATION thecurrentrateisameasureofthesubstantial RATIOS distancewestillhavetogo. Theexpansionhasalsomeantgoodnews Unemploymentratestellonlypartofthe regardingtheteenageunemploymentrate,which employmentstory.Duringanyperiodinwhich in1992averaged20.1percent(allraces).Since employmentopportunitiesareexpanding,two then,theteenageunemploymentratehasfallen thingshappen:First,morepeoplebecome toaround13percent,a30-yearlow.Evenduring employed;and,second,moreofthepeoplewho 2 Prosperity:JustHowGoodHasItBeenfortheLaborMarket? hadchosentostayoutofthelaborforcedecide beentransformedaswomenandblacksmakeup toreenter,ortoenteritforthefirsttime.Although largersharesofemploymentthanatanytime bothoftheseeffectsareimportant,newspaper sincetheendoftheSecondWorldWar.These reportersandTVnewscasterstendtolookonly changesarepartofalong-termtrendthathasbeen atthefirstandtoignorethesecond.Focusingon disruptedfrequentlybyperiodsofeconomic theunemploymentrateandignoringthegrowth downturn.Thelongerthecurrentexpansionis ofemploymentmeansmissingoutonsomedra- sustained,themorelikelyitisthatthesegains maticchangesthathavetransformedthelabor willbecomepermanent,asthesegroupsbecome market,perhapspermanently,asrelativelylarger entrenchedintheworkforce. proportionsofcertaingroupshavebeendrawn intoit.Moreover,concentratingonlyonunem- ploymentratesmissescompletelyamajorpart EARNINGS, POVERTY, AND oftheU.S.successstoryintheglobaleconomy. INCOME DISTRIBUTION Onewaytogetanideaofhowthelabormarket hasbeentransformedbythecurrentexpansion Sofar,I’vepresentedevidencethatemploy- istolookattheratioofemploymenttopopulation mentopportunitieshaveimprovedforbroad forvariousdemographicgroups.Theseratiostell classesofpeople,buthavesaidnothingabout ustheshareofthepopulationthatissuccessfully theireconomicwell-being.Wecanmeasurewell- engagedinthelabormarket.Examiningthese beinginmanyways,themostcommonbeing ratioswillalsodemonstratethatU.S.successis wages,incomeandearnings.Basedonthese notaphenomenonthatbeganjustin1992.For broadincomemeasures,theaveragepersonhas thecivilianpopulationasawhole,ages16and beendoingbettersince1992,aspercapitareal over,theratioroseby2percentagepointsinthe disposablepersonalincomehasrisenbymore 1960s,byanother2pointsinthe1970s,by3 than12percent. pointsinthe1980s,andbyanadditionalpoint Despitethesedata,variousstudies,news sofarinthe1990s.TheU.S.economyistrulya articles,andpunditshaveclaimedthattheexpan- fantasticjobmachine. sionhasleftbehindthepoorest,claimingthat Moreover,employment-to-populationratios theirrealwageshavestagnatedorevendeclined. highlightoneofthegreatsuccessesoftherecent Theargumentisusuallybasedondatashowing expansion—bringingincreasingsharesofwomen thattheaveragerealwagehasnotincreasedvery andblacksintoemployment.Between1992and much,orthattheaveragerealwageofthelowest August1999,theshareofadultwhitewomenwho quintileorlowestquartileisnotmuchhigher,or wereemployedroseby3.1percentagepoints; isevenlower,thanbeforetheexpansionbegan. thatofblackmenroseby3.1percentagepoints; Weshouldbewary,however,ofanyclaims andtheshareofblackwomenroseanastounding basedonaveragewages.Recalltheevidence 10.7percentagepoints.Comparethesenumbers presentedearlierthatthecurrentexpansionhas withthoseforthe20previousyears.Between increasedtheemploymentofmanywhowere 1973and1992,theshareofblackmenemployed previouslyexcluded.Alsonotethatthewagesof actuallyfellby8.7percentagepointsandtheshare manyofthesenewlyemployedpersonswould