For release on delivery
2:00 p.m. EST
February 10, 2021
Getting Back to a Strong Labor Market
Remarks by
Jerome H. Powell
Chair
Board of Governors of the Federal Reserve System
at
The Economic Club of New York
(via webcast)
February 10, 2021
Today I will discuss the state of our labor market, from the recent past to the
present and then over the longer term. A strong labor market that is sustained for an
extended period can deliver substantial economic and social benefits, including higher
employment and income levels, improved and expanded job opportunities, narrower
economic disparities, and healing of the entrenched damage inflicted by past recessions
on individuals' economic and personal well-being. At present, we are a long way from
such a labor market. Fully realizing the benefits of a strong labor market will take
continued support from both near-term policy and longer-run investments so that all those
seeking jobs have the skills and opportunities that will enable them to contribute to, and
share in, the benefits of prosperity.
The Labor Market of a Year Ago
We need only look to February of last year to see how beneficial a strong labor
market can be. The overall unemployment rate was 3.5 percent, the lowest level in a
half-century. The unemployment rate for African Americans had also reached historical
lows (figure 1). Prime-age labor force participation was the highest in over a decade, and
a high proportion of households saw jobs as "plentiful."1 Overall wage growth was
moderate, but wages were rising more rapidly for earners on the lower end of the scale.
These encouraging statistics were reaffirmed and given voice by those we met and
conferred with, including the community, labor, and business leaders; retirees; students;
and others we met with during the 14 Fed Listens events we conducted in 2019.2
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Many of these gains had emerged only in the later years of the expansion. The
labor force participation rate, for example, had been steadily declining from 2008 to 2015
even as the recovery from the Global Financial Crisis unfolded. In fact, in 2015, prime-
age labor force participation-which I focus on because it is not significantly affected by
the aging of the population-reached its lowest level in 30 years even as the
unemployment rate declined to a relatively low 5 percent. Also concerning was that
much of the decline in participation up to that point had been concentrated in the
population without a college degree (figure 2). At the time, many forecasters worried
that globalization and technological change might have permanently reduced job
opportunities for these individuals, and that, as a result, there might be limited scope for
participation to recover.
Fortunately, the participation rate after 2015 consistently outperformed
expectations, and by the beginning of 2020, the prime-age participation rate had fully
reversed its decline from the 2008-to-2015 period. Moreover, gains in participation were
concentrated among people without a college degree. Given that U.S. labor force
participation has lagged relative to other advanced economy nations, this progress was
especially welcome (figure 3).3
As I mentioned, we also saw faster wage growth for low earners once the labor
market had strengthened sufficiently. Nearly six years into the recovery, wage growth
for the lowest earning quartile had been persistently modest and well below the pace
enjoyed by other workers. At the tipping point of 2015, however, as the labor market
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continued to strengthen, the trend reversed, with wage growth for the lowest quartile
consistently and significantly exceeding that of other workers (figure 4).
At the end of 2015, the Black unemployment rate was still quite elevated, at
9 percent, despite the relatively low overall unemployment rate. But that disparity too
began to shrink; as the expansion continued beyond 2015, Black unemployment reached
a historic low of 5.2 percent, and the gap between Black and white unemployment rates
was the narrowest since 1972, when data on unemployment by race started to be
collected. Black unemployment has tended to rise more than overall unemployment in
recessions but also to fall more quickly in expansions.4 Over the course of a long
expansion, these persistent disparities can decline significantly, but, without policies to
address their underlying causes, they may increase again when the economy ultimately
turns down.
These late-breaking improvements in the labor market did not result in unwanted
upward pressures on inflation, as might have been expected; in fact, inflation did not even
rise to 2 percent on a sustained basis. There was every reason to expect that the labor
market could have strengthened even further without causing a worrisome increase in
inflation were it not for the onset of the pandemic.
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The Labor Market Today
The state of our labor market today could hardly be more different. Despite the
surprising speed of recovery early on, we are still very far from a strong labor market
whose benefits are broadly shared. Employment in January of this year was nearly
10 million below its February 2020 level, a greater shortfall than the worst of the Great
Recession's aftermath (figure 5).
