New York () — Millions of jobs could be cut this year as the Federal Reserve (Fed) continues its bid to raise interest rates to control inflation. But the effects of this action are not likely to spread evenly across the economy.
The Fed has had some success: Inflation has cooled for the eighth straight month, according to the February Consumer Price Index. The producer price index shows a drastic drop in wholesale prices in February. And the Federal Reserve’s favorite inflation gauge, the personal consumption spending price index, has also begun to moderate.
But the labor market has proven to be a formidable force, holding up against rate hikes aimed at slowing its growth. After adding more than half a million jobs in January, the US economy added 311,000 jobs in February, with an unemployment rate of 3.6%, just above the half-century low, according to the Bureau of Labor Statistics.
However, the unemployment rate is not expected to stay this low for long.
In its last monetary policy meeting, the Fed released its forecasts for next year, according to which unemployment could rise to 4.5% by the end of the year, which would mean the loss of 1.5 million jobs. of work.
Although this is a small improvement from the previous estimate for the unemployment rate of 4.6%, economists say it is likely to exceed the Federal Reserve’s expectations. Furthermore, they claim that historically disadvantaged groups could be disproportionately affected by the central bank’s tight monetary policy.
The unemployment rate varies a lot
While some often-marginalized groups in the labor market have seen benefits from the strengthened labor market, women have posted a faster pace of job gains than men in recent months—others, including Black women and men, for example. Latino men, have seen slower recoveries in unemployment rates since the start of the covid pandemic.
Fears of a recession gained strength last month when the collapse of Silicon Valley Bank sent markets reeling, raising concerns about the economy’s ability to withstand further stress. Goldman Sachs revised its estimate of the possibility of the United States entering a recession in the next 12 months to 35%, compared to 25% before the turmoil in the banking sector.
This is of particular concern to certain demographic groups. Unemployment rates for black and Hispanic Americans tend to rise more than their white counterparts during recessions, says Rakesh Kochhar, a senior fellow in Demographics and Social Trends at the Pew Research Center.
History makes that discrepancy clear.
A report from Pew Research Center which compares two recessions from the past few decades shows how black and Hispanic Americans experience disproportionate effects on their unemployment rates during periods of economic downturn. From the second quarter of 2007 to the second quarter of 2009, during the Great Recession, the unemployment rate rose 6.5 percentage points for black Americans. The Hispanic unemployment rate rose 6.3 percentage points. For white workers, it increased 4 percentage points.
And from the first quarter of 1990 to the first quarter of 1991, the unemployment rate rose 1.4 percentage points for black Americans and 2.1 percentage points for Hispanic Americans. The unemployment rate for whites rose 1.3 percentage points.
It can be difficult to stop an unemployment spiral
Economists say it’s hard to predict the trajectory of the unemployment rate this year, noting that it could very well beat the Fed’s estimate.
“Once the economy slows down enough for the unemployment rate to go up, it’s very hard to reverse it,” says Josh Bivens, director of research and chief economist at the Economic Policy Institute.
Therefore, tightening of the Federal Reserve’s monetary policy could cause the black unemployment rate to rise much more than the overall unemployment rate, according to William Spriggs, a Howard University economics professor and chief economist at the AFL-CIO.
“If the Fed continues to use unemployment as a measure of labor shortages and thinks it wants an unemployment rate of 4.5%, for that to happen it would have to induce net job losses in the labor market.” Spriggs told in an email. “If we go through two months of negative job growth, anything can happen. The black unemployment rate will easily go to 9% in that scenario.”
Another likely consequence of rising unemployment is slowing wage growth, according to Bivens.
Like rising unemployment, stagnant wage growth tends to hit marginalized groups the hardest. A report from the 2021 Economic Policy Institute shows that a one percentage point increase in overall unemployment correlates with about 0.5% slower wage growth for white median hourly wages. Wage growth falls to about 0.8% for black median hourly wages.
“A lot of people have this idea that in a recession, if unemployment goes up a couple of percentage points, as long as you’re not one of those unfortunate people who loses a job, you’ve dodged the bullet,” Bivens said. “And that’s not true at all.”
Labor market strength cannot last forever
Still, a strong labor market is not a permanent solution to reducing job disparities, even if the Fed keeps rates lower, says Wendy Edelberg, director of the Hamilton Project and a senior fellow for economic studies at the Brookings Institution.
The recent strength of the labor market is unsustainable. The US economy needs about 75,000 net job gains a month to stay stable and is currently adding about 350,000 net job gains a month on average, according to Edelberg.
“[La Fed tiene] reason to trust that one of the things that is going to have to happen to get inflation back to a normal and stable level is to get job growth to a normal and sustainable level,” Edelberg said. “But if stocks the Federal Reserve lead to a slower job market, and then inflation stays high, that would be a disaster.”
The Labor Department’s March jobs report, due to be released this Friday at 8:30 am, is expected to show that the US economy gained 240,000 jobs last month. ADP’s private sector payrolls report, generally seen by investors as a proxy for the trajectory of Friday’s number, fell short of expectations, with only 145,000 jobs added.
Economists expected private hiring to increase by 200,000 positions last month.
