On Wednesday, Feb. 5, Philip Jefferson, current Vice Chair of the Federal Reserve Board of Governors and former Centennial Professor of Economics at Swarthmore, visited campus to lecture on noninflationary economic expansions’ impact on shared prosperity. Earlier in the day, Jefferson had answered questions from a smaller group of students on career advice and macroeconomic policy.
Gil and Frank Mustin Professor of Economics Stephen O’Connell introduced Jefferson, saying that, as both a friend and economist, there is no one he would rather have in Jefferson’s position at the Fed. Prior to being nominated to the Federal Reserve Board by President Biden in January 2022 and becoming Vice Chair that May, Jefferson completed his Ph.D at the University of Virginia and then became a staff economist at the Fed. In 1997, he joined Swarthmore’s faculty and taught macroeconomics and econometrics for 20 years before becoming a professor and the Dean of Faculty at Davidson College. At Swarthmore, he researched monetary policy’s impact on aggregate employment. Swarthmore economics Professor Erin Bronchetti said his research experience on monetary policy makes him well suited to the Fed’s dual-mandate of maximum employment and stable prices, pointing to his thoughtful decision-making and deliberative manner while at Swarthmore that gives him the right temperament for the Fed.
“Professor Jefferson’s later work and teaching at Swarthmore also explored his deep interest in poverty – its measurement, trends in poverty rates for different groups of Americans, and its relationship to the state of the macroeconomy,” Bronchetti said. “While directly addressing poverty is outside of the Fed’s mandate, we saw in his talk that Dr. Jefferson remains intellectually curious about how macroeconomic conditions and policy affect inequalities across racial and education groups.”
Jefferson’s talk focused on the U.S. labor market, comparing the current market to the 2019 pre-pandemic market. He highlighted a dropping unemployment gap – reaching historic lows – between more advantaged groups and minorities and those with less education until 2019, and rising labor participation that started in 2016 and lasted until the Covid-19 pandemic.
“Had this long non-inflationary expansion continued as the committee forecasts, gaps in employment and earnings across groups may well have continued to narrow,” Jefferson said.
However, he said the expansion was cut short by the pandemic, and those who had been benefiting from it did worse at the start of the pandemic due to gaps such as more service industry job losses than other fields. When labor demand surged during the pandemic recovery, the participation rate remained low while job vacancies rose, earning it a title among economists: “the Great Resignation.” Additionally, inflation rose, impacting those at the bottom of wealth distribution the most.
These poor economic conditions for lower earners have changed; Jefferson pointed to recent real wage growth, narrowing of wage gaps, and controlled inflation.
“On the downside, this contributed to the significant shortage of workers as the economy was reopening,” Jefferson said. “On the upside, those openings may have created more opportunities for younger workers to move up the job ladder than is typical during a normal expansion. The COVID pandemic was a remarkable reallocation shock and elevated levels of quit and job switching may have improved the quality of matches between businesses and workers more than usual, potentially contributing to a strong road of productivity and wage gains.”
However, Jefferson cautioned tight labor markets may hurt low-wage workers in the long run: “Perhaps paradoxically, the excessively tight labor markets may not be beneficial to lower wage workers in the long run. Some economists argue that hiring difficulties may cause firms to adopt technology that substitute rather than complement workers, ultimately reducing labor demand. Similarly, an overheating labor market may need some workers to prioritize short-term gains on longer-term career stability.”
Tight labor markets in expansions may be hard to maintain, Jefferson said, pointing to empirical evidence that young people taking unstable jobs are likely to disappear in the next recession rather than invest in job training.
Concluding with his lecture, Jefferson said the intent of monetary policy has been to return to a place of stable inflation. He suggested shared prosperity, including narrower demographic gaps, is more likely when the economy moves towards low inflation and stable prices, according to historical evidence. This improves and corrects disproportionate losses during economic downturns.
During the Q&A portion of the talk, Jefferson took questions from a packed room of over 200 students, faculty, and guests. He laughed off direct questions about Federal Reserve decisions that, if answered, would cause massive disruptions to inflation expectations. He refused to speculate on the successor of Chair Jerome Powell, who Trump has a strained relationship with but has said he will not attempt to replace. Jefferson continuously reiterated that his perspective was not necessarily a reflection of the Fed as an institution, pointing to a pre-planned statement on his slideshow.
In response to a question about the impacts of artificial intelligence on the job market, Jefferson said there could be changes when thinking about the level of stable, consistent employment but that it is still too soon to say if it will lead to persistent productivity growth at a higher level than the past. He compared the current situation with the late 1990s, when new technology allowed the stable unemployment rate to lower while productivity increased at twice the rate than the previous decade.
In response to more political questions surrounding the Trump administration – such as the effect of Trump tariffs, reductions of immigration, and changes in DEI programs and jobs – Jefferson stressed the Fed is maintaining current levels of high interest rates to restrict borrowing while waiting to see net effects. Regardless of party, he stressed, the Fed’s congressionally-mandated dual mission is to provide conditions for maximum employment and price stability.
Additionally, Jefferson said the inflation rate is falling, even if bumpy, and evidence shows the rate is still restrictive, with space for policy to continue bringing down inflation. This matches recent public communication from the Fed in January, as they held interest rates steady despite urges from Trump to cut rates, which have been ignored by Fed Chair Jerome Powell.
“Because there is still policy space, we can be patient and wait to see what the net effect of any policy changes by the current administration will be,” Jefferson said.
Professor Bronchetti encouraged current students interested in going on to work at the Fed to take econometrics, and micro and macro economics theory and applied courses, as well as build research and communication skills.
“The importance of writing — even as an economist — cannot be understated,” Bronchetti said. “Being able to communicate complex ideas to audiences with different levels of expertise or familiarity, as Dr. Jefferson did in his talk, is crucial.”
