Matt O’Brien hit the nail on the head in a Wonkblog post about non-compete agreements for doggy day care workers yesterday. Camp Bow Wow, as Dave Jamieson reports, forces new hires to agree not to work for a competing business within 25 miles of their location’s “franchise territory” for two years after leaving the company. Dog sitters obviously don’t learn valuable trade secrets that have to be protected from competitors, so something else is motivating the chain’s non-compete clause—just as trade secrets were not driving Jimmy John’s to restrict where its employees could work when they moved on from the sandwich shop. That motivation is wage suppression. As O’Brien puts it:
“Non-competes create a Balkanized labor force where you’re not a sandwich maker, but either a Jimmy John’s or Subway sandwich maker. Workers, in other words, are being forced to pledge fealty to companies that can still fire them at will. The payoff, of course, is that workers who, practically-speaking, can’t switch jobs are workers who can’t ask for raises.”
It’s common sense that increased experience in an occupation should eventually lead to higher wages and that if, for example, Camp Bow Wow doesn’t sufficiently reward an employee’s experience, some other dog care chain will. The employee might look around and find that experienced dog sitters are paid $1.00 an hour more at Camp Canine. But a non-compete agreement keeps the employee from jumping ship to take the better-paying job. A two-year restriction on competing dog-care employment means the employee has to leave the area to get the benefit of her experience. It’s not slavery, but as O’Brien points out, it’s not the kind of freedom capitalism promises, either. (If the National Right to Work Committee weren’t simply a union-hating sham, it would take up the cause of workers who are being forced to accept such contracts.)
Limiting the right to quit and take another job leaves the employer with ever more bargaining power. How do you negotiate a raise if your employer knows you can’t take your experience and knowledge elsewhere?
Last week, President Obama indicated he would veto an emerging Senate deal that cobbled together $440 billion worth of tax breaks, with big business reaping the vast majority of the benefits. The rationale for the veto threat was that the potential “tax extenders” deal did not make permanent the expansions of the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC), which were originally included in the Recovery Act and are currently set to expire in 2017.
The veto threat has been portrayed as dividing Democrats in two groups: those that would have been willing to vote for the nearly-agreed upon $440 billion tax deal as is, versus those that would have only accepted the deal had it included the EITC and CTC.
Not mentioned: anyone who thinks that simply tacking on an expanded EITC and CTC on top of the Senate agreement would still be bad policy, and that these issues should get disentangled, quickly—a group which, spoiler alert, contains EPI.
To be clear, the expanded EITC and CTC are good policies, and both should be a permanent part of our tax code. The Center on Budget and Policy Priorities writes that letting the expansions expire would push 16 million people—including 8 million children—either into or deeper into poverty. The steep progressivity of taxes at the bottom of the income distribution helps a lot of needy people and also aids the cause of economic recovery; the people that receive the EITC and CTC tend to spend the money, helping it circulate throughout the economy quickly. And the cost for making these expansions permanent—$96 billion between now and the end of the 10-year budget window in 2024—is pretty modest compared to the packages floating around the House and Senate this week.
As we near the end of the calendar year, we’ve once again reached tax extender season—the time of year when senators and representatives set aside their differences to hand out tax breaks, loopholes, credits, and deductions as if they got them at a Black Friday sale. For the uninitiated, “tax extenders” refers to a whole package of supposedly temporary tax breaks that are lumped together and passed into law every year or two, like clockwork.
Tax extender packages are genetically designed to sail through even the most acrimonious Congress. For one thing, there’s something for everyone. Supporters of schoolteachers will vote for the package because it includes a deduction for teachers to buy items for their classrooms, even if it includes tax breaks they don’t like at all, like those that benefit thoroughbred racehorse owners and NASCAR racetrack developers. (Policymakers that like watching fast things race in circles, but don’t care much for teachers, are also happy to vote for the package.) Moreover, the temporary nature of extenders packages allows Congress to simultaneously pretend that the tax breaks will actually expire soon (so as to deflate the budgetary cost of the legislation) while telling key constituencies—most of whom happen to be big businesses—that their cherished tax breaks are effectively permanent because they have always been extended before.
This week, Congress appears to be zeroing on a tax extender deal to be voted on when lawmakers return to Washington after Thanksgiving—and somehow, the biannual tax-cut fest is worse than normal.
The holidays are coming, and this means dealing with the stereotypical uncle or brother-in-law who will make for a tense dinnertime by (among other things) loudly spouting conservative talking points on the economy.
There’s not time to detail the full Bingo board of silly views on the economy, but we can go over five themes that regularly recur, along with some detail on why they’re wrong.
1) The government’s spending too much—they should tighten their belts the same way households had to following the Great Recession
This “tighten the belts” line is perhaps the worst analogy ever. And yes, it’s bipartisan silliness. Simply put, if everybody (households, businesses, and governments) tightens their belts together (i.e., stops spending money) then the result is just a steep recession. Even with increased federal government spending, tightened household and business spending in 2008-2009 led to a savage economic downturn. Actively cutting government spending would’ve made it worse. Much worse. There really is tons of evidence that the increases in government spending during and right after the Great Recession (the Recovery Act, mostly) made the recession much lighter and the recovery come faster.
But, say you continue to disbelieve the overwhelming evidence that spending cuts slow growth and worsen recessions. Let’s just look at the data on federal spending in the recovery since the Great Recession versus recovery from the previous three recessions (in the early 1980s, early 1990s, and early 2000s) to see if even the premise of “exploding spending” in recent years is right. The figure below shows (inflation adjusted) federal government spending over the full business cycle (centered on the recession’s trough in the middle of 2009.
