As I wrote earlier today, while it may be too soon to sound the alarm, this morning’s Employment Situation Report should give us pause. The bottom line is this: only 126,000 jobs added in March and the downward revision of 38,000 jobs in February, together make for disappointing numbers. While it’s important not to put too much stock in a couple months of data—especially since February and March’s job creation numbers were likely dampened by the unusually large amount of snow that blanketed the country those two months—policymakers should be wary of any signs of any slowdown from the solid job growth over the previous year.
Other indicators make it clear that there is still ample slack in the labor market, most notably in the continuing trend of inadequate wage growth—private sector hourly wages are up only 2.1 percent over the year. The chart below looks at both private sector wages and the wages of production and nonsupervisory workers over the last several years, and it’s clear that wages according to either measure are far below target.
There was, however, one positive wage sign: a mild acceleration in quarter over quarter hourly wages. The annualized increase between 2014 Q4 and 2015 Q1 was 2.8 percent, reasonably faster than trend 2.0 percent. Despite this mild acceleration, we need to see even faster growth, and for a longer time, before we can say the economy is truly working for working people. The slow growth of private sector wages coupled with a few months of disappointing jobs growth mean that the Federal Reserve should not be thinking about tapping the brakes any time soon.
Nominal wage growth has been far below target in the recovery: Year-over-year change in private-sector nominal average hourly earnings, 2007–2015
|All nonfarm employees||Production/nonsupervisory workers|
* Nominal wage growth consistent with the Federal Reserve Board's 2 percent inflation target, 1.5 percent productivity growth, and a stable labor share of income.
Source: EPI analysis of Bureau of Labor Statistics Current Employment Statistics public data series
Hardcore fans of EPI’s labor market indicators will notice a change today. Our estimate of the number of “missing workers”—potential workers who are no longer classified as in the labor force but who will likely be working or looking for work if the labor market improvement continues—has been revised.
Our earlier estimates were built in large part upon projections for labor force growth contained in a paper published by the Bureau of Labor Statistics in 2007. These projections examined labor force participation rates for age-specific groups of both men and women between 1986 and 1996 and between 1996 and 2006. The paper then projected age- and gender-specific labor force participation rates for 2016.
We used these projected rates to see what labor force participation “should” be in each month between 2006 and 2016, and interpreted shortfalls between the actual participation rate and these projections as how much participation was depressed due to economic weakness, as opposed to structural changes in the labor force, like the retirement of baby boomers. We chose to look at pre-2008 projections precisely because we wanted these projections to be free of any cyclical drag imposed by the Great Recession.
But looking again at these projections recently, we noticed some slightly worrying features. For one, the labor force participation rate for men 25-34 fell significantly in both the 1986-1996 and 1996-2006 periods, yet was projected to rise substantially between 2006 and 2016. Further, the unemployment rate in 1986 was 7.0, the unemployment rate in 1996 was 5.4, and the unemployment rate in 2006 was 4.6 percent. This means that the trends estimated in the BLS projections may be buoyed up by cyclical effects. The BLS projections made no attempt to parse trends in participation rates that were driven by long-run trends versus cyclical weakness in the economy.
Eleven Atlanta educators, convicted and imprisoned, have taken the fall for systematic cheating on standardized tests in American education. Such cheating is widespread, as is similar corruption in any institution—whether health care, criminal justice, the Veterans Administration, or others—where top policymakers try to manage their institutions with simple quantitative measures that distort the institution’s goals. This corruption is especially inevitable when out-of-touch policymakers set impossible-to-achieve goals and expect that success will nonetheless follow if only underlings are held accountable for measurable results.
There was little doubt, even before the jury’s decision, that Atlanta teachers and administrators had changed answers on student test booklets to increase scores. There was also little doubt that Atlanta’s late superintendent, Beverly Hall, was partly responsible because she had, as a state investigation revealed, “created a culture of fear, intimidation and retaliation” that had permitted “cheating—at all levels—to go unchecked for years.”
What the trial did not explore was whether Dr. Hall herself was reacting to a culture of fear, intimidation, and retaliation that her board, state education officials, and the Bush and Obama administrations had created. Just as her principals’ jobs were in jeopardy if test scores didn’t rise, her tenure, too, was dependent on ever rising test scores.
Holding educators accountable for student test results makes sense if the tests are reasonable reflections of teacher performance. But if they are not, and if educators are being held accountable for meeting standards that are impossible to achieve, then the only way to meet fanciful goals imposed from above—according to federal law, that all children will make adequate yearly progress towards full proficiency in 2014—is to cheat, using illegal or barely legal devices. It is not surprising that educators do just that.
The recent budget negotiations in Congress are a reminder that policymakers can actively slow (or if they choose, speed up) recovery by depressing (or increasing) demand. As the budget talks continue, it is important to remember that more stimulus, not austerity, would have aided in the labor market recovery, and would still be a powerful way to grow the economy.
Austerity at all levels of government continues to be a drag on the economy. The effects of austerity are widespread. Cuts to safety net programs (like SNAP), for instance, not only hurt families, but also decrease demand which would spur on job growth. One clear, direct effect, meanwhile,is the lack of public sector jobs, particularly at the local level—think teachers.
As shown in the figure below, public sector jobs are still nearly half a million down from where they were before the recession began. And, this fails to account for the fact that we would have expected these jobs to grow with the population—taking that into consideration, the economy is short 1.8 million public sector jobs. This shortfall in jobs in turn removes the multiplier effect on private sector demand, snowballing into an even slower recovery.
The National Retail Federation Hates the Proposed Overtime Rules (Even Though No One Knows What They Are)
The National Retail Federation (NRF) doesn’t know what the U.S. Department of Labor’s new rules concerning exemptions from overtime protections will be, but they know they’re against them. Claiming to speak on behalf of managers who might be affected by the not-yet-released rules, NRF says: “Retail managers say the proposed changes to the federal Fair Labor Standards Act regulations show the Department greatly misunderstands their roles in the workplace and would effectively strip retail managers of their salaried status, generating negative consequences for the entire industry.”
But unless someone has leaked the proposed rule to them, NRF is just making things up! What are “the proposed changes to the federal Fair Labor Standards Act regulations” that the managers disapprove? NRF doesn’t say. Equally important, what did NRF tell the managers it surveyed? Why do “75 percent of respondents” say “the changes would diminish the effectiveness of training and hinder managers’ ability to lead by example”? I personally doubt very much the proposed rule, if it is ever issued, will say anything about training.
