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The last meeting of the BE Board of Economists ended in an unusual fashion. After providing our semiannual assessment of the economic status of African Americans, BE Publisher Earl G. Graves jumped in with the observation: “Twenty years ago, this board provided their first assessment of the economic status of African Americans. And your assessment today is largely as bleak as it was then. When will these large racial disparities end, and what must happen to make them end?” Graves then challenged the board to come up with new and innovative solutions to deal with the problems plaguing the black community. A plan for eliminating the racial disparity in unemployment by the year 2010 is presented here.
Several decades ago, Arthur Okun, former chairman of the President’s Council of Economic Advisors, identified a general economic trend now known as Okun’s Law. By studying how unemployment changes with the growth or stagnation of the economy, Okun concluded that for the general unemployment rate to decline by one percentage point, the economy must grow for a year at two percentage points above its long-run trend of 2.25%. If the government wants to reduce the unemployment rate from 6% to 5%, it must stimulate the economy to grow at a rate of 4.25% for a year.
But Okun’s Law applies to reducing the general rate of unemployment–not specifically the rate faced by African Americans. While it’s true that economic growth reduces the rate of African American unemployment, it’s also true that this rate is usually about 1.9 times higher than the general unemployment rate. For example, during the deep recession of 1982, total unemployment averaged 9.7%, while African American unemployment averaged 18.9%.
One reason Okun’s Law does not apply to African Americans is that our unemployment rate is so high that the amount of economic growth it would take to reduce it to 5% would never be allowed by the Federal Reserve because it would pose too great a threat to inflation. According to Okun’s Law, it would take a growth rate of 12.5% a year to bring a general unemployment rate of 10% down to 5%. So, obviously, it would take much more than this for African Americans to reach that level.
Today, African Americans comprise 20% of all unemployed workers, but make up only 11.2% of the labor force. Indeed, racial disparities have not changed significantly over the last 20 years. And as long as the employment of African Americans is assumed to “trickle down” from general full employment policies, racial disparities will remain.
But consider the following scenario Suppose there are two types of companies in the economy: Type A and Type B. In Type A companies, 10.5 out of every 100 workers are African Americans. By contrast, 80 out of every 100 workers are African Americans in Type B companies. Now what’s the solution if we want to create jobs for African Americans? Create more Type B companies. In general, about 80% of all employees in African American-owned firms are black as opposed