While the economy continues to create jobs, we’ve been tracking nominal wages as well as job growth, and it’s clear from this that continued slack in the labor market has left workers without bargaining power to bid up their wages. And it may be some time before wage growth gets anywhere near 3.5 to 4 percent, a growth rate that would be consistent with the Fed’s 2 percent inflation target and assumption of 1.5 percent productivity. Eventually, wage growth at that rate could even begin to claw back labor share of corporate-sector income, which has not even started moving in the right direction since the recession began.
This week, the Bureau of Labor Statistics released the Consumer Price Index for October 2014. These data allow us to look at real (inflation-adjusted) wages. The figure below shows real average hourly earnings of all private employees (top line) and production/nonsupervisory workers (bottom line) since the recession began in December 2007. For both series, you can see that real wages fell during the recession, then jumped up in late 2008 in direct response to a drop in inflation. When inflation falls and nominal wages hold steady, the mathematical result is a rise in inflation-adjusted wags. After the deflation leading up to 2009 stopped boosting real wages, wage growth has been flat.
Real average hourly earnings, December 2007– November 2014
|All private employees||Production/Nonsupervisory|
Note: Earnings are adjusted to November 2014 dollars.
Source: Author analysis of Bureau of Labor Statistics's Current Employment Statistics and Consumer Price Index, public data series.
The second figure below charts the year over year change in real hourly earnings for both series over the last four years, notably after the spikes in real wages associated with a brief deflationary period. From the figure, it is obvious that wages for both series—all private sector and production/nonsupervisory workers—have stayed close to zero over the entire period. Both the nominal wage series and the real wage series tell a consistent story. Wages are continuing to flat line far into the so-called recovery.
Year-over-year change in real average hourly earnings of all private nonfarm employees and private production/ nonsupervisory employees, November 2009– November 2014
|All Private Employees||Production/Nonsupervisory|
Note: Earnings are adjusted to November 2014 dollars. Light shaded area denotes recession.
Source: Author analysis of Bureau of Labor Statistics's Current Employment Statistics and Consumer Price Index, public data series.
As retailers and consumers gear up for the holiday shopping season, it’s a good time to take a closer look at what things are like for the person on the other side of the cash register. Over the past year, there have been an increasing number of retail strikes as workers in the industry call for higher pay and better working conditions. Why should this matter to the ordinary shopper just out looking for the perfect gift? Because poor wages in retail may be shrinking your paycheck as well, and in more ways than one.
Retail workers tend to be paid significantly lower than workers in other industries. As the graphic below shows, the median hourly wage for workers in the retail sector is 32.4% lower than the median hourly wage for all other industries.1 Importantly, the lower wages in retail are not simply the result of demographic factors that might contribute to lower wages, such as the age or education levels of typical retail workers. Using a regression approach to control for demographic and regional factors, the data show that wages in retail are 18% lower than in other industries.2 This is the “wage penalty” of working in retail.
The prevalence of low-wage work in the retail sector leads to lower annual incomes and higher concentrations of poverty among retail workers. In 2013, the average annual weekly earnings of nonsupervisory retail workers was $423—that’s less than $23,000 per year, and more than $500 below the federal poverty line for a family of four. It should come as no surprise then that poverty rates for retail workers are significantly higher than for workers in other industries. The poverty rate for workers in retail was 10.1 percent, compared with 6.6 percent of workers outside of retail.3
I can’t for the life of me understand what all the noise is about over the president’s plan to issue an executive order on immigration this evening. I remember many years ago when Ronald Reagan issued an executive order that gave many immigrants “amnesty.” At that time, Democrats did not threaten to sue him, because everyone said that it was the right thing to do. So why is it wrong now?
When President Reagan issued his executive order, many people from all around the world benefited. They had lived here for many years, working and living under false pretense, making minimum wage, and taking any job just to be employed—even though many were highly educated and had college degrees obtained right here in America. The same situation applies to those affected immigrants today. So why was it right to give those people under Ronald Reagan’s signature an opportunity, and wrong for Obama to do the same for the millions of immigrants who have lived—many for ten years or more—worked, paid taxes, and received an education in this country?
The Republicans have many immigrants in their ranks, and they must know that the president is doing the right thing but, because he is taking the initiative to make things right for these undocumented immigrants—just like he took the initiative to give health care to millions of Americans—they’re once again foaming at the mouth about it.
The president’s actions tonight will go a long way to make America better, both socially and economically.
Alyce Anderson is a Liberian American and the Executive Assistant to EPI President Larry Mishel.
This post originally ran on the Wall Street Journal‘s Think Tank blog.
The New York Times David Leonhardt is a sharp observer of American economic trends, but I think he took a wrong turn in his Monday piece on wages—and data released Wednesday by the Congressional Budget Office helps show why.
Mr. Leonhardt pointed out the dismal wage trends for the vast majority of American workers in recent decades and how it would be a heavy policy lift to reverse them. This seems right to me. But then he wrote:
“Washington could definitely do more to help growth: better infrastructure, a less burdensome tax code, a less wasteful health care system, more bargaining power for workers and, above all, stronger schools and colleges, to lift the skills of the nation’s work force.”
As they might say on “Seinfeld,” you can’t “yada yada” more bargaining power for workers. It’s the most important part of the story.
