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Falling US unemployment draws lowest tiers into work

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Via Financial Times

US unemployment has been below 4 per cent for more than 18 months and now sits at a level last seen in 1969 — and that is particularly helping minorities and workers with less education.

At 3.6 per cent, the historically low unemployment rate means economists and particularly the Federal Reserve are relearning a lesson they first learned 50 years ago: as the unemployment rate drops, the last few tenths of a percentage point do particular good for the groups the US has traditionally found it hardest to help into work.

“We continue to get numbers that are better than we thought possible,” said Douglas Holtz-Eakin, an economic adviser to two Republican administrations and the former director of the non-partisan Congressional Budget Office.

The positive performance suggests the barrier to labour-force participation — the percentage of working-age people who choose to either work or look for a job — is more porous than he had previously thought, Mr Holtz-Eakin said. People who had been classified as “marginally attached” — people who could work but have not looked for a job in the past month — are coming back into the workforce.

“That allows you to create an extra 35,000 jobs a month,” he said. 

Recent research found that at such low unemployment levels, a disproportionately large number of minorities and workers with less education are brought into the labour market — groups that US public policy has traditionally struggled to reach.

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This was reflected in Friday’s employment numbers which showed that the gap in employment between whites and African Americans is near record lows.

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Mary Daly, president of the San Francisco Fed and one of the authors of the paper along with Stephanie Aaronson of the Brookings Institution and two other economists from the Fed’s Board of Governors, based the work on research originally published by the economist Arthur Okun in 1973.

“We become forgetful,” she said. “The idea of a high-pressure labour market is not a new one.” 

African Americans, Hispanics and those with less education are cyclically sensitive, the research found — they are more likely to lose their jobs in a downturn, and more likely to regain them when growth returns.

Ms Daly and her co-authors found that the last few increments of improvement in the labour market help these groups in particular. 

“We close these gaps, a little bit, these structural gaps, which are really challenging to close,” said Ms Daly. “They get a little narrower. They don’t close, but they get narrower.”

This is healing the scars left from the depths of the financial crisis a decade ago, said Ioana Marinescu, a labour economist at the University of Pennsylvania: “It has taken incredibly long to dig ourselves back from the hole a very large recession has plunged us into.”

The ratio of workers to the total population of prime-age adults, those age 25 to 54, only reached its pre-recession high of 80.3 per cent in October, she noted.

Although the improvements are clear in the data, economists are finding it difficult to figure out how exactly why they are happening.

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Ms Daly thinks businesses are more willing to train than they used to be. “Firms start to think it’s better to have someone who wants to show up and I’ll train them on the job than it is to have nobody doing this job,” she said.

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Mr Holtz-Eakin suggested that businesses have changed their standards for hiring. For some lower-risk professions, he said, “You just don’t run a drug test any more.”

Ms Marinescu said that, with businesses more desperate, employees have more bargaining power. 

The Beige Book — the Fed’s record of its conversations with local businesses — contains evidence for all three theories.

It is also not clear how long the tight employment market can continue.

The Fed does not have specific employment targets, as it does for inflation. Its rate-setting committee has not elaborated on how it will weigh these employment gains for specific communities against pressures in other parts of the economy.

Fed chairman Jay Powell has repeatedly said that wage gains are going in particular to low earners.

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Speaking last week after announcing a third 25 basis point interest rate cut, he said: “We’ve been hearing from people who live and work in low- and moderate-income communities that this is the best labour market they’ve seen in their lifetime. There’s just a lot more good that can be done there.”

The employment gains among this group of workers were not a specific reason for this year’s rate cuts, but they were “a reason for us to want to extend the expansion”, he added.

The relatively subdued inflation climate means that the Fed has the luxury of a little more leeway, Ms Daly said: “We have an opportunity to experiment on what full employment really means.”

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