On November 2, 2022, the Federal Reserve is expected to announce another interest rate hike in an effort to fight inflation. Since March 2022, the Federal Reserve has been increasing interest rates at a rapid pace, including—for the first time in modern history—three consecutive 75 basis-point increases. The Federal Reserve has a dual mandate to pursue price stability and full employment. Yet by attempting to reduce demand and increase unemployment, the Federal Reserve’s latest actions have pursued the former at the expense of the latter, ultimately risking sending the United States into a recession. And notably, while inflation and interest rate rises affect everyone, both undoubtedly cause greater pain among low- and middle-income households.
Indeed, a recession caused by the Federal Reserve’s efforts to combat inflation would especially hurt those already struggling to make ends meet while not addressing the root supply-side and global issues causing today’s inflation. Alternative methods to bring down inflation without hurting the most vulnerable are already being pursued and should continue.
It is more important than ever that the Federal Reserve does not overreact, cause unnecessary hardship, and risk reversing the United States’ strong economic recovery.
Multiple rounds of fiscal support during and following the COVID-19 recession have created a resilient labor market, which has recovered faster and more equitably than in prior downturns. Over the past few months, consistent, stable job growth has continued alongside rising interest rates and a notable decline in job openings, signaling that there is room for the Federal Reserve to act cautiously and restore price stability without causing mass job loss. While the U.S. labor market remains in a strong position to manage ongoing global economic headwinds, it is more important than ever that the Federal Reserve does not overreact, cause unnecessary hardship, and risk reversing the United States’ strong economic recovery.
What is causing inflation?
The inflationary pressures that continue to persist in the United States and globally are caused by factors mostly outside of the Federal Reserve’s control—such as supply chain disruptions, climate change, the ongoing economic implications of the COVID-19 pandemic, and Russia’s war in Ukraine. Meanwhile, longer-term inflationary expectations remain in check and a wage-price spiral has not come to fruition. Importantly, the Biden administration has taken steps to ensure that fiscal policy plays its part in working to expand supply and reduce household costs while not adding to inflation. This landscape means that the Federal Reserve has some leeway to move cautiously and not cause unwarranted mass job loss, particularly among those already struggling to make ends meet.
Vulnerable workers will be harmed most by the Federal Reserve’s actions
In September 2022, the Federal Reserve released projections for its economic outlook that showed it expects unemployment to rise to 4.4 percent in 2023, higher than both its earlier projection of 3.9 percent and the current unemployment rate of 3.5 percent. Yet this topline unemployment rate of 4.4 percent masks the experiences of some of the most vulnerable workers—including workers without a college degree, workers of color, and disabled workers—who will undoubtedly face disproportionate job loss. These same groups of workers have long faced struggles in the labor market and persistent economic insecurity.
Workers without a college degree
People without a college degree are often left behind in the economy. In addition to earning significantly lower wages, those without a college degree are consistently unemployed at about twice the rate of those with at least a bachelor’s degree, while the unemployment rate for those without a high school diploma is more than three times as high, on average, as it is for bachelor’s degree-holders. But not only is this demographic unemployed at higher rates; people without a college degree also see much higher swings in their unemployment rates when the overall unemployment rate moves. (see Figure 1) In fact, a 1 percentage point increase in the overall unemployment rate—which is about what the Federal Reserve is hoping to achieve in the next year—would result in a roughly 2.1 percentage point increase, on average, in unemployment for those with less than a high school diploma and a 1.3 percentage point increase in unemployment for those with a high school diploma or GED, compared with just a 0.6 percentage point increase in unemployment for those with a bachelor’s degree or higher.
Workers of color
Similarly, earnings are much lower and unemployment is much higher, on average, for workers of color than they are for white workers. In particular, the Black unemployment rate is consistently more than double the white unemployment rate, while other race and ethnicity groups have comparable unemployment rate gaps. Much of this is due to both occupational segregation, which pushes workers of color into low-wage jobs and industries, and systemic discrimination against Black, Hispanic, and other workers of color—often perpetuated by government policy. Notably, these workers are also more affected by changes to the unemployment rate in both directions. (see Figure 2) A 1 percentage point increase in the overall unemployment rate results in just a 0.9 percentage point increase, on average, in the white unemployment rate, but the Black, Hispanic, Native American, Pacific Islander, and multiracial unemployment rates all increase by at least 1.4 percentage points. In particular, Black and Asian workers who lose their jobs typically experience longer spells of unemployment.
