Is the Federal Reserve killing Black Jobs?

Is the Federal Reserve killing Black Jobs?


It is Thanksgiving week and Americans are thinking about what they have to be thankful for. As the country moves deeper into campaign season the candidates’ rhetoric leaves many with the impression that ‘tis the season not to be jolly.

Oft repeated statistics support the rhetoric. The nation’s unemployment rate stands at nine percent. Analysts and commentators don’t expect much of a change in that – even as the U.S. Department of Labor issues its jobs situation report on December 2nd.

The outlook is at best mixed. According to the U.S. Department of Labor, on November 12th the number of first time claims for unemployment came in at 388,000, the lowest in seven months. Indicators of demand for goods and services were in the negative for October, however, with the Producer Price Index down .3% and the Consumer Price Index down .1%.

The CPI measures changes in prices paid by urban consumers for a representative basket of goods and services. The PPI measures the average change over time in the selling prices received by domestic producers for their output. While increases in these indexes may result in bill shock for consumers, increases also mean that consumers want what America is producing.

As a consumer driven economy, we want to see increases in demand. How to incite the demand is another story. The Obama Administration and Congress don’t want to admit it, but there may not be much more that they can do to help consumers spend more. President Obama’s stimulus funds ran out in 2010. His new stimulus plan, under the guise of a jobs bill, is getting no love from the Republican controlled House of Representatives. Fiscal policy, that combination of changes in taxing and spending by government, appears dead in the water.

We don’t appear to be getting much help from the Federal Reserve either. As part of its dual mandate, the Federal Reserve is responsible for helping to stabilize prices while promoting full employment. The Fed does not appear to be doing well on either front.

On average, prices paid by consumers for goods and services have increased approximately 2.5% per year since 2002. Like any long plane flight, the ride has not been consistently smooth. Changes in price took a sharp up-turn in 2004 (3.3%) and 2005 (3.4%).  They also dropped in 2006 (2.5%) only to experience another sharp up-tick in rate of change by 2007 (4.5%).

By 2008 the lack of demand for everything from Big Macs to Cadillacs was apparent with prices increasing by a whopping .1%. That’s point one percent.

Things are looking up in terms of demand in 2011 with prices up 3.3% so far since December 2010. The downside is the impact the topsy turvy changes in consumer prices have had on our real wages.

Wages, according to the Bureau of Labor Statisitics Employment Cost Index, have increased on average 2.4% since 2002.

While the changes in wages have been smoother than the changes in consumer prices, Americans have not just been tightening their belts but they’ve been taking a couple blows below the belt because price changes have been outstripping wage increases. At an average price increase of 3.3% with given wage increases of 2.4%, the nine-tenths of a percentage point gives the number “9” a more harrowing meaning than a go nowhere tax policy.

Over the last ten years, wage increases were greater than price increases in five of those years. It’s tough for households to budget over the next twelve months when there is such uncertainty over what the prices for goods and services may be.

The saving grace, at least between 2002 and 2008 was that the economy, overall, was at full employment. The overall unemployment rate was 5.3% during this period. For African Americans during this period, the unemployment rate was almost double the national average at 9.8%. For Hispanic Americans, the unemployment rate was 6.7% between 2002 and 2008.

The saving grace, like any other type of grace, ran out in 2008. By 2009, the overall unemployment rate was to begin a three-year run exceeding nine percent (the real 9-9-9). African Americans saw their unemployment rate hit 14.8% in 2009; 16.0% in 2010; and so far 15.1% as of the end of October 2011.

The Hispanic American unemployment rate also saw double digits at 12.1% (2009); 12.5% (2010); and 11.4% as of the end of October 2011.

And all the while, what was the Federal Reserve up to? Between 2002 and 2004, the fed funds rate – the rate at which Federal Reserve member banks lend money to each other 0 held steady ranging from 1.13% to 1.67%.

The years 2005, 2006, and 2007 saw significant increases in the fed funds rate. The Federal Reserve targeted its rates at 3.22%, 4.97%, and 5.02% respectively. It was during this period that overall unemployment fell to 5.1% (2005) and 4.6% (2006 and 2007).

For African Americans, unemployment fell to 10.0%(2005); 8.9%(2006); and 8.3%(2007). Hispanic Americans also saw a decrease in unemployment with the unemployment rate at 6.0% in 2005; 5.2% in 2006; and 5.6% in 2007.