Some of the NRF report’s “key findings” are pretty wild. For example, “Duties and salary are not effective litmus tests for successful management.” The Fair Labor Standards Act requires employers to pay an overtime premium to all employees, including managers, unless they are bona fide executives, administrators, or professionals. The definition of “executive” has always, since the FLSA was enacted in 1938, used duties tests and the salary level to determine who is a bona fide executive. That is the case today, so the “key finding” is nonsense. The question for the Department of Labor is what salary level is an executive salary? Is it $70,000 a year, or is it the current $23,660 threshold set by the Bush administration in 2004?
What to Watch on Jobs Day: Weather-Related Revisions, Thoughts on Austerity, Missing Workers, and Nominal Wages
As another Jobs Day approaches, there are a few things I’ll be thinking about and watching for: the top line payroll employment numbers and whether the February number will get revised downward (because of the weather); the effect that proposed budget cuts could have (and the harmful effects that austerity has had so far on the economic recovery); whether more people enter the labor force in March as job opportunities appear to be on the horizon and what that does to our missing workers number (and the official unemployment rate); and, of course, what’s happening with nominal wages (and the patience of the Fed).
While payroll employment has picked up in the last year, February’s numbers—295,000 new jobs—came in a little higher than expectations. It’s possible that revisions may lower that number slightly, because of the unseasonably large amounts of snow that fell mid-month. However, we should not put too much stock into any small deviations from trend. Job growth has been solid, and as long as it stays that way, a return to pre-recession labor market health is about two years away.
I’m optimistic for stronger growth and a faster recovery, but the recent budget talks are a reminder that policymakers can actively slow (or if they choose, speed up) recovery by depressing (or increasing) demand. As the budget debate continues in Congress, it is important to remember that more stimulus, not austerity, would have aided in the labor market recovery. Austerity at all levels of government continues to be a drag on the economy. One clear direct effect of austerity is that public sector jobs are still nearly half a million down from where they were before the recession began. And, this fails to account for the fact that we would have expected these jobs to grow with the population—taking that into consideration, the economy is short 1.3 million public sector jobs. This shortfall in jobs in turn removes the multiplier effect on private sector demand, snowballing into an even slower recovery. Furthermore, cuts to public programs (like SNAP) not only hurts families, but also lower the demand needed to spur on job growth.
Earlier this week, I had the opportunity to present findings from my recent report, The Impact of Full Employment on African American Employment and Wages, at the Center on Budget and Policy Priorities’ Full Employment forum. This blog post is taken from my opening remarks, which you can watch on C-SPAN.
Talking about the labor market each month has become a bit like taking my children on a road trip—every couple miles one of them is asking, “Are we there yet?” In the case of the labor market, this question commonly refers to whether or not the economy has fully recovered. In both cases, my typical response is, “No, not yet.” If you’re familiar with either of these situations you know that answer usually leads to another question: “How much longer?” The answer to that question ultimately depends on the intended destination.
Clearly, going to a neighborhood park requires less time in the car and is cheaper than going to Busch Gardens. However, it’s also true that the payoff for these two destinations is not the same. Similarly, I would argue that full employment is a better destination with a better payoff than full recovery, and this is especially true for African Americans. The distinction is this: A full recovery is simply a return to pre-Great Recession labor market conditions. Whether or not that’s a good outcome depends on how well you were doing in 2007—while the national unemployment rate in 2007 was 5.6 percent, the black unemployment rate was 8.3 percent. On the other hand, full employment raises the bar to the point at which anyone who is willing and able to work at the prevailing wage rate can find a job.
(Update of a blog post from March 14, 2014).
March 15th was the third anniversary of the U.S.-Korea Free Trade Agreement (KORUS). President Obama said that the agreement would support 70,000 U.S. jobs. This claim was supported by a White House fact sheet that claimed that the KORUS agreement would “increase exports of American goods by $10 to $11 billion…” and that they would “support 70,000 American jobs from increased goods exports alone.” Things are not turning out as predicted. Far from supporting jobs, growing goods trade deficits with Korea have eliminated more than 75,000 jobs between 2011 and 2014.
Expanding exports alone is not enough to ensure that trade adds jobs to the economy. Increases in U.S. exports tend to create jobs in the United States, but increases in imports lead to job loss—by destroying existing jobs and preventing new job creation—as imports displace goods that otherwise would have been made in the United States by domestic workers. Thus, it is changes in trade balances—the net of exports and imports—that determine the number of jobs created or displaced by trade and investment deals like KORUS.
In the first three years after KORUS took effect, U.S. domestic exports to Korea increased by only $0.8 billion, an increase of 1.8 percent, as shown in the figure below. Imports from Korea increased $12.6 billion, an increase of 22.5 percent. As a result, the U.S.trade deficit with Korea increased $11.8 billion between 2011 and 2014, an increase of 80.4 percent, nearly doubling in just three years.
Should We Force Integration on Those Who Don’t Want It?, and Other Commonplace Questions about Race Relations
Last week, Stuart Butler and Jonathan Grabinsky of the Brookings Institution published a web-memorandum describing “Segregation and Concentrated Poverty in the Nation’s Capital.” It showed that racial segregation has not diminished in Washington, D.C. over the last 20 years and that few blacks in the city live in low-poverty neighborhoods, while most whites in the city do so. It noted that such segregation blocks economic mobility for African Americans.
I write here not so much to discuss their memorandum as the comments that followed it on the memo’s web page. One asked,
“Who is forcing this segregation? Could it just maybe be a voluntary choice of the individuals involved? Could it be basic human nature to be with those more like yourself??? Do you think we should force integration on all Americans regardless of what they want???… Why is it the business of government to decide who lives where??”
Another observed that African Americans in the Washington metropolitan area are
“…moving to segregated areas of Maryland which does not help the situation. Even though mandating a move [to integrated neighborhoods] might be a good social engineering experiment I’m sure it will be quickly looked on as gerrymandering.”
And another said that it is obvious that
“there are negative consequences to a person’s decision NOT to invest in their own human capital, to develop marketable skills or to become educated… [L]et’s not get fooled by the notion that “segregation” is a cause. We are all self-educated! It’s just that some of us decided not to participate in that effort. … I don’t have a whole lot of sympathy for anybody that decides to follow that path – nor do I think the rest of us should have to pay for it!”
These are very commonplace reactions to discussions of racial segregation, by those who are relatively well-informed and those who are not, and by liberals and conservatives alike. These issues deserve to be aired, explored, and resolved.