After rising to 14.8 percent in April of last year, the published unemployment rate
has fallen relatively swiftly, reaching 6.3 percent in January. But published
unemployment rates during COVID have dramatically understated the deterioration in the
labor market. Most importantly, the pandemic has led to the largest 12-month decline in
labor force participation since at least 1948.5 Fear of the virus and the disappearance of
employment opportunities in the sectors most affected by it, such as restaurants, hotels,
and entertainment venues, have led many to withdraw from the workforce. At the same
time, virtual schooling has forced many parents to leave the work force to provide all-day
care for their children. All told, nearly 5 million people say the pandemic prevented them
from looking for work in January. In addition, the Bureau of Labor Statistics reports that
many unemployed individuals have been misclassified as employed. Correcting this
misclassification and counting those who have left the labor force since last February as
unemployed would boost the unemployment rate to close to 10 percent in January
(figure 6).
Unfortunately, even those grim statistics understate the decline in labor market
conditions for the most economically vulnerable Americans. Aggregate employment has
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declined 6.5 percent since last February, but the decline in employment for workers in the
top quartile of the wage distribution has been only 4 percent, while the decline for the
bottom quartile has been a staggering 17 percent (figure 7). Moreover, employment for
these workers has changed little in recent months, while employment for the higher-wage
groups has continued to improve. Similarly, the unemployment rates for Blacks and
Hispanics have risen significantly more than for whites since February 2020 (figure 8).
As a result, economic disparities that were already too wide have widened further.
In the past few months, improvement in labor market conditions stalled as the rate
of infections sharply increased. In particular, jobs in the leisure and hospitality sector
dropped over 1/2 million in December and a further 61,000 in January. The recovery
continues to depend on controlling the spread of the virus, which will require mass
vaccinations in addition to continued vigilance in social distancing and mask wearing in
the meantime.
Since the onset of the pandemic, we have been concerned about its longer-term
effects on the labor market. Extended periods of unemployment can inflict persistent
damage on lives and livelihoods while also eroding the productive capacity of the
economy.6 And we know from the previous expansion that it can take many years to
reverse the damage.
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At the start of the pandemic, the increase in unemployment was almost entirely
due to temporary job losses.7 Temporarily laid-off workers tend to return to work much
more quickly, on average, than those whose ties to their former employers are
permanently severed. But as some sectors of the economy have continued to struggle,
permanent job loss has increased (figure 9). So too has long-term unemployment. Still,
as of January, the level of permanent job loss, as a fraction of the labor force, was
considerably smaller than during the Great Recession. Research shows that the Paycheck
Protection Program has played an important role in limiting permanent layoffs and
preserving small businesses.8 The renewal of the program this year in the face of another
surge in COVID-related job cuts is an encouraging development.
Of course, in a healthy market-based economy, perpetual churn will always
render some jobs obsolete as they are replaced by new employment opportunities. Over
time, workers and capital move from firm to firm and from sector to sector. It is likely
that the pandemic has both increased the need for such movements and brought forward
some movement that would have occurred eventually.9
7
The Bureau of Labor Statistics defines a job loss as temporary if the affected worker has been given a date
to return to work or expects to be recalled to their former job within six months.
8
For research on the effect of the Paycheck Protection Program on employment, see David Autor, David
Cho, Leland D. Crane, Mita Goldar, Byron Lutz, Joshua Montes, William B. Peterman, David Ratner,
Daniel Villar, and Ahu Yildirmaz (2020), "An Evaluation of the Paycheck Protection Program Using
Administrative Payroll Microdata," preliminary paper, Massachusetts Institute of Technology, July,
https://economics.mit.edu/files/20094; João Granja, Christos Makridis, Constantine Yannelis, and Eric
Zwick (2020), "Did the Paycheck Protection Program Hit the Target?" NBER Working Paper Series 27095
(Cambridge, Mass.: National Bureau of Economic Research, May (revised November 2020)),
https://www.nber.org/system/files/working_papers/w27095/w27095.pdf; and R. Glenn Hubbard and
Michael R. Strain (2020), "Has the Paycheck Protection Program Succeeded?" NBER Working Paper
Series 28032 (Cambridge, Mass.: National Bureau of Economic Research, October),
https://doi.org/10.3386/w28032.