Likewise, disabled workers face significant obstacles to joining the workforce and earning a living wage. In fact, workers with disabilities earn just 74 cents for every dollar earned by their nondisabled counterparts, while nondisabled workers are employed at more than triple the rate. This is the result of systemic barriers, undervaluation of disabled workers’ capabilities, and a lack of accessibility and willingness to provide accommodations in many workplaces, as well as the persistence of subminimum wages for disabled people. Unsurprisingly, movements in the unemployment rate, again, affect workers with disabilities more: A 1 percentage point increase in the overall unemployment rate results in a 1.4 percentage point rise, on average, in the disabled unemployment rate versus a 1 percentage point rise in the nondisabled rate. (see Figure 3)
Simply put, low-wage workers are viewed as more expendable in the U.S. economy. And these workers are overwhelmingly disabled people, people of color, and people without a college degree—those who society has deemed to belong in those jobs and receive less protection than more privileged groups.
These are not abstract effects; intentional decisions to increase unemployment rates, even for the worthwhile goal of taming inflation, have real long-term consequences for millions of individuals and households. While inflation is undoubtedly causing economic harm for workers across the country, an involuntary spell of unemployment would have long-term damaging impacts—especially for the most vulnerable workers. Indeed, long-term unemployment is associated with worse health, sometimes including lower life expectancy; greater difficulty finding a new job; lower earnings even after finding a new job; and children who perform worse academically and even earn less when they grow up. Communities with high rates of long-term unemployment, likewise, tend to experience more crime and violence. Moreover, the longer a worker is unemployed for, the less likely they are to find a new job in the near future—if ever—and the lower their wages will be at any job they ultimately get, with their lifetime earnings thereafter taking a significant permanent downward shock.
The labor market remains resilient
This situation may be avoided if the Federal Reserve does not overreact to current inflationary pressures, particularly in light of the labor market’s continued strength and resilience. Since January 2021, the economy has added jobs every month, accumulating more than 10 million jobs. In welcome news, job growth has continued in 2022 at more stable levels and has been widespread throughout the economy, even when job openings have declined. (see Figure 4) Moderation in job and wage growth should give the Federal Reserve room to act cautiously, and continued job growth, alongside declines in job openings—which remain high—and near record-low layoffs, will help prevent mass job loss.
While the labor market is cooling, the unemployed-persons-per-job-opening ratio indicates that the labor market is still very tight compared with other periods from the 21st century. However, declining job openings have contributed to a slight bump in the ratio for the first time since 2020—from 0.5 to 0.6 unemployed persons per opening—while quit rates have been inching back down from the highs of 2021. (see Figure 5)
The window of opportunity for a soft landing may be reduced if the Federal Reserve continues its pace of interest rate increases.
If these trends continue, the overall state of the labor market will return to pre-pandemic levels before long. But the window of opportunity for a soft landing may be reduced if the Federal Reserve continues its pace of interest rate increases. The full impacts of the Federal Reserve’s current interest rate hikes have not yet been fully felt—even by its own admission—so additional increases could elevate the risk of creating unnecessary bumps in unemployment down the road.
Despite ongoing global uncertainty and rising interest rates, the U.S. labor market has remained resilient. Signs of cooling beginning to appear after multiple interest rate hikes show that it is still possible to evade a post-pandemic recession as long as the Federal Reserve exercises restraint. As it considers its strategy for the months ahead, the Federal Reserve should be careful not to push too hard or too fast toward achieving the goal of lowering inflation, as it could end up hurting the same vulnerable people it set out to help.
The authors would like to thank Lily Roberts, Seth Hanlon, Christian Weller, Mia Ives-Rublee, Jared Bass, and Edwith Theogene for their helpful feedback, as well as Camila Garcia for her thorough fact-checking.