The root of the U.S. wage problem (which is, in turn, the root of America’s inequality problem) is that most workers aren’t seeing their wages keep pace with overall productivity growth. The policies on Mr. Leonhardt’s list are worthy, but most would not reliably close this gap between productivity and pay. Boosting the bargaining power of workers would.
President Obama’s Executive Action on Immigration Will Improve the Wages and Working Conditions of Unauthorized Immigrants and U.S.-Born Workers Alike
The internet and Twitter have virtually exploded over President Obama’s scheduled announcement tonight at 8 p.m. EST, regarding the actions he will take to reform the immigration system without Congress, relying on the legal authority he has to execute the laws of the United States. Most of the discussion surrounding this has focused on: 1) what the substance of the reforms will be and, regarding the most important reform—shielding unauthorized immigrants from deportation—estimating the share of the unauthorized population that will be eligible; 2) whether the executive reforms are lawful without a legislative directive from Congress; and 3) how the reforms will impact American politics (including whether there will be a government shutdown and if the reforms will “poison the well” for cooperation between Republicans and Democrats on other topics).
Tonight we’ll find out the exact substance of the reforms. And I’ve already discussed at length here and here how temporarily removing the threat of deportation (also known as “deferred action”) for up to four or five million unauthorized immigrants who have resided in the United States for at least five or ten years, and granting them employment authorization—is well within the bounds of the president’s legal authority to act. The Constitution allows the president prosecutorial discretion to enforce the law selectively when he has limited resources available to him, and he’ll be targeting those resources more effectively if he focuses the government’s immigration enforcement machinery on criminals and terrorists, rather than otherwise law-abiding immigrants who have deep ties to the nation and U.S. citizen children and spouses. Regarding the political impacts of the action, I’ll leave that up to the political analysts and prognosticators. But the one aspect that receives too little attention is the positive impact that deferred action and work authorization will have on the wages and workplace bargaining power of the unauthorized immigrant workers in our labor market who might qualify for the president’s new deferred action.
American workers are increasingly concerned about how their employers schedule their work time, and for good reason. The spread of just-in-time scheduling, facilitated by computer programs that match employee shifts with customer traffic, is making life harder for the employees whose schedules are constantly changed, who report for work after long commutes only to find their hours have been cut—say from an expected eight that day, down to only one or two—and right at the last minute. That can make it close to impossible for workers to plan arrangements for child care, class schedules, or even transportation to and from work. Other employees are taken advantage of by employers who schedule them for long hours without advance notice, disrupting the same child care, education, and transportation schedules(though at least the excessive hours result in higher pay, if they’re covered by overtime protections and entitled to time-and-a-half for hours in excess of 40 in a week).
Politicians have two kinds of responses to these problems. Some are interested in real solutions, like the San Francisco Predictable Scheduling ordinance approved yesterday, which outlaws unpredictable scheduling practices at retail chain stores and promotes equal treatment of part-time workers. State law in California already requires employers to compensate employees who report to work but are given less than half their scheduled hours, and requires employers to pay for an extra hour of work when there are unpaid interruptions of the work day longer than a bona fide meal period.
Other politicians only pretend to do something for workers without doing it—or even make matters worse. A perfect example of that kind of fraudulent response is H.R. 1406, the House Republicans’ perennial answer to demands for improvements in the work-family balance. They call their bill the “Working Families Flexibility Act,” but the only flexibility it provides is to employers, rather than to employees. It gives employers the right not to pay anything for overtime hours in the week in which they are worked, but to instead consider giving time-and-a-half off with pay at some later point in the year. If it never turns out to be convenient, the employer has to repay the employee for her overtime at the end of 12 months. In effect, the bill authorizes an interest-free loan of the employees’ overtime pay with no guarantee of any time off.
Pity the top 1 percent in America. At the end of 2012, their taxes went up. First, Congress allowed the top tax rates on ordinary income and capital gains to increase back to 2001 levels (39.6 percent and 20 percent respectively), and the top tax rate on dividends increased to 20 percent (which is lower than the 2001 rate of 39.6 percent). Second, the Affordable Care Act net investment income tax of 3.8 percent and the additional Medicare tax of 0.9 percent took effect for high income taxpayers. Third, the limitation on itemized deductions and the personal exemption phase-out were reinstated for taxpayers with income over $250,000 (basically the top 3 percent). Lastly, the temporary payroll tax holiday, which reduced the Social Security payroll tax rate to 4.2 percent, expired (the tax rate is back to 6.2 percent for all workers).
With all these new (and old) taxes, how are the 1 percent doing? The Congressional Budget Office recently released a report on the distribution of household income and taxes for 2011, which may provide an answer.
CBO’s analysis shows trends in the average tax rate and income between 1979 and 2011, for various income groups. Between 1979 and 2011, the inflation-adjusted before-tax income of the top 1 percent grew by 175 percent; the income of the middle 60 percent grew by 29 percent. Over the same period, the inflation-adjusted after-tax income of the top 1 percent increased by 200 percent, compared to 40 percent for the middle 60 percent of the income distribution. At least in 2011, the top 1 percent was doing very well—especially compared to everyone else.
Of course, this information does not answer our question. CBO also estimated taxes under the 2013 tax law (assuming the 2011 distribution of income) and showed that average tax rates would indeed be higher across the income distribution. The average tax rate of the top 1 percent would be 33 percent under the 2013 tax code rather than the 29 percent under the 2011 tax code—a whopping 4 percentage point increase. However, even with this increase, the average tax rate of the top 1 percent is lower than it was in 1979, 1980, 1993, 1994, 1995, 1996, and 1997!
