The quest to soften America’s labour market has a downside

Federal Reserve Chair Jerome Powell testified before Congress last week on the state of the US economy and monetary policy. The Monetary Policy Report he delivered acknowledges that America’s “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 US labour market, which will almost certainly hit the disadvantaged hardest.

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. By Census Bureau data, the percentage of the US population with a high school degree or less is about 40%, or roughly the same share as that with a college degree or more.

Wage growth among the less educated relates to a broader set of socioeconomic issues. 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. In addition, higher mortality rates are associated with less education. In neither case is it about going to school for a few more years. It’s about more opportunities and higher pay—the advantages of a very tight labour market, albeit in a permanent way.

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 telling them to go to college, which is not the best path for everyone; apprenticeships and training programmes are often better.

Expanding apprenticeship and training programmes 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 programmes. 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 scheme will support regional gatherings to share what has worked at what hasn’t.

But as promising as the apprenticeship programmes and similar ones seem, they don’t always do well. Active labour market initiatives have only a mixed record of delivering better employment outcomes; research that summarizes hundreds of evaluation studies found no effect in the short-run, though some came a few years later. The type of scheme 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 programmes, 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 unionization in recent years of less than 10,000 Starbucks employees and one Amazon.com warehouse is not enough institutional change to maintain wage growth for those at the bottom. During covid, the rate of unionization continued to fall (to just 10% in 2022). Unions may be active in some sectors, but they are too small to affect the American 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 affect business costs, profits and productivity. But it is hard to predict the outcome of these changes. A late-2022 study published by the Kellogg School of Management of the effect of raising the minimum wage found a reduction in profits from 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.