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Wednesday, January 18, 2017

Bernstein: Dr. King and full employment: some evidence [feedly]

Dr. King and full employment: some evidence
http://jaredbernsteinblog.com/dr-king-and-full-employment-some-evidence/

I wanted to add some quantitative analysis to my WaPo piece from yesterday, which argued for remembering the importance Dr. King's "institutional" analysis, which gives a far greater role to power and systemic norms than your basic market-forces analysis.

I noted that Dr. King became increasingly committed to full employment—the slide below is from the March on Washington for Jobs and Freedom—as evidence developed in the 1960s and 1970s was beginning to show the importance of very tight labor markets for African-Americans.

Source: History.com

Here's a bit of empirical backup. The first figure shows the Census Bureau's series of black and white real median family incomes against the unemployment rate. The cyclicality of the series is evident, but there are only a few episodes wherein very low unemployment persisted for a few years: mainly in the 1960s and 1990s, periods associated with rising median incomes for blacks and whites.

Sources: Census, BLS

In fact, a simple regression of the log change in real black median income on a flexible specification for the unemployment rate (at t, t-1, and squared) explains 39 percent of the variance in the dependent variable (results for whites are similar), more than you might expect given the fact that income formation is a pretty complex phenomenon.

Turning to low incomes, Census also provides 20th percentile family incomes by race, though the data for blacks begins in the mid-1960s. Not only did black incomes shoot up in the full employment 1990s, but they grew faster than white low incomes, partially closing the racial income gap at the 20th percentile.

Source: Census

Applying the same model just noted to black 20th percentile real incomes and forecasting the series based only on unemployment shows a remarkably good fit given the simplicity of the model (the forecast is "dynamic," meaning the forecast using predicted, not actual, values for changes in the DV, a tougher test of the model's accuracy).

Source: Census, BLS, my analysis

OK, some caveats. One reason many economic indicators for blacks were so positive in the 1990s had to do with the disproportionate share of working-age African-Americans in prison, and thus left out of the data (a "selection bias"). And as I stressed in the WaPo piece, tight job markets make it more costly to discriminate; they don't eradicate discrimination.

This final chart provides a simple way to underscore this last point. It is widely known that the black unemployment rate tends to be twice that of the white rate, but many assume that this is largely due to the lower educational attainment of African-Americans. In fact, black unemployment is higher for every education group. The relative difference is somewhat larger for high-school or less, but the figure reminds us that even were blacks to achieve education parity with whites, their jobless rates would likely remain higher.

Source: BLS

These are both highly relevant caveats re the impact of discrimination and the criminal justice system, but they do not change the fact that it takes persistently very tight labor markets to give black workers the bargaining clout they need to get ahead, a fact Dr. King picked up on long ago.

Especially as team Trump takes the field, it's especially important for the Federal Reserve to keep these racial dynamics forefront in their plans for balancing full employment and price pressures. Preemptive rate hikes may well dampen or even reverse the real gains blacks (and whites) just started making, as can be seen at the end of the above figures.

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