Beyond Fairness: The Value of an Inclusive Economy

Speech Info

Los Angeles World Affairs Council & Town Hall Los Angeles, CA By Mary C. Daly, President and CEO, Federal Reserve Bank of San Francisco For delivery on October 15, 2019 12:30PM PT

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Thank you so much for the invitation to be here. It’s a real honor. The issues
of our day require a commitment to dialogue. Allowing diverse groups to
discuss, debate, and learn raises the best ideas and creates better outcomes.

The Los Angeles World Affairs Council and Town Hall Los Angeles have promoted
such dialogue for decades. And now that you’ve joined forces, I know your
legacy will grow even more. I’m personally delighted to be one of the first
speakers of this new partnership.

Today, I’m going to talk about one of the most critical issues of our day:
economic growth. How we are growing now… growth we’ve experienced in the
past… and what factors could temper or spur our growth in the future.

But before I begin, I need to give the standard disclaimer: the remarks I’m
about to deliver are my own and don’t necessarily reflect the views of anyone
else within the Federal Reserve System.

Current conditions

So let’s start with growth today. How’s the economy doing?

Here, the news is largely positive. The economy continues to expand at a solid
pace. Job growth is strong, unemployment is low, consumer spending is healthy,
and households remain confident. These are all really good signs.

On the other hand, we’ve yet to achieve our inflation goal on a sustained
basis. And a number of headwinds – such as trade uncertainty and slower global
growth – have started to gust. This has caused manufacturing and business
investment to soften considerably over the course of the year.

To ensure we sustain the expansion against these headwinds, the Fed has
adopted a more accommodative monetary policy position – cutting the federal
funds rate in both July and September. This accommodation should help the
economy continue to grow so that we can make further progress on our mandated
goals of full employment and price stability.

Drags on future growth

But what is the pace of growth we’re trying to hit? What’s sustainable?

This number has changed dramatically over time. During the 60 years prior to
the Great Recession, GDP growth averaged around 3.5 percent.

During the current expansion, growth has averaged only 2.3 percent. And this
slower pace, far from being an anomaly, is expected to continue. Most
economists and forecasters, including me, predict GDP growth will average a
bit under 2 percent for the foreseeable future.1

So what’s going on? Why is America’s economy expanding at a much slower pace
than it used to?

To explain, we need to look at the fundamental drivers of economic growth:
productivity and the labor force.

Let’s first consider productivity growth. Although it’s fluctuated over time,
it’s generally contributed a little over 1 percentage point to overall GDP
growth since the 1970s. It’s forecast to do about the same going forward. So
the reason for slower growth likely isn’t productivity.2

Labor force growth tells a different story. In the 1970s, when the U.S.
population was increasing rapidly and women were entering the workforce in
large numbers, labor force growth alone averaged 2.7 percent
annually. That means – even if productivity growth had been zero – the economy
would have expanded at 2.7 percent. That’s faster than the pace of our current

Since that peak, the number has come down substantially. The labor force has
grown less than 0.5 percentage point annually for the past decade – and it’s
forecast to stay that way for at least another ten years.3

Much of this decline in labor force growth is due to simple demographic
changes. Our population is aging. Fewer babies are being born. This dynamic
isn’t unique to the United States – countries around the world are
experiencing similar trends.

But there’s something that is different in America. We’ve experienced a
decline in labor force participation for people between the ages of 25 and 54
– what we often call prime-age workers. And right now, there is a smaller
fraction of this group working or actively seeking work than we had back in
the late 1980s and 1990s.

This raises an important question: why aren’t more prime-age Americans

There isn’t a simple answer. There’s a whole host of issues at play.

On one end of the spectrum, research suggests that some of the drop may be
attributed to wealthier families choosing to have only one earner.4
So families with the financial ability to make these work-life choices may
account for some of the lost labor force participation.

On the other end of the spectrum, many people stay home to take care of
children not out of choice, but out of necessity. Rising childcare costs and
lack of access to parental leave likely contribute to lower labor force
participation rates, especially among women.5

Then there’s the changing labor market, which is leaving many people on the
sidelines – wanting to work, but not having the skills or education to keep
pace with the ever-evolving economy.6

More jobs currently require a bachelor’s degree than a high school diploma.7
Unfortunately, college completion rates haven’t kept up with demand. Recent
data tells us only 37 percent of 25- to 29-year-olds have a college
And we see that much of the decline in prime-age workforce participation is
concentrated among individuals who lack a college degree.9

These are just a few of the factors driving down labor force participation in
the United States. We could also talk about the talent being lost to opioid
addiction. Or geographic mismatches that leave rural communities with
affordable housing and few jobs, and urban communities with plentiful jobs and
skyrocketing housing costs.

