The U.S. Is Reaping the Benefits of Low Unemployment

With the Labor Department having released its December jobs report last Friday, we now have a complete picture of 2023, and it’s a very encouraging one. During the course of the year, the U.S. economy created 2.7 million jobs, taking total non-farm employment to 157.2 million. That means there are about 4.9 million more people working than there were in February, 2020, when the spread of COVID-19 accelerated, and about 14.3 million more than there were when Joe Biden entered office in January, 2021.

Since it’s an election year, the figures will inevitably be parsed from a partisan perspective: In the first three years of the Biden Administration, more than twice as many jobs were created as during the equivalent period in the Trump Presidency. As I’ve pointed out before, the big stimulus package, which a Democratic-controlled Congress passed at the start of the Administration, undoubtedly helped to bolster demand and hasten the recovery from the pandemic in the labor market, which is now virtually complete. But the benefits of strong job creation and low unemployment go far beyond political bragging rights. Simply put, they greatly improve the welfare of countless Americans, including some of the neediest ones. In many ways, indeed, keeping the jobless rate low and the labor markets tight is the most effective and cost-efficient welfare policy there is.

For one thing, it insures that the overwhelming number of Americans who want a job, or need a job, do have one. In December, the unemployment rate was 3.7 per cent. It has now been under four per cent for almost two years straight, which hasn’t happened in more than half a century. If these low jobless rates were primarily a consequence of people dropping out of the workforce permanently during the pandemic, they wouldn’t be as impressive. That isn’t the case, though. A lot of people did drop out, particularly older workers, but many of them have returned, and their numbers have been supplemented by millions of new entrants: young people and immigrants. Since the start of the pandemic, the over-all labor force has risen by more than three million. Among prime-age workers (those between twenty-five and fifty-four), the labor-force-participation rate—the percentage of the civilian population that is working or looking for work—is now higher than it was before the pandemic, at 83.2 per cent.

The second big benefit of keeping the over-all unemployment rate at very low levels is that it is easier for disadvantaged groups to find and keep jobs. Averaged over all of 2023, the Black unemployment rate was 5.5 per cent. That’s the lowest figure since the government began keeping track of this rate in 1972, the White House Council of Economic Advisers pointed out in a blog post. Another group that is benefitting from a tight labor market is Americans who have disabilities. For health reasons, many people in this group aren’t able to work. But, last year, the percentage of people with a disability who are employed reached a new high.

Another big plus of a low unemployment economy is that, if it can be sustained, it enables many workers, particularly lower-paid ones, to obtain higher wages. This is largely a matter of supply and demand. When jobs are scarce, there is a lot of competition even for openings that pay low wages. But when employers are struggling to find enough workers to fill their vacancies, they have to raise their wage offers. One economist who has highlighted this phenomenon is Arindrajit Dube, who teaches at the University of Massachusetts Amherst. Over the weekend, Dube posted on X, formerly known as Twitter, a picture of a McDonald’s in Texas that is offering starting salaries of up to fourteen dollars an hour. Texas doesn’t have a state minimum wage, Dube explained, but “a tight labor market has provided a partial (if uncertain) remedy.”

In a paper co-authored with his colleagues Annie McGrew and David Autor, of M.I.T., Dube has pointed out that, since the second half of 2021, when the unemployment rate fell below five per cent, workers in the tenth percentile of the income distribution—i.e., those near the bottom—have seen their wages rise considerably faster than workers in the middle of the distribution and those near the top. “The rise in wages was particularly strong among workers under 40 years of age and without a college degree,” the three economists wrote. This pattern represents a dramatic reversal of the previous trend, which saw the wages of low-paid workers dropping further and further behind. Indeed, Dube and his colleagues calculate that the recent wage growth for low-paid workers has reversed about forty per cent of the rise in wage inequality that took place between 1980 and 2020, as captured by one commonly used metric. That’s a historic development, and one well worth building on.

For all these reasons, it’s imperative to keep unemployment as low as possible in the months and years ahead. In the last eighteen months, as a result of skill or good fortune—I won’t go into that debate here—the Federal Reserve has presided over a big fall in inflation (from 9.1 per cent in June, 2022, to 3.1 per cent in November) with virtually no increase in the jobless rate. As Jerome Powell and his colleagues decide what to do in 2024, they should keep in mind the many benefits of a tight labor market, and the need to preserve them. ♦

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