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The Federal Reserve Board: The Best Weapon Against Discrimination?

A high-employment economy is an effective way to reduce racial discrimination in the labor market.

The Eccles Building, home of the Federal Reserve Board, in a photo from October 15, 2011. (Photo: Futureatlas.com; Edited: LW / TO)

Most people have little understanding of the Federal Reserve Board. This is unfortunate because it has an enormous impact on the economy and therefore on people’s lives. The Fed’s decisions on interest rate policy can slow the rate of the economy’s growth and bring job creation to a halt, if they choose. Conversely, if the Fed adopts an interest policy to foster growth, then millions more people can have jobs.

The Fed’s impact in this area is not just a question of aggregate job numbers. After all, adding another 1 million jobs in a labor market with 150 million jobs may not seem like a very big deal. However the job growth that we see as the labor market tightens overwhelmingly benefits the most disadvantaged groups in society.

The additional jobs go disproportionately to those with less education and also to workers who face discrimination in the labor market, specifically African-American and Latino workers. Along with the increase in job opportunities, these workers are also likely to see more wage gains since the stronger job market improves their bargaining position.

A few years back Jared Bernstein and I wrote a book on the benefits of full employment that emphasized this point about full employment offering especially large benefits for the disadvantaged. A new paper from the Federal Reserve Board made the same point with additional data and analysis.

The basic point is that a high-employment economy is an effective way to reduce racial discrimination in the labor market. While a low unemployment rate should not be an excuse for abandoning policies explicitly designed to combat racial discrimination in the labor market — it is a very effective tool, especially at a time when other channels may be blocked.

We see clear evidence of the benefits over the last three years. The members of the Federal Reserve Board’s Open Market Committee (FOMC), which decides interest rate policy, are regularly surveyed about their estimate for the non-accelerating inflation rate of unemployment, or NAIRU. This is in principle the lowest the unemployment rate can go before inflation starts to spiral upward.

In the survey given three years ago, the range of estimates from FOMC members went from 5.2 percent to 6 percent. Today, the unemployment rate is 4.4 percent. Furthermore, inflationary pressures by almost every measure have weakened in the last year, suggesting that the unemployment rate could go even lower without causing inflation to be a problem.

But it’s worth asking what would have happened if the inflation hawks among the FOMC had gotten their way. This would have meant that the Fed would have raised interest rates sooner and faster, preventing the unemployment rate from getting below their projections for the NAIRU.

If we start at the more optimistic 5.2 percent number, the economy reached this level of unemployment in July of 2015. At that time the employment-to-population ratio (EPOP) for African Americans was 55.9 percent. (This is the percentage of African Americans over age 16 that have jobs.) In the most recent data, the EPOP for African Americans was 57.6 percent. This translates into another 560,000 African Americans with jobs.

The EPOP for African American teens stands at 24.4 percent in the most recent data, a full four percentage points above its July 2015 level. While this is still a low level, it means the probability of an African-American teen having a job is 20 percent greater than if the unemployment rate had been kept from falling below the 5.2 percent estimate for the NAIRU. Of course the story would be considerably worse if the inflation hawks on the FOMC, with their 6 percent NAIRU estimate, had gotten their way.

There is a similar story with Latinos. Their EPOP is 62.9 percent today, compared to 61.4 percent in July of 2015. This difference translates into another 620,000 jobs for Latino workers.

This points are especially important now, because Donald Trump is about to make his first appointment to the Federal Reserve Board. His pick is Marvin Goodfriend, an economics professor at Carnegie Mellon University.

Goodfriend has been a consistent critic of the policies pursued by the Federal Reserve Board (and Congress) to try to speed the recovery and lower unemployment. It is a safe bet that he would be among the inflation hawks that would be looking to slow the economy and reduce the rate of job creation.

The Republicans have a majority in the Senate, which makes it likely that Goodfriend will be approved for this position. But it is important that the public know how much is at stake with this appointment. If Goodfriend joins the FOMC, he is likely to be a major force against using the Fed’s power to reduce the extent of racial discrimination in the labor market.

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