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date: 20 January 2022

The Macroeconomics of Stratificationfree

The Macroeconomics of Stratificationfree

  • Stephanie SeguinoStephanie SeguinoDepartment of Economics, University of Vermont

Summary

Stratification economics, which has emerged as a new subfield of research on inequality, is distinguished by a system-level analysis. It explores the role of power in influencing the processes and institutions that produce hierarchical economic and social orderings based on ascriptive characteristics. Macroeconomic factors play a role in buttressing stratification, especially by race and gender. Among the macroeconomic policy levers that produce and perpetuate intergroup inequality are monetary policy, fiscal expenditures, exchange rate policy, industrial policy, and trade, investment, and financial policies. These policies interact with a stratification “infrastructure,” comprised of racial and gender ideologies, norms, and stereotypes that are internalized at the individual level and act as a “stealth” factor in reproducing hierarchies. In stratified societies, racial and gender norms and stereotypes act to justify various forms of exclusion from prized economic assets such as good jobs. For example, gendered and racial stereotypes contribute to job segregation, with subordinated groups largely sequestered in the secondary labor market where wages are low and jobs are insecure. The net effect is that subordinated groups serve as shock absorbers that insulate members of the dominant group from the impact of negative macroeconomic phenomena such as unemployment and economic volatility. Further, racial and gender inequality have economy-wide effects, and play a role in determining the rate of economic growth and overall performance of an economy. The impact of intergroup inequality on macro-level outcomes depends on a country’s economic structure. While under some conditions, intergroup inequality acts as a stimulus to economic growth, under other conditions, it undermines societal well-being. Countries are not locked into a path whereby inequality has a positive or negative effect on growth. Rather, through their policy decisions, countries can choose the low road (stratification) or the high road (intergroup inequality). Thus, even if intergroup inequality has been a stimulus to growth in the past, it is possible to choose an equity-led growth path.

Subjects

  • Macroeconomics and Monetary Economics

Macroeconomics and Intergroup Inequality

Stratification economics is the study of the processes and institutions that result in a hierarchical economic and social ordering based on ascriptive characteristics. Unlike mainstream economics, whose unit of analysis is the individual, stratification economics emphasizes the role of groups and the structural forces that shape intergroup inequality. Stratification economics explores the intentionality of a dominant group to maintain its privileged economic position, a distinctly different approach than the mainstream lens which lays the causes of intergroup inequality at the feet of “deficits” of groups lower on the social and economic hierarchy.

In stratified systems, the struggle for dominance extends beyond labor markets to include political, financial, and educational institutions that influence the distribution of income, wealth, and resources. The focus of this article is the policy levers at the macroeconomic level that reinforce racial and gender stratification. Research has demonstrated that macroeconomic policies (including monetary policy, fiscal expenditures, exchange rate policy, industrial policy, and trade, investment, and financial policies) are far from being distributionally neutral. A variety of mechanisms by which state power, using macro-level policy tools, can reinforce stratification processes at the micro level are reviewed here. Further, research on the reverse causality—that is, the impact of intergroup economic inequality at the micro level on the functioning of the macroeconomy—is discussed. That work demonstrates that intergroup inequality has economy-wide effects, influencing the rate of economic growth and overall performance of the economy in meeting the material needs of a country. More generally, stratification regimes comprise a two-way relationship between inequality at the micro level on the one hand and macroeconomic outcomes on the other.

Anticipating the results of this analysis, three major findings emerge. First, the mechanisms by which intergroup inequality are transmitted over time rely on a stratification infrastructure, the latter comprised of racial and gender ideologies, norms, and stereotypes that are internalized at the individual level and act as a “stealth” factor in reproducing hierarchies. Second, subordinated groups in stratified societies act as shock absorbers, reducing the impact of negative macroeconomic phenomena on members of the dominant group. And third, racial and gender inequality have macroeconomic effects. Research has shown that under some structural conditions, intergroup inequality acts as a stimulus to growth and in other circumstances, undermines economic growth and economy-wide well-being.1 These latter results make it clear that countries, through their policy decisions, can choose the low road (stratification) or the high road (intergroup inequality). Thus, even if intergroup inequality has been a stimulus to growth in the past, it is possible to choose an equity-led growth path.