The first commenter asks, reasonably, “Why is it the business of government to decide who lives where?” Perhaps it is not, but the commenter fails to realize that it was government that decided that blacks should live in ghettos. We should think of efforts to desegregate as only a demand that government undo the enduring effects of its previous unconstitutional decisions about who should live where. The second commenter is partly correct that desegregation policy would be “social engineering.” What she fails to realize is that it would only be reverse social engineering, attempting to undo the harm previously committed by government’s successful and multi-faceted efforts to engineer segregation.Read more
As I’ve noted before, as trade agreements and other legislation (Trade Promotion Authority, or TPA) get debated, you’ll see more and more bad arguments in favor of them. Just yesterday, a study from Third Way claimed that trade agreements signed after 2000 have led to reductions in the U.S. trade deficit. They label these post-2000 trade agreements as “higher standard” trade agreements.
My guess it would be news to lots of policymakers that, say, the Central American Free Trade Agreement (CAFTA) and the Australia-U.S. FTA, signed in the mid-2000s during the George W Bush administration, and the Korea-US and Panama-US agreements, signed in 2012 and 2013 respectively, all qualify as simply indistinguishably “high-standard.” For instance, those who follow issues of labor standards, say, would argue that CAFTA had far less effective labor protections than these later agreements.
Leaving that aside, Third Way claims that because bilateral trade balances between the United States and the signatory countries improved after the treaties were enacted, that this means these agreements are “working.” This is really facile analysis. To see why, just note that the large majority (about 75%) of the total improvement in bilateral trade deficits following trade treaty enactment that Third Way identifies occurred with a set of countries that signed trade agreements between 2004 and 2006: Singapore, Chile, Australia, El Salvador, Guatemala, Honduras, Nicaragua, Morocco and Bahrain. The real action is the first three, which account for nearly all the improvement in this groups’ bilateral trade balance improvement between treaty enactment and 2014.
What’s the significance of this? Well of course the sum of trade balances with those countries improved between 2004-06 and 2014—the overall U.S. trade deficit fell from over $1 trillion on average in those years to just over $900 billion today.*
There was nothing magic at all about those trade treaties that drove improvement in the nation’s trade balance—what happened between the mid-2000s and today was the Great Recession, which compressed imports and reduced trade deficits. Add to this the improvement in the U.S. oil trade balance (which I don’t think anybody claims has been influenced by trade treaties) and you really don’t need to invoke trade treaties at all to explain improving trade balances between 2004-06 and 2014.
*Update: I’m reporting numbers that used the same deflation choice Third Way used – converting to $2014 using the CPI-U-RS. This isn’t quite the right way to deflate these, but wanted my numbers to be comparable.
This piece originally appeared in The Hill.
The annual federal budget debate typically doesn’t excite many folks outside the Washington beltway. And with good reason—the Republican budget process is intended to lull the public to sleep by staying short on details and long on damaging provisions that will hurt low-income and middle-class families.
But folks should pay attention to the debate because budgets have consequences—and if done right, they can truly move our country forward. The “People’s Budget,” which we both helped prepare, is a bold and responsible alternative to the Republican plans that take from working families while giving more to corporations and the wealthy.
The GOP budgets proposed in Congress would cut about $5 trillion over the next decade. The overwhelming burden would fall on programs that boost working families: education, Medicare and Medicaid, college aid, job training, medical research and rebuilding roads and bridges. Tens of millions of Americans would lose health insurance and millions more would lose food stamps or be priced out of college.
Republicans push these devastating cuts as a path to a balanced budget. But their budgets have been widely panned by experts as being based on “magic asterisks.” While they’re comfortable putting the squeeze on working families who will be most affected by these cuts in benefits and services, they refuse to ask corporations and the wealthy to contribute one thin dime to the effort. In fact, not one tax loophole is closed by their budgets.
The Senate Judiciary Committee explored important economic questions this week. Should businesses be able to lay off qualified U.S. tech workers and replace them with lower paid foreign workers? Is there a shortage of skilled Science, Technology, Engineering and Math (STEM) workers—or an oversupply? And even if there is such a shortage, should we import temporary non-immigrant labor from abroad, or would it be better to let the free market work long enough for wages to rise and more students to be attracted to these fields?
The committee’s Republican and Democratic members disagreed with each other without regard to party labels. No senator, in fact, seemed more concerned about the rights of U.S. workers and their economic outcomes—and more skeptical of claims made by the business community—than Sen. Jeff Sessions of Alabama, a conservative, anti-union Republican. Two Democrats, Sen. Amy Klobuchar (D-MN) and Sen. Chuck Schumer (D-NY) took the side of big business, along with Sen. Orrin Hatch (R-UT), Sen. John Cornyn (R-TX) and Sen. Jeff Flake, while Sen. Dick Durbin (D-IL) and Sen. Chuck Grassley (R-IA) defended the interests of U.S. workers.
Most Americans probably think it is illegal to lay off an U.S. worker and replace him with a temporary foreign worker. Yet Prof. Ron Hira and several other witnesses testified that this is not just a common practice, it is the primary use of the H-1B visa program. (Hira points out that most of the top 10 users of the H-1B visa are firms that outsource and offshore U.S. IT jobs.) When Ben Johnson of the American Immigration Council said replacing U.S. workers should not be prohibited, Sens. Hatch, Klobuchar, and Flake all agreed; in fact, they voted in 2013 to remove language from the immigration bill that would have made it illegal to use the H-1B visa to replace U.S. workers. And all three are sponsors of the “I-Squared” bill, which would triple the number of temporary non-immigrant foreign workers replacing Americans.
Yesterday I wrote a quick overview of the House GOP budget proposal, which I argued would clearly be bad for our economic—and quite possibly physical—health. The Senate GOP budget proposal is a bit better, but while less it’s less austere than the House GOP budget, it is still harmful to the general welfare and the economy.
The Senate Budget Committee’s fiscal year 2016 budget resolution, proposed by Senator Mike Enzi (R-WY), would continue damaging austerity for yet another year. This budget, which like the House Budget resolution passed with only GOP support, proposes to eliminate the budget deficit by 2025 without raising taxes. However, to achieve this goal, the budget punishes low- and middle-income people, with cuts to public investments (education, infrastructure, research and development), Medicaid, unemployment benefits, and nutrition programs for needy children.
Furthermore, because these cuts start early, when the economy is still likely to be operating below potential due to deficient aggregate demand, the budget plan has adverse effects on economic growth and jobs in the near-term. Based on standard multipliers and relationships between GDP and employment growth, I estimate that the Senate GOP budget cuts would reduce GDP by 0.7 percent in FY2016 and decrease payrolls by almost 800,000 jobs, relative to CBO’s baseline economic and budget projections. It gets even worse in FY2017—GDP would be reduced by almost 1.9 percent, with payrolls decreasing by 2.3 million jobs.