9
For a description of the reallocation of resources induced by the COVID-19 shock, see Jose Maria
Barrero, Nicholas Bloom, and Steven J. Davis (2020), "COVID-19 Is Also a Reallocation Shock," NBER
Working Paper Series 27137 (Cambridge, Mass.: National Bureau of Economic Research, May),
https://doi.org/10.3386/w27137.
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Getting Back to a Strong Labor Market
So how do we get from where we are today back to a strong labor market that
benefits all Americans and that starts to heal the damage already done? And what can we
do to sustain those benefits over time? Experience tells us that getting to and staying at
full employment will not be easy. In the near term, policies that bring the pandemic to an
end as soon as possible are paramount. In addition, workers and households who struggle
to find their place in the post-pandemic economy are likely to need continued support.
The same is true for many small businesses that are likely to prosper again once the
pandemic is behind us.
Also important is a patiently accommodative monetary policy stance that
embraces the lessons of the past-about the labor market in particular and the economy
more generally. I described several of those important lessons, as well as our new policy
framework, at the Jackson Hole conference last year.10 I have already mentioned the
broad-based benefits that a strong labor market can deliver and noted that many of these
benefits only arose toward the end of the previous expansion. I also noted that these
benefits were achieved with low inflation. Indeed, inflation has been much lower and
more stable over the past three decades than in earlier times.
In addition, we have seen that the longer-run potential growth rate of the economy
appears to be lower than it once was, in part because of population aging, and that the
neutral rate of interest-or the rate consistent with the economy being at full employment
with 2 percent inflation-is also much lower than before. A low neutral rate means that
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our policy rate will be constrained more often by the effective lower bound. That
circumstance can lead to worse economic outcomes-particularly for the most
economically vulnerable Americans.
To take these economic developments into account, we made substantial revisions
to our monetary policy framework, as described in the FOMC's Statement on Longer-
Run Goals and Monetary Policy Strategy.11 This revised statement shares many features
with its predecessor, including our view that longer-run inflation of 2 percent is most
consistent with our mandate to promote maximum employment and price stability. But it
also has some innovations.
The revised statement emphasizes that maximum employment is a broad and
inclusive goal. This change reflects our appreciation for the benefits of a strong labor
market, particularly for many in low- and moderate-income communities. Recognizing
the economy's ability to sustain a robust job market without causing an unwanted
increase in inflation, the statement says that our policy decisions will be informed by our
"assessments of the shortfalls of employment from its maximum level" rather than by
"deviations from its maximum level."12 This means that we will not tighten monetary
policy solely in response to a strong labor market. Finally, to counter the adverse
economic dynamics that could ensue from declines in inflation expectations in an
environment where our main policy tool is more frequently constrained, we now
explicitly seek to achieve inflation that averages 2 percent over time. This means that
following periods when inflation has been running persistently below 2 percent,
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appropriate monetary policy will likely aim to achieve inflation moderately above
2 percent for some time in the service of keeping inflation expectations well anchored at
our 2 percent longer-run goal.
Our January postmeeting statement on monetary policy implements this new
framework.13 In particular, we expect that it will be appropriate to maintain the current
accommodative target range of the federal funds rate until labor market conditions have
reached levels consistent with maximum employment and inflation has risen to 2 percent
and is on track to moderately exceed 2 percent for some time. In addition, we will
continue to increase our holdings of Treasury securities and agency mortgage-backed
securities by $80 billion and $40 billion per month, respectively, until substantial further
progress has been made toward our maximum-employment and price-stability goals.
The Broad Responsibility for Achieving Maximum Employment
Seventy-five years ago, in the wake of WWII, the United States faced the
challenge of reemploying millions amid a major restructuring of the economy toward
peacetime ends.14 Part of Congress's response was the Employment Act of 1946, which
states that "it is the continuing policy and responsibility of the federal government to use
all practicable means . . . to promote maximum employment."15 As later amended in the
Humphrey-Hawkins Act, this provision formed the basis of the employment side of the
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Fed's dual mandate. My colleagues and I are strongly committed to doing all we can to
promote this employment goal.
