A Federal Reserve paper documents a number of large and persistent differences in labour market outcomes between blacks and non-Hispanic whites in the US. Arguably the most important is that blacks—especially black men—are much more likely to lose their jobs.
The models that researchers build to understand the economy tend to be blind to race and gender, as if macroeconomic policies typically affect blacks the same as whites and women the same as men. Increasingly, that’s looking like the wrong way to go about it. Academic macroeconomists get a lot of flak for using models that oversimplify the world—for example, by having one “representative agent” stand in for all consumers. This is more than a bit unfair, because they have been studying models in which people differ in important ways for at least 30 years. This vital research agenda has looked at such things as the distributions of income, wealth and employment, seeking to understand how they change over time and through the business cycle.
That said, the kinds of heterogeneity that economists study remain quite limited. Gender has figured in some work, but is typically ignored. To my knowledge, no work within this research program has focused explicitly on race. Two recent papers cast significant doubt on the wisdom of assuming a raceless and genderless society. In one, three economists—Margherita Borella, Mariacristina De Nardi and Fang Yang—document systematic differences in the way American men and women participate in the labour force over the course of their lives. They use this evidence to make a persuasive argument: Quantitative economic models that ignore such differences can be poor guides to understanding the impact of government programs such as Social Security on savings and employment.
The second paper, by a team of economists from the Federal Reserve Board in Washington, D.C., documents a number of large and persistent differences in labour market outcomes between blacks and non-Hispanic whites in the US. Arguably the most important is that blacks—especially black men—are much more likely to lose their jobs. This risk of job loss is highly cyclical, which is why blacks fare so much worse than whites during recessions. For example, the black unemployment rate peaked at nearly 17% after the Great Recession, compared with just over 9% for whites. What’s more, the paper finds that age and educational attainment—factors that a growing number of macroeconomic models do consider—explain little of the black-white difference.
Economics is supposed to be concerned with figuring out what makes people better off, and how we can have more of it. For decades, macroeconomists have operated with the (largely unspoken) presumption that such questions are best addressed using models that ignore race and gender differences. The more we learn about these differences, the clearer it becomes that this is a mistake. The models need to change.