Economic Downturns

A concerning feature of recessions is the resulting widespread destruction of jobs. How gender and race interact with job losses during a recession depends in part on the structure of a country’s economy and the sectoral nature of job segregation. In cases where downturns first affect demand in industries in which subordinate groups are concentrated, job losses for those groups are likely to exceed those of the dominant group.

The evidence for this can be found as recently as the COVID-19-induced economic crisis. Due to job segregation, women across racial groups as well as Black and Latino male workers in service sector jobs were differentially harmed early in the crisis (Hamilton et al, 2021). That harm comes in two forms. Public-facing jobs in the leisure, food, and accommodation industry experienced large declines due to plummeting demand. This shows up in the data not only as higher unemployment rates for workers in these industries, but also sharper declines in labor force participation rates. The latter may be due to the discouraged worker effect, and for women especially, it is also due to the greater need to provide unpaid care work at home (resulting from illness, the increased demand for home-cooked meals, and time needed to school and/or care for children). For other types of service sector jobs that are considered essential, workers may be constrained to continue working, facing the risk of contracting COVID-19, posing a danger also to their families. Disproportionately, the workers in these two categories are subaltern racial groups and low-income White women (Gould & Wilson, 2020).

The distress that job loss imposes on family well-being is accentuated for Black and Latino/a workers as well as single mothers of all races. The preexisting inequality results in those groups having fewer assets or savings to weather the economic storm created by COVID-19 or other economic crises such as the Great Recession. Further, prolonged recessions that lead to strains on public sector budgets and therefore budget cuts may have more negative effects on racial and gender subordinated groups.⁷ This results from their greater employment concentration in government jobs and in jobs supported by government spending on education, healthcare, and other social services.

Prolonged recessions also can lead to hysteresis, thereby lowering long-run growth rates due to the impact on labor productivity. Insofar as racial and gender equality are a stimulus to growth and well-being, business cycles and recessions, if left unaddressed with countervailing policies, portend slower economic growth.

It bears reiterating that the gendered and racialized effects of recessions, crises, and austerity are not temporary or short-run. Rather, the effects perpetuate the intergenerational transmission of stratification. Indeed, a useful way to understand the differentiated effects of economic downturns, crises, and the sometimes resulting austerity is that subordinated groups serve as the shock absorbers, protecting or at least cushioning dominant groups from the resulting fallout of these economic events.

Government-Induced Economic Downturns: Austerity and Stratification

Recessions result in lower tax revenues, and as a result, exacerbate budget deficits. For Keynesians, budget deficits are the solution, not the problem, to economic downturns. Moreover, budget deficits are not necessary if governments are willing to generate tax revenues to fund spending. But neoclassical economists and conservatives continue to argue against deficits. As a result, governments respond to recessions in various ways—by adopting a stimulus package, doing nothing, or imposing austerity.

During the Great Recession, for example, governments in the United States, Europe, and East Asia initially adopted large fiscal stimulus packages. Moving the economy out of a low-level equilibrium, fiscal stimulus causes aggregate demand to rise, fueling employment growth. In the event the stimulus is funded through borrowing rather than tax increases, increased tax revenues that result from employment growth pay down the cost the debt incurred to finance additional spending or tax cuts.

Austerity, however, prioritizes reducing budget deficits over addressing the problem of high unemployment. This path was taken by many of the same advanced economies after first adopting stimulus packages in response to the Great Recession. Austerity policies also may be undertaken to respond to fears of inflation. In either case, cuts to government spending reduce aggregate demand, and reverberate throughout labor and credit markets, resulting in a decline in the demand for labor and lending to businesses.

Two factors influence the racial and gender effects of austerity. First, on the employment side, higher shares of racial and gender subordinate groups are employed by the public sector than the private sector and are thus more likely to experience larger job losses. Second, austerity induces greater job competition in the private sector. Under those conditions, stratification processes put racial and gender subordinate groups at the back of the line when jobs are scarce (Mason, 1995; Seguino, 2003). In particular, where racial and gender subordinate groups are concentrated in the hardest hit sectors, they will bear the brunt of the burden of rising unemployment.

