The issue of currency management by U.S. trading partners that increases U.S. trade deficits has become a front-burner issue in debates over the proposed Trans-Pacific Partnership (TPP). The discussion about whether or not trade deficits can really affect U.S. employment, however, occasionally gets very muddled. Here’s a quick attempt to un-muddle a couple different issues.
Trade deficits and overall employment
Trade deficits occurring when the U.S. economy is stuck below full employment and at the zero lower bound (ZLB) on short-term interest rates are a drag on economic growth and overall employment, period. And this describes the U.S. economy today, so a reduction in the trade deficit in the next couple of years spurred by a reversal of trading partners’ currency management would boost growth and jobs.
The logic is simple—exports boost demand for U.S. output while imports reduce demand for U.S. output. When net exports (exports minus imports) fall, then aggregate demand is reduced. Trade deficits are the mirror image of capital inflows into the U.S. economy, and there are times when these capital inflows can reduce domestic interest rates and boost economic activity, providing an offset to the demand-drag caused by trade flows. Today is not one of those times—further downward pressure on already rock-bottom interest rates (particularly since most of these inflows go into U.S. Treasuries) do very little to boost domestic investment to counteract the demand drag from trade flows.
‘Tis the season to be a graduate and members of the class of 2015 may be wondering: what are my chances in this job market?
The class of 2015 is entering an economy still in recovery from the Great Recession. Job prospects for the class of 2015 are better than for the several classes that graduated before them, but young graduates today still face many economic challenges, including stagnant wages and high levels of unemployment and underemployment. The class of 2015 joins the six classes before it in graduating into an acutely weak labor market and competing with more experienced workers for a limited amount of job opportunities.
Although unemployment rates of young graduates have come down in recent years after skyrocketing during the Great Recession, they still remain elevated compared to where they were before the recession began. Underemployment rates for the class of 2015 also remain high. This means that many young graduates either want a job but have recently given up looking for work, or have a job that does not provide the hours they need.
Among young college graduates who are employed, many are working in a job that does not require a college degree at all. This is another sign of continued slack in the labor market, and a sign that young graduates’ high unemployment is not because they lack the right skills, but because of a continued lack of economy-wide demand for workers.
This week marks the 50th anniversary of Head Start, a Great Society program that despite spotty funding has brightened the lives of millions of preschoolers. My daughter is one of them.
Like three-quarters of the public schools here in Washington DC, my daughter’s school is a Title I school, where 40 percent or more of the students are from low-income families. Her pre-K program is funded in part by Head Start, even though my daughter and some of her classmates don’t qualify as low income. As it happens, my daughter’s school, HD Cooke Elementary, helped pioneer the Head Start program in 1965 (see cute picture below).
DC has a cutting-edge universal pre-K program and also participates in a pilot program where all kids eat free thanks to a U.S. Department of Agriculture grant. So my daughter not only started attending a great public school at age 3, but eats two nutritious meals a day with her buddies, starting with a meet-and-greet breakfast, the social highlight of her day (and often mine).
DC is somewhat atypical in that there has been an influx of upper-income taxpayers, yet the school system still serves a heavily low-income student body. DC public schools were “majority-minority” before this was true for the United States as a whole.
The growing tax base helped pay to retrofit my daughter’s school to add more natural lighting, a beautiful library and gym, and great playgrounds. In 2010, the school, built in 1909 with an extension dating to 1960, became the first school in DC and one of the oldest in the country to be certified green. Projects like these show how infrastructure and human capital investment can combine with job creation and energy efficiency—a win-win-win unless your name is Koch.
When assigning blame for our nation’s persistent poverty problem, many policymakers tend to focus on underlying demographics or behavior of the poor—factors like racial background or the rise of single parent households, instead of the stark economic reality the poorest Americans have to contend with. While demographics and individual behavior have a place in the policy discussion, growing inequality is the primary reason the poverty rate has remained elevated over the last several decades.
The chart below breaks down the poverty rate and shows how demographic and economic factors affected the poverty rate between 1979 and 2013. Since 1979, increasing inequality has been the largest poverty-boosting factor, outweighing racial identity and family structure and completely eclipsing the effects of overall economic growth and educational attainment in driving down the poverty rate. Despite our growing economy and the fact that poor workers are now more educated than ever, rising inequality has worked to keep low-income people in poverty. This increase in inequality was driven by stagnating wages for low- and middle-income households (for example, 10th percentile real wages were actually lower in 2013 than they were in 1979).
