Is Labor Market Disparity Hindering Future Economic Growth in America?

This article was last updated on April 16, 2022

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recent speech by Federal Reserve Governor Lael Brainard looks at the disparities in the labor market, an issue which will have a marked impact on future economic performance in the United States.  As we all know, the Federal Reserve has a dual mandate; an inflationary target of 2 percent and maximizing employment, a goal which has no set numerical target, largely because the Federal Reserve has difficulty quantifying the level of maximum employment since it “depends on nonmonetary factors that affect the structure and dynamics of the labor market, which may change over time and may not be directly measurable.

Mr. Brainard beings by noting that the Federal Reserve is “keenly interested in disparities in employment, labor force participation, income and wealth because they may have implications for the growth capacity of the economy“.  Given that growth in employment levels have dropped since the end of the Great Recession and that growth in employment has looked rather tepid since the end of the Great Recession as shown here:

is labor market disparity hindering future economic growth in america?

…the Fed is questioning whether the low levels of employment and labor force participation for prime age working groups represent “slack” in the economy that could “if successfully tapped”, increase economic activity. 

Obviously, there are large differences in employment opportunities in the United States based on race and ethnicity, a factor that plays a very important role in the economy’s potential growth rate.  Here is a graphic from Mr. Brainard’s presentation showing the wide range in labor force participation levels for the four main ethnic/racial groups that make up the United States:

is labor market disparity hindering future economic growth in america?

Additionally, when we look beyond the headline U-3 aggregate unemployment rate, we find that there are significant differences in unemployment among the four main ethnic racial groups:

is labor market disparity hindering future economic growth in america?

Unemployment rates in August 2017 averaged 4.4 percent nationally which is low by historic standards, however, the rate varied as follows:

White – 3.9 percent

Asian – 4.0 percent

Hispanic – 5.2 percent

African American – 7.7 percent

These gaps in both labor force participation and unemployment rates have existed going back decades, gaps that cannot be completely attributed to differences in age and educational levels.

These disparities go beyond the labor force.  As shown on this graphic, the average income for white, African American and Hispanic families varied widely:

is labor market disparity hindering future economic growth in america?

…as did average family wealth:

is labor market disparity hindering future economic growth in america?

In 2016, average wealth holdings for families were as follows:

White – $933,000

Hispanic – $191,000

African American – $138,000

As you can see, the gap in both family income and family wealth has actually widened as the years have passed, with median family wealth rising much more rapidly for white families than for either Hispanic or African American families.   

So, how does the Federal Reserve plan to battle this labor market disparity, an issue of concern since it will ultimately have an impact on economic growth levels?   Mr. Brainard admits that the “policy tools available to the Federal Reserve are not well suited to addressing the barriers that contribute to persistent disparities in labor market outcomes, understanding these barriers and efforts to address them is vital in assessing maximum employment as well as potential growth.”  That said, the Fed has a variety of initiative that are aimed at understanding economic disparities and fostering more-inclusive growth as follows:

1.) The Opportunity and Inclusive Growth Institute at the Federal Reserve Bank of Minneapolis, a group of academics and Fed Board members who are conducting research to increase economic opportunity and inclusive growth to help the Fed achieve its maximum employment mandate.

2.) The Economic Growth and Mobility Project at the Federal Reserve Bank of Philadelphia, an initiative dedicated to promoting equal access to economic opportunity for all.

While all of that is just wonderful, even Mr. Brainard admits that the “barriers to labor market outcomes for particular groups appear to be structural” and that factors including both differences in access to quality education and discrimination may play into why there is labor market disparity in the United States.

While the Federal Reserve believes that one of the barriers to further economic growth in the United States is related to disparities in the labor market that are related to ethnicity and race, I would suggest that this may be a bigger hindrance to future economic growth:

is labor market disparity hindering future economic growth in america?

In the second quarter of 2017, total household indebtedness reached $12.84 trillion, $164 billion above its peak in the third quarter of 2008, thanks to this:

is labor market disparity hindering future economic growth in america?

…and this:

is labor market disparity hindering future economic growth in america?

Certainly, disparities in the labor market do play a role in economic growth, however, common sense would seem to indicate that high levels of consumer indebtedness, thanks to the Fed’s long-term experiment with near-zero interest rates, will play a much bigger role in slowing economic growth levels in the future.  If that proves to be the case, the Federal Reserve will prove to be its own worst enemy.   

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