Disproportionate effects on women, especially women from marginalized groups, are due to patterns not only of paid work but also of unpaid work. Women are more likely to rely on the welfare state due to their low income and responsibility for care of children and families. They therefore are more likely to use social services like public transport, public education, medical care provision, and child care. The effect of austerity then on women in marginalized groups is to increase their unpaid care burden at home as cuts to public social services are made. The loss of male incomes also induces increases in women’s labor market participation in low-wage jobs to compensate for their partners’ loss of employment. These “distress” sales of labor are evidence of the accentuated impact of austerity on subordinate groups. Added to this, wealth inequality results in subordinate groups possessing the most limited ability to weather economic storms by tapping into savings and other assets.

Monetary Policy Responses to (Fears of) Inflation

Over the last 25 years, monetary policy has been dominated by rentier (wealth holder) interests in the form of inflation targeting. While it is often claimed that low inflation is a necessary macroeconomic fundamental, evidence suggests that a moderate inflation rate is not harmful to growth. In particular, although inflation targets in the era of financial liberalization have been set in the low single digits, Pollin and Zhu (2006) found that an inflation rate up to 15–18% is associated with moderate growth gains. Despite this evidence, inflation has tended to be opposed by wealth holders and the banking sector. This is because, for creditors, the real value of repayment of loans as well as the real rate of return on investments declines with inflation.

Employers, too, may support contractionary monetary policies, long before full employment is reached. Long ago, Michal Kalecki (1990) argued that while full employment was a theoretical possibility, it was not a likely outcome due to political resistance by the “captains of industry.” Why is this so? Business dislikes the social and political effects that result from full employment. In particular, with full employment, the “sack” would cease to play a disciplinary role, threatening business profits as well as the social hierarchy. Rentiers, too, have reason to oppose full employment due to the possibility of wage-induced inflation that worker bargaining power may set off.

A critical question is whether the impacts of contractionary monetary policy vary systematically by gender and race. Abell (1991) argues that although Federal Reserve reaction functions appear to only emphasize aggregate concerns—price stability, unemployment rates, and interest rates—the sociological makeup of the Fed (White male elites) can lead them to privilege the interests of the wealth holding class and ignore negative distributional effects on subordinated racial and gender groups. That said, the Fed’s actions do not produce direct distributional effects; those are transmitted via the impact of interest rate changes on business and consumer borrowing. As a result, they affect employers’ decisions about whom to hire or fire in response to changes in demand. Several studies find evidence of a disproportionately negative effect of contractionary monetary policy on women and African Americans (Carpenter & Rodgers, 2004; Rodgers, 2008).

Seguino and Heintz (2012) draw out the implications of these results for economic stratification theory. In addition to the industry-specific effects of monetary tightening, overall increases in joblessness result in greater job competition. Groups with less power and lower status in the social hierarchy fare worse in the competition over jobs, resulting in a disproportionate rise in White female and Black unemployment rates relative to White males in response to U.S. contractionary monetary policy. Their empirical results demonstrate the costs of fighting inflation are unevenly distributed across workers, weighing more heavily on Black females and Black males, followed by White females, and lastly, White males. In essence, the sacrifice ratio (the percentage decline in employment in response to a 1% decline in the rate of inflation) is steeper for subordinate groups than for members of the dominant group.⁸

From a stratification perspective, these results indicate that whether by intent or impact, as a result of underlying structural inequality, contractionary monetary policy protects White male workers from the harsher negative employment effects, distributing instead the burden to subordinated groups. This example demonstrates again that macroeconomic stratification processes and structures result in subordinated racial and gender groups serving as shock absorbers, shielding the dominant group from the harsher effects of economic hard times.