The Infrastructure of Stratification

Race and gender inequality are the result of systemic conditions that are embedded in institutions, reproducing stratification over time. The system is buttressed by social and psychological processes that construct racial and gender roles in ways that economically advantage dominant racial and gender groups relative to subordinated group(s).2 Evidence indicates that women of a subordinate racial group experience a “double jeopardy” which manifests as an intensification of stratification (Holder, 2020; Kim, 2020).3

Exclusion (or opportunity hoarding) and exploitation are two key mechanisms by which race and gender stratification are reproduced (Tomascovic-Devey, 2014). Exclusion is a process whereby members of the dominant group monopolize valuable positions or resources, using a variety of mechanisms to exclude members of subordinated groups. Exploitation is characterized by members of a subordinate group receiving less than the value of what they contribute to output.4 A salient example of exploitation in U.S. economic history is the enslavement of African-descended peoples. With regard to gender, the unpaid care work performed predominantly by women—work that is economically necessary to produce and reproduce the workers of today and tomorrow—acts as a form of exploitation. In this case, the beneficiaries are society as a whole (under the assumption that children are public goods5) as well as employers whose wage payments to workers cover only current costs, not sunk costs.

Exploitation and exclusion operate simultaneously at the micro level via job segregation. Workers in subordinated groups tend to be segregated into employment in the secondary sector of dual labor markets, excluded from jobs in the primary sector. Jobs in the secondary labor market are typically dead-end, pay low wages, are insecure, and offer few, if any, benefits. Primary sector jobs are those that pay higher wages and come with a job ladder, training, benefits, and greater job security than secondary sector jobs. A key tenet of dual labor market theory is that otherwise qualified people in subordinate groups face barriers to entry to the primary labor market due to biases and institutional rules applied by the “gatekeepers”—those who do the hiring for jobs in the primary sector. Because many skills are obtained on the job, the lack of access to high-quality jobs in the primary sector is an impediment to skills acquisition for members of subordinated groups.

It should be noted that some portion of the dual labor market segregation may be due to gender and racial differences in skills and training. That disparity, itself, however, can be credited to the stratification processes. Darity (2001) observes that stratification dynamics operate to produce pre-market as well as within-market intergroup inequality, noting that dominant groups work to structure and control access to the credentials required for higher wage jobs to ensure admission of their own and to exclude others.

The crowding of racial and gender subordinate groups into a restricted number of jobs in the secondary sector weakens their bargaining power and holds down wages. The negative wage effects of that crowding contributes to higher profits and higher wages for White workers who face less job competition due to job segregation (Bergmann, 1971, 1974; Dickens & Lang, 1985). The limits on the bargaining power of those segregated in the secondary labor market may also result from low rates of unionization and, in some cases, firm mobility (the capacity to escape higher wages by relocating to lower wage sites). With regard to the latter, firms that produce labor-intensive goods typically have low sunk costs, making relocation feasible in response to higher costs.

The ability of firms to relocate contributes to a threat of job loss to workers (or what Alan Greenspan called “the traumatized worker” effect), thus holding down wages even if firms do not relocate (Seguino, 2007a). Subordinated groups are more concentrated in such industries (Standing, 1989). Another aspect of exploitation occurs along gender lines. Women from developing countries who work as low-wage domestics and care workers in rich countries and, more generally, women’s unpaid work support the reproduction of human capacities essential to a functioning market economy (Folbre, 2002).

Exclusion operates in a broad set of contexts, beyond labor markets. Subordinated groups’ exclusion from access to desirable schools and neighborhoods, bank loans, voting (which influences state-level resources allocations, itself a source of exclusion), and quality medical facilities are just a few of the various terrains on which exclusion operates.