With the tax increase after 2012, the inflation-adjusted after-tax income of the top 1 percent increased by over 180 percent since 1979; income for the middle 60 percent increased by less than 40 percent since 1979. Even with the additional taxes, the folks in the top 1 percent are doing much better than they were in 1979 and much better than everyone else; they don’t need pity.
The Washington Post published an editorial on the “wage freeze” on Sunday, revealing the emptiness of its analysis and offering no recommendations for generating wage growth. At least there was acknowledgment of the problem, that “middle-class family incomes are still not growing very much” and “average income for the bottom 90 percent of households has barely grown at all, in real terms, over the last four decades.”
Why care is answered with:
“If you believe that democracy’s social foundation is a strong middle class, this trend is worrisome not only for its human cost, but also for the threat it poses to U.S. political health.”
So far so good, the problem is widespread (the entire bottom 90 percent), it is long-term (last four decades) and it matters (for our democracy). I agree.
What shall we do? The editorial says we need to acknowledge how “difficult it will be to reverse middle-class income stagnation” and offers no suggestions whatsoever. I guess that’s better than bad suggestions, such as tax cuts, either temporary or permanent, or that sending more people to college is the answer (it is not: the wages of college graduates are stagnant, especially young college grads many of whom are working in jobs that don’t require a college degree. Remember, the problem afflicts the bottom 90 percent!).Read more
On Friday, EPI’s Larry Mishel and I joined a group of workers and community activists who are urging the Federal Reserve to resist pressures to raise interest rates before the labor market has fully recovered and who are also calling for greater public input into the selection of regional Fed bank presidents and board members.
At a press briefing outside the Fed before the meeting, organized by the Center for Popular Democracy, featuring workers and community organizers, I delivered the following remarks:
Hello, I’m Josh Bivens, the Director of Research and Policy at the Economic Policy Institute here in Washington, DC and a macroeconomist. I’m going to try to provide some economic context for today’s meeting and highlight the high stakes in this debate.
But I’ll start just by saying that I think today’s meeting with Federal Reserve Chair Yellen and this group is a hugely encouraging event.
Encouraging because the Federal Reserve is the most influential policymaking institution in the United States—and likely the world—yet far too few American realize the enormous stake they have in decisions made there.
The September Job Openings and Labor Turnover Survey (JOLTS) data released yesterday showed job openings falling as hires rose. Over the business cycle thus far, both opening and hires fell dramatically over the recession, then have been climbing back up throughout the recovery.
What’s striking from the first figure below is that openings fell at a faster rate than hires during the recession and have also returned at a faster rate over the recovery. Both are now at least back to their prerecession levels, and growth in openings has now overtaken growth in hires. However, returning to their immediate prerecession levels is not a particular milestone, because it fails to take into account the growth in the working age population.
The recent excess of openings over hires has led some to infer that this suggests a shortage for some types of workers, and evidence that a mismatch between workers’ skills and employers’ demands has become a key labor market problem. We should note that there are substantial other pieces of evidence that are inconsistent with this “skills mismatch” theory. For example, there are still 2 unemployed workers for every job opening in the economy. And, there are no sectors where jobseekers outnumber job openings. That is pretty strong evidence against any shortage of skills in the economy today, but the gap in the growth of opening and hires have led some to suggest that there is a one.
The figure below shows the number of unemployed workers and the number of job openings in September, by industry. This figure is useful for diagnosing what’s behind our sustained high unemployment. If today’s labor market woes were the result of skills shortages or mismatches, we would expect to see some sectors where there are more unemployed workers than job openings, and others where there are more job openings than unemployed workers. What we find, however, is that unemployed workers exceed jobs openings across the board.
Some sectors have been closing the gap faster than others. Health care and social assistance, which has been consistently adding jobs throughout the business cycle, has a ratio quickly approaching 1-to-1. On the other end of the spectrum, there are 6.5 unemployed construction workers for every job opening. Removing those two extremes, there are between 1.1 and 3.1 as many unemployed workers as job openings in every other industry. This demonstrates that the main problem in the labor market is a broad-based lack of demand for workers—not, as is often claimed, available workers lacking the skills needed for the sectors with job openings.
Unemployed and job openings, by industry (in millions)
|Professional and business services||1.1383||.8208|
|Health care and social assistance||.7028||.6798|
|Accommodation and food services||.9651||.5539|
|Finance and insurance||.2733||.2183|
|Durable goods manufacturing||.5034||.1746|
|Transportation, warehousing, and utilities||.3823||.1598|
|Nondurable goods manufacturing||.3262||.1081|
|Real estate and rental and leasing||.1212||.0519|
|Arts, entertainment, and recreation||.2258||.0738|
|Mining and logging||.0558||.0274|
Note: Because the data are not seasonally adjusted, these are 12-month averages, September 2013–August 2014.
Source: EPI analysis of data from the Job Openings and Labor Turnover Survey and the Current Population Survey
The September Job Openings and Labor Turnover Survey (JOLTS) data released this morning from the Bureau of Labor Statistics showed mostly positive news. The one bleak spot was job openings, which fell by 118,000 jobs, to 4.7 million. On the other hand, the hires rate and the quits rate both increased, while the layoffs rate held steady.