Whatever the reason, we have more people sitting on the sidelines than in the
past. This poses obvious problems for individuals and families – but it also
poses problems for our economy.

Absent a surge in productivity growth, slow growth in the workforce is going
to be a significant structural restraint on America’s economic future.

The present doesn’t have to define the future

So what can we do? Are we really destined to grow at just 2 percent moving
forward? The answer is likely yes… unless we make significant changes that
better engage all that talent we’re leaving on the sidelines. This will
require a concerted effort from many stakeholders – including the Federal

At the Fed, our job is to support a healthy economy and achieve the dual
mandate goals of full employment and price stability. The logic of our mandate
is that a strong economy benefits everyone. And we can see this in the current

Ten years of sustained growth have reduced unemployment rates to near historic
lows and pulled millions of Americans back into the labor force. This long and
robust expansion has been particularly beneficial to historically
less-advantaged workers, including African Americans, Hispanics, and those
with less than a college degree.

This makes sense. When labor markets are tight, as they are now, businesses
have to compete for workers and find new ways to fill jobs. They recruit more
intensively, adjust hiring standards, and look to a broader pool of potential
employees. This creates new opportunities for less advantaged workers and
allows them to get a foothold in the labor force.10
Indeed, the data tell us that the strength of the current expansion has
narrowed long-standing gaps between more and less advantaged groups.11

But while these gaps are narrowing, they still persist. And monetary policy
alone isn’t enough to close them. Reducing the structural barriers that limit
workforce participation or keep individuals from reaching their full potential
requires taking a hard look at some of our social and workplace policies.

There are any number of examples we could consider, but I’d like to focus on
two from recent research.

The first looks at women. In the mid-1990s, a gap began to form in the
participation rates of women in the United States and Canada. By 2017, the
prime-age participation rate for American women was 8 percentage points lower
than for similar women in Canada. This is a startling difference. It
represents about 5 million U.S. women who could be in the labor force. A
growing body of work suggests that this difference can be attributed in part
to Canada’s generous parental leave policies and childcare subsidies, which
allow women to remain attached to the labor market after child birth.12

My second example relates to educational attainment and career opportunities.
African Americans and Hispanics receive four-year degrees at about half the
rate of whites.13
And even when they do get degrees, their career paths have a flatter
In economics parlance, we call this is a misallocation of talent.

But how costly is this sort of misallocation? It’s hard to know in real time,
but we can look to history for some indication. Researchers at Stanford and
the University of Chicago examined growth in U.S. per capita output between
1960 and 2010. They asked how much of that growth was due to the removal of
structural barriers, such as direct discrimination, lower school quality in
minority communities, and financial obstacles that kept less-advantaged people
from pursuing high-paying careers in fields like medicine and law. The
findings were striking. They estimated that the removal of structural barriers
accounted for up to 40 percent of the gains in U.S. per capita output.15

So talent misallocation affects our bottom line. This suggests that equalizing
educational attainment rates and career opportunities for less advantaged
groups could produce a considerable economic boost.

One person at a time

Up until now, I’ve talked about what institutions can do to help get talent
off the sidelines and into the labor force. But I want to end with what people
can do. Because this is what gives me the most hope.

Let me take you to Firebaugh, California, about four hours north of here in
Fresno County. It’s a rural agricultural community. Many of the people living
there don’t speak English as their first language. It’s one of the poorest
regions in America.

And yet… 97 percent of Firebaugh’s kids graduate from high school. That’s 12
percentage points higher than the national average. And most of them go on to
college or other post-secondary study.16

So how do they do it? The entire community of Firebaugh – from parents to
teachers to students to local leaders – have made education a singular

But they’re not the only one.

Barrio Logan, near downtown San Diego, is a mostly Latinx community. The
average annual income for a family of four there is $25,000. Only 38 percent
of adults have a high school diploma. Just 3 percent hold a bachelor’s degree.

But the Barrio Logan College Institute is helping change that narrative. They
start preparing first generation students for college in third grade. For kids
enrolled in their program, 100 percent end up graduating from high school –
and 100 percent go on to enroll in college.17

These are inspirational success stories. They tell us the power of people. And
they show us what’s possible when people come together to decide that their
state today doesn’t have to determine their state tomorrow.


So how do we change the future? How do we scale places like Firebaugh and
Barrio Logan?