Exclusion or opportunity hoarding intensifies when resources, including high-quality jobs, are in short supply, leading to rationing on the basis of the social forces of stratification (Jayadev & Johnson, 2017; Seguino & Heintz, 2012). What are those social forces? Here, economists have a great deal to learn from sociologists and social psychologists who have explored the mechanisms by which inequality is both internalized at the individual level and reproduced over time. Sociologists argue that racial and gender social definitions—that is, ideology, norms, and stereotypes—are a critical component of a stratified system.

Ideologies (that is, a system’s metanarrative that infers who is deserving and who is not) are designed to justify existing systems of racial and gender (in)equality. Norms specify acceptable behavioral boundaries for members of racial groups and for women and men. Norms are malleable and change over time. Norms may be formal, embedded in laws and rules, or informal, the latter disseminated through observation, imitation, and general socialization. These undergird racial and gender ideologies, which serve to justify the racial and gender imbalance in power and resources. A telling racial norm in the United States is that Blacks should “stay in their place,” that is, not aspire to higher positions in the economy and society at large. The Tulsa race massacre of 1921 is just one such example of the enforcement of that “norm.” In the case of gender, a widely held norm is that women should perform the bulk of unpaid caring labor, thereby limiting the time they have to spend in paid activities.

More specifically, norms specify acceptable behavioral and social boundaries for members of racial and gender groups. Individuals tend to internalize norms under the threat of disapproval or other consequences if they fail to conform to social expectations. Norms also shape the perceptions of those who control resources, such as employers. For example, in the case of a norm that women should provide caring labor, women are less likely to be hired for jobs in high-wage or leadership positions if employers fear losing the sunk costs of their investments in training. Instead, women are seen as “secondary” wage earners, more appropriately suited to labor-intensive, low-skill, or high-turnover jobs.

The creation and perpetuation of stereotypes is a related mechanism for perpetuating hierarchy as these become internalized at the individual level. Racial and gender stereotypes describe the ways in which racial and gender groups presumably differ, usually in ways that justify the racial and gender division of labor as well as access to and control over material resources. Stereotypes need not be accurate. Indeed, stratification-inducing stereotypes place a particular emphasis on pathologizing members of those perceived to be non-White. And they typically describe members of the dominant group as harder working, more intelligent, and less inclined toward criminal behavior. Thus, stereotypes are constructed to legitimize the “superiority” or greater deservingness of White—often male—control, undervaluing men and women of subaltern groups.

Stereotypes contribute to the construction of mental schemas. A schema is a cognitive construct that helps organize and interpret information, allowing people to take shortcuts in interpreting large amounts of information. In stratification theory, schemas and associated stereotypes act as a stealth factor, shaping everyday decisions on whom to hire, whom to lay off, who is most suited to leadership or supervisory position, and who should leave the labor force to care for children and sick family members. They obviate the need for explicit and visible gender and race policing to enforce hierarchies.

Norms and stereotypes act as both a lubricant and cohering agent in systems predicated on inequality, but it is the dominant group’s drive to ensure a sufficiently large piece of the material pie that is the central dynamic of the system. However, intergroup economic inequality influences not only the distribution of the economic pie; it also plays a role in determining the size of that pie. An understanding of the dynamic between inequality and the “size of the pie” requires an analysis of the role of inequality in determining macroeconomic outcomes in the short and long run.

Macroeconomics and Stratification

Darity et al. (2011) note that “when examining the basic question of why intergroup disparities exist, the stratification economist will look to structural-cum-contextual factors that constrain the quality of outcomes for the subaltern group.” An important part of the structural environment that shapes intergroup inequality is the macroeconomy. The macroeconomy encompasses economy-wide output, employment, inflation, growth, balance of payments and volatility. In this article, the policies that give rise to macroeconomic conditions are construed more broadly than fiscal and monetary policy to include exchange rate, trade, investment policies, and well as financial regulation.

