Laying Off Workers Is Not the Answer to Inflation

While unemployment is at a 53-1/2-year low, anxiety over inflation and Federal Reserve policy on interest rates continues to dominate policy discussions over the trajectory of the American economy. President Biden’s State of the Union address made clear that a favorable labor market is a critical policy priority and a key to his own political future. Nonetheless, “inflation hawks” are eager to see the Fed tamp down hot labor markets, insisting that wage increases that emerge when employers are competing for workers are responsible for price increases. But nearly absent from the debate are the long-term benefits for the country when people at the bottom of the class structure remain on the job.

As sociologists interested in the connection between poverty and the dynamics of labor markets, we have traced the employment and earnings trajectories of 18,000 individuals across business cycles for the last half century. What we have found is striking: When unemployment dips below 4.5%, the odds that a marginalized worker—especially Black workers, younger workers, and those without a high school diploma—finds and keeps a job over the long-term increase dramatically. Their earnings start higher and increase faster relative to their peers who find work when jobseekers outnumber job openings.

The key to success here is to be in very tight labor markets like the one we are currently experiencing—not just garden-variety low unemployment rates. When unemployment is at record lows—a classic sign of a tight labor market—workers gain leverage relative to employers. As a result, employers change their practices in pivotal ways that boost opportunity. We see improvements in wages, working conditions, benefits, and prospects for upward mobility emerge for low wage workers. Remember the “fight for $15?” That war is over, and workers won. Indeed, wages have been rising faster among the working poor than anyone else. Target inaugurated a new wage scale in early 2022 that brings new workers in at $15-24 an hour. Benefits that were unheard of at places like McDonalds—health and dental insurance, retirement, and college tuition reimbursement—are now routine .

At the height of the pandemic-induced recession in 2020, Black men saw their jobless rate climb to 16%. By December 2022, it was down to 5.1%. That is still significantly higher than white men, which hit a historic high at 12% in April 2022 and now sits at 2.8%. But the rate declined faster for Black men and wages increased more rapidly among them than for any other group in the labor market. Tight labor markets help to narrow racial gaps in earnings, an otherwise elusive goal in a society that has been plagued by economic inequality by race.

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Improving conditions for low wage workers hasn’t happened by accident or out of newfound benevolence. Tight labor markets force the hand of employers to raise pay and provide for better working conditions because, otherwise, they will not be able to find workers and risk losing the employees they have to better paying jobs.

Employers turn to sources of applicant pools they wouldn’t have considered when they had the opportunity to be choosy. As a result, people who have traditionally found it very hard to crack the employment barrier—from citizens returning from the prison system to high school dropouts—find they are in greater demand. Their problems are hardly over; it is still the case that ex-prisoners face daunting barriers in finding jobs. But when labor markets are tight, the likelihood of success is significantly improved.

Moreover, when employers tap unusual sources, they end up having to invest more in training them. The training they pay for translates into millions of workers who now have more human capital, from commercial driver’s licenses to mastery of Microsoft Excel spread sheets necessary to do their jobs. That internal investment transforms workers into people who can move up inside companies or jump ship to an employer that will offer even more. Tight labor markets underwrite a mobility machine that blunts the runaway credentialism we have seen because employers cannot demand those skills from the outset. They must cultivate them.

The plus side of this ledger spills over from individual workers to the families they are supporting. According to our research, when unemployment declines below 4%, families receive nearly all (94%) of the child support they are owed. When unemployment rises, that figure falls quickly (to 82.5%). Men—who make up 80% of non-custodial parents—are better able to support their children when they are working, even when they are not the child’s legal guardian.

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Children who are raised in economically stable households are far more likely to be healthy, graduate from high school, and find employment themselves, as compared to those who experience economic instability. For instance, children of workers who lost jobs in the 1982 recession have far worse outcomes than those whose parents remained employed. They had lower earnings, higher unemployment rates, and higher demands for social services.

The negative consequences of income instability are particularly acute for Black families and their children, both because Black Americans have fewer economics resources with which to buffer economic shocks and because persistent labor market discrimination makes it more difficult for Black workers to find stable work. Record low unemployment helps to reduce income instability, thereby mitigating a major source of long-term disadvantage.

To be sure, rising inflation is a problem for the poor as it is for the rest of the nation’s workers. Indeed, higher prices for food, medicine, housing, and transportation cut deeply into the budgets of low-income households even when rising wages are not the source of inflationary pressures. But while policy makers work on the inflation problem, we should not lose sight of the positive benefits of persistently low unemployment.

Moreover, we should think hard about the costs the country can avoid when we keep people on the job and poverty declines as a result. Over time, we are likely to see rising rates of educational attainment, lower levels of domestic violence, far less reliance on public benefits, and ultimately, reductions in the price tag for the social safety net. The long-term impact of tight labor markets is mainly positive if we are thinking about family stability and increasing human capital. While inflation must be tempered, doing so on the backs of workers by trying to increase unemployment and slow wage growth is a bad strategy, especially if our real goal is the durable stability and growing mobility of American households.