Trade and Investment Liberalization

Trade and investment liberalization (that is, import tariff reductions and liberalization of rules on foreign direct investment) have resulted in the loss of manufacturing jobs in the United States and Europe since the 1970s, resulting in a structural change in these economies. The loss of “good” manufacturing jobs—jobs that paid a decent wage and provided pension, healthcare and other benefits to workers—meant downward mobility for displaced workers who were re-employed in low wage service sector jobs that offer little economic security or benefits.

Research shows that Black workers have been affected more negatively by the decline in manufacturing sector employment than White workers (Gould, 2018). This outcome is in part due to Black overrepresentation in manufacturing sector employment relative to their share of the overall employment. Further, of the remaining manufacturing industries, some jobs have been converted to part-time jobs. Black workers are overrepresented among these positions as well, comprising 26% of the temp workforce compared with just 12.1% of the overall workforce (Zessoules, 2019). As this research shows, trade and investment policies are not race-neutral.

Nor are these policies gender-neutral (van Staveren et al., 2007). Women have tended to be disproportionately hired to work in labor-intensive export industries because they can be paid relatively lower wages. Despite the strong demand for female labor, labor-intensive export firms are highly mobile, placing downward pressure on wages in this sector. This has dampened women’s wage growth over time relative to men’s, such that even in countries like China that have registered strong export-led growth and demand for female labor, the discriminatory portion of the gender wage gap has been widening (Iwasaki & Ma, 2020).

Financial (De)Regulation

Financial deregulation has led to three distinct phenomena that have racial and gender effects. Deregulation (that is, financial liberalization of interest rates and cross-border flows of money) has contributed to: (a) a deflationary bias that has slowed employment growth, (b) greater economic volatility, and (c) targeting of racial minorities (in the United States) for predatory financial instruments.

Regarding deflationary bias, with the liberalization of financial markets, governments wishing to attract capital inflows have been forced to adopt contractionary monetary and fiscal policies aimed at keeping inflation low (well below what is required to support economic growth). This is because, as noted previously, wealth holders have a stronger preference for low inflation than employed workers, and this is due to the fact that inflation reduces the real rate of return on investments. Governments are thus constrained in their ability to address high rates of unemployment and underemployment, disproportionately felt by racial and gender subordinated groups. It also inhibits public sector spending which could be used to redress market-induced racial and gender inequality.

In sum, macro-policies are not distributionally neutral. Some policies, moreover, are adopted because they serve the interests of the wealthy class of the dominant group (especially financial interests).⁹ The net effect is that subordinated groups become the shock absorbers in response to policy shifts, shielding White workers who themselves might otherwise face even harsher repercussions of these policies.

Short-Run Growth

There are several pathways by which greater racial and gender equality affect macroeconomic growth in the short run. This domain of analysis has largely been occupied by Keynesian and Kaleckian economists for whom the short run still matters. The emphasis in that body of work has been on class inequality, and thus much work remains to fully integrate gender and racial (in)equality into short-run growth analyses for countries at different stages of development.

For illustrative purposes, consider the case of Black workers in South Africa and women in semi-industrialized economies. Relative wages are the measure of inequality of interest, reflecting the fast-acting effect of changes in price variables on macro-outcomes as compared to slower-moving effects of changes in relative human capacities (education and health, for example), which matter in the longer run.

The structural framework for evaluating the short-run macroeconomic effects of a higher Black wage or a higher wage for all women centers on the condition for macroeconomic equilibrium in an open economy or:

where $I$ is investment (in domestic currency terms), $P_X$ is the price of export goods, $X$ is the volume of exports, $S$ is aggregate saving, $e$ is the nominal exchange rate, ${P_Z}^{\ast }$ is the foreign price of imports, and $Z$ is the volume of imports. For simplicity, we assume a balanced budget. (Recent studies incorporate the role of the government sector).

