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Prosperity: Just How Good Has It Been
for the Labor Market?
Investing Public Funds in the 21st Century Seminar
Co-sponsored by the Missouri State Treasurer, the Missouri Municipal League, GFOA of Missouri,
the Missouri School Boards Association, and the Missouri County Treasurers Association
Jefferson City, Missouri
September 27, 1999


lmost everyone is familiar with the
strong economic performance of the
United States over the last eight years.
Consider the highlights: Since 1992,
growth of real per capita GDP has averaged 3.7
percent per year, compared with an average
growth rate of 2.6 percent over the prior 20 years;
the unemployment rate has fallen to its lowest
level in almost 30 years; and employment has
grown steadily, so that today about 18 million
more people have jobs. To top it off, this fine
performance has been achieved during a period
in which inflation has been at or below 3 percent.
The state of Missouri has shared in this growth.
Its latest unemployment rate was even lower than
for the country as a whole, 3.3 percent, and there
are 276,000 more people employed here than
there were in 1992.
Despite all of this good news, many are still
worried that gains from this remarkable expansion have not been distributed very broadly and
that significant segments of society are being left
behind. High on the list of concerns are increases
in wage inequality and stagnant or falling wages
for some groups at the low end of the wage
Our nature in this country is to be unsatisfied
with where we are, and that is good. All of us who
study these issues are well aware that the benefits
of prosperity are far from being equally shared.
Still, we need to be careful not to mischaracterize
the situation. What I want to discuss today is what
exactly our labor market situation looks like in
the United States.

Before proceeding, I want to emphasize that
the views I express here are mine and do not necessarily reflect official positions of the Federal
Reserve System. I thank my colleagues—especially
Howard Wall, who is a co-author of this speech—
at the Federal Reserve Bank of St. Louis for their
comments, but I retain responsibility for errors.
I believe that the balance of the evidence
shows that there is less to worry about than some
have described, and that there have been strong
employment and wage gains for most broad categories of the population. In fact, some groups that
began the period in the worst economic shape,
including teenagers and those at the bottom end
of the education and income distributions, have
enjoyed substantial gains. Sustained prosperity
has brought greater opportunities for groups sometimes excluded from employment and, in the
process, has transformed labor markets. Perhaps
the most remarkable of these transformations has
been increased employment opportunities for
blacks and women. In fact, the shares of total
employment for both groups are higher than they
have been for many years.
The effects of continued prosperity on labor
markets are best illustrated by presenting and
dissecting some of the aggregate employment
numbers. In doing so, I’m going to present a picture of an economic expansion that, in terms of
falling unemployment, greater employment opportunities and rising incomes, has benefited a broad
cross-section of the population.
I hope it will be apparent that sustained real
economic growth is important if we are to con1


tinue improving the labor market situation for
all segments of society. Once you are convinced
of that, I would also like to outline why I believe
that the only way that the Federal Reserve can
assist in ensuring that these gains persist in the
long run is to remain vigilant about inflation.

Because it is the most widely used indicator
of labor market performance, let me start dissecting the data with the unemployment rate. Since
peaking at 7.8 percent in June 1992, the unemployment rate has fallen steadily, reaching 4.3 percent
in December 1998, where it has hovered ever
since. When we disaggregate these unemployment
numbers, it becomes apparent that the expansion
has been very beneficial for groups that began the
period in the worst situations: blacks, teenagers,
and the less-educated.
The employment picture for blacks was grim
in 1992, when the unemployment rate for this
group averaged 14.2 percent. That rate has since
fallen to 7.8 percent, and the average rate for 1999
looks like it will be even lower than last year,
when it was lower than at any time since 1972.
The continuing fall in black unemployment—one
full percentage point during the past year—contrasts with the unemployment rate for whites,
which has been mostly unchanged for 18 months.
So, although the unemployment rate for whites
continues to be lower, continued economic growth
has meant that the unemployment gap between
whites and blacks has been narrowing. And there
is good reason to believe that ongoing economic
growth will narrow the gap even further. The
decline in the black unemployment rate from
14.2 percent to 7.8 percent between 1992 and
today is a measure of our nation’s progress, but
the current rate is a measure of the substantial
distance we still have to go.
The expansion has also meant good news
regarding the teenage unemployment rate, which
in 1992 averaged 20.1 percent (all races). Since
then, the teenage unemployment rate has fallen
to around 13 percent, a 30-year low. Even during

