Academic journal article New England Economic Review

Rising Tide in the Labor Market: To What Degree Do Expansions Benefit the Disadvantaged?

Academic journal article New England Economic Review

Rising Tide in the Labor Market: To What Degree Do Expansions Benefit the Disadvantaged?

Article excerpt

The long and eventually strong expansion of the 1990s elicited a spate of articles referring to a rising tide and its salutary effect on all boats. [1] The analogy of the rising tide says that as overall economic conditions improve, each individual's situation improves-- everyone benefits. How apt is this analogy to the U.S. situation in the late 1990s--early 2000? Is the current strong U.S. expansion--rising tide-- being shared across the U.S. population--floating all boats? (And what does the analogy really mean--that all boats rise in parallel or all come to float at the same level?) More specifically, to what degree are groups that are typically disadvantaged in the labor market--blacks, women, teens, the less educated--participating in the current prosperity? [2]

To understand the effects of economic expansion (or recession) on various labor market groups, one should investigate not only cyclical variations but also the factors that determine the groups' relative labor market positions over the longer term. The disadvantage that a group experiences in the labor market, defined here as above-average unemployment rates or below-average fractions employed, may be attributable to barriers in the labor market as well as to differences in group characteristics such as educational attainment. Different reasons for disadvantage suggest different likely responses to the business cycle.

This article presents data that describe the patterns of labor force status by race, sex, education, and age (teens) during recent decades. These data indicate that while virtually all groups are seeing improvements in labor market outcomes in the current expansion, the gaps between disadvantaged groups and the rest of the economy are shrinking more in some cases than in others. Furthermore, even the strong and long expansion of the 1990s has not reduced the gaps to zero. The research literature offers several explanations for historical patterns of disadvantage and provides some predictions as to how disparities in labor force status should respond to recessions or to an expansion like that of the 1990s. This article attempts to quantify the contributions of various influences (suggested by that literature) on job market disparities in the 1970s, 1980s, and 1990s.

I. The 1990s (Unusual) Recovery in Historical Context--Disparities in Labor Force Status

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. Typically, as the U.S. economy expands output, more workers are employed and unemployment rates fall. [3] However, if the economy grows "too fast" for an extended period, pressures build in markets for inputs, including labor, and prices begin to rise, sowing the seeds of a subsequent slowdown. [4]

The top panel of Figure 1 displays U.S. unemployment rates. The "jobless" beginning of the current expansion is confirmed by the delayed peak in unemployment, which occurred more than a year after the official recession trough (shown by the end of the shaded area); in the earlier recessions, joblessness began declining before or immediately after the trough. By contrast, since mid 1997, the nation's unemployment rate has been below 5 percent, rates not enjoyed on such a sustained basis since the late 1960s.

Labor force participation rates (middle panel) typically vary much less than unemployment rates over the business cycle. Nonetheless, good times elicit new job candidates and a weak economy discourages some people from seeking work. Additionally, in the last few years of this expansion, "the end of welfare as we know it" has pushed up participation rates of former and potential welfare recipients.

While the 1990s increases in participation are much less steep than those in the expansions of the 1970s or 1980s, the uptrend in participation combined with declining unemployment rates has led to a record fraction of the working-age population being employed (lower panel). …

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