In addition to the impact of these policies on intergroup inequality, there is evidence that intergroup inequality influences macroeconomic outcomes. Those effects are transmitted to both the supply side of the economy (affecting the quality of the labor supply and productivity growth) and the demand side (influencing the level of aggregate demand).6 There is thus a two-way causality between intergroup inequality at the micro level relative to macro-level economic outcomes.

Macro-Policy Effects on Racial and Gender Equality

This section presents a non-exhaustive set of examples of the potential impact of macro-level policies on racial and gender inequality.

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.

The Impact of Gender and Racial Inequality on Macro-level Outcomes

In the last two decades, increased attention has been directed at the impact of inequality on macroeconomic outcomes by scholars operating from very different theoretical perspectives. The effects of inequality are experienced on the demand side of the economy in the short run and on both the demand and supply side in the longer run. Whether those effects are positive or negative (or neutral) depends on a variety of factors, including: (a) the type of inequality under consideration (for example, education, health, wages, paid versus unpaid work), (b) the economy’s structure of production (such as agricultural, export-oriented, semi-industrialized, knowledge-intensive), and (c) with regard to race and gender, the degree and types of segregation, such as in employment.

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:

I + P X X = S + eP Z Z [1]

where I is investment (in domestic currency terms), PX is the price of export goods, X is the volume of exports, S is aggregate saving, e is the nominal exchange rate, PZ 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:

I + G + P x X = S + T + P z Z [2]

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

y P = λ + β [3]
β = ϕ 0 + ϕ 1 g D + ϕ 2 H [4]
g D = y P [5]

Equation [3] describes the growth rate of potential output yP as a positive function of the growth rate of the labor force λ, assumed exogenous,12 and endogenously-determined productivity growth β. Equation [4] models productivity growth as a function of the growth of demand-induced output gD, the quality of the labor supply H, and autonomous technical progress ϕ0. 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 gD 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 gD, 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.

The Two-Way Relationship Between Macroeconomics and Intergroup Inequality

The two-way relationship between macroeconomic outcomes and intergroup inequality highlights the importance of expanding the lens of stratification economics and of macroeconomic theory. Macroeconomic conditions affect numerous aspects of race and gender inequality. At the same time, intergroup inequality by race and gender influences economy-wide well-being.

This article outlines a variety of pathways by which macroeconomic policies contribute to and reinforce stratification. This accounting is based on a definition of macro-level policies that is broader than fiscal and monetary policies. Trade, investment, and financial market policies also produce effects that can contribute to or reduce economic stratification. The feedback effects from the micro level to the macroeconomy have also been outlined.

While this research has yet to be fully developed, some observations are possible. Intergroup inequality can be a stimulus to short-run growth under some conditions, depending in part on the structure of the economy and the type of gender and race job segregation. In particular, discriminatory low wages increase capitalist profits and thus investment (and exports in economies in which subordinated groups are crowded into the export sector), and these impacts may be large enough to outweigh the positive effects of greater intergroup equality on consumption spending. That said, the net effect of gender and racial inequality on short-run growth is an empirical question, and may differ by economy. In the long run, the negative effects of stratification on productivity growth are clearly observed, via the impact on human capacities development.

The research to delineate the pathways by which intergroup inequality produces economy-wide effects is in its early stages. The pathways are likely to differ, depending on the specifics of a country’s system of stratification. For example, in the United States, mass incarceration that differentially affects Blacks, may produce positive short-run demand effects on investment spending (on private prisons and related expenditures) but produce negative long-run effects due to the impact on families of incarcerated persons.

On the gender side, feminist economists have explored the benefits of an equitable sharing of the labor required for social reproduction—that is, the production of human capacities that undergirds the macroeconomy’s health (Braunstein et al., 2020). Research has also demonstrated that the costs of gender norms, specifically norms of masculinity that contribute to intimate partner violence, are costly at the macro level, beyond the impact on directly involved individuals. Duvvury et al. (2013), pioneers in this research, have found, for example, that in Vietnam, income and multiplier losses due to such violence amount to 1.6% of GDP.