Source: EPI analysis of Current Population Survey Annual Social and Economic Supplement microdata based on Danziger and Gottschalk (1995)
Impact on poverty rate of economic, demographic, and education changes, 1979–2013
Source: EPI analysis of Current Population Survey Annual Social and Economic Supplement microdata based on Danziger and Gottschalk (1995)
The New York Times’ Binyamin Appelbaum wrote an excellent piece yesterday on the costs and benefits of globalization. But because I’ve thought a lot about this topic, I have some hobby-horse issues concerning how economists characterize how large the gains from trade are and how its gains and losses are distributed. Put simply, the overall net benefits of trade are much smaller than commonly advertised, but the regressive redistribution trade causes is considerable.
First, on the gains from trade policy (i.e., how much we should expect national income to rise if we sign trade agreements), Appelbaum refers to a piece from the Peterson Institute of International Economics claiming that trade liberalization added 7.3 percent of GDP to American incomes by 2005—about $9000-10,000 per American household. This is just not true. It’s a wildly inflated number that should not be in the policy debate (and if you need much smarter and better-credentialed people making the some point—here’s Dani Rodrik). This number is an effort to bully people into going along with today’s trade agreements by making them think the stakes are utterly enormous. In fact, even if it was correct (again, it’s not) this study would be irrelevant to today’s trade policy debates because the sum total of economic gains from all post-1982 trade agreements (this includes NAFTA, the completion of the General Agreement on Tariffs and Trade, the formation of the WTO, and the permanent normal trading relations with China) is estimated to be just $9 per household, meaning that 99.9 percent of the gains from trade estimated in the study happened before 1982. So even if trade liberalization really did spur mammoth gains at some point in the (distant) past, the effects were over by the early 1980s.
Second, on the distribution of gains and losses from trade, it is striking to me that so many economists who favor signing every trade agreement that comes down the pike can still feign surprise that expanded trade seems to be bad for most workers’ wages. Put simply, it is completely predicted in textbook trade economics that wages for most workers will fall and inequality will rise when the United States trades more with poorer trading partners. Yes, expanded trade is predicted to lead to higher overall national income, but it is also predicted to redistribute enough income within the United that it can (and is likely to) make most workers worse-off. This should not be a surprise to anyone familiar with the topic.
The common wisdom on Capitol Hill, carefully nurtured by corporate lobbyists and campaign cash, is that America needs more high-tech guestworkers, requiring a big increase in the number of H-1B guestworker visas made available each year. A number of senators, including Amy Klobuchar and Orrin Hatch, have introduced legislation to double or triple the number of non-immigrant tech workers who can be imported each year, despite evidence from the U.S. Government Accountability Office, independent researchers, and various media reports that the H-1B is used to lower wages and displace U.S. workers.
The senators endlessly proclaim that H-1B employees are good for our economy, that businesses can’t find enough talent here, that the H-1Bs are innovative, the “best and the brightest,” and that importing them leads to more job creation. In support, they cite a paper by Agnes Scott College researcher Madeline Zavodny, which found that hiring H-1Bs creates jobs for Americans: specifically, that “adding 100 H-1B workers results in an additional 183 jobs among U.S. natives.”
The problem is that it isn’t true. Zavodny’s research couldn’t discern whether the H-1Bs were hired because the economy was growing and jobs were being created—for natives and guestworkers alike—or whether the H-1Bs were responsible for the job growth. (The weakness of her results is demonstrated by another, completely implausible finding she reports, that H-2B unskilled guestworkers are associated with two-and-a-half times greater job creation than the college-educated H-1Bs: 464 jobs for every 100 H-2B guestworkers. The notion that hiring low-wage-earning landscapers and groundskeepers, hotel maids and dishwashers—most of whom have little or no college education—spurs spectacular job growth is ludicrous on its face.)
Growing Consensus that Labor Market Slack Remains: The Fed Should Stay the Course and Wait to Increase Rates Until the Weakness Has Lessened Substantially
Nominal wage growth’s failure to significantly increase over the last several months (and years) is evidence enough that there’s sufficient labor market slack to convince the Federal Reserve to keep its foot off the economic brakes and not increase short-term interest rates. Nominal hourly wages have grown at only around 2.0-2.3 percent annually, far below wage growth that would be consistent with the Fed’s own 2 percent inflation target, 1.5 percent trend productivity growth, and a stable labor share of income. It’s clear from the evidence that the Fed should not even consider raising interest rates to forestall inflation until wage growth is consistently above this target.
One of the leading forces (besides the 30+ year trend in workers losing bargaining power ) behind sluggish wage growth is the fact that there’s still much labor market slack left in the economy today. The headline unemployment rate underestimates this slack because some of it shows up as cyclically depressed rates of labor force participation instead of elevated unemployment. Over the last couple of years, we’ve been tracking what we call “missing workers”—potential workers who, because of weak job opportunities, are neither employed nor actively seeking a job. In other words, these are people who would be either working or looking for work if job opportunities were significantly stronger. Because jobless workers are only counted in the labor force if they are actively seeking work, these missing workers are not included in the labor force and hence are not classified as officially unemployed.