the strong but shorter-lived growth of the 1980s,
teenage unemployment didn’t fall below 15 percent, a level that this expansion achieved nearly
two years ago. Black and white teenage unemployment are both at their lowest levels in 30 years,
although the white teenage unemployment picture
is still much better than that for black teenagers.
Well-educated workers, of course, continue
to be sought after by employers. Nevertheless,
the less-educated have clearly reaped many of
the benefits of economic growth in the 1990s. In
August of this year, the unemployment rate for
those older than 25 who did not have a high school
diploma was 7.1 percent; this rate had been 12.2
percent in mid-1992. For those with a high school
diploma but no college training, unemployment
was at 3.5 percent in August, a drop from 7.3 percent in mid-1992. These data make very clear
the tremendous importance of improving the
education of our citizens. Here again, we have a
great challenge for the future.
It appears, then, that despite the concern
that an increasingly high-tech economy will leave
the less-educated behind, the economy has found
room for the relatively unskilled. What has happened, as anyone can confirm by talking to
employers, is that the shortage of well-qualified
workers has led firm after firm to hire less-educated
workers, and workers with poor employment
histories, and train them. On-the-job training has
assumed increasing importance in the United
States, and the results are gratifying. Firms find
that not everyone hired works out, but many do.
As a result, the U.S. economy is not only generating employment for many left behind in earlier
years, but also helping these workers develop new
skills that open up opportunities for them.

Unemployment rates tell only part of the
employment story. During any period in which
employment opportunities are expanding, two
things happen: First, more people become
employed; and, second, more of the people who

Prosperity: Just How Good Has It Been for the Labor Market?

had chosen to stay out of the labor force decide
to reenter, or to enter it for the first time. Although
both of these effects are important, newspaper
reporters and TV newscasters tend to look only
at the first and to ignore the second. Focusing on
the unemployment rate and ignoring the growth
of employment means missing out on some dramatic changes that have transformed the labor
market, perhaps permanently, as relatively larger
proportions of certain groups have been drawn
into it. Moreover, concentrating only on unemployment rates misses completely a major part
of the U.S. success story in the global economy.
One way to get an idea of how the labor market
has been transformed by the current expansion
is to look at the ratio of employment to population
for various demographic groups. These ratios tell
us the share of the population that is successfully
engaged in the labor market. Examining these
ratios will also demonstrate that U.S. success is
not a phenomenon that began just in 1992. For
the civilian population as a whole, ages 16 and
over, the ratio rose by 2 percentage points in the
1960s, by another 2 points in the 1970s, by 3
points in the 1980s, and by an additional point
so far in the 1990s. The U.S. economy is truly a
fantastic job machine.
Moreover, employment-to-population ratios
highlight one of the great successes of the recent
expansion—bringing increasing shares of women
and blacks into employment. Between 1992 and
August 1999, the share of adult white women who
were employed rose by 3.1 percentage points;
that of black men rose by 3.1 percentage points;
and the share of black women rose an astounding
10.7 percentage points. Compare these numbers
with those for the 20 previous years. Between
1973 and 1992, the share of black men employed
actually fell by 8.7 percentage points and the share
of black women grew by 7.1 percentage points.
One of the reasons that blacks have been
making such steady gains in the 1990s compared
with the previous two decades is that the economy
has experienced steady growth. So far, we have
avoided the deep downturns that have hindered
or reversed gains made during upturns. As a
result, the face of the working population has

been transformed as women and blacks make up
larger shares of employment than at any time
since the end of the Second World War. These
changes are part of a long-term trend that has been
disrupted frequently by periods of economic
downturn. The longer the current expansion is
sustained, the more likely it is that these gains
will become permanent, as these groups become
entrenched in the workforce.

So far, I’ve presented evidence that employment opportunities have improved for broad
classes of people, but have said nothing about
their economic well-being. We can measure wellbeing in many ways, the most common being
wages, income and earnings. Based on these
broad income measures, the average person has
been doing better since 1992, as per capita real
disposable personal income has risen by more
than 12 percent.
Despite these data, various studies, news
articles, and pundits have claimed that the expansion has left behind the poorest, claiming that
their real wages have stagnated or even declined.
The argument is usually based on data showing
that the average real wage has not increased very
much, or that the average real wage of the lowest
quintile or lowest quartile is not much higher, or
is even lower, than before the expansion began.
We should be wary, however, of any claims
based on average wages. Recall the evidence
presented earlier that the current expansion has
increased the employment of many who were
previously excluded. Also note that the wages of
many of these newly employed persons would
be lower than those of the already employed. As
these low-wage workers are added to the ranks of
the employed, the average wage for all workers
is necessarily pulled down, even if everyone else’s
wages are unchanged.
We can see how this process works using an
illustration: Let’s say that there are two groups of
workers—long-term, or L workers, and newly