ofblackwomengrewby7.1percentagepoints. belowerthanthoseofthealreadyemployed.As Oneofthereasonsthatblackshavebeen theselow-wageworkersareaddedtotheranksof makingsuchsteadygainsinthe1990scompared theemployed,theaveragewageforallworkers withtheprevioustwodecadesisthattheeconomy isnecessarilypulleddown,evenifeveryoneelse’s hasexperiencedsteadygrowth.Sofar,wehave wagesareunchanged. avoidedthedeepdownturnsthathavehindered Wecanseehowthisprocessworksusingan orreversedgainsmadeduringupturns.Asa illustration:Let’ssaythattherearetwogroupsof result,thefaceoftheworkingpopulationhas workers—long-term,orLworkers,andnewly 3 ECONOMICGROWTH employed,orNworkers.TheNworkersarerela- thatnumberdeclinedto34percent.Households tivelyunskilledandjointheranksofemployed inthemiddlegroupfellfrom31percentto30 personsatrelativelylowwages.Thechangein percentofallhouseholds.Thehighgroup,there- theaveragewageofallworkersfromoneyearto fore,wentfrom33percentto37percentofall thenextreflectstwoforces:Thefirstistheincrease households.(Thesharesfor1997addupto101 inthewagesofLworkers,andthesecondisthe percent,duetoroundingerrors.)Mybestguess additionofNworkers,whowerenotpreviously isthatthismobilityhascontinuedafter1997,so employed. thatlargersharesofthepopulationhavemoved KeepingthissimplesoIcanmakethecalcula- intohigherincomegroups.Whilethisevidence tionsinmyhead,supposethereare10Lworkers isbynomeansdefinitive,itdoesillustratethat inYear1eachearning$20perhour.Eachofthese thecurrentexpansionhasraisedtheeconomic workersreceivesa10percentpayincrease,to well-beingofmanyofthoseatthelowend. $22perhour,inyear2.ButinYear2,twoNwork- ersarehiredat$10perhour.Theaveragewage forthe12workersinYear2iseasytocalculate. PRO-EMPLOYMENT PRICE Tenworkersarepaid$22each,foratotalof$220. STABILITY Twoworkersarepaid$10each,foratotalof$20. The12workerstogetherarepaid$240,oran Ihavebeenemphasizingthatthecurrent averagewageof$20each. expansionhasbenefitedawiderangeofpeople Inthisillustration,therehasbeennochange andthatfutureeconomicgrowthwillleadtomore atallintheaveragewagefromYear1toYear2! gains.Allofuswantemploymentopportunities But,andthisisaveryimportant“but,”10workers tocontinuetogrow,andincomelevelsadjusted enjoyedwageincreasesof10percent,andtwo forinflationtocontinuetoimprove.Assignificant workerswentfromunemploymenttojobspaying asrecentgainshavebeen,weallrecognizethat $10perhour.Ibelievethissimpleillustration theUnitedStatesfacesagreatchallengeforthe helpstounderstandwhymostworkersfeelbetter future. offdespitetheslowgrowthinaveragewages. Meetingthechallengewillrequireimprove- Thosewithcontinuingemploymenthistoriesare mentsinmanydifferentdirections.Betteredu- receivingwageincreasesandthenewlyemployed, cation,especiallyforthoseindisadvantaged whileoftenbattlingnumerousproblems,atleast circumstances,isclearlyveryimportant.I’msure findthattheirnewjobsbringmoreincomeand thateachofuscanaddotherimportanttasksfor morepersonalsatisfactionthantheyenjoyed thefuture,suchassoundlyadministeredsocial whileunemployed. programsandtaxpolicies,technologyimprove- Forabettermeasureofhoweconomicwell- ment,reducedcrimerates,andmanyothers.The beingatthelowendhaschanged,weneedtolook agencies,businesses,andfamiliesresponsiblefor attheentirepopulation.Onestraightforward theseareasareworkinghardandhavemuchtodo. approachistolookatthepercentagesofhouse- WeattheFederalReservealsohaveacontri- holdsinvariousincomeclasses.Usingdatafor