The figure below shows the hires rate, the quits rate, and the layoffs rate. Layoffs, which shot up during the recession, recovered quickly once the recession officially ended. Layoffs have been at prerecession levels for more than three years. This makes sense—the economy is in a recovery and businesses are no longer shedding workers at an elevated rate. The fact that this trend continued in September is a good sign.
But two things need to happen before we see a full recovery in the labor market: Layoffs need to come down and hiring needs to pick up. While it’s been generally improving, the hires rate, , has not yet come close to a full recovery—it’s well below its prerecession level.
The voluntary quits rate, which has been flat for the last seven months, saw a spike up in September. A larger number of people voluntarily quitting their job indicates a labor market in which hiring is prevalent and workers are able to leave jobs that are not right for them, and find new ones. While these series are somewhat volatile, the sharp increase in the quits rate is a positive sign. That said, there are still 5 percent fewer voluntary quits each month than there were before the recession began. A return to pre-recession levels of in voluntary quits would indicate that fewer workers are locked into jobs they would leave if they could.
Hires, quits, and layoff rates, December 2000–September 2014
|Month||Hires rate||Layoffs rate||Quits rate|
Note: Shaded areas denote recessions. The hires rate is the number of hires during the entire month as a percent of total employment. The layoff rate is the number of layoffs and discharges during the entire month as a percent of total employment. The quits rate is the number of quits during the entire month as a percent of total employment.
Source: EPI analysis of Bureau of Labor Statistics Job Openings and Labor Turnover Survey
This morning’s Job Openings and Labor Turnover Summary (JOLTS) shows that the total number of job openings in September was 4.7 million, down 118,000 since August. Meanwhile, there were 9.3 million job seekers (unemployment data are from the Census’s Current Population Survey), meaning that there were 2.0 times as many job seekers as job openings in September. Put another way, job seekers so outnumbered job openings that about half of the unemployed were not going to find a job no matter what they did. In a labor market with strong job opportunities, there would be roughly as many job openings as job seekers.
While the jobs-seekers-to-job-openings ratio held steady, it has otherwise been steadily declining since its high of 6.8 to 1 in July 2009, as you can see in the figure below. The ratio has fallen by 0.9 over the last year.
At the same time, the 9.3 million unemployed workers understates how many job openings will be needed when a robust jobs recovery finally begins, due to the existence of 6.3 million would-be workers (in September) who are currently not in the labor market, but who would be if job opportunities were strong. Many of these “missing workers” will become job seekers when we enter a robust jobs recovery, so job openings will be needed for them, too.
Furthermore, a job opening when the labor market is weak often does not mean the same thing as a job opening when the labor market is strong. There is a wide range of “recruitment intensity” with which a company can deal with a job opening. For example, if a company is trying hard to fill an opening, it may increase the compensation package and/or scale back the required qualifications. Conversely, if it is not trying very hard, it may hike up the required qualifications and/or offer a meager compensation package. Perhaps unsurprisingly, research shows that recruitment intensity is cyclical—it tends to be stronger when the labor market is strong, and weaker when the labor market is weak. This means that when a job opening goes unfilled when the labor market is weak, as it is today, companies may very well be holding out for an overly qualified candidate at a cheap price.
Congress is back in session this week, following an election that saw the Democrats lose control of the Senate and fall further into the minority in the House. A number of postmortems about the election have focused on the issue of wage stagnation—the fact that wages for the bottom 70 percent of the American workforce have essentially seen no increase at all since 1979. Worse, without the full-employment period of the late 1990s that pushed up wages across the board, wages for this group of workers would have outright fallen over the past three decades.
One of the better insights in these postmortems on wages and politics came from Gene Sperling, former economic advisor to both the Clinton and Obama administrations, who told the New York Times that jump-starting wage growth “is not a silver-bullet issue.” Now, part of why I think this is such a good insight is that I’ve said it many times in the past—arguing for a wages policy agenda a long time ago—and reiterated it recently with some colleagues, arguing again for a wage policy agenda with the launch of our Raising America’s Pay project.
But I also like this insight because it’s just obviously true. Unlike, say, health reform or climate change abatement, this is not an issue that lends itself to a single omnibus piece of legislation that will pass and make the problem go away (or even ameliorate it a lot).
This week, U.S. Trade Representative Michael Froman announced a “breakthrough” agreement between the United States and China to expand the World Trade Organization’s (WTO) Information Technology Agreement (ITA), which eliminates tariffs among 54 countries in high-tech products. Froman enthusiastically noted that the ITA was last amended in 1996, when “most of the GPS technology… [and] high-tech gadgetry that we rely on in our lives didn’t even exist.” The United States has a massive and rapidly growing trade deficit in computers and electronic products and related electronic “gadgets.” The proposed expansion of the Information Technology Agreement will open the door to a massive increase in job-destroying imports of Chinese high-tech products.
The U.S. trade deficit in computers and parts increased from $19.9 billion before China entered the WTO in 2001, to an estimated $160 billion in 2014, as shown in the figure below. Job-destroying imports exceed job-supporting exports in this industry by more than 15 to 1. Further opening of the U.S. market to Chinese high tech products will cost hundreds of thousands of jobs. Growing U.S. trade deficits in computers and electronic products eliminated more than 1 million U.S. jobs between 2001 and 2011 alone. Currency manipulation by China (and other countries) acts as a subsidy to all of China’s exports of computers and other products, and as a tax on U.S. exports to China, and every country where U.S. firms compete with Chinese products. Froman is giving away access to U.S. hi-tech markets and seems unaware that the U.S. computer manufacturing and parts industry has been decimated by cheap, subsidized Chinese imports.
