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 employmentandwagegainsformostbroadcateperformance 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 hasbroughtgreateropportunitiesforgroupssomethere 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’mgoingtopresentapicstudytheseissuesarewellawarethatthebenefits 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’tfallbelow15perofthat,IwouldalsoliketooutlinewhyIbelieve cent,alevelthatthisexpansionachievednearly thattheonlywaythattheFederalReservecan twoyearsago.Blackandwhiteteenageunemployassistinensuringthatthesegainspersistinthe 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,theunemploydiplomawas7.1percent;thisratehadbeen12.2 mentratehasfallensteadily,reaching4.3percent percentinmid-1992.Forthosewithahighschool inDecember1998,whereithashoveredever diplomabutnocollegetraining,unemployment since.Whenwedisaggregatetheseunemployment wasat3.5percentinAugust,adropfrom7.3pernumbers,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.Whathashaplookslikeitwillbeevenlowerthanlastyear, pened,asanyonecanconfirmbytalkingto whenitwaslowerthanatanytimesince1972. employers,isthattheshortageofwell-qualified Thecontinuingfallinblackunemployment—one workershasledfirmafterfirmtohireless-educated fullpercentagepointduringthepastyear—conworkers,andworkerswithpooremployment trastswiththeunemploymentrateforwhites, histories,andtrainthem.On-the-jobtraininghas whichhasbeenmostlyunchangedfor18months. assumedincreasingimportanceintheUnited So,althoughtheunemploymentrateforwhites States,andtheresultsaregratifying.Firmsfind continuestobelower,continuedeconomicgrowth thatnoteveryonehiredworksout,butmanydo. hasmeantthattheunemploymentgapbetween Asaresult,theU.S.economyisnotonlygenerwhitesandblackshasbeennarrowing.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,concentratingonlyonunemploymentratesmissescompletelyamajorpart EARNINGS, POVERTY, AND oftheU.S.successstoryintheglobaleconomy. INCOME DISTRIBUTION Onewaytogetanideaofhowthelabormarket hasbeentransformedbythecurrentexpansion Sofar,I’vepresentedevidencethatemployistolookattheratioofemploymenttopopulation mentopportunitieshaveimprovedforbroad forvariousdemographicgroups.Theseratiostell classesofpeople,buthavesaidnothingabout ustheshareofthepopulationthatissuccessfully theireconomicwell-being.Wecanmeasurewellengagedinthelabormarket.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,andpunditshaveclaimedthattheexpanfantasticjobmachine. 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,theretheaveragewageofallworkersfromoneyearto 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,twoNworkersarehiredat$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.Betteredureceivingwageincreasesandthenewlyemployed, 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- WeattheFederalReservealsohaveacontriholdsinvariousincomeclasses.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 meansthatwewillleaveratesalonewhennecesgainsIoutlinedearlier.Ifinflationtakeshold, sary.Thosedecisionsrequirethatwelookseveral recessionwillalmostcertainlyfollowwithina yearsahead,beingcarefulnottoletthecurrent relativelyfewquarters.Why?Becauseinflation flowofdataandshort-runmarketfluctuations isalwaysaccompaniedbygreateruncertainty divertusfromourlong-runpathofseekingconaboutthefuture,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,whilefarfromperketistohaveanyfearsabouttheFed,theappro- fect,isgoodenoughtogetusthere. 5