By the late summer of 2007, banks were having an increasingly hard time obtaining credit. The Federal Reserve stepped in, targeting a lower fed funds rate by buying bonds and other credit instruments. As demand for these credit instruments increased, interest rates started to fall. As the recession of 2007 started to crystallize, unemployment started to increase.

Would the Federal Reserve’s decision to lower rates help stabilize unemployment in line with its mandate? It appears not.

In 2008, overall unemployment was 5.8%, but climbed to 9.3% in 2009; 9.6% in 2010; and 9.0% at the end of October 2011.

African American and Hispanic American unemployment increased, and in the case of the African American community doubled that of White Americans.

Meanwhile the Federal Reserve decreased its fed funds rates dramatically with effective rates of 1.92% in 2008; .16% in 2009; and .18% in 2010. These dramatic reductions were spread throughout the rest of the economy in the form of lower interest rates, making the cost of money cheaper. With the lower cost of money, businesses (assuming they could get credit) could choose between more capital and less labor.

Labor overall and minority labor in particular, became expendable.

Can the U.S. reverse this trend? Probably – but it will have to start with the Federal Reserve. Increasing rates would be the first place to start. It would force businesses to reconsider how they allocate money between labor and capital. Higher rates would attract greater foreign capital, while discouraging the practice of parking cash in low yielding government Treasuries.

As long as the Federal Reserve continues with its low interest policies, African and Hispanic American labor will continue to suffer.


  1. how bout this: who cares whether the color of your skin affects your employment. If you're an American, employment will be affected one way or another based on your skills, intellect, etc. and ALMOST NEVER because of your race.

    As long as interest rates are low AF's and Hispo's will continue to suffer? what a moron you are. Have you ever studied economics? Have you ever studies history? Low interest rates allow for low lending rates which allows biz owners, who otherwise might not be able to, to borrow and invest and grow their businesses, which employs Americans (sorry ifi it doesn't matter what their race is, because most of us don't care about their skin color) and grows the economy.

    I appreciate that you're trying to incite comments with idiotic commentary, but what would your mother think of you pretending to be an idiot in order to get readers?

    • You must really be mad. You called Alton a moron, idiot, and even invoked his Mother. WOW!

      Sorry, Boss. Skin color most definitely affects employment. Just like Gender. Not a fluke the women earn less for the same work men do. And whites earn more than minorities for the same work. Race, like all socio-economic factors, plays into unemployment.

      His point is that businesses aren't using low interest rates to borrow and grow their biz. They are using it to borrow and invest in growing capital, not more employees.

      I'll save the insults. Have a cheerful Thanksgiving!

  2. The theme of this article is inaccurate and it does a grave disservice to black people trying to understand the economy. The big flaw in this article is that eh author mistakes cause and effect. High interest rates do not lower unemployment nor do they materially change the relative costs between capital and labor. What was at play was during the period when black unemployment was less than at present, the economy was in an expansionary mode. During these periods, the Federal Reserve acts counter-cyclically, meaning it increases the interest rate to prevent the economy from overheating. Thus, the high interest rates did not cause better employment., The higher rates were simply the Fed's policy response to a economy in expansion. It was the economic expansion that caused the better employment figures. The interest rates had nothing to do with it. Currently, the Fed employs low interest rates in its attempt to inflate the deflated economy through cheap money . This is an ineffective stimulus as the most potent measures would be expansionary fiscal policy. However, it is inaccurate to say that the low interest rates increased unemployment. The truth is that unemployment would worsen significantly if the Fed embraced the author's prescription. In short, the author must exercise greater care in drawing logical causal relationships. His mistake is akin to observing that a bird always chirps at twilight then concluding that the bird's singing brings the night. Actually, the obverse is true.

    The author has also to keep in mind that the interest rates have little connection with whether firms hire equipment or labor. Firms borrow to hire both, thus the allocation between them is not interest-rate sensitive. The real problem regarding employment is not the interest rate but the lack of aggregate demand in the economy. When there is greater demand for goods and services, then firms will hire and the interest rate at that point is at most a secondary consideration. Thus, complaining about the Fed is a distraction. We must keep our focus on the real problem. Federal fiscal policy is too austere given the lack of private sector demand caused by the debt overhang over the private sector.