Pay attention to the losers in the Federal Reserve's efforts to soften the labor market.

June 21, 2023:- Federal Reserve Chair Jerome Powell is set to testify before Congress, and tensions are expected to arise. In the Monetary Policy Report, he will acknowledge that the tight labor market has benefited disadvantaged groups but argue for some softening, which will most likely impact low-income people.

It’s important to note that lower-income workers have been filling job openings, particularly in the leisure and hospitality sectors. They also have the potential to increase labor productivity in the future. The benefits of a tight labor market, such as wage growth, have been observed among those with lower levels of education. Workers with a high school degree or less have experienced consistent wage growth outpacing those with a college degree or higher, and their wage growth has exceeded inflation.

Looking at long-term data, the recent wage relationship between these two groups is highly unusual. Typically, workers with a high school degree have lower wage growth than those with a college degree, creating a growing disparity over time. This affects millions of Americans and reduces the incentive to work. Approximately 40% of the US population holds a high school degree or less, similar to the share of those with a college degree or higher.

The wage growth of less-educated workers is connected to broader socioeconomic issues. Declining labor force participation, especially among those with a high school degree or less, particularly men, is a troubling long-term trend. Additionally, lower levels of education are associated with higher mortality rates. The solution does not lie in merely encouraging more years of schooling but rather in providing more opportunities and higher-paying jobs through a tight labor market.

While recent years have seen relatively rapid growth, there still needs to catch up to do. Long-term solutions should focus on improving the marketable skills of individuals with high school degrees without solely promoting college education. High-quality apprenticeships and training programs often offer better alternatives. The Biden administration’s initiative, Raise the Bar: Unlocking Career Success, emphasizes expanding apprenticeship and training programs in manufacturing, automotive, and cybersecurity. The aim is to establish connections between K-12 schools, colleges, employers, and workforce development programs to ensure high-quality training aligned with job needs.

Despite the promise of apprenticeship programs, they take time to implement effectively. Active labor market programs have shown mixed outcomes in delivering better employment results. The type of program matters, with those focusing on skill-building tending to fare better, albeit with modest effects. Therefore, designing training programs in collaboration with employers to identify in-demand skills is crucial.

Unions present another avenue to enhance the skills and wages of workers with high school degrees. They have successfully negotiated compensation contracts for workers with lower education levels. It’s the skills rather than academic degrees that truly matter. However, recent unionization efforts, such as among Starbucks and Amazon workers, have not been sufficient to drive wage growth for those at the bottom. Unionization rates declined during the pandemic, reaching just 10% in 2022. While unions may be active in specific sectors, their impact on the labor market is limited.

Lastly, businesses should evaluate the productivity of employees hired during labor shortages at higher wages. Are they working more efficiently per hour? Has employee turnover decreased? These factors influence business costs, profits, and productivity. However, the outcomes of these changes take time to predict. A study conducted by Northwestern University’s Kellogg School of Management in December 2022, examining the impact of raising the minimum wage, found reduced profits due to higher pay. Nevertheless, the recent labor shortages present a different scenario. Businesses may consider implementing substantial raises and practices like predictable schedules if it proves profitable.