Full Employment: One Last Time For The Road – OpEd
By Dean Baker
I’ve already given my Biden economy retrospective, but I want to come back and double down on the main point there, because I think it is incredibly important and largely overlooked.
The one thing that Biden’s economic performance should clearly establish is the importance of running a full employment economy. There is no better way to give large benefits to tens of millions of people, especially groups facing discrimination in the labor market like Black workers and people with criminal records.
Here’s the picture on unemployment over the last 75 years.
Under Biden the unemployment rate fell sharply from 6.4 percent when he took office in January of 2021 to 3.9 percent in December. It stayed at 4.0 percent or lower until June of last year. That is the longest stretch of low unemployment in seventy years. The low of 3.4 percent, hit in April of 2023, was the lowest single month rate since the 1960s.
This recovery was far faster than anyone had predicted, and the unemployment rate dipped lower than most economists thought possible. When Biden took office, The Congressional Budget Office had projected that we would end the year with 5.3 percent unemployment. It projected the rate would continue to decline slowly, hitting 4.2 percent in the last months of his term.
In the Biden years, many pundits argued that unemployment doesn’t matter much because a one percentage point drop in the unemployment rate just means another 1.6 million people have jobs. That doesn’t seem like a very big deal in a workforce of 160 million.
But this reasoning is badly confused. Full employment matters not just because it reduces the number of people who are unable to find jobs, but also because it improves the bargaining position of tens of millions of workers. The point is simple, but huge.
In a normal month 5-6 million people lose or leave their job, with the vast majority looking for new ones. That translates into 60-70 million people over the course of the year coming into direct contact with the state of the labor market. For these people it matters enormously if there is a strong labor market near full employment or a sagging labor market where people struggle to find jobs.
In a strong labor market these workers will be able to move to better jobs that pay more and offer better working conditions. It’s not an accident that we saw a recordlevel of workplace satisfaction in 2023 after we had record rates of job switches the prior year.
The ability to leave for a better job also leaves workers better positioned to get pay raises at their current job, if they decide not to leave. This is especially true for workers at the lower end of the wage distribution. They have far more bargaining power than in a weak labor market. The graph below shows real wage growth (inflation-adjusted) since 1980 for workers at the 10th percentile, the 30th percentile, and the 50th percentile of the wage distribution.
As can be seen, real wages at the 30th and 50th percentiles were essentially flat in the weak labor markets of the 1980s and the first half of the 1990s. Wages for workers at the 10th percentile actually fell by more than 10 percent over this period. As the labor market tightened in the second half of the 1990s, workers at all three points along the wage distribution saw substantial gains in real wages. (This was also helped by strong productivity growth.) The sharpest gains were for workers at the 10th percentile, whose pay closed some of the gap with slightly higher paid workers.
Wages again plateaued in 2003 and then fall with the Great Recession. They begin rising again at all three points along the wage distribution as the labor market became reasonably tight in the second half of the decade. As in the strong labor market of the late 1990s, the fastest wage growth was at the 10th percentile.
The data are somewhat skewed in 2020 because of the pandemic. The shutdowns caused tens of millions of workers to lose their jobs for at least part of the year. These workers were disproportionately concentrated in low-paying sectors like hotels and restaurants. With these workers out of jobs, the average pay of those still employed was higher, not because they got pay raises but because the lower paid workers are not included in the mix.
To control for this composition effect, we can compare pay in 2023 with pay in 2019, before the pandemic. (We don’t have full data for 2024 yet, but it is virtually certain we will see further real wage gains at all points along the wage distribution.) The real wage of workers at the 50th percentile was 3.9 percent higher than in 2023 than in 2019. For workers at the 30th percentile, the rise was 2.9 percent, and for workers at the 10th percentile the gain was 13.2 percent.
The gain for workers at the 10th percentile was extraordinary. It essentially reversed the gap in pay that developed in the 80s and the first half of the 1990s.
The increases in pay for workers at the 30th and 50th percentile may not seem especially impressive. But it is worth noting that there were long periods where pay for workers at these points along the wage distribution was flat or falling, so by comparison, the increases in this four-year stretch are pretty respectable.
The other point to keep in mind is that we were getting through a worldwide pandemic that disrupted economies everywhere. The United States was an outlier in seeing much more rapid growth than almost any other country in the recovery from the pandemic. And it was also an outlier in that workers actually had real wage gains. Again, the strong labor market we saw, with unemployment below 4.0 percent for most of this period, almost certainly played an important role.
We also saw the predicted benefits of full unemployment in other areas. The unemployment rate for Black workers hit an all-time low of 4.8 percent in April of 2023. The unemployment rate for Black teens also hit an all-time low of 11.8 percent in May of 2023.
And the unemployment rate for Hispanic workers tied its all-time low of 3.9 percent in September of 2022, matching the rate in September of 2019. These rates are all too high, and still indicate a substantial gap with white workers, but there was considerable progress in reducing the gap in the pandemic recovery.
The Black-White wage gap was also reduced during this period. The 13 percent gap in 2023 is the lowest level on record.
In short, there is considerable evidence that the quick move to full employment that we saw following the passage of the Biden recovery package had the predicted impact for the most disadvantaged groups in society. To be clear, this doesn’t mean that low wage workers or even workers at the median were doing great.
They had to struggle with higher prices and rents. Those who did not own a home, but were hoping to buy one, got whacked with a one-two punch of higher house prices and a big jump in mortgage rates after the Fed started hiking in 2022.
But there was substantial progress in this period by most measures, in spite of the pandemic, and full employment was a huge part of that picture. It is hard to envision a politically feasible social program that could provide anywhere near as much benefit to the bottom half of the wage distribution. This part of Biden’s legacy very much deserves to be applauded and remembered.
- This article first appeared on Dean Baker’s “Beat the Press” blog.