All in all, the Senate GOP budget does slightly less damage than the House GOP budget, but that’s a low bar to clear.
The House Budget Committee passed, along party lines, a fiscal year 2016 budget resolution proposed by Chairman Tom Price that would continue damaging austerity for yet another year. This draconian budget proposes to eliminate the budget deficit by 2025 without raising taxes. To achieve this goal, the budget would punish low- and middle-income people by reducing economic growth and jobs over the next 2 fiscal years, eroding the effectiveness of safety net programs, taking away health insurance coverage provided by the Affordable Care Act, and reducing public investments. If the Obamacare repeal and proposed savings from debt servicing are excluded, 95 percent of the House GOP budget cuts are targeted to just 38 percent of federal spending—the spending that includes public investments (education, infrastructure, research and development), Medicaid, unemployment benefits, and nutrition programs for needy children.
Besides the clearly significant, but hard to precisely quantify harm done to the general welfare, the House GOP budget resolution would damage economic growth in coming years in quite predictable ways. I estimate that the House GOP budget cuts would reduce GDP by 1 percent in FY2016 and decrease payrolls by 1.3 million jobs, relative to CBO’s baseline economic and budget projections. It gets even worse in FY2017—GDP would be reduced by almost 2.5 percent with payrolls decreasing by 2.9 million jobs.
It seems rather odd that the GOP would completely ignore the current state of the economy in designing their FY2016 budget. While the official unemployment rate is slowly falling and the economy is adding jobs every month, there continues to be a great deal of slack in the labor market. First, unemployment still remains high among some racial and ethnic groups. Second, the “jobs gap”—the number of jobs needed to restore the labor market to pre-Great Recession health—remains in the millions. Furthermore, there is only one job opening for every two job seekers. Finally, wages are stagnant for the majority of workers. Yet the budget appears to be designed to knock workers down and take away a hand up.
Fiscal austerity has been best described as a dangerous idea. The GOP seems bent on turning a dangerous idea into a health hazard.
It was widely reported yesterday that the word “patient” was dropped from the Federal Reserve statement on monetary policy. But too much focus on this one word might lead one to miss the forest through the trees.
Yes, the Fed no longer is committed to official “patience.” In practice that’s their way of saying we could raise rates at any time in coming meetings without giving you (and by “you,” I mean “markets”) any more warning. This has been widely (and reasonably) interpreted to mean that such a rate increase is coming soon.
Such a rate increase would be a mistake. The labor market is clearly improving, with unemployment falling and job growth accelerating in 2014. But the point of raising interest rates shouldn’t, of course, be simply to sabotage the labor market anytime it starts generating lots of jobs and reducing unemployment. The point of rate hikes in the face of economic strength is supposed to be preventing incipient inflationary pressures. But there’s an important link in the chain between falling unemployment and accelerating inflation: wages have to start accelerating. Importantly, they need to start accelerating faster than the sum of the Fed’s inflation target plus productivity growth.
What’s the logic of this wage target? For one, note that nominal (i.e., not inflation-adjusted) wage growth that simply equals productivity growth puts no upward pressure on prices at all. Say that wages rise by 2 percent but productivity rises by 2 percent too. What has happened to the cost per unit of output? Nothing. Hourly wages are up 2 percent, but the amount produced in each hour of work has risen by 2 percent as well, so costs per unit of output haven’t budged. Assume trend productivity growth of around 1.5-2 percent, and this means that only nominal wage growth over 1.5-2 percent puts any upward pressure on prices at all.
What’s Wrong with the TPP? This deal will lead to more job loss and downward pressures on the wages of most working Americans
In a recent op-ed in the Washington Post, three prominent economists, David Autor, David Dorn, and Gordon Hanson make a number of controversial arguments in favor of the proposed Trans-Pacific Partnership (TPP).
Autor, et al, acknowledge that the United States has lost 5 million manufacturing jobs since 2000 due to globalization and automation, but they then make the argument that these jobs are not coming back. There’s no sense closing the barn door after the horse has escaped, as it were. But this line of thought ignores the crucial role played by currency manipulation, which costs jobs by subsidizing foreign exports to the United States while acting like a tax on U.S. exports. Many prominent economists, including Fred Bergsten and Larry Summers, have said that trade deals like the TPP should include restrictions on currency manipulation. As Dean Baker notes, this is particularly important to keep in mind because the TPP is designed to be expandable, and countries such as China (the world’s largest currency manipulator), Korea, and India are candidates for early inclusion in an expanded TPP, if the agreement is completed.
Eliminating currency manipulation could reduce the U.S. trade deficit by up to $500 billion, adding up to 4.9 percent to U.S. GDP and creating up to 5.8 million U.S. jobs, with about 40 percent (2.3 million) of those jobs gained in manufacturing. So, many of those lost manufacturing jobs could in fact be recovered, in part through the inclusion of a currency clause that Autor, et al, fail to consider in their analysis of the TPP. A TPP without a currency clause will make it affirmatively harder to end currency manipulation in the future, and the effect of this on net exports swamps the effect of even large tariff cuts.
The TPP, trade, and job loss
Autor, Dorn, and Hanson go on to claim that because U.S. tariffs are already low, import competition from TPP members would “barely affect” U.S. manufacturers. This is an old claim, often made for previous trade and investment deals, and the actual outcomes have rarely supported these predictions. Under the North American Free Trade Agreement (NAFTA), it was Mexico that made large tariff concessions when U.S. tariffs were already low. Yet U.S. imports from Mexico still grew much faster than exports to that country, eliminating nearly 700,000 U.S. jobs by 2010 through growing trade deficits.
When China came into the WTO in 2001, it clearly had much higher tariffs than the United States, and China made large tariff cuts to gain WTO admission. Yet growing U.S. trade deficits with China through 2013 eliminated 3.2 million U.S. jobs. If tariff cuts are so favorable to U.S. exports, why do these deals usually result in growing U.S. trade deficits and job losses?
Mexico and China both experienced a tremendous increase in foreign direct investment (FDI) and outsourcing in the wake of NAFTA and China’s WTO entry. FDI in Mexico nearly tripled as a share of GDP in the decade after NAFTA, compared with the decade before NAFTA. China, meanwhile, became the third largest recipient of FDI in the world. In both countries, FDI fueled the growth of thousands of new manufacturing plants that generated exports to the United States and other markets.
Manufacturers were willing to invest in Mexico and China because of special protections offered in these deals for investors, including greatly expanded intellectual property rights and special, extra-judicial dispute settlement mechanisms to protect corporate investments (so-called investor-state dispute settlement or ISDS). The TPP threatens to roll back U.S. regulations in areas such as food safety, banking and finance regulations. These changes will be enforced through private actions under the ISDS, as well as changes in government rules.
