Photographer: John Taggart/Bloomberg

Black Workers Face a Tough Labor-Market Slog During Recessions

Minorities see bigger job losses during downturns than their white counterparts

The U.S. Constitution may declare all men and women equal, regardless of color and background, but their labor market experiences are certainly not the same.  

Black men and women are much more likely to lose their job in a downturn, Federal Reserve research finds, and that's the lead item in our economic research wrap this week. We also take a look at the tradeoffs facing the Fed, the evolution of the relationship between employment and inflation, and how stock market participation boosts innovation in China. 

Check this column every week for the latest in economic studies from around the world. 

Racial gaps in labor market outcomes

Over the past four decades, black Americans have had higher unemployment rates that are more business-cycle tied than those of their white counterparts. Observable characteristics such as education do little to explain the discrepancy, Fed research shows.

While it's possible that the divide exists because the data do a poor job of measuring the skills gap, it's also possible that individual or institutional discrimination is at play here. Incarceration is probably also driving some of the discrepancy, because black men are much more likely to do time, and a stint in prison dims future labor-market prospects. There's also a Hispanic-white unemployment rate gap, though it is comparatively small and is largely explained by lower educational attainment. 

The idea that downturns are especially bad for minority workers is an important one. Monetary policy makers often say the best thing they can do is to foster resilient expansions and try to avoid recessions, but that's unlikely to ease pressure on the central bank to be more attentive to the needs of the groups most-strongly impacted by economic gyrations.  

Racial Gaps in Labor Market Outcomes in the Last Four Decades and over the Business Cycle
Published June 2017
Available on the Federal Reserve website

The Fed faces new tradeoffs

Monetary policy in the U.S. is having a smaller effect on prices and larger impact on gross domestic product than in the past. That means that interest-rate hikes designed to curb inflation drag economic growth more these days.

At the same time, policies are having much stronger effects on credit and house prices relative to economic data. For example, a monetary expansion that lifted real GDP by 1 percent in sample period after 1984 boosted inflation-adjusted house prices by 3.8 percent while raising credit by 2.3 percent. That's up from a 0.1 percent increase in home prices and 0.9 percent boost in credit before the 1980s. 

All of these changes mean that the tradeoffs around monetary policy have shifted dramatically. Policy makers can stabilize home and credit prices at less cost to growth, and they can stabilize expansions at a lower cost to inflation stability.

It's worth noting that the Fed is focused mainly on its dual mandate, which calls for stable inflation and maximum employment. In fact, policy makers often reiterate that growth and financial conditions matter to them only inasmuch as they affect their ability to achieve those two goals. 

Monetary policy transmission and trade-offs in the United States: Old and new
Available on the Bank for International Settlements website
Published June 2017

The Phillips Curve(ball) 

One reason that the Fed is operating on a new playing field: Something has changed about the relationship where low unemployment begets higher inflation, which is modeled by the so-called Phillips Curve. Unemployment has fallen below estimates of its long-run sustainable level, yet inflation remains subdued. Policy makers and researchers often point out that the Phillips curve is probably nonlinear, meaning that when joblessness dips below some crucial threshold, prices will take off. 

Looking at metropolitan data, Fed researchers find evidence of that nonlinearity. That said, inflation projections tend to shoot up only when the jobless rate falls below 3.75 percent, which is substantially lower than the current 4.3 percent national level. 

Nonlinearities in the Phillips Curve for the United States: Evidence Using Metropolitan Data
Available on the Federal Reserve Board website
Published June 28, 2017

How to know if you're headed for a rough downturn

A recession's impact on your finances will depend on how much you're earning now, research from the St. Louis Fed shows. A worker's average earnings over the five-year period that precedes a recession "strongly predicts" how much the worker is going to lose in the downturn, Fatih Guvenen finds, with previously low-income earners losing more than high-income earners.

The pattern reverses for the very top of the income scale, however. Workers in the top 1 percent during the Great Recession lost on average 30 percent of their incomes from 2007 to 2009, and those in the top 0.1 percent lost 50 percent of their pre-recession income. The dataset Guvenen used doesn't include capital income, but it does include bonuses, restricted stock units at time of vesting and exercised stock options, which could influence that volatility at the top.

Understanding Income Risk: New Insights from Big Data
Published June 26, 2017 
Available at the Federal Reserve Bank of Minneapolis website

Does the stock market boost innovation? 

Initial public offerings in China lead to an increase in the quantity and quality of innovation, new International Monetary Fund research shows. The findings are based on annual patent applications.

This is partly a financing story: The equity raised by an IPO helps a company to meet its financing needs, allowing it to increase innovation-related work. Corporate governance structures also play an important role in boosting invention, the researchers find. "By aligning the interests of managers and shareholders, stock granting provides a stronger incentive to innovate so as to add long-term value for the firm," the researchers write. 

Does the Stock Market Boost Firm Innovation? Evidence from Chinese Firms
Published June 30, 2017
Available on the IMF website


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