The Full Employment Route to Poverty Reduction

Efforts to alleviate poverty are often seen as being separate from the debate on overall economic policy, with the former involving a distinct set of issues that only marginally overlap with the latter. This is unfortunate, since the health of the economy, and specifically the level of unemployment, has an enormous impact on the prospects of the poor. In fact, there are few policies that are likely to have as much effect on improving the plight of the poor or near poor as a genuine commitment to full employment economic policies.

There are three separate channels through which a reduction in the unemployment rate is likely to benefit low-income people. The first is simply by increasing their probability of finding jobs. Unemployment is not evenly distributed throughout the workforce; the less-educated and disadvantaged see the sharpest rises in unemployment when the economy goes into a downturn.

In the year prior to the beginning of the recession, the unemployment rate for workers without a high school degree averaged just over 7.0 percent. Its average for 2010 was 14.8 percent, an increase of 7.8 percentage points. For workers with high school degrees the unemployment rate went from 4.3 percent to 10.3 percent, a rise of 6.0 percentage points. By contrast, the unemployment rate for college grads rose by just 2.7 percentage points, from 2.0 percent to 4.7 percent. While everyone got hit by the downturn, clearly those with less education saw the greatest increase in their risk of being unemployed.

There is a similar story about race. The unemployment rate for whites rose from 4.1 percent in the years before the downturn to 8.7 percent in 2010, a rise of 4.6 percentage points. The unemployment rate for African Americans rose from 8.2 percent to 16.0 percent in 2010, a rise of 7.8 percentage points. The unemployment rate for Hispanics went from 5.6 percent before the downturn to 12.5 percent, an increase of 6.9 percentage points.

There are various explanations as to why less educated and African American and Hispanic workers see the sharpest rise in unemployment during downturns, but there is little debate about this outcome. Also, there is no evidence of any change in this pattern as the economy has recovered, despite the claims of some analysts.

For the first five months of 2014 the unemployment rate for workers without high school degrees averaged 9.5 percent, a drop of 5.3 percentage points from 2010 levels.  The unemployment rate for college grads averaged 3.3 percent, a decline of 1.4 percentage points from recession peaks. This means the least educated workers have actually made more progress in getting back to pre-recession unemployment rates than the most educated workers. If the unemployment rate were to return to pre-recession levels for the population as a whole, it would almost certainly fall back to pre-recession levels for the less educated and minorities as well.

In addition to the unemployment channel, workers at the bottom of the income ladder are also likely to benefit from low unemployment as a result of having the opportunity to work more hours. In my book with Jared Bernstein, Getting Back to Full Employment (free download available), we show that the late 1990s boom was associated with an increase of 17 percent in the total number of hours worked for households in the bottom fifth of the income distribution. By contrast, the increase in hours worked for households in the top two income quintiles was just 1.0 percent. There are many low-income people who would like to be able to put in more hours on the job. The low unemployment of the late 1990s, which bottomed out at 4.0 percent as a year-round average in 2000, provided this opportunity.

Finally, low unemployment provides workers at the middle and bottom of the wage distribution with the bargaining power they need to get a share of the economy’s growth. Hourly wages have been largely stagnant for these workers for most of the last three decades. However, in the years from 1996-2000, workers at the middle and bottom saw substantial wage gains. According to our analysis, a sustained 1.0 percentage point drop in the unemployment rate translates to a 9.8 percent increase in the wages of a worker at the 20th percentile of the wage distribution. It would lead to a wage gain for a worker in the middle of the wage distribution of 4.2 percent. It has little effect on the wages of workers at the top of the income distribution.

For these reasons, a full employment policy is an effective way to increase the opportunities and income of people at the bottom. If full employment of the sort that we saw at the end of the 1990s could be sustained for a long period of time, it would almost certainly lead to a substantial reduction in poverty rates and a large improvement in living standards for low-income people.

When the unemployment rate was falling to thirty year lows in the late 1990s the press had accounts of suburban hotels and restaurants chartering busses to pick workers up in the inner cities and drive them to their jobs in the suburbs. There were stories of employers providing day care facilities and even making arrangements to accommodate elder care for workers caring for aging parents. Some firms actively sought out workers with disabilities. In a tight labor market, firms will make extraordinary efforts to recruit employees who at other times they would never likely hire.

Full employment is also a desirable policy because it goes directly against the “makers versus takers” line that many conservatives push. Full employment is about giving people at the bottom the opportunity to work. In this same context, not pursuing full employment is effectively a policy of not offering people an opportunity to work.

This is a crucial point. We can talk about a policy to promote full employment—by investing in infrastructure, spending on retrofitting buildings or solar paneling to reduce greenhouse gas emissions, or subsidizing pre-K education; but accepting a higher level of unemployment is also a policy decision. We know that we can get more growth and lower rates of unemployment with more government spending. There is enough research on this topic that it should no longer be a debatable point.

We can also get lower rates of unemployment by reducing the size of the trade deficit. If we can increase our exports and replace imports with domestically produced goods and services, it will increase output and lead to more jobs. If we were to eliminate the trade deficit altogether and have balanced trade, it would create almost 6 million jobs. The trade deficit is also the result of policy decisions, most importantly ones pertaining to the value of the dollar. A dollar that costs less in foreign currencies makes our goods cheaper for the rest of the world to purchase, and makes imports more expensive. We could make deals with foreign countries to raise the value of their currency against the dollar as President Reagan did with the Plaza Accord in 1985, but our trade policy has taken a different direction.

There may be reasons why people want smaller budget deficits, but pushing for deficit reduction in the current economic environment is ultimately a policy of denying people jobs. In the same vein, supporting a high dollar, and therefore a large trade deficit, is also a policy of denying people jobs. And, since higher unemployment reduces the bargaining power of workers and leads to lower wages, a high unemployment policy is a policy that provides employers with low-cost labor, exacerbating economic inequality.

In short, a full employment policy is a tremendously effective way to increase the income and opportunities available to the poor and near poor. But the high unemployment policy we currently have in place is one that redistributes income upward and denies people the jobs they need to escape poverty.

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, DC.  His blog, Beat the Press, features commentary on economic reporting. 

Photo provided by AP Photo/Mike Groll