Finally, Autor, Dorn, and Hanson’s claim that the TPP won’t significantly expand access to the U.S. market (“tariffs are already low”) is hard to reconcile with the desire of other countries to sign the deal. Why would they sign and make the sacrifices required, if not for access to the U.S. market?
It’s also important to acknowledge that terms of the TPP are still secret, and negotiations are incomplete. We are basing our analysis based on what’s happened under past agreements; other seem to be basing their analysis on their own policy preferences.
The authors claim that enhanced intellectual property rights in the TPP will generate substantial benefits for U.S. corporations and U.S. workers in industries such as information and computer services and other industries that derive much of their incomes from copyrights and royalties (including movies and hi-tech firms like Apple and pharmaceutical makers like Pfizer). While high-tech service industries are the glamour names in these discussions, it’s important to keep in mind that U.S. manufacturing firms, which stand to lose out as a result of the TPP, are responsible for more than two-thirds of U.S. business research and development spending (68.9 percent of total business R&D in 2012).
Special protections for investors in the proposed TPP will encourage the growth of outsourcing to TPP countries. In this regard, what’s important to remember is that 12 million jobs remain in U.S. manufacturing. It’s these jobs that are on the line in the next wave of outsourcing. The TPP will open up countries like Vietnam and Malaysia to more U.S. FDI and outsourcing. If China and India are allowed to join the deal in the future, the threat of additional outsourcing will increase exponentially.
The United States already has a large and growing trade deficit with the 11 other countries in the proposed TPP that reached $265.1 billion in 2014. In contrast, the United States had a small trade surplus with Mexico in 1993, before NAFTA took effect. Outsourcing to the TPP countries is a potentially much greater threat than it was under NAFTA with Mexico.
TPP will increase wage inequality
Globalization has already increased wage and income inequality, and here our findings are similar to those of Autor, et al’s, published research (though not mentioned in their column). Our research has identified two channels through which trade and globalization have driven down the wages of working Americans. First, the growth of trade deficits with China (along with other low wage countries) has forced workers out of good-paying jobs with excellent benefits into lower-paying jobs in non-traded (e.g. service) industries. I have estimated that this resulted in direct wage losses of $37 billion for the 2.7 million workers displaced by China trade in 2011 alone.
And second, my colleague Josh Bivens has used standard trade models to estimate that expanded trade has changed the composition of jobs in ways that reduced the annual wages of a full-time American worker without a four-year college degree who earns the median wage by $1,800 per year. Given that there are roughly 100 million non-college-educated workers in the U.S. economy, the scale of wage losses suffered by this group likely translates into close to a full 1 percent of GDP—roughly $180 billion.
Autor et al’s arguments about the benefits of the TPP add fuel to the income inequality fire. As Dean Baker notes, they argue that the regulatory structures being developed in the agreement would “largely benefit U.S. corporations, since they would get more money for the patents and copyrights,” and would gain new tools to use against foreign governments who threaten those profits.
The corporations that stand to benefit have few, if any, organic ties to the U.S. economy—most have outsourced a large share of production jobs to other countries. The primary beneficiaries will be people from the United States who happen to own stock in these companies. And the greatest benefits will flow to those who own the most stocks, primarily those in the top 1, 5, and 10 percent of the income distribution. So, the TPP and similar agreements will only serve to worsen U.S. income inequality.
What’s more, there are costs to providing greater protections to intellectual property. As Paul Krugman recently noted, protecting intellectual property creates a monopoly for the patent or copyright holder, which makes the world poorer. And as Dean Baker notes, it also diverts resources to the monopolists, reducing demand for everything else made by producers of other products. Questions about the impact of the TPP on income distribution and the distortions imposed by tightening intellectual property rights have motivated Nobel Prize winning economists such as Krugman and Joseph E. Stiglitz to challenge the justification for the TPP.
The administration has chosen to conduct a high-stakes campaign for fast-track authority to conclude negotiation of the TPP and a similar agreement with the European Union (the Transatlantic Trade and Investment Partnership). While fast-track requires congressional approval of negotiating objectives, it creates a process for consideration of final agreements that denies members of Congress the right to revise or amend any part of those agreements.
Alternatively, the president could decide to take steps to end currency manipulation by China and more than 20 other countries, mostly in Asia. There are a number of steps that could be taken, such as the inclusion of currency manipulation clause in the TPP. The president and federal agencies already possess the tools needed to end currency manipulation outside of the TPP. The Treasury and Federal Reserve Board of Governors have the authority needed to offset purchases of foreign assets by foreign governments by engaging in countervailing currency intervention. By taking these steps, the U.S. government could make efforts by foreign governments to manipulate their currencies costly and/or ineffective.
Ending currency manipulation could create up to 5.8 million U.S. jobs, and up to 2.3 million jobs in manufacturing alone. Manufacturing is not dead. Manufacturing job loss is not a “fait accompli,” in the words of Autor, et al. Creating millions of jobs in the United States, and especially good jobs in manufacturing, would raise U.S. wages and begin to reverse the rise in U.S. income inequality that has had a strangle hold on the economy for the past 30 years.
The president can continue the fight for fast-track and the TPP, raising corporate profits while putting good manufacturing jobs and wages at risk. Or he can take action to create jobs and reduce inequality. He can’t do both.
This post originally appeared in the New York Times Room for Debate forum on March 12, 2015.
“Right-to-work” laws deny unions the money they need to help employees bargain with their employers for better wages, benefits and working conditions. So it’s not surprising that research shows that workers in “right-to-work” states have lower wages and fewer benefits, on average, than workers in other states.
Under federal law, no one can be forced to join a union as a condition of employment, and the Supreme Court has made clear that workers can’t be forced to pay dues used for political purposes. Right-to-work goes one step further and entitles employees to the benefits of a union contract — including the right to have the union take up their grievance if their employer abuses them — without paying any of the cost.
This means that if a worker who does not pay a union representation fee is fired, the union must prosecute that worker’s grievance just as it would a dues-paying member’s, even if it costs tens of thousands of dollars. Non-dues-paying workers would also receive the higher wages and benefits their dues-paying coworkers enjoy. Right-to-work laws have nothing to do with whether people can be forced to join a union or contribute to political causes they don’t support; that’s already illegal. The only freedom workers would receive is the ability to get something for nothing.
But this comes at a substantial cost. As compared with non-right-to-work states, wages in right-to-work states are 3.2 percent lower on average, or about $1,500 less a year. Workers in right-to-work states were less likely to have employer-sponsored health insurance and pension coverage. This does not just apply to union members, but to all employees in a state.