The macroeconomic policy question du jour is when will the Federal Reserve begin raising short-term interest rates to slow economic recovery and reduce inflationary pressures? We at EPI have been pretty clear on when they should do this: not until wage-growth is much, much stronger.
Since the economic channel through which raising rates stems inflationary pressures is slower job growth, leading to a reduction in workers’ bargaining power and reduced wage growth, this makes data on what is actually happening to wage growth crucially important to Fed decision making.
EPI economists have been tracking this a lot recently and have shown how the Fed’s target for overall price inflation (2 percent) is consistent with wage growth of at least 3.5 percent. We calculate this simply by noting that trend productivity growth is likely at least 1.5 percent and pointing out that it takes wages costs in excess of productivity growth to spur any upward pressure on prices at all. We’ve also noted that the very large decline in the overall share of national income going to labor compensation (see Figure G here) means that the economy could afford an extended period of wage growth outpacing the sum of productivity and price inflation, to allow labor income to claw back some gains it lost to capital owners earlier in the recovery.
Yesterday, the macroeconomic team at Goldman Sachs implicitly argued that this 3.5-4 percent wage growth target is too cautious. In a research note released today (no link available, sorry), they argue that trend productivity growth in the non-farm business sector is 2 percent or higher, not 1.5.
Now, you need to discount a little of this (roughly 0.2 percentage points) to translate productivity in the non-farm business sector to total economy productivity, but the fact remains that even extraordinarily cautious estimates of labor productivity growth (i.e., ours) still means that wage-growth could almost double from today’s levels for an extended period before it puts enough upward pressure on wages to force the Fed to act.
In an article just published in the journal Race and Social Policy, I reviewed why education policy is inseparable from civil rights policy. Failure to recognize this connection is the greatest impediment to improving the academic performance of disadvantaged African American and other minority and low-income children.
For years now, education policymakers and advocates have attempted to close the black-white achievement gap by reforming schools. The primary vehicles have been greater accountability for schools and teachers, higher expectations for students, deregulation and semi-privatization by charter schools, and more recently, curricular reform with the Common Core.
All efforts, however, have come up short. The racial achievement gap remains.
At least 650,000 college-educated temporary foreign workers are employed in the United States through the H-1B visa program, mostly in the high-tech industry. The H-1B is a well-known guestworker program that is inadequately—but at least minimally—regulated, with an annual limit and a requirement that employers pay a “prevailing” wage. Other visa programs, like the L-1 and the F-1 Optional Practical Training (OPT) program, have almost no rules and receive little scrutiny, but are used to employ hundreds of thousands of foreign tech workers. Behind the scenes, the tech industry is pushing President Obama to expand them both as part of executive actions he’s considering on immigration. He should resist.
Twenty years ago, the radical wing of the Republican Party announced its “Contract With America,” a set of policies and actions Rep. Newt Gingrich and his caucus pledged to accomplish if they were elected to a majority in Congress. The Contract included eight internal reforms to change congressional operations (things like applying labor laws to Congress and putting term limits on committee chairmen) and ten bills affecting national policy that would be brought to the floor and voted on within the first 100 days of the new Congress.
Gingrich’s early battles ultimately ended in victory for the public and for the environmental and consumer protections he wanted to undo. Gingrich’s bills were made worse as they moved through committee and were amended in the House and Senate, finally resulting in what one senior Republican Senate staffer called “a revolution”—a system that would allow any corporation to escape enforcement through legal or procedural loopholes. Every regulation would be effectively voluntary, and the polluters and producers of unsafe products would have nothing to fear from the EPA, the Consumer Product Safety Commission, OSHA, or any other regulatory agency.
The vehicle for this revolution was one of the first bills considered and passed in the House in 1995, “The Job Creation and Wage Enhancement Act.” Its goal was to subject federal regulations—regardless of statutory mandates to the contrary—to new risk assessment and cost-benefit analysis requirements and to create multiple opportunities for businesses to block federal rules and interfere with their enforcement. Big chemical and pharmaceutical manufacturers didn’t want clean water laws interfering with their profits, the meat industry wanted to prevent new rules about bacteria and contamination, and construction companies didn’t want to have to comply with new workplace safety standards. The legislation would have stopped new rules in their tracks.
What adjective should we use when we talk about job growth of 214,000 in October? Is it strong, weak, solid? Is it enough? Enough for what?
Take an amble with me through some calculations. If you don’t care to take a walk, the punchline is that if we extrapolate this rate of jobs growth into the future, it will be 2018 before we return to a labor market resembling the one we had before the recession began.
Now for the math. Employment fell dramatically through the recession and its aftermath. The economy has been consistently adding jobs over the last four and a half years. But, we are still experiencing a 6.1 million job shortfall. That’s the amount of jobs needed to keep up with the growth in the potential labor force, shown in the figure below.
Today’s jobs report from the Bureau of Labor Statistics shows that payroll employment has increased by more than 200,000 jobs for nine consecutive months (since February 2014) and the average rate of growth this year has been 232,000 jobs per month, compared to 197,000 jobs per month over the same period last year.
