Macroeconomic shocks and racial labor market differences

We investigate the effects of three structural macroeconomic shocks (monetary, demand, and supply) on the labor market outcomes of black and white Americans using a factor‐augmented vector autoregression (FAVAR) framework with 136 U.S. macroeconomic indicators from 1973 to 2017. Our results indicate that adverse macroeconomic shocks have differential effects on labor market outcomes for blacks and whites, hurting blacks disproportionately more than whites. Black Americans' labor market outcomes appear to be significantly more sensitive to macroeconomic shocks than are the outcomes for white Americans. Our findings indicate that business‐cycle costs are disproportionately borne by black Americans and that racial inequality in the labor market rises in recessions. The strongest effects occur in recessions caused by supply side disturbances. Our results suggest policymakers should take these heterogeneous effects into account when designing policy.