Where unions are strong, compensation increases even for workers not covered by any union contract, as nonunion employers face competitive pressure to match union standards. Likewise, when unions are weakened by right-to-work laws, all of a state’s workers feel the impact.
In our recent EPI briefing paper, How Low Can We Go?, we noted that a lower proportion of jobless workers are protected by state unemployment insurance (UI) programs than at any time in history. The UI benefit recipiency rate for state programs fell to 23.1 percent in December 2014—below the previous record-low level of 25.0 percent in September 1984.
Eight states that cut the length of time benefits were available below the traditional 26 weeks have seen recipiency declines that exceeded all other states that did not abandon the 26 week norm.
The figure below shows declines in short-term benefit recipiency in each of the eight states starting with the month cuts took effect, and compares those declines to the average decline in the states not taking this approach over the same time periods. We calculated a short-term recipiency rate in order to isolate the target population for state UI programs—those out of work for less 26 weeks or less. Even using this narrower definition of benefit recipiency, nationally only 35 out of 100 jobless workers received UI benefits at the end of 2014. In South Carolina, which cut available weeks to 20 in 2011 and adopted other restrictions, fewer than 15 out of 100 short-term unemployed workers got UI in 2014.
By Saving Billions in Retiree Health and Pension Benefits, Auto Bailouts Were an Even Bigger Success Than Acknowledged
Austan Goolsbee and Alan Krueger’s new working paper for the National Bureau of Economic Research, “A Retrospective Look at Rescuing and Restructuring General Motors and Chrysler,” provides an excellent analysis of the auto bailouts. However, it focuses mostly on the impact of bailouts on auto production and jobs for current workers. Unfortunately, for the most part it fails to discuss the impact on retirees, which had major ramifications for the federal government and the country as a whole.
The issue of the retirees was of critical importance to the auto companies’ passage through the bankruptcy process. At the time General Motors filed for bankruptcy, it had 10 retirees for every active employee. Chrysler’s retiree-to-active worker ratio was similarly skewed. Overall, there were about 870,000 UAW retirees and dependents in the pension and health care plans at GM, Chrysler, and Ford at the time of the federal bailout. The alternative to the auto bailouts—uncontrolled bankruptcies at GM and Chrysler, and the likely demise of Ford as well—would have had devastating consequences for the huge numbers of retirees and their families.
Goolsbee and Krueger do note that if the companies had not received the federal bailouts, and instead had undergone uncontrolled bankruptcies, their pension plans would have been terminated and billions of dollars in unfunded pension liabilities would have been transferred to the Pension Benefit Guaranty Corporation (PBGC), threatening the financial stability of that agency. However, the authors fail to mention that the termination of the pension plans would also have made retirees aged 55 to 64 eligible for the federal health care tax credit. This would have put the federal government on the hook for billions of dollars in retiree health care liabilities.
Hidden amid all the discussion of when falling unemployment will lead to rising wages are the expectations shared in the media and among economic analysts that we can only expect wages to rise when unemployment is low. There is confusion here. Yes, we certainly expect wages to rise more quickly as unemployment falls. But why is there a widespread acceptance that real wages will not rise (i.e., that wages will not rise faster than inflation) at all when there is 5.5 or 6.5 percent unemployment? Why not expect real wages to rise every year as they used to in the United States and in other advanced nations? After all, output per hour has been steadily rising, profits have been historically high, and the stock market has soared. There are certainly no economic fundamentals that only allow real wages (on average or at the median) to rise during the few short years of each business cycle when unemployment is relatively low.
These lowered expectations reflect how poorly wages have performed over the last four decades. These low expectations constitute an unstated acceptance of an unacceptable normal that real wages will rarely rise. Reflecting this, analysts claim to be “puzzled” that wages have yet to accelerate as the recovery gains momentum, but seemingly are not puzzled at all when real wages fail to grow on a regular basis. So, I am calling on analysts and the journalists who cover them to examine, or at least explain, their unstated assumptions about wage growth. My view is that the failure of white-collar and blue-collar real wages to rise for well over a decade (through the last recovery and not only the recent recession but also this recovery) reflects a policy regime that makes employers dominant in the labor market, enabling them to suppress wage growth.
One of the recurring myths following the Great Recession has been that recovery in the labor market has lagged because workers don’t have the right skills. The figure below, which shows the number of unemployed workers and the number of job openings in January by industry, is a useful way to examine this idea. 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 there are more unemployed workers than jobs openings in almost every industry.
The notable exception is health care and social assistance, which has been consistently adding jobs throughout the business cycle, and there are signs that workers in that industry are facing a tighter labor market. However, we have yet to see any sign of decent wage gains yet, which would be the final indicator that the labor market, at least for those workers, was approaching reasonable health.
Other sectors have seen little-to-no improvement in their job-seekers-to-job-openings ratios. There are, for example, still nearly six unemployed construction workers for every job opening. In other words, despite claims from some employers, there is no shortage of construction workers.
Taken as a whole, these numbers demonstrate that the main problem in the labor market is a broad-based lack of demand for workers—not available workers lacking the skills needed for the sectors with job openings.
Unemployed and job openings, by industry (in millions)
|Professional and business services||1.0633||0.8969|
|Health care and social assistance||0.7018||0.7433|
|Accommodation and food services||0.9598||0.6060|
|Finance and insurance||0.2514||0.2338|
|Durable goods manufacturing||0.4524||0.1817|
|Transportation, warehousing, and utilities||0.3498||0.1688|
|Nondurable goods manufacturing||0.2974||0.1137|
|Real estate and rental and leasing||0.1148||0.0638|
|Arts, entertainment, and recreation||0.2106||0.0684|
|Mining and logging||0.0518||0.0273|
Note: Because the data are not seasonally adjusted, these are 12-month averages, February 2014–January 2015.
Source: EPI analysis of data from the Job Openings and Labor Turnover Survey and the Current Population Survey
The hires, quits, and layoffs rates all held fairly steady in the January Job Openings and Labor Turnover Survey (JOLTS). As you can see in the figure below, layoffs shot up during the recession but recovered quickly and have been at prerecession levels for more than three years. The fact that this trend continued in December is a good sign. That said, not only do layoffs need to come down before we see a full recovery in the labor market, but hiring needs to pick up. While the hires rate has been generally improving, it’s still below its prerecession level.
