Magazine article The American Prospect

It's Full Employment, Stupid: Even a Slight Rise in Unemployment Clobbers the Bottom Half

Magazine article The American Prospect

It's Full Employment, Stupid: Even a Slight Rise in Unemployment Clobbers the Bottom Half

Article excerpt

NEWLY RELEASED DATA ON INCOME AND POVERTY suggest that the recent economic downturn hit lower-income families disproportionately. The latest Census Bureau report found that poverty began rising and median family income started falling in 200l, confirming what many of us have always known: The key to improved living standards for the bottom half was, and is, full employment.

After tumbling through the latter half of the 1990s, the unemployment rate hit a 30-year low of 4 percent in 2000. With the onset of recession, it reversed course and climbed to 4.8 percent in 200l.

Now, 4.8 percent doesn't sound that bad. Most economists used to think that you couldn't get below 6 percent unemployment without triggering dangerous inflation. But from the new data we learn that the 0.8 percent increment in unemployment led to higher poverty, less income for the typical middle-class family and a return to the 1980s and early 1990s pattern of highly unequal income growth.

In one sense, this reversal of economic fortune isn't entirely unexpected; that's what recessions do. But the new information stands in stark contrast to the impressive progress of the latter 1990s. During that boom, as we stress in our latest edition of The State of Working America, gains were broadly shared for the first time in decades.

The lesson is not just that booms are great and recessions are lousy. It's that broadly shared prosperity requires full employment. During the boom years of 1995-2000, everyone gained some but the most affluent gained more. Yet with a mild increase in unemployment in 2001, everyone lost except for the top fifth, much like in the bad old 1980s.

Those who lack historical context will just blame the temporary downturn. But the fact is that the economy of the latter half of the 1990s was truly unique. From the late 1970s through the mid-1990s, the increasing inequality and stagnant living standards that beset lower-income families seemed inexorable, a trend widely ascribed, by liberals and conservatives alike, to a general lack of skills in a high-tech, globalized economy. The numbers supported this view: The real family income of low income families was stuck at about $22,000 in 1979,1989 and 1995.

But in the late 1990s, this pattern changed. By 2000 low-income families were up to about $25,000, a 12 percent real increase in five years. Middle-income families likewise added far more real income in 1995-2000 than they did during the whole of the 1980s.

The source of this growth was near-full employment, with the increased bargaining power that tight labor markets always provide workers. Casting even further doubt on the notion that skills pure and simple are the key to income, the strong growth of this period provided the biggest boost to the worst off. Minority-family incomes grew by 16 percent for African-American families and a remarkable 25 percent for Hispanic families, about 5 percent per year in real terms from 1995 to 2000. White-family incomes grew at a slower rate--11 percent--meaning that racial income gaps closed significantly during this period.

Black and Hispanic poverty fell 7 percentage points and 9 percentage points, respectively, signaling historic lows in both cases, compared with a 1 percentage point drop for whites. For young black children, poverty fell more than 16 percentage points, by far the best performance period since we've been tracking such data, implying that the gains over this period were particularly important to low-income working parents. Conservatives, of course, want to assign these gains to welfare reform, but reams of research show that while the policy pushed people into the labor market, it was growth (and not newly gained skills) that got them jobs.

Hold your fire, New Democrats. Nobody is saying that skills aren't important. One of the most reliable findings in labor economics is that more education equals higher earnings, and the payback has grown over time. …

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