Racial and gender equity-led growth requires that a redistribution (via, for example, a higher minimum wage) result in a short-run demand-side stimulus. A redistribution via higher wages to Black workers or female workers collectively will produce a demand stimulus to output, growth, and employment so long as the net effect on the macro equilibrium condition is such that $I+X>S+Z$. Any negative effects of equality on individual macroeconomic variables in the equilibrium condition then must be outweighed by positive effects on other variables in the system in order for a redistribution (in the form of higher relative wages)¹⁰ to be a stimulus to short-run output and employment. A redistribution to Blacks/women that stimulates demand can be labelled wage-led growth. Conversely, should a redistribution lead to a decline in output and employment, the system would be labeled as profit-led growth and would be considered racially and gender “conflictive.”

To see this, take the case of Black workers in South Africa who are segregated in export industries that produce primary commodities as well as labor-intensive goods. Higher Black wages in mining would likely not have a negative effect on investment $I$ or exports $X$, given the immobility of mining firms and the fact that products from such industries are price inelastic. Still, higher wages in labor-intensive industries could have negative effects on both exports (where goods tend to be price elastic) and investment (firms are “mobile”). With regard to the right-hand side of the equilibrium condition, higher Black wages may lead to an increase in consumption (and thus lower savings), based on the evidence that low-income groups have a higher marginal propensity to consume than high-income groups.

The effect on imports would depend on whether Whites’ marginal propensity to import exceeds that of Blacks. Assume for the moment that a larger share of consumption by Blacks is of domestically produced goods than for Whites (presumably they consume fewer imported luxury goods, and more locally-produced basic goods). A redistribution in that case would cause $Z$ to decline. Whether higher Black wages then have a beneficial effect on output and employment depends on whether the demand stimulus of lower saving and imports outweighs the loss to demand due to declines in exports and investment. In export economies heavily dependent on labor-intensive exports, it is likely that the net macroeconomic effect of a redistribution would be negative. Efforts to redistribute income impose costs on output and employment, and are thus likely to be resisted by Whites.

An additional example of women segregated in labor-intensive manufacturing export sector employment also suggests that a redistribution to women via a higher female wage is likely to have a negative effect on macroeconomic output and employment in the short run (Seguino, 2010). Labor-intensive manufactured goods tend to be highly price elastic, making export demand sensitive to changes in female wages. A higher female wage will dampen export demand as well as investment (labor-intensive manufacturing firms tend to be very mobile, relocating to lower wage countries when local wages rise).

Even if women’s marginal propensity to consume is higher than men’s, the positive demand-side impact on consumption may not be sufficient to offset the large negative export and investment effects. The impact on aggregate savings (and thus consumption) depends on gender differences in the marginal propensity to save and consume. Regarding import demand, the import bill may decline if women’s spending on imports is lower than men’s (perhaps, for example, if women’s responsibilities for care of family cause them to spend more on basic goods that are locally produced as compared to luxury goods that are imported).

In the examples given here, inequality, then, is a stimulus to firm profits, and thus investment, as well as exports—and potentially short-run growth. Beyond the short-run macroeconomic effects, stratification may influence a country’s balance of payments. This is because gender and race segregation in export industries combined with the low wages paid to workers in these sectors generate the foreign exchange required for countries to import the capital goods and purchase the technology licenses needed to move up the industrial ladder. One author revealingly describes the segregation of women in export sectors as the “feminization of foreign currency earnings” (Samarasinghe, 1998). Further, job segregation by gender and race in numerous countries serves to attract foreign financial capital by helping to keep inflation low, and rentier profits high, thus relaxing the balance of payments constraint. Racial and gender ideologies legitimize this unequal system as natural, obscuring the important role of inequality in reproducing the wealth of the dominant groups.

Some recent models and empirical analyses drop the assumption of a balanced budget, resulting in the following macroeconomic equilibrium condition:

where $G$ is government spending and $T$ is taxes. This formulation allows for an exploration of the impact of targeted fiscal spending on short-run growth, and facilitates analysis of the effect on racial and gender inequality. Government spending that is targeted to investment in social and physical infrastructure can disproportionately increase the employment of subordinate racial and gender groups (Onaran et al., 2019). This is because, in terms of social infrastructure spending on education and health, for example, the two groups comprise the majority of workers in associated occupations such as teachers and healthcare workers.