employed, or N workers. The N workers are relatively unskilled and join the ranks of employed
persons at relatively low wages. The change in
the average wage of all workers from one year to
the next reflects two forces: The first is the increase
in the wages of L workers, and the second is the
addition of N workers, who were not previously
Keeping this simple so I can make the calculations in my head, suppose there are 10 L workers
in Year 1 each earning $20 per hour. Each of these
workers receives a 10 percent pay increase, to
$22 per hour, in year 2. But in Year 2, two N workers are hired at $10 per hour. The average wage
for the 12 workers in Year 2 is easy to calculate.
Ten workers are paid $22 each, for a total of $220.
Two workers are paid $10 each, for a total of $20.
The 12 workers together are paid $240, or an
average wage of $20 each.
In this illustration, there has been no change
at all in the average wage from Year 1 to Year 2!
But, and this is a very important “but,” 10 workers
enjoyed wage increases of 10 percent, and two
workers went from unemployment to jobs paying
$10 per hour. I believe this simple illustration
helps to understand why most workers feel better
off despite the slow growth in average wages.
Those with continuing employment histories are
receiving wage increases and the newly employed,
while often battling numerous problems, at least
find that their new jobs bring more income and
more personal satisfaction than they enjoyed
while unemployed.
For a better measure of how economic wellbeing at the low end has changed, we need to look
at the entire population. One straightforward
approach is to look at the percentages of households in various income classes. Using data for
1997, the latest available, we can gain a feel for
what has been going on. We can divide all of the
households in the United States into three real
income categories: those in the low group have
incomes below $25,000, those in the middle group
have incomes between $25,000 and $50,000, and
those in the high group have incomes above
$50,000. In 1992, 36 percent of households were
in the low group; by 1997, only five years later,

that number declined to 34 percent. Households
in the middle group fell from 31 percent to 30
percent of all households. The high group, therefore, went from 33 percent to 37 percent of all
households. (The shares for 1997 add up to 101
percent, due to rounding errors.) My best guess
is that this mobility has continued after 1997, so
that larger shares of the population have moved
into higher income groups. While this evidence
is by no means definitive, it does illustrate that
the current expansion has raised the economic
well-being of many of those at the low end.

I have been emphasizing that the current
expansion has benefited a wide range of people
and that future economic growth will lead to more
gains. All of us want employment opportunities
to continue to grow, and income levels adjusted
for inflation to continue to improve. As significant
as recent gains have been, we all recognize that
the United States faces a great challenge for the
Meeting the challenge will require improvements in many different directions. Better education, especially for those in disadvantaged
circumstances, is clearly very important. I’m sure
that each of us can add other important tasks for
the future, such as soundly administered social
programs and tax policies, technology improvement, reduced crime rates, and many others. The
agencies, businesses, and families responsible for
these areas are working hard and have much to do.
We at the Federal Reserve also have a contribution to make to a brighter future, and it flows
from the three main areas of our responsibility:
First, general monetary policy to maintain a low
and stable rate of inflation. Second, maintenance
of a sound banking system through efficient bank
supervision and regulation. Third, provision of
efficient payment services through managing the
nation’s currency and playing a central role in
check-processing and various electronic payment

Prosperity: Just How Good Has It Been for the Labor Market?

I want to focus on the Fed’s monetary policy
responsibilities, for this area is the most difficult
technically and offers the greatest possibility for
error. We at the Fed are convinced that the critical
contribution we can make toward maximum sustainable economic growth is to maintain low and
stable inflation—price stability, for short.
So far, the Federal Reserve has been successful
in fending off inflation. The battle against inflation,
however, is never permanently won. No matter
how long the inflation rate stays low, we can never
pack our bags and go home. We must remain vigilant because the return of price instability could
jeopardize the expansion and the employment
gains I outlined earlier. If inflation takes hold,
recession will almost certainly follow within a
relatively few quarters. Why? Because inflation
is always accompanied by greater uncertainty
about the future, which makes it difficult for
businesses and households to plan efficiently.
With inefficient planning come frequent and
unavoidable mistakes, resulting in greater variability in growth and employment.
Given the central importance of low inflation
to our prosperity, frequent references in the press
to financial market fears that the Fed will raise
interest rates strike me as unfortunate. If the market is to have any fears about the Fed, the appro-

priate thing to fear is that the Fed might not act
when it needs to for inflation to remain low.
Maintaining low inflation contributes to maximum
sustainable economic growth. Low inflation is
investor-friendly and employment-friendly.
I do not know what monetary policy actions
will be required to keep inflation low over the
months and years ahead. And I certainly will not
speculate on possible Fed action next week. But
I do want to assure you that I will do what I can
to contribute to Fed decisions to change interest
rates in the direction necessary and at the time
necessary. Changing rates when necessary also
means that we will leave rates alone when necessary. Those decisions require that we look several
years ahead, being careful not to let the current
flow of data and short-run market fluctuations
divert us from our long-run path of seeking continuing good inflation performance.
This is our task, and if we are not always
clear about what needs to be done because of the
great uncertainty about how the economy works,
at least you know without any question what our
objective is. An excellent roadmap is worthless
unless you know where you want to go. At the
Fed, we do know where we want to go, and I’m
convinced that our roadmap, while far from perfect, is good enough to get us there.