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How low unemployment lifts workers at the bottom

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A sign promoting job openings at a Taco Bell in Austin, Texas.

"When unemployment goes below about 4.5%, folks who've been out of work find work and keep work," said author Elisabeth Jacobs. Brandon Bell/Getty Images

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The Federal Reserve, famously, has a dual mandate: price stability and maximum employment. Typically, economists view those two goals as somewhat opposed: If the Fed raises interest rates to quell rising prices, then employment declines, and vice versa. Right now, though, despite the Fed carrying out rate hike after rate hike, unemployment is staying stubbornly low. So far, the labor market is refusing to loosen up.

While that is not what the Fed wants — or expects — to happen, a new book looks at the bigger picture of what low unemployment really means for workers and challenges the need for that classic trade-off.

Katherine Newman and Elisabeth Jacobs are the authors of “Moving the Needle: What Tight Labor Markets Do for the Poor.” They joined Marketplace’s Amy Scott to talk about the impact that low unemployment can have on the cohort of workers who are often excluded from the workforce. The following is an edited transcript of their conversation.

Katherine Newman: Employment plays such a critical role in every single theory of poverty. Bad employment prospects, low earnings, erratic take-home pay [are all] a generative aspect of poverty. So what happens when that’s not the case anymore? And that’s why we wrote the book.

Amy Scott: And of course, after 2019, unemployment spiked sharply at the start of the pandemic. But now we’re back in what you can call a very tight labor market with employee unemployment at 3.6%. What did you find? How does a tight labor market benefit the very poor?

Newman: The first thing that happens is that employers begin to seek people who they didn’t consider eligible for employment before. They pull in people like young Black men, who usually are at the very back of the queue in desirable employees in a loose labor market. They begin to think about people coming out of the prison system. They consider single mothers to a much greater degree. Then, they try to improve the quality of the jobs they have because they can’t hold on to people if they don’t. They raise wages, they increase benefits. So the whole labor market shifts in very surprising and important ways, and it has an enormous benefit, especially to the people at the bottom.

Elisabeth Jacobs: So, we were able to trace people across tight labor markets over time. And what we found is that when unemployment goes below about 4.5%, folks who’ve been out of work find work and keep work, which I think is a really important thing to think about. Because part of what happens when folks cycle in and out of the labor market, they aren’t able to actually get a foothold and start that climb up the middle class and out of poverty. The other thing that I’ll say is that we’ve seen that in times that don’t necessarily come with the kind of hand waving over inflation, which we’ve talked about many times over because the book has kind of arrived into a labor market where unemployment is still quite low, but prices have risen quite a bit. And one of the things that we see is that those two things aren’t necessarily related.

Scott: Yeah, and we’ll talk about inflation a little bit later on. But I wanted to get to an example in the book of how this benefits someone who would traditionally be on the fringes of the labor market. Tell me about Sam in Boston.

Newman: So, Sam had a very, very rough childhood. He was arrested in a very serious way when he was 18. And for the next 20 years, he was a guest of the Massachusetts criminal justice system. He has a very rocky history of violence, drug abuse. But when his sentence was up, he graduated into that very tight labor market that spawned this book in the first place. He had a full-time job within about two weeks of leaving prison. And it was an overnight job of stocking shelves for a grocery store near where his family lived.

Scott: And just to jump in here for a moment, he targeted an overnight job because he had advice, right? Those are less competitive positions, and someone coming in with a criminal record is more likely to get such a job.

Newman: Not necessarily in a loose labor market. But in a tight labor market, the combination of undesirable qualities of the job — mainly that it’s all night long and the fact that employers have a hard time finding people in general for night shifts — but when labor markets are very tight, they can’t find a single soul. And that overnight shift turned out to be a magical solution for him because he graduated into management, graduated into better shifts. Ultimately, he left that job behind and went on into even better jobs. The idea that someone with a background like Sam’s could make that happen is, I think, testimony to the way in which tight labor markets shift the prospects for the hard-to-employ and push employers to look in corners they didn’t look in before.

Scott: Elisabeth, what happens to people like Sam, though, when the economy shifts and unemployment starts to rise? Are they able to hold on to those gains in the labor market?

Jacobs: So, folks who found opportunity in a tight labor market are more likely to hold on. At the same time, we do know that when the labor market collapses, those folks are often the first out the door. That said, your likelihood of reemployment, and reemployment at a relatively solid wage, is much higher if you’ve had the opportunity during a tight labor market to work and earn and generate a track record as someone who is really deeply connected and valuable in the labor market.

Scott: You talk in the book about the Fed’s dual mandate: full employment and stable prices. And recently, the approach has been, you know, to sacrifice some employment to try to bring down inflation. And you know, while there will be job losses associated with that, likely, we know that inflation also hits the poor the hardest. Do you think the Fed is making the right trade-off?

Jacobs: We have both spent a lot of time talking with people and looking very closely at the numbers that track people’s lives over time. And it’s very clear that inflation and opportunity for workers don’t need to be trade-offs. I mean, I think the dialogue around what to do about rising prices right now has focused so narrowly on this idea that we have to push unemployment up in order to control prices. And there are many, many other reasons that inflation may be going up that go outside of pitting those two against each other and having the narrative turn into a trade-off between price stability and opportunity for workers, particularly those at the bottom.

Scott: You lay out some policies in the book that could help people who get on that ladder during a period of a tight labor market stay there. How would you summarize kind of the best approach? Because the reality of our economy is that we have business cycles, so there are going to be periods of high unemployment and periods of low unemployment. What can we do to help people once the market shifts?

Newman: If you reward employers through the tax system for investing in the human capital of their workers, those workers become more valuable, and that’s probably the best training system we’ve got. Raising the minimum wage has been a very important vehicle for stabilizing the whole wage structure at the bottom. The child allowance took a third of the nation’s poor children out of poverty. We do know how to do this. We just need the political will to recognize that those stabilizing forces enable people at the bottom to manage through difficult periods and prosper during the best periods and hopefully see their way right up out of the poverty category altogether.

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