The voluntary quits rate rose slightly from 1.9 in December to 2.0 in January, the same rate it had been for both September and October. In January, the quits rate was still 8.0 percent lower than it was in 2007, before the recession began. A larger number of people voluntarily quitting their jobs indicates a strong labor market—one where workers are able to leave jobs that are not right for them and find new ones. Before long, we should look for a return to pre-recession levels of voluntary quits, which would mean that fewer workers are locked into jobs they would leave if they could. But, we are not there yet.
Hires, quits, and layoff rates, December 2000–January 2015
|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
While the U.S. economy has been solidly adding jobs for many months now, the Job Openings and Labor Turnover Summary (JOLTS) released today is another indicator of how much slack still remains in the labor market.
The figure below plots job openings and unemployment levels from December 2000 to January 2015, the latest month of data available. Both indicators are moving in the right direction and have clearly been improving, albeit slowly, throughout the recovery. However, in a stronger labor market, these two indicators would be closer together. The gap is a good indicator of a certain amount of slack. And, it is important to point out that the unemployment level doesn’t include the nearly 6 million missing workers, who have yet to enter or return to the labor force.
Republicans in Congress are trying to pass a joint resolution of disapproval to prevent the National Labor Relations Board (NLRB) from updating the rules that govern union elections. Republicans used fast track procedures to pass the resolution in the Senate, and held a hearing on Wednesday to begin moving the resolution through the House. If it were to pass, it would repeal the NLRB’s updates and prevent the agency from ever issuing a similar rule.
The House Education and Workforce Committee hearing was a painful experience. The NLRB is updating obsolete election rules that fail to recognize modern developments like e-mail, and which encourage excessive litigation and delay. Yet a panel stacked with anti-union lawyers attacked the rules as if they were ending American democracy. Meanwhile one witness, a registered nurse from California, offered an opposing view.
What do the new NLRB rules do? First, they require employers to share e-mail addresses and phone numbers with the union seeking an election, so that the union will have more equal access to voters. For many decades the law has required employers to share home addresses, and the NLRB sensibly thinks it is less intrusive to have union supporters call or email than to have them visit you at home. But the panel and the Republican members treated this as if it were the end of privacy as we know it (has even one of them complained about NSA spying on Americans’ phone records or calls?). Brenda Crawford, the registered nurse who testified, said her employer bombarded employees with e-mails and texts in the weeks before the election, in addition to daily anti-union messages at work, including captive audience meetings where nurses were called away from patient care to hear anti-union harangues. When she tried to put out union literature in the employee break room, it was removed. She testified that the company’s ability to campaign throughout the workday, and electronically when the workday ended, overwhelmed the nurses and their union, who had no way to respond.
Solid job growth but sluggish wage growth has been a constant refrain over the last few months. We’ve finally seen 12 consecutive months of job growth above 200,000, but wage growth shows little sign of accelerating. The question that everyone seems to be asking now is, when will wage growth pick up?
In the last couple of weeks, we’ve seen some employers take a step forward and make a choice to pay higher wages. Corporate profits are near all-time highs, so employers can pay their workers more without having to raise prices. They might even find that workers who are paid more have more company loyalty, leading to better recruitment and retention, and higher productivity. It’s a reminder that the path we’ve chosen—one where economic gains are disproportionately enjoyed by those at the top—is a choice.
Policy can help turn this around. Minimum wage increases across the country are a good example. In 2014, 18 states, where 47 percent of all U.S. workers reside, increased their minimum wage. And this change made a difference: while real hourly wages fell or stagnated across the board last month, low wage workers actually saw a modest wage increase.
The good news is, today’s jobs report was positive overall. February’s gain of 295,000 jobs continues a favorable trend. At this rate, economy will return to pre-recession labor market health in about two years.
One thing about this month’s report was different, however. As I noted yesterday, my expectation for coming months was for the unemployment rate to hold steady, or at least fall relatively slowly, given the underlying pace of job growth. This was because I expected more prime-age workers to re-enter the labor market as it improved. Given this, I was a little surprised by the 0.2 percentage point drop in the unemployment rate last month. This drop in unemployment was primarily because the labor force shrank, as employment growth in the household survey was just 96,000. (Admittedly, the household survey is far more volatile than the establishment survey, so month-to-month changes should be taken with a grain of salt.)
My guess is that the overall trends I highlighted yesterday are more likely to hold in coming months: participation will firm up, making the unemployment rate fall less slowly than the pace of job growth might normally make us expect. That’s what we saw in January and I think that trend will continue in the upcoming months, even if it didn’t hold this month.
When the February Employment Situation report is released tomorrow, I will be looking at three particular numbers: nominal wage growth, labor force participation, and the unemployment rate. Yes, I will also be looking at the overall jobs numbers, long-term unemployment, and everything else, but I am watching these three gauges in particular for indications of the strength of the recovery’s impact on workers.
While the economy has continued to add jobs, the most watched indicator—particularly by Federal Reserve policymakers and those who monitor the Fed’s actions—is wages. Nominal (non-inflation adjusted) average hourly wages for private sector workers has been rising slowly, at around 2 percent, the last several years. There has been lots of talk of when the Federal Reserve should raise interest rates in order to keep inflation at bay, even though, in this economic environment, there is no need to even begin talking about setting a date to slow the economy down. Wages are simply showing no signs of producing inflationary pressures.
We track nominal wage growth every month, and it’s abundantly clear that this indicator is far below target. What’s more, slowing down the economy prematurely would be especially deleterious to lower-wage workers and to workers of color. We need to give the economy a real chance to recover, and give workers a chance at decent wage increases, before we slow the economy down by raising interest rates. Remember that wage growth has been sluggish for many years, so in order for workers to make up that lost ground wages needs to start rising at a good clip.
Update: Binyamin Appelbaum has made a useful change to his article that I comment on below, noting that Black workers do indeed stand to benefit disproportionately from any demand boost that keeps overall unemployment rates falling in coming years. Again, however, I think that while he makes an important point, it still doesn’t strike me as right to frame it as about the limits of monetary policy. His point (as I read it) is that the gap in unemployment rates between Black and White workers is an economic problem that policymakers should seek to end, but this end-goal of no racial unemployment gap at all cannot be achieved with any single policy lever.
But while an expansionary monetary policy is not a sufficient condition to erase the racial unemployment gap, it is a necessary condition. That is, the first step towards tearing down racial bias in hiring is to rob employers of the economic power they can use to indulge this bias. And the best way to rob them of this economic power is to have tight labor markets that force employers to compete to hire workers. So, macroeconomic policy (which is dominated by the Federal Reserve) is just crucial to meeting the long-run goal of ending racial unemployment gaps.
