Who Benefits Most from a Strong Economy?*

In 1973, Arthur Okun wrote an iconic paper asking whether a “highpressure economy” could contribute to the upward mobility of U.S. workers. Okun’s hypothesis was simple. In a high-pressure economy—defined by resource utilization running beyond its longer-run sustainable rate—firms would find it difficult to fill vacancies at a given wage and would react by relaxing hiring standards and reducing their use of statistical metrics for evaluating candidates in favor of more intense personal screening. He argued that these changes had the potential to improve the economic circumstances of less advantaged workers, allowing them to find employment, build their skills, and climb the job-and-income ladder.

Looking at the data, he found that these benefits were indeed a feature of high-pressure periods in U.S. economic history; during high-pressure episodes, men moved up the job ladder, creating room for women and teenagers to move into the labor market. On the basis of these findings, Okun concluded that though not a panacea, a high-pressure economy complemented other policies working to achieve the social objective of upward mobility.

Nearly 50 years later, Okun’s analysis remains relevant. The current economic expansion has now become the longest in U.S. history and the labor market is tight by most standards. Moreover, inflation has been muted, running consistently below the 2 percent target of the Federal Open Market Committee (FOMC). As shown by the heavy solid line in figure 1, the unemployment rate, a standard measure of labor market strength, is currently about as low as it has been since 1969. Moreover, it is well below the estimate by the Congressional Budget Office (CBO) of its longer-run sustainable value (the dotted line).

*Excerpt from “Okun Revisited: Who Benefits Most from a Strong Economy?”