Don’t forget who loses in Fed's quest to soften labour market

The troubling, decades-long trend of falling participation in the labour force is most pronounced among those with a high school degree or less, especially men. (Source: Bloomberg)

Federal Reserve Chair Jerome Powell is testifying before Congress this week on the state of the US economy and monetary policy, and there will be some tension. The Monetary Policy Report he will be delivering will acknowledge that the “very tight” labour market has benefited a wide range of disadvantaged groups. At the same time, though, it argues that we need “some softening” of the labour market, which will almost certainly hit the disadvantaged hardest.

Keep in mind that lower-income workers are the ones who have come off the sidelines to fill many recent job openings, especially in leisure and hospitality. And they may be the most likely to push up labour productivity in the future. The benefits of the tight labour market, as one example, appear to be going to those with less education. During the current recovery, the wage growth of workers with a high school degree or less has consistently outpaced those of workers with a college degree or more. And the least educated were the only group with wage growth that exceeded inflation.

A look at the data over the long term shows just how unusual the recent wage relationship among the two groups has been. Usually, the wage growth of workers with a high school degree is below that of workers with a college degree. That difference compounds over time, reducing the incentive to work and with the disparity affecting millions of Americans. According to the Census Bureau, the percentage of the US population with a high school degree or less is about 40 percent, or roughly the same share as that with a college degree or more.

Even with these recent years of relatively rapid growth, there is ground to catch up. Long-term solutions should focus on raising the marketable skills of individuals with high school degrees without simply telling them to go to college. College is not the best path for everyone; high-quality apprenticeships and training programs are often better.

Expanding apprenticeship and training programs is at the heart of the new  Biden administration initiative Raise the Bar: Unlocking Career Success. Three key areas of training are manufacturing, automotive and cybersecurity. The goal is also to connect K-12 schools, colleges, employers and workforce development programs. The idea of bringing all these stakeholders together is to ensure that the training students get is high-quality and aligns with actual job needs. The program will support regional gatherings to share what has worked at what hasn’t.

But as promising as the apprenticeship programs and similar ones seem, they are hard to do well. Active labour market programs have only a mixed record of delivering better employment outcomes; research that summarises hundreds of evaluation studies found no effect in the short run though some came a few years later. The type of program mattered. Those that focused on skill-building tended to do better, but even those had modest effects. That underscores the need for careful design of the training programs, especially collaborations with employers, to determine which skills are in demand.

Unions are another option to boost the skills and wages of workers with high school degrees. They are often successful at bargaining compensation contracts for their workers, including those with less education. It’s skills rather than academic degrees that matter. The unionisation in recent years of less than 10,000 Starbucks Corp employees and one Amazon.com Inc warehouse is not enough institutional change to maintain wage growth for those at the bottom. In fact, during the pandemic, the rate of unionisation continued to decline, to just 10 percent in 2022. Unions may be active in some sectors, but they are too small to affect the labour market overall.

Finally, businesses should assess the productivity of staff they hired during the labour shortages at higher pay. Do they work harder per hour? Has turnover fallen? Those factors both affect business costs, profits and productivity. But it is hard to predict the outcome of these changes. A December 2022 published by Northwestern University’s Kellogg School of Management of the effect of raising the minimum wage found a reduction in profits from the higher pay. That said, the recent labour shortages are far different. If it is profitable, then businesses may consider solid raises and practices like predictable schedules.

Claudia Sahm is the founder of Sahm Consulting and a former Federal Reserve economist. Views are personal and do not represent the stand of this publication.

Credit: Bloomberg