There are likely other avenues by which racial and gender inequality produce macro-level impacts. One of these, not yet captured in the macroeconomics literature research, is mass incarceration. In the United States, mass incarceration disproportionately affects Black men, reducing job competition in labor markets. There is evidence that adverse macro-level conditions, to the extent they harm White workers, contribute to higher Black incarceration rates, with Black workers acting as a shock absorber that shields White workers from economic hard times (Myers & Sabol, 1987; Petach & Peña, 2021).

The economic impact of incarceration extends beyond foregone income of the incarcerated person him/herself. Collateral sanctions of incarceration are extensive and result in roadblocks for the formerly incarcerated in obtaining work, furthering their education, and accessing social safety net programs. Collateral sanctions are legal restrictions on the rights, privileges, and opportunities of people who have experienced criminal justice contact. They include, depending on the jurisdiction, loss of voting rights, ineligibility for government-funded college loans, restricted access to public housing and public benefits, and barriers to employment in licensed occupations. Beyond that, the negative long-term impact on family members, including on children’s well-being, are well-documented. The disproportionate impact of Black incarceration rates (as compared to Whites) is extensive. Lee et al. (2015), for example, find that 44% of Black women and 32% of Black men but only 12% of White women and 6% of White men have a family member imprisoned.

What are the macroeconomic implications of racial disparities in mass incarceration as well as the high rate of incarceration? On the one hand, there may be short-run effects on aggregate demand, given the negative impact incarceration has on family income and thus consumption. There are also long-term negative effects on labor productivity, via the impact on the children of incarcerated parents, who experience limited economic resources, homelessness, and emotional distress.

On the other hand, the use of prison labor in the production of a variety of goods coupled with the power of firms to overprice the services they provide to prisoners (such as for telephone calls, video visits, bail bonds, commissary goods) may stimulate investment spending and thus short-run growth. Private sector construction firms that build prisons and the private prison owners also benefit from mass incarceration. Whether the profits extracted through this system are sufficient to influence growth is an empirical question that requires investigation. This example is specific to the U.S. context and makes clear that analyzing how intergroup inequality affects macroeconomic conditions must be determined at the country level, taking into account the specific features of intergroup inequality.

Long-Run Growth

There are a variety of approaches to assessing the long-run impact of intergroup inequality on economy-wide well-being. On the neoclassical side, Solow-type growth models can be employed to show how growth is dependent on changes in the capital stock, labor productivity, and technological change. The main mechanism through which gender inequality operates in these models (as yet no models or empirical analysis using race as the measure of intergroup equality have been developed) is selection bias in access to education.

Gender inequality in education is argued to lower economy-wide labor productivity growth because it results in overinvestment in less talented males’ education and underinvestment in qualified females (Klasen & Lamanna, 2009). This is based on the assumption that talent is equally distributed between genders. Some theorists also make the case that improvement in women’s well-being has direct effects on children’s cognitive development with, again, long-run effects on the growth of labor productivity (Agénor & Canuto, 2012).

A limitation of mainstream models is that they elide any potential short-run demand problems with an assumption of full employment, instead emphasizing only the effect of inequality on the supply-side. Kaleckian long-run growth models incorporate the impact of short-run demand-side dynamics, which have the potential to influence capital accumulation and long-run productivity growth. This is critical since short-run disturbances in aggregate demand can make it difficult to achieve long-run potential.

More specifically, aggregate demand shocks can knock a county off its “normal” long-run growth path (Dutt & Ros, 2007). These demand-side effects are important to take into consideration in a modeling framework because, even if in the long run, gender or racial equality could produce positive supply-side effects on the quality of the labor force; in the short run, greater intergroup equality might induce shocks that drive economies off their long-run paths.

