Issues in Economics: How Much Do Expansions Reduce the Black-White Unemployment Gap?
The expansion that began in the early 1990s and continues into 2000 is an unusual one. What started in mid 1991 as the 'jobless recovery' has become the 'how-can-unemployment-stay-so-low? expansion.' In the expansions of the late 1970s and 1980s, the nation's unemployment rate never dipped below 5 percent. In the current expansion, by contrast, the U.S. rate has remained below 5 percent since mid 1997 and below 4.5 percent since the end of 1998, levels not enjoyed on such a sustained basis since the late 1960s.
Nonetheless, jobless rates for blacks remain noticeably higher than those for whites. In the first half of 2000, the unemployment rate averaged 6.9 percent for black men (20 years of age or older) as compared to 2.8 percent for white men, and 6.5 percent for black women versus 3.2 percent for white women. (Data limitations prevent a similar analysis for Hispanics.)
This raises an obvious question. Is the current strong U.S. expansion being shared across the U.S. population? Is the rising tide lifting all boats? More specifically, to what degree are black men and women participating in the current prosperity by seeing their unemployment rates fall closer to the rates of whites?
DIFFERENCES IN EDUCATION AND AGE MIX
Regardless of the performance of the national economy, unemployment rates have been higher for black men and women than for white men and women over the last quarter of a century (see charts). Part of the explanation lies in differing levels of educational attainment. Workers whose education never extended beyond high school are much more likely to be unemployed than college grads. Blacks, on average, have historically had less education than whites and that partly accounts for their higher unemployment rates. For instance, in 1972, over 60 percent of blacks had not graduated from high school as compared with 40 percent of the corresponding white population, while 5 percent of black men and women had college degrees as compared with 9 (women) to 16 (men) percent of whites. Lower educational attainment by blacks accounted for about one-half of a percentage point of the 3 percentage-point gap between black and white unemployment rates that year.
Narrowing differences in education would be expected to reduce this gap. Between 1972 and 1998, the fraction of blacks without a high school diploma fell markedly, and the fractions who had either completed a high school diploma or had some college rose to equal those of whites. Still, some differences remained; for example, the fraction of blacks who graduated from college more than doubled between 1972 and 1998, but the white fraction almost doubled, so whites retained a sizable lead in percent completing college or higher degrees. Furthermore, the payoff to additional education, in terms of reduced unemployment, was greater in the 1990s than in the 1970s. On balance, however, blacks have made progress on the education front. Although the black-white unemployment gap increased almost a percentage point between 1972 and 1998, it would have widened even more (up to half a percentage point more) without blacks' educational gains.
The age mix of the population also has an impact on joblessness. Workers between 16 and 34 years of age have higher unemployment rates, on average, than those 35 years and older. The fact that the fraction of the black population under age 35 exceeds that of whites contributes to blacks' higher unemployment rates.
In addition to education and age, economists hypothesize that the black-white unemployment gap is attributable to various mismatches - in geographic location and access to information, for example - between the characteristics of black workers and the job characteristics defined by employers. Discrimination may also play a role.
WHAT HAPPENS OVER THE BUSINESS CYCLE?
The factors that contribute to generally higher black joblessness do not account for the way the black-white unemployment gap tends to rise in recessions and shrink in recoveries (see lower panel in chart). In the severe national recession period from 1979 to 1982, the unemployment rate for black men rose from 9.4 percent in the first half of 1979 to 18.9 percent in the second half of 1982; meanwhile, the white male rate rose from 3.5 percent to 8.6 percent. That is, an additional 9.5 percent of the black adult male labor force joined the ranks of the unemployed as compared with 'only' 5.1 percent of white males.
Typically, as the national economy recovers, the unemployment rate for black men drops more than for white men, and the gap declines. In the current expansion, the jobless rate for black men has fallen by 6.7 percentage points from a high of 13.6 percent in the first half of 1992, while white men's unemployment has fallen 2.8 percentage points from 5.6 percent at the trough of the recession. Together, these changes have narrowed the gap between black and white unemployment rates for men by 3.9 percentage points. The patterns for women are similar, although the cyclical swings are smaller. For example, the current expansion has been associated with a 2.9 percentage point decline in the black-white unemployment gap for women.
Economists have several hypotheses for this cyclical pattern. In good times, when the labor market is tight, employers may make extra efforts to recruit, hire, and train people whom they might not usually consider because of the educational, geographic, or cultural barriers that place those individuals lower down the employment queue. For example, employers may reduce their reliance on informal methods of looking for workers (such as referrals by friends and current employees) and advertise more widely, thus increasing blacks' access to information about job openings. They may find discrimination more costly when the economy is strong and their preferred type of job candidate is fully employed elsewhere. They may also adapt the content of their jobs, and hire workers with less skill and experience, or increase on-the-job training to provide the needed skills. In the current expansion,'the shortage of well-qualified workers has led firm after firm to hire less-educated workers, and those with poor employment histories, and train them,' observe coauthors St. Louis Fed President William Poole and Senior Economist Howard Wall in a January 2000 article in The Regional Economist.
THE UNUSUALLY HOT ECONOMY OF THE LATE 1990s
The business cycle plays an important role in determining the size of the black-white unemployment gap, but the 1990s expansion has brought more than the 'typical' cyclical reduction. For example, based on past patterns and the overall economic growth during the period, one would have expected a drop of 1.6 percentage points in the black-white gap in female unemployment rates; the actual drop was 2.9 percentage points. Men also saw more of a drop in the black-white gap than would have been expected.
Some economists have hypothesized that it takes an especially sustained period of prosperity or exceptionally low overall unemployment rates - a 'hot' economy - for the benefits to spread fully to the most disadvantaged. As Business Week put it in 1998, 'With the economy continuing to expand and unemployment at its lowest point in 30 years, companies are snapping up minorities, women, seniors, and anyone else willing to work for a day's pay.'
The economy has certainly been hot - with very low unemployment - in the last several years, and the black-white unemployment gap has dropped to its lowest point since the early 1970s. Alternatively, the narrowing of the gap could be due to idiosyncratic factors not related to the business cycle, but the data suggest that blacks make extraordinary gains in good economic times.
Moreover, some research suggests that the effect of the good times is not entirely reversed after the economy cools. A booming economy moves some individuals who can't find jobs in ordinary times into employment, and this work experience enhances their future employability. Regarding the current expansion, Poole and Wall note that 'not only is the U.S. economy generating employment for many left behind in earlier years, but these workers are also developing new skills that will undoubtedly yield opportunities for them in the future.'
The usual cyclical improvements and the extra gains from a 'hot' economy, however, have not been enough to entirely eliminate black-white disparities. Disadvantaged groups still have above-average unemployment rates even in these good times. Thus, some analysts argue that only targeted employment and training policies, or policies to reduce geographic and other barriers to job access, can provide sufficient labor market opportunity to the disadvantaged. But the time to undertake them is when the economy is strong. As Arthur Okun wrote in 1973 after an earlier 'hot' economy episode, 'Policies to promote upward mobility are probably best accomplished in the context of a higher-pressure labor market.'