When people are asked what is the number one problem facing the economy, they overwhelmingly say it’s inflation—and they aren’t wrong. Inflation has been higher, broader, and more persistent than most experts predicted last year. The US annual inflation rate in May was 8.6 percent—the highest since 1981. Even before Russia’s invasion of Ukraine sent energy and food prices soaring, inflation had been higher than economists and lawmakers should have been comfortable with. Combating it requires an all-of-the-above approach, from investments in infrastructure to alleviate supply chain problems to public funding of care work to help with the labor supply. The Federal Reserve will need to tamp down demand, but it is not the solution. If the Fed raises interest rates too high too fast, it could trigger another recession. Only the government can provide the industrial policy that we need to ensure stability in food and energy prices.
Yet amid the rising prices, there are positive signs in the economy, ones that matter for everyday people. Right now, the labor market is stronger, more dynamic, and more equitable than nearly anyone following the economy foresaw. As we consider how to move the pandemic recovery into the next stage, these developments need to be not only acknowledged but protected.
First, the labor market has not been this strong for workers this early in a recovery in generations. And that is most likely due to the effects of the American Rescue Plan. There are between 1.75 million and 3 million more jobs than the Congressional Budget Office projected without the ARP, and labor force participation is 0.3 percent higher and unemployment 1.5 percent lower. This has left the United States in a much better position, both in terms of overall growth and wages, than Europe, which is facing similar inflation challenges.
The second strength is labor market dynamism. Over the past decade, economists and popular commentators have argued, correctly, that labor markets were too cold—meaning there were too few people switching jobs, starting businesses, or otherwise moving to find better and more productive places to work. This wasn’t just bad for workers; it was bad for the whole economy, which lost productivity and growth and became more sclerotic.
This problem has been solved by the white-hot labor market. Workers are upgrading their jobs at a record pace, with strong wage growth as a result. Though inflation has taken a bite out of workers’ paychecks, wages have been increasing for those at the bottom of the income distribution. As the economist Arindrajit Dube has found, while workers in the middle of the income distribution have seen a slight drop in their wages in inflation-adjusted terms, those in the bottom 10 percent have seen a 5 percent increase. This is unlike what happened in previous recoveries, in which benefits went to the wealthy first before trickling down to anyone else.
Which leads to a third strength: the numerous ways this economic recovery has been uniquely equitable. As Joelle Gamble, the chief economist at the Department of Labor, recently observed, Black men have a higher employment rate now than they did before the pandemic. More generally, increases in employment have been broadly shared, especially when compared with the recovery that followed the Great Recession.
Economists have found that the recovery in the labor market is running eight years faster than the previous one. And the rebound after the Great Recession was especially slow for those traditionally excluded from the job market, but during this one, people across genders, ages, and education levels have seen significant and swift gains. Though there is a long way to go in alleviating underlying inequities—Black men, for instance, still face an unemployment rate 2.1 percentage points higher than the overall rate—a strong labor market can ensure that the recovery isn’t isolated to those who were already well-off. An economic slowdown, however, would likely harm workers of color and other vulnerable groups disproportionately.
As policy-makers move to drive inflation down, it is essential that they don’t lose sight of these important developments. There’s room to land a soft recovery and keep what’s working in our economy. But to do that, we need to recognize that, in addition to the problems, there are encouraging trends that we must fight to preserve.