butiontomaketoabrighterfuture,anditflows 1997,thelatestavailable,wecangainafeelfor fromthethreemainareasofourresponsibility: whathasbeengoingon.Wecandivideallofthe First,generalmonetarypolicytomaintainalow householdsintheUnitedStatesintothreereal andstablerateofinflation.Second,maintenance incomecategories:thoseinthelowgrouphave ofasoundbankingsystemthroughefficientbank incomesbelow$25,000,thoseinthemiddlegroup supervisionandregulation.Third,provisionof haveincomesbetween$25,000and$50,000,and efficientpaymentservicesthroughmanagingthe thoseinthehighgrouphaveincomesabove nation’scurrencyandplayingacentralrolein $50,000.In1992,36percentofhouseholdswere check-processingandvariouselectronicpayment inthelowgroup;by1997,onlyfiveyearslater, mechanisms. 4 Prosperity:JustHowGoodHasItBeenfortheLaborMarket? IwanttofocusontheFed’smonetarypolicy priatethingtofearisthattheFedmightnotact responsibilities,forthisareaisthemostdifficult whenitneedstoforinflationtoremainlow. technicallyandoffersthegreatestpossibilityfor Maintaininglowinflationcontributestomaximum error.WeattheFedareconvincedthatthecritical sustainableeconomicgrowth.Lowinflationis contributionwecanmaketowardmaximumsus- investor-friendlyandemployment-friendly. tainableeconomicgrowthistomaintainlowand Idonotknowwhatmonetarypolicyactions stableinflation—pricestability,forshort. willberequiredtokeepinflationlowoverthe Sofar,theFederalReservehasbeensuccessful monthsandyearsahead.AndIcertainlywillnot infendingoffinflation.Thebattleagainstinflation, speculateonpossibleFedactionnextweek.But however,isneverpermanentlywon.Nomatter IdowanttoassureyouthatIwilldowhatIcan howlongtheinflationratestayslow,wecannever tocontributetoFeddecisionstochangeinterest packourbagsandgohome.Wemustremainvigi- ratesinthedirectionnecessaryandatthetime lantbecausethereturnofpriceinstabilitycould necessary.Changingrateswhennecessaryalso jeopardizetheexpansionandtheemployment meansthatwewillleaveratesalonewhenneces- gainsIoutlinedearlier.Ifinflationtakeshold, sary.Thosedecisionsrequirethatwelookseveral recessionwillalmostcertainlyfollowwithina yearsahead,beingcarefulnottoletthecurrent relativelyfewquarters.Why?Becauseinflation flowofdataandshort-runmarketfluctuations isalwaysaccompaniedbygreateruncertainty divertusfromourlong-runpathofseekingcon- aboutthefuture,whichmakesitdifficultfor tinuinggoodinflationperformance. businessesandhouseholdstoplanefficiently. Thisisourtask,andifwearenotalways Withinefficientplanningcomefrequentand clearaboutwhatneedstobedonebecauseofthe unavoidablemistakes,resultingingreatervari- greatuncertaintyabouthowtheeconomyworks, abilityingrowthandemployment. atleastyouknowwithoutanyquestionwhatour Giventhecentralimportanceoflowinflation objectiveis.Anexcellentroadmapisworthless toourprosperity,frequentreferencesinthepress unlessyouknowwhereyouwanttogo.Atthe tofinancialmarketfearsthattheFedwillraise Fed,wedoknowwherewewanttogo,andI’m interestratesstrikemeasunfortunate.Ifthemar- convincedthatourroadmap,whilefarfromper- ketistohaveanyfearsabouttheFed,theappro- fect,isgoodenoughtogetusthere. 5

William Poole (1999, September 26). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_19990927_poole

@misc{wtfs_speech_19990927_poole,
  author = {William Poole},
  title = {Speech},
  year = {1999},
  month = {Sep},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_19990927_poole},
  note = {Retrieved via When the Fed Speaks corpus}
}