Some generalizations can be made with regard to stratification and macroeconomics. First, stratification is internalized in individuals as well as embedded in institutions, via the intentional construction of ideologies, norms, and stereotypes that seek to justify the superior economic position of dominant groups. In this way, the enforcement of stratification is diffused, and most people are unaware they are participants in and contributors to a hierarchical system, via implicit bias that results from gender and racial stereotypes (Eberhardt, 2019). This is not meant to suggest that hierarchies are permanent features of societies. Social psychology research shows that stereotypes are malleable (Diekman et al., 2005; Seguino, 2007b). There is evidence that racial animus worsens during economically hard times (Anderson et al., 2020), with an obvious remedy a full employment policy (like a national job guarantee program). Moreover, macro-level policies can be utilized to promote intergroup equality and to create the conditions whereby intergroup equality has beneficial macroeconomic effects.

Second, subordinate groups act as shock absorbers, reducing the effects of economy-wide downturns and shocks on dominant group members. As Darity (2001) has noted, in this way, stratification is functional to the economic system, in that stratification systems primarily deliver the “bad news” of capitalist economic disruption to subordinate groups. This reduces the political resistance of lower status members of the dominant group to the ills of a capitalist economy.

A more complete accounting of the ways in which gender and racial stratification affect growth is needed, however. And a better understanding of the ways in which gender and racial stratification interact, substitute, or complement one another is also needed. What is clear at this stage of research is that these two systems of inequality (race and gender) overlap in some ways (processes of job segregation are similar) but differ in others (gender norms on the provision of unpaid care work is an important factor underlying gender stratification). Finally, while stratification or intergroup inequality may be a stimulus to growth (and thus energizes a desire to maintain this system for the benefit of members of the dominant group), growth that is premised on intergroup equality is possible. For those economists who see our role as that of creating the conditions for people to provide for themselves and their families with dignity and economic security, the exploration of a macroeconomics of equality is worthy of our attention.

Further Reading

  • Blecker, R., & Seguino, S. (2002). Macroeconomic effects of reducing gender wage inequality in an export-oriented, semi-industrialized economy. Review of Development Economics, 6(1), 103–119.
  • Blumberg, R. L. (1984). A general theory of gender stratification. Sociological Theory, 2, 23–101.
  • Blumer, H. (1958). Prejudice as a sense of group position. Pacific Sociological Review, 1(1), 3–7.
  • Braunstein, E. (2008). The feminist political economy of the rent-seeking society: An investigation of gender inequality and economic growth. Journal of Economic Issues, 42(4), 959–979.
  • Darity, W., Jr. (2005). Stratification economics: The role of intergroup inequality. Journal of Economics and Finance, 29(2), 144–153.
  • Eagly, A., & Diekman, A. (2005). What is the problem? Prejudice as an attitude-in-context problem. In J. Dovidio, P. Glick, & L. Rudman (Eds.), On the nature of prejudice: Fifty years after Allport. Blackwell.
  • Flynn, A., Warren, D., Wong, F., & Holmberg, S. (Eds). (2017). The hidden rules of race: Barriers to an inclusive economy. Cambridge University Press.
  • Glaser, J. (2015). Suspect race: Causes and consequences of racial profiling. Oxford University Press.
  • Goff, P., Eberhardt, J., Williams, M., & Jackson, M. (2008). Not yet human: Implicit knowledge, historical dehumanization, and contemporary consequences. Journal of Personality and Social Psychology, 94(2), 292–306.
  • Palley, T. I. (2002). Keynesian macroeconomics and the theory of economic growth: Putting aggregate demand back into the picture. In M. Setterfield (Ed.), The economics of demand-led growth: Challenging the supply-side vision of the long run. Edward Elgar Publishing.
  • Seguino, S. (2013). Toward gender justice: Confronting stratification and power. Géneros, 2(1), 1–36.
  • Taylor, L. (1991). Income distribution, inflation, and growth. MIT Press.

