Awelcome development as the labor market has continued to recover since spring 2020 has been a narrowing of the gaps in unemployment rates between Black and Hispanic men and white men and the gaps in rates between Black and Hispanic women and white women. This reduction is in keeping with historical patterns: declines in the aggregate unemployment rate lead to a narrowing of racial and ethnic unemployment gaps.

The effectiveness of a strong macroeconomy in ameliorating inequities in labor market outcomes has led advocates and economists to call on the Federal Reserve’s Federal Open Market Committee to set policy so as to promote a hot labor market. And in fact, the framework the FOMC announced in August 2020 specifically refers to its employment mandate as a “broad and inclusive goal,” which FOMC members have discussed as including a focus on disparities in labor market outcomes among other things. The FOMC also articulated a new strategy for achieving this goal: focusing on shortfalls of employment from its maximum level, rather than on whether employment was deviating from its maximum level in either direction, in determining whether to raise interest rates. This represented a significant shift in how the FOMC discusses and implements the employment half of its mandate.

In this piece, we show both the benefits and potential limitations of promoting a tight labor market to eliminate racial and ethnic disparities in unemployment rates. Our work shows that while strong labor markets are associated with significant reductions in racial and ethnic disparities in unemployment rates, by itself a strong labor market is highly unlikely to eliminate the racial and ethnic unemployment rate gaps that have been remarkably persistent over the decades. Creating true equality of opportunity will require structural changes to our institutions, policies, and attitudes.

Read the full article about racial unemployment gaps by Stephanie Aaronson, Mitchell Barnes, and Wendy Edelberg at Brookings.