The answer is simple: with intention.

Fairness has been a long-standing aspiration of our society. But aspiration
isn’t enough. We have to turn our desire to be fair into a commitment to
include. Inclusion has to become our practice.

We have to come together. We have to combine the forces of our institutions…
our communities… our people.

That’s the way we rise above what the data tell us is possible. That’s the way
we’ll give the next generation a better future than the one we inherited.

Thank you.

End Notes

1. Board of Governors (2019). The median
of FOMC member projections of longer-run growth is 1.9 percent.

2. Fernald and Li (2019).

3. Congressional Budget Office (2019) and
Fernald and Li (2019).

4. Hall and Petrosky-Nadeau (2016).

5. Daly et al. (2018) and Blau and Kahn

6. Valletta and Barlow (2018) and
Charles, Hurst, and Schwartz (2019).

7. Carnevale, Jayasundera, and Gulish

8. National Center for Education
Statistics (2018).

9. See Tuzemen (2018), who focuses on
prime-age men.

10. Petrosky-Nadeau and Valletta

11. Aaronson et al. (2019).

12. Daly et al. (2018).

13. National Center for Education
Statistics (2018).

14. Daly et al. (2017).

15. Hsieh et al. (2019).

16. Firebaugh High School (2017).

17. Barrio Logan College Institute


Aaronson, Stephanie, Mary C. Daly, William Wascher, and David W. Wilcox. 2019.
“Okun Revisited: Who Benefits Most From a Strong Economy?”
Brookings Papers on Economic Activity Conference Draft, Spring.

Barrio Logan College Institute. 2019.
“The Need for BLCI.”
Website accessed October 8, 2019.

Blau, Francine D., and Lawrence M. Kahn. 2013.
“Female Labor Supply: Why Is the United States Falling Behind?”
American Economic Review 103(3, May), pp. 251–256.

Board of Governors of the Federal Reserve System. 2019.
“FOMC Projections materials, accessible version.”
September 18.

Carnevale, Anthony P., Tamara Jayasundera, and Artem Gulish. 2016.
America’s Divided Recovery: College Haves and Have-Nots.
Washington, DC: Georgetown University Center on Education and the Workforce.

Charles, Kerwin Kofi, Erik Hurst, and Mariel Schwartz. 2019. “The
Transformation of Manufacturing and the Decline in U.S. Employment.” Chapter
5, NBER Macroeconomics Annual 2018, volume 33, edited by Martin
Eichenbaum and Jonathan A. Parker. Chicago: University of Chicago Press.

Congressional Budget Office. 2019.
An Update to the Budget and Economic Outlook: 2019 to 2029.
August 21.

Daly, Mary C., Joseph H. Pedtke, Nicolas Petrosky-Nadeau, and Annemarie
Schweinert. 2018.
“Why Aren’t U.S. Workers Working?”
FRBSF Economic Letter 2018-24 (November 13).

Daly, Mary C., Bart Hobijn, and Joseph H. Pedtke. 2017.
“Disappointing Facts about the Black-White Wage Gap.”
FRBSF Economic Letter 2017-26 (September 5).

Fernald, John, and Huiyu Li. 2019.
“Is Slow Still the New Normal for GDP Growth?”
FRBSF Economic Letter 2019-17 (June 24).

Firebaugh High School. 2017.
“Firebaugh High School: School Accountability Report Card Reported Using
Data from the 2015–16 School Year.”

Hall, Robert, and Nicolas Petrosky-Nadeau. 2016.
“Changes in Labor Participation and Household Income.”
FRBSF Economic Letter 2016-02 (February 1).

Hsieh, Chang-Tai, Erik Hurst, Charles I. Jones, and Peter J. Klenow. 2019.
“The Allocation of Talent and U.S. Economic Growth.”
Econometrica 87(5, September), pp. 1,439–1,474.

National Center for Education Statistics. 2018.
“2018 Tables and Figures.”
Digest of Education Statistics, Table 104.20.

Petrosky-Nadeau, Nicolas, and Robert G. Valletta. 2019.
“Unemployment: Lower for Longer?”
FRBSF Economic Letter 2019-21 (August 19).

Tuzemen, Didem. 2018.
“Why Are Prime-Age Men Vanishing from the Labor Force?”
Federal Reserve Bank of Kansas City Economic Review Q1, pp. 5–30.

Valletta, Robert G., and Nathaniel Barlow. 2018.
“The Prime-Age Workforce and Labor Market Polarization.”
FRBSF Economic Letter 2018-21 (September 10).