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Notes

  • 1. Using a class measure of inequality, growth can be, for example, wage-led or profit-led, depending upon the structure of the economy and the size of key macro parameters (Blecker, 2016). Similarly, growth can be gender-equality or -inequality led (Seguino, 2010).

  • 2. Stratification theory has been most fully developed to explain racial and gender inequality, based on visible characteristics that allow observers to sort people into groups. But other types of intergroup inequality may matter in some contexts. For example, religion and citizenship may be vectors of stratification. The question of how stratification is enforced and perpetuated in cases where hierarchies are not based on ascriptive characteristics has yet to be fully explored. Deshpande and Darity (2003) indicate that in non-color-based societies, there are potentially internally understood markers that are relied on to classify people into groups. For example, language, diction, names, and clothing are potential markers that while not ascriptive (that is, manifested in one’s physical body so as to be unchangeable) can still lead to group sorting.

  • 3. Scholars have yet to fully grapple with the relationship between various types of stratification. For example, in the United States, gender and racial stratification are made more complex by the role that White women have played in supporting a racial hierarchy.

  • 4. The concept of exploitation may be applied to domains beyond the labor market. Enslavement in the United States was not simply the failure to pay wages, for example. Rather, slaveholders exercised control over the entire lives of enslaved people in an environment in which the concept of a “work day” did not apply. In another example, the establishment of toxic waste sites and industries near Black, Latino/a, and Native American communities lowers the cost to firms of disposing waste, thus enhancing profits.

  • 5. See Folbre (1994), who argues that while parents (women, especially) bear most of the costs raising children, to the extent that children grow into productive, tax-paying citizens, they create positive externalities that benefit the rest of society. This framing is consistent with Wolff (1999), who notes that exploitation does not require direct coercion. An individual may “choose” to enter an exploitative relationship (especially if they have few choices to begin with), although the worst forms of exploitation are associated with coercion.

  • 6. See, for example, Blecker (2016), McKinsey and Company (2019), Citi GPS (2020), Seguino (2020), and McGhee (2021).

  • 7. Gender subordinated groups largely refers to Black and Latina women as well as White single mothers.

  • 8. Seguino and Heintz (2012) found that a 1 percentage point increase in the federal funds rate led to a 3.9% increase in the Black female/white male unemployment rate ratio, and a 10.8% increase in the Black male/White male unemployment rate ratio.

  • 9. For example, it is noteworthy that the Great Recession was met with bailouts, not austerity policies, for financial institutions. White middle-class workers may be tolerant of these bailouts because they worry about the value of their pensions and other financial assets. This contrasts with (in the United States) Blacks and Latino/as who have much, much lower net worth, who do not benefit from policies that protect the asset values of wealth holders. I am indebted to James Heintz (personal communication, March 2021) for this observation.

  • 10. These models typically adopt the restrictive assumption that there are no efficiency wage effects. But higher relative wages could induce increases in productivity, thereby attenuating negative effects on profits and product prices. Although there is evidence of efficiency wage effects in the economics literature, they have not been modeled or tested in the macroeconomic literature, especially in relation to race and gender efficiency wages.

  • 11. Braunstein, Bouhia, and Seguino (2020) conceptualize human capacities to include a broad array of features that make human beings more economically effective, such as emotional maturity and self-confidence, as well as standard human capital measures, such as education and skills.

  • 12. This formulation reflects earlier Kaleckian growth models. Newer work from feminist economists argues that the growth rate of the labor force is endogenous. Given that women are largely responsible for the “production” of labor, changes in women’s economic conditions can affect fertility rates, and thus the growth rate of the labor force (Heintz & Folbre, 2019).