Presented here is a skeletal long-run growth model in the tradition of Kalecki that incorporates the role of intergroup (in)equality and human capacities, a broader concept than human capital.¹¹

Equation [3] describes the growth rate of potential output $y^P$ as a positive function of the growth rate of the labor force $\lambda$, assumed exogenous,¹² and endogenously-determined productivity growth $\beta$. Equation [4] models productivity growth as a function of the growth of demand-induced output $g^D$_, the quality of the labor supply $H$, and autonomous technical progress ${\varphi }_0$. Demand growth is determined from [2] in the short-run growth model where racial and gender wage inequality are independent variables. The stimulus to potential output provided by the rate of growth of aggregate demand $g^D$ represents labor-augmenting technical progress or the Verdoorn effect (productivity growth induced by increasing returns, process innovation, and new ideas embodied in investment) as well as learning-by-doing effects (Amsden, 1992). $H$ captures the level of human capacities development.

Equation [5] is the condition for sustainable steady-state growth, which requires that demand and supply grow at the same rates. From the short-run model, distribution affects demand growth, with relative wages of racial/gender subordinate groups and public investment the key distributional variables. A variety of factors can induce increases in $H$, including government and household spending (resulting from gender and race redistributions of income and wealth) on aspects of human capacities development such as children’s education and health, publicly financed child care, investments in affordable housing, and worker retraining programs. And a variety of race-based policies and practices (including differential funding of education and healthcare, and the disproportionate mass incarceration of subordinate groups) have a negative effect on $H$, slowing long-run growth.

As this framework shows, inequality can be a stimulus to growth if it fuels investment, but in the longer run, growth will be hampered by the negative effects on human capacities improvements, thereby limiting productivity growth. If, however, the positive effects of greater intergroup equality are sufficiently large, this may overcome the negative effect of redistribution on the rate of growth of aggregate demand $g^D$, even in economies in which short-run growth is inequality-led.

While these examples are focused on within-country intergroup inequality, racial stratification may take place across borders. Obeng-Odoom (2020) presents a structural analysis of the determinants of African growth and development from a stratification lens, where the dominant group is neocolonial Europe and the United States. He contradicts the neoclassical framing of Africa’s economic status as one of dysfunction with an accounting of the neocolonial powers’ exploitation and transfer of African resources. This very innovative application of stratification analysis between countries (with very different racial compositions) suggests a fruitful avenue for economic development studies.

What is clear from these analyses is there is no one-size-fits-all relationship between intergroup inequality and growth. Darity and Deshpande (2000), too, find that few if any unqualified claims can be made about the relationship between racial inequality and economy-wide well-being, measured alternatively as per capita GDP or the Human Development Index. Numerous high-income countries, they found, have wide gaps in income and capabilities, such as the United States, Canada, Japan, and New Zealand. In those cases, it would appear that the impact of race-based economic inequality has not been costly in terms of per capita income and human development.

The research also suggests that inequality is not an unambiguously losing or winning proposition in terms of its effects on growth and development. Countries may choose the low road, with growth stimulated by segregating subordinate groups in key sectors of employment, which dampens wages and stimulates profits. Or they may choose the high road, using a variety of macro- and micro-level policies to promote intergroup equality that promote economy-wide human capacities development, raising economy-wide productivity.

Before concluding this discussion on the growth effects of intergroup inequality, it is useful to note the absence of finance and wealth factors in the research conducted on the macroeconomics of stratification. Racial and gender wealth gaps have been a subject of attention in recent years (Darity et al, 2018; Deere & Doss, 2006). In macro theory, consumption spending is a positive function of wealth. Therefore, we would expect positive short-run demand-side effects of wealth redistribution or of a targeted effort to promote wealth accumulation, such as through the government provision of “baby bonds,” and policies to redress discrimination in mortgage lending and housing (Hamilton & Darity, 2010). Long-run productivity effects via the impact on human capacities development are also plausible. This approach to redressing intergroup inequality—that is, via the promotion of wealth accumulation—does not pose the downside or negative effects on business spending that higher relative wages would induce. As this brief discussion makes clear, there are many avenues to extend this body of research to make it more encompassing of aspects of intergroup inequality that have macro effects.