In a new paper, EPI Research Director Josh Bivens and Economist Ben Zipperer detail the importance of extended periods of labor market tightness for the wage growth of low- and middle-wage workers, and highlight new research on how extended periods of labor market tightness can shrink some racial disparities in the labor market.

Bivens and Zipperer argue that by a variety of metrics, the U.S. economy is still not unambiguously at full employment and that, even if the economy has reached genuine full employment, this by itself does not argue for increasing interest rates. As long as inflation remains in line with the Federal Reserve’s long-run targets, there is no reason to raise interest rates—and there is a significant upside to keeping the economy at full employment for an extended period time.

“As the Fed considers the proper path of interest rate increases going forward, it needs to consider that there are substantial benefits to sustained periods of low unemployment for workers who have not shared in recent economic growth,” said Bivens. “Too often it’s assumed that there is little the Fed can do to help push back against the problem of income and racial inequality. This is not true. Pushing back against this inequality does require them to take on a small bit of risk, but the potential cost of running the economy “too hot” is dwarfed by the potential benefits stemming from faster and more equal wage growth and reduced race-based disparities in the labor market.”

The authors show that excessively high unemployment is linked to rising inequality, and that, conversely, equitable wage growth is linked with extended low unemployment. Since 1979, the only period of strong across-the-board wage growth occurred in the late 1990s and early 2000s, which was also the only period of extended low unemployment in recent decades.

“The fact that full employment attacks both class-based inequalities and racial disparities in the labor market means that it pursuing it should be a high priority,” said Zipperer. “Macroeconomic policymakers—particularly the Federal Reserve—should place a very high weight on these benefits and aggressively push toward a high-pressure labor market.”

Bivens and Zipperer provide support a long-standing finding that low unemployment provides progressively larger benefits for the wage growth of lower-wage workers, by examining a panel dataset of U.S. states since 1979. They find that a 1 percentage point drop in unemployment results in annual wage growth 0.5 percentage points faster for workers at the 10th percentile of the wage distribution, 0.4 percentage points faster for workers near the median of the wage distribution, and 0.3 percentage points faster for workers at the 90th percentile. They also provide national evidence that increasingly lower unemployment rates have been needed in recent decades for median workers to see any inflation-adjusted wage growth at all, a finding which likely reflects the steady erosion of workers’ bargaining power over the past 40 years.

At the same time, the authors find that tight labor markets can narrow some racial employment gaps. While even in a tight labor market the black unemployment rate is persistently twice the white rate, extended periods of low unemployment narrow both the absolute and relative gaps between the black and white employment-to-population ratio (EPOP) as well as the gap in hours worked. A 1 percentage point decline in the overall unemployment rate is associated with a 1.1 percent increase in average hours worked by white workers and a 2.7 percent increase in hours worked by African American workers.