Finally, while the existence of a racial unemployment gap in both good and bad times is a terrible problem, it’s an even bigger problem when the respective White and Black unemployment rates are 5.3 and 11.3 percent (like they were in 2014) than when they are 3.5 and 7.6 percent (like they were in 2000). So while ending the racial unemployment gap entirely should be the long-game, we also need to be keenly aware of what can alleviate economic pain in the short run. And that short-run is just dominated by what the Fed decides to do.
Simply put, the most effective policy lever to reduce the black unemployment rate in the next few years is for the Fed to keep its foot off the economic brakes by keeping short-term interest rates low until we see real signs of healthy wage growth for American workers.
Binyamin Appelbaum gets one deeply wrong in the New York Times, riffing off a report released by the Center for Popular Democracy with (full disclosure) data assistance from EPI and concludes with a version of the old saying that the Fed’s “hammer” can’t effectively address non-nail problems like excessive unemployment.
Appelbaum notes that the report shows that Black unemployment rates are significantly higher than White (or overall) unemployment rates in both recessions and recoveries. Fair enough. And if his conclusions had simply been that because the gap persists in both booms and busts that monetary policy alone cannot completely erase these unemployment gaps, that would also have been fair enough.
But instead he pushed this idea way too far, and ended getting something completely wrong. In his words (brackets and emphasis added by me):
“The same factors [that keep unemployment rates higher for Black workers in both good times and bad] help to explain why black workers are quicker to lose jobs and slower to return to work. Any given level of economic stimulus, as a result, helps black workers less than it helps white workers.”
This is totally backwards. Because Black unemployment is almost exactly double White unemployment in both recessions and booms, this means that Black workers are indeed “quicker to lose jobs” during recoveries, but they are actually faster, not “slower” to return to work. And any given level of economic stimulus reduces Black unemployment by twice as many percentage points as it reduces White unemployment, helping Black workers more than it helps White workers. In short, as the CPD report shows, the stakes regarding at what pace the economy improves and overall unemployment falls are highest for Black workers. And this means that the stakes regarding Fed decisions are highest for Black workers.
In 2004, California enacted a nurse-to-patient ratio law. To this day, California is the only state with a nurse-to-patient ratio law. On most hospital wards, the law mandates a minimum ratio of one nurse for every five patients; within Intensive Care Units, the ratio is one to two (1:2). These mandated ratios are typically higher than the prevailing ratios prior to 2004. In fact, nurse employment rose approximately 15 percent after 2004 as a result of the law. The intent of the law was to improve care for patients and although no consensus has yet been reached, studies have shown that the law has improved patient care in a variety of domains.
My colleagues and I addressed a different research question: Could the law have improved safety for the nurses themselves? We found that it did; occupational injury and illness rates dropped over 30 percent. This is important, in part, because the nursing occupation generates more occupational injuries to women than any other occupation. We used data on work injuries resulting in at least one day of work loss among registered nurses and licensed practical nurses. These data were drawn from the Bureau of Labor Statistics Survey of Occupational Injuries and Illnesses. This Survey, authorized by the OSHA law, has been collecting information on occupational injuries and illnesses from 160,000 to over 250,000 private establishments since the1970s.
Our data were annual injury and illness rates (cases per total number of employed) from 1999 through 2009. We used the difference-in-differences approach. The rates before 2004 were subtracted from the rates after 2004 within California. This California subtracted difference was then compared to a similar subtracted difference before and after 2004 for the other 49 states. In scientific language, California was the “intervention group” and the other 49 states were the “control group.” The subtracted difference for California was more than 30 percent larger than the difference for the other 49 states for both registered nurses and licensed practical nurses.
There are many mechanisms whereby greater numbers of nurses taking care of the same number of patients may result in fewer nurse injuries. For example, many nurses injure their backs they try to move patients. The nurse may weigh 130 pounds and the patient weighs 200 pounds. Back injuries have been shown to be much less frequent when two nurses lift a patient, rather than one.
Although the study did not address costs, it is likely that the law resulted in lower worker’s compensation costs because employment grew by 15 percent whereas injuries per employed nurse dropped by 30 percent.
Our results suggest that other state legislatures should consider the benefits to nurse safety that could result from enacting laws setting minimum nurse-to-patient ratios.
Business Roundtable Study Fails the Laugh Test: The U.S. Trade Deficit has Cost Millions of U.S. Jobs
The United States had a goods and services trade deficit of approximately $463.5 billion in 2013, which cost millions of U.S. jobs. Contrary to the well agreed-upon fact that trade deficits lead to job loss, the Business Roundtable (BRT) has sponsored a study which claims to show that U.S. goods and services trade (both imports and exports) supported nearly 40 million U.S. jobs in 2013. They achieve these results with a highly distorted model which looks at what would happen if all U.S. exports and imports of goods and services were eliminated “by imposing prohibitive duties against” U.S. goods and service trade.
The silliness of this approach is obvious. The BRT study arrives at its conclusions by assessing how many people would be out of work if the vast majority of workers involved in producing or using traded goods just stopped working. But that’s not how the economy works in the real world. If one assumes away 30 percent of the U.S. economy, one of course assumes away about 30 percent of the jobs. It’s irrelevant to the policy question of whether our trade should be balanced, and it falsely assumes that imports have the same positive employment impacts as exports, when, in fact, imports tend to reduce domestic employment by reducing domestic production.
Using a simple and straightforward macroeconomic model described here, I estimate that the U.S. trade deficit resulted in a net loss of 5.3 million U.S. jobs in 2013. Claims that U.S. trade deficits supported millions of U.S. jobs cannot be justified with any reasonable set of macroeconomic models or assumptions.
The BRT study also claims that two massive, proposed trade and investment deals (the Trans-Pacific Partnership or TPP, and the Transatlantic Trade and Investment Partnership or TTIP) would benefit the U.S. economy. It supports the claim by imagining what would happen if all trade with these countries were eliminated—a proposal no one has made. Any serious debate must focus on how the deals will affect trade at the margin, whether they will do more to stimulate exports or imports, and whether they will increase or decrease U.S. trade deficits. Most other major trade investment deals, including those with Mexico, Korea, and China, have resulted in growing trade deficits and job losses, so the burden of proof is on those who support these deals to show that they will have different outcomes. The study sheds no light on these questions because its assumptions are fatally flawed.
The fact is, the United States had a goods and services trade deficit of approximately $135 billion in 2013 with the European Union and members of the proposed Trans-Pacific Partnership. This trade deficit made up 29.2 percent of the total U.S. trade deficit in 2013, and was responsible for approximately 1.5 million of the total of 5.3 million U.S. jobs displaced by the U.S. trade deficit in 2013.