Given the number of people who have lost their jobs and the likelihood that some
will struggle to find work in the post-pandemic economy, achieving and sustaining
maximum employment will require more than supportive monetary policy. It will require
a society-wide commitment, with contributions from across government and the private
sector. The potential benefits of investing in our nation's workforce are immense.
Steady employment provides more than a regular paycheck. It also bestows a sense of
purpose, improves mental health, increases lifespans, and benefits workers and their
families.16 I am confident that with our collective efforts across the government and the
private sector, our nation will make sustained progress toward our national goal of
maximum employment.
Figure 1. Unemployment Rate
Percent
25
Monthly
Unemployment rate
Black unemployment rate
20
15
10
5
Feb. 2020
0
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020
Note: Published data on unemployment rates by race start in 1972.
Source: Bureau of Labor Statistics.
Figure 2. Prime-Age Labor Force Participation
Percent
85
Monthly
All workers
84
Workers without a college degree
83
82
Feb. 2020 81
80
79
78
77
76
75
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Note: Prime age refers to ages 25 to 54.
Source: Bureau of Labor Statistics and Board staff calculations using microdata from the Current Population Survey.
Figure 3. Labor Force Participation Rate in OECD Countries: 25-64 Year Olds, 2019
Percent
90
80
70
60
50
40
30
20
10
0
Rica
Africa Italy States
Korea Britain
Brazil Chile Malta Israel Spain Latvia
Japan
Turkey Mexico Croatia Greece Poland Ireland France Austria Russia Cyprus Finland Estonia Iceland
Namibia Belgium Bulgaria Canada Norway Portugal Republic Zealand Sweden
Romania Hungary Slovakia Australia Slovenia Denmark Lithuania
Columbia Germany
Indonesia
Macedonia
Costa
Switzerland
South Netherlands
South Luxembourg Great New
N. United
Czech
Note: OECD is Organisation for Economic Co-operation and Development.
Source: OECD (2021), ''Labour force participation rate'' (indicator), https://doi.org/10.1787/8a801325-en (accessed on February 1, 2021).
Figure 4. Wage Growth for Low Earners Compared with Other Workers
Percent
5.5
Monthly
Top wage quartile
5.0
Top-middle wage quartile
Bottom-middle wage quartile
Bottom wage quartile
4.5
Feb. 2020
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Figure 5. Payroll Employment
Millions
160
Monthly
-9.9 million
150
Jan. 2021 140
-8.7 million
130
120
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Note: Red arrows indicate the peak-to-trough change in employment during the Great Recession and the decline in employment from February 2020 to January 2021.
Source: Bureau of Labor Statistics.
Figure 6. Official and Alternative Unemployment Rates
Percent
27
Monthly
Published unemployment
+ misclassification error
24
+ labor force decline since Feb. 2020
21
18
15
12
Jan. 2021
9
6
3
Jan . Feb . Mar . Apr . May Jun . Jul . Aug . Sep . Oct . Nov . Dec . Jan .
Figure 7. Employment by Wage Quartile
Percent
110
Weekly
100
90
Jan. 9, 2021
80
70
Bottom Top-middle
Bottom-middle Top
60
50
. Feb . Mar . Apr . May Jun . Jul . Aug . Sep . Oct . Nov . Dec . Jan .
2020 2021
Note: Employment indexed to 100 as of Feb. 15, 2020. Wage quartiles are defined using the February 2020 wage distribution.
Source: Board staff calculations based on employment data from ADP, Inc.
Figure 8. Change in Unemployment Rate by Race/Ethnicity since February 2020
Percentage points
16
Monthly
White
Black
14
Asian
Hispanic
12
10
8
Jan. 2021 6
4
2
0
Feb . Mar . Apr . May Jun . Jul . Aug . Sep . Oct . Nov . Dec . Jan .
Figure 9. Permanent and Temporary Layoffs
Percent
12
Monthly
Temporary
Permanent
10
8
6
4
2
Jan. 2021
0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Note: Number of individuals on permanent and temporary layoff as a percent of the labor force.
Source: Bureau of Labor Statistics.