At this stage in the recovery, these numbers demonstrate an important point about the importance of pursuing full employment in lowering unemployment among people of color. The point to be made here is that the longer the economy continues to add jobs, the greater the impact on labor market outcomes for people of color. Over the past twelve months (since October 2013), African Americans and Hispanics have seen larger relative improvements than whites in all the major labor market indicators— unemployment rate, labor force participation, and employment-population (EPOP) ratio. And, most if not all of those improvements have taken place this year (since January 2014). The following chart shows these relative changes over the period of interest.
Starting with the unemployment rate, whites have seen a 1.5 percentage point decline since October 2013, compared to 2.1 and 2.2 percentage points for African Americans and Latinos, respectively. While improvements in the unemployment rate can be distorted by people leaving the labor force, this has not been the case for people of color. The labor force participation rates for African Americans and Latinos have increased over the past year, but declined for whites. In fact, as whites have left the labor force at a higher rate since January 2014, African Americans have entered at a greater rate.
Percentage-point change in unemployment rate, labor force participation rate, and employment-to-population ratio, by race and ethnicity, Oct. 2013–Oct. 2014
|Measure||Race/ethnicity||Oct. 2013–Oct. 2014||Jan. 2014–Oct. 2014|
|Labor force participation rate||White||-0.1||-0.5|
Source: EPI analysis of Current Population Survey public data series
The top line story coming out of today’s jobs report should be about wages. Nominal wage growth remains sluggish—far too slow to set a time frame for raising interest rates, or even start a conversation about it. For more on that, see the most recent monthly wages figure and quarterly data and this explainer.
Job growth, meanwhile, has been solid, but not strong. The unemployment rate is still slowly moving in the right direction. But, we are still far from the economy we had before the great recession began. At the rate jobs were added in October (214,000), it will be 2018 before we return to 2007 normalcy.
The employment-to-population ratio for prime-age workers is a great measure of the economy—and a favorite of my predecessor—which captures a variety of different labor market components. The employment-to-population ratio (or EPOP) is simply the share of the population with a job. This allows us to sidestep the issue of whether potential workers are in the labor force—though we know there are still a lot of missing workers out there (5.75 million at last count). Also, when we restrict our attention to prime-age workers (25-54 years old), it serves the important purpose of avoiding confounding changes in employment that are not due to labor market conditions, but are instead due to longer-run structural factors, such as baby boomers hitting retirement age.
From the figure below, it is clear that jobs are returning—EPOPs have been on the rise. Growing shares of prime-age workers are getting jobs. That is good news, but it’s clear how far we have to go—look at the sharp drop in the EPOP during the great recession. Then, it is clear that we are slowing climbing out, but we have far to go.
In the BLS report this morning, overall jobs numbers were solid and the unemployment rate continued to show signs of improvement. However, the unfortunate downside of this morning’s release is that wage growth has continued to be sluggish. Average hourly earnings of all employees on nonfarm payrolls and average hourly earnings of production and nonsupervisory employees on private nonfarm payrolls saw 2.0 percent and 2.2 percent growth, respectively, over this last year.
Despite fears from some inflation hawks, the fact is that the weak labor market of the last seven years has put enormous downward pressure on wages, and there has been no significant pickup in nominal wage growth in recent years. Wage growth is far below the 3.5 percent rate consistent with the Federal Reserve Board’s inflation target of 2 percent, and far below the 4 percent rate that could easily be absorbed for a while to restore labor’s share of national income from its current historic lows.
This lackluster wage growth is a clear indicator that there’s still considerable slack in the labor market. With so many Americans looking for work—and millions more who would be looking for work if job opportunities were stronger—employers simply don’t have to offer wage increases to get and keep the workers they need. It’s a positive sign that the economy is growing, but it’s simply not enough for workers to feel the effects in their paychecks.
Year-over-year change in nominal average hourly earnings of all private nonfarm employees and private production/nonsupervisory workers, 2007–2014
|Month||All private employees||Production/nonsupervisory workers|
Note: Wage target consistent with Federal Reserve Board's 2 percent inflation target and 1.5% labor productivity growth assumption. Light shaded area denotes recession.
Source: Authors' analysis of Bureau of Labor Statistics' Current Employment Statistics, public data series.
On Friday, the Bureau of Labor Statistics will release the October numbers on employment, unemployment, and nominal wages. Consensus forecasts are that that unemployment rate will hold steady, while total employment continues to rise, likely adding over 200,000 jobs. If job growth continues on this trajectory, it will likely keep on the front burner debates over just how much “slack” remains in the labor market, and whether the Federal Reserve should begin raising rates sooner or later.
But the most reliable indicator of slack at this point is not employment growth or unemployment—it’s the nominal wage series. The numbers on nominal wage growth from the Employment Situation, and other related government data, are likely to be the single most important indicator driving the Fed’s decisions in coming months.
Despite fears from some inflation hawks, the fact is that the weak labor market of the last seven years has put enormous downward pressure on wages, and there has been no significant pickup in nominal wage growth in recent years.
The figure below shows year over year nominal wage growth from a variety of data sources.
Quarterly wage series, 2000Q1–2014Q3
|Average hourly earnings of production/nonsupervisory workers||Average hourly earnings of all private employees||CPS-ORG median*||ECI, wages and salaries, all private workers||ECEC, wages and salaries, all private workers|
Note: Wage target consistent with Fed 2% inflation target and 1.5% productivity growth assumption. CPS-ORG median is a six-month moving average.
Source: Author's analysis of Bureau of Labor Statistics' Current Establishment Survey, Current Population Survey (CPS), Total Economy Productivity (unpublished), Employment Cost Index (ECI), and Employment Costs for Employee Compensation (ECEC).
As you can see in the figure, even quarterly wage measures exhibit a fair amount of volatility. Taken together, however, it is clear that wage growth is far below the 3.5 percent rate consistent with the Federal Reserve Board’s inflation target of 2 percent, and far below 4 percent rate that could easily be absorbed for a while to restore labor’s share of national income from its current historic lows. It’s clear that Fed policymakers should continue its low interest rate policy until the wage data really turns around. For a longer analysis of the Fed target and what to watch for in upcoming months on wage growth, see this earlier explainer. On Friday, we will continue to track any changes in monthly nominal wages and put them in broader economic context.
This post is the latest in a series that has aimed to question the conventional Beltway wisdom about the supposed harm to the economy inflicted by the corporate tax code. Today, we’ll take on the idea that’s long been fermenting on the right, but now increasingly popping up in more mainstream outlets, to abolish the corporate tax code entirely. While there are reasons the idea of ceasing to tax corporations makes sense, the idea’s proponents have underestimated its drawbacks.
Getting rid of the corporate code entirely has some intrinsic appeal. Because corporate taxes are ultimately paid out of individuals’ pockets, it can seem desirable to tax these individuals directly—without dealing with all of the exemptions, credits, loopholes, and deductions in the corporate code, not to mention the “tax avoidance industry” such provisions support. This could potentially be a more efficient way to raise the same amount of revenue. However, there are three main obstacles that stand in the way of getting rid of the corporate code entirely.
- The corporate tax code is a progressive revenue raiser. While the corporate code only brings in about 10 percent of federal revenue, that’s still $315 billion in 2014. It’s also really progressive; the lowest fifth of earners pay about 0.9 percent of their income in corporate income tax, while the top 0.1 percent of earners pay 9.7 percent. According to the Congressional Budget Office, about four-fifths of corporate income is held by the top fifth of the income scale, and about half is held by the top 1 percent. Thus, as Jared Bernstein points out, “Unless we could replace it with higher taxes on those same households… scrapping or even just lowering the corporate tax rate would increase after-tax income inequality.” Raising that kind of revenue from the same sources, in the absence of a corporate income tax, is tougher than it may seem. The plan cited by the New York Times’ Josh Barro would replace the corporate tax by taxing individuals’ capital gains at ordinary income tax rates—a proposal long favored by progressives—and that would still only make up half of the lost revenue.
- Unintended consequences. As we’ve seen this year in Kansas’s experiment with eliminating corporate taxation, the unintended consequences are enormous. For instance, if corporations don’t pay taxes, but people still do, what would stop individuals from simply incorporating themselves for tax reasons—thus paying no taxes until their “corporate” earnings are distributed? (Kansas lost out on almost $300 million of revenue over a two-month period this year, for just this reason.) This maneuver would be just the tip of the tax avoidance iceberg if the corporate code were abolished. Getting rid of the corporate tax code and its myriad opportunities to evade taxes would not necessarily result in a system that’s harder to game.
- If you win the race to the bottom, you’re still at the bottom. While scrapping the corporate tax code would represent a “victory” in the international race to the bottom, it would undoubtedly be short-lived, as other countries would certainly react by slashing or zeroing their rates as well. This would be like a game of prisoner’s dilemma in which each suspect ratted out the other and everyone ended up in jail for a long, long time. (Jail in this case would be a hypothetical world in which multinational corporations paid no tax to any country at all.) Currently, every developed country levies a corporate income tax. They may tax different kinds of income and at different rates, but these taxes still exist throughout the world because they provide governments with revenue that would be hard to replace by switching to another tax system.
New Wages and Salaries Data from the Employment Cost Index Show Yet Again It’s Not Quite Time To Declare Mission Accomplished
This morning, the Bureau of Labor Statistics released the 2014 third quarter data from the Employment Cost Index (ECI). Total compensation and wages and salaries for the private-sector workforce both rose 0.7 percent. This is the second straight quarter of faster-than-average growth since the recovery from the Great Recession began. While this is absolutely a move in the right direction, we shouldn’t declare “mission accomplished” in spurring decent wage growth. The figure below shows the year-over-year growth rates of wages from a variety of measures: the ECI, hourly wages of all workers and hourly wages of production and nonsupervisory workers (the latter two from the monthly payroll survey, which will be updated again in a week).
There are two clear trends to note from the graph. First, all the series move fairly consistently with each other over time. In the third quarter, they all measured between 2.0 and 2.3 percent. Second, these growth rates are still far lower than the growth rates in 2007, when the wage growth ranged from 3.1 percent for all workers in the payroll survey to 4.1 percent in the ECI.
Year-over-year growth rates of wages, 2002–2014
|Date||ECI*, all workers||CES**, production/nonsupervisory workers||CES**, all workers|
* Employer Cost Index
** Current Employment Statistics
Note: All series are for private sector workers.
Source: EPI analysis of Bureau Labor Statistics' Employer Cost Trends and Current Employment Statistics
The fact is that the weak labor market of the last seven years has put enormous downward pressure on wages, and there has been no significant and sustained pickup in nominal wage growth in recent years. Employers still don’t seem to have to offer big wage increases to get and keep the workers they need, when hiring rates and net job creation remain far slower than what’s needed to generate healthy labor market outcomes.