While it’s clear that some structural forces (aging of the Baby Boomers, for example) are putting downward pressure on labor force participation rates, it’s clear that some of the depressed participation rate is still reflecting cyclical weakness. New evidence released today backs up our “missing worker” interpretation that the unemployment rate is underestimating the true degree of labor market slack because labor force participation remains cyclically depressed. The Goldman Sachs Global Macro Research US Daily (sorry, no link: paywall) points out that research from the New York Fed implies that the overall “jobs gap” may be 3 million, even while the Fed’s estimates of the ”unemployment gap”—the gap between today’s unemployment rate and the rate consistent with stable inflation— is much lower. In short, the headline unemployment rate does indeed continue to obscure how much labor market slack remains. The Goldman team draws out the policy implications:
“This implies much less urgency to start normalizing monetary policy . . . and it is an important reason why we think it would be better for the FOMC to wait until 2016 before starting the normalization process.”
I couldn’t agree more. Sluggish wage growth and depressed labor force participation continue to show signs of a weak economy and the Fed should continue staying the course until the economy is considerably stronger. Acting too soon, would be a mistake for the economy and the people in it.
As Jeff Faux notes, we seem to have reached the part of the debate over the TPP when facts and evidence have largely given way to table-pounding. But given that this is still a live debate and that silly arguments continue to proliferate, here are a couple of clarifications that might be helpful to the debate:
First, a vote for the TPP is a vote to reduce the wages of most American workers and increase inequality. Yes, policies that boost U.S. imports (like the TPP) raise total national income in the United States, but they also redistribute so much more income within the United States that most workers are made worse off. And to be clear about this, the losses are not just the workers directly displaced by trade. Instead, it’s the wages of all workers in the economy who compete with the trade-displaced workers for other jobs—about 100 million workers in all. The way to think of it is that landscapers and waitresses don’t lose their jobs to trade, but their wages suffer from having to compete with laid-off apparel workers looking for work elsewhere.
Now, it’s true that the TPP would reduce wages for most Americans and increase inequality just a little bit. But that’s the direction. And it’s also true that expanded trade can potentially benefit everybody if the winners compensate the losers, but that would require complementary compensatory policies, and ones on a scale much, much larger than the Trade Adjustment Assistance (TAA) often throws in with trade agreements.
And while TPP proponents low-ball the wage-suppressing effect of TPP, they often exaggerate the overall benefits for national income. But the source of both gains and losses from trade are the same: domestic reshuffling of production that sees importable sectors shrink and export sectors expand. So how big are the TPP’s estimated income benefits? Not very big—it’s estimated to increase U.S. GDP by about 0.4 percent cumulatively over the next 12 years, according to a paper by Petri and Plummer (2012) for the Peterson Institute for International Economics (PIIE). Yesterday, the normally-sharp Adam Posen (President of PIIE) put these benefits in an interview at a few tenths of a percent of GDP each year. That’s clearly wrong, even by his own shop’s estimates (roughly ten times higher than what the Petri and Plummer (2012) paper shows). Posen claimed on Twitter that this 0.4-percent-over-12-years estimate was “a lower bound” that “doesn’t show dynamic gains from productivity growth thru competition”. But that’s not right—the Petri and Plummer (2012) PIIE estimate is actually a significant increase relative to an earlier estimate by the same authors, and they justify the newer higher estimate exactly by saying they’re now incorporating estimates of productivity gains stemming from more-competitive firms gaining market share after TPP’s passage.*
Job Prospects Have Improved for Graduates, but the Class of 2015 Still Faces a Challenging Labor Market
Despite officially ending in June 2009, the Great Recession and its aftermath continues to have a damaging effect on the labor market prospects of young adults. The depth of the recession and the slow pace of recovery since it ended means that seven classes of students have now graduated into a weak labor market and have had to compete with more experienced workers for a limited and slowly growing pool of job opportunities. Recent improvements in economic conditions have begun to finally translate into better job prospects for young graduates, but there is a long way to go before we return to the labor market health of the pre-recession period.
Although the labor market is slowly recovering, unemployment remains elevated for both young high school and college graduates; underemployment rates for these groups are also unusually high. As seen in the charts below, the unemployment rate is 7.2 percent for young college graduates and 19.5 percent for young high school graduates. Although these rates have come down from the peaks after the Great Recession, they are still elevated above their 2007 levels (5.5 percent for college grads and 15.9 percent for high school grads), which were already high compared to the more favorable rates seen in 1995-2000. The Class of 2015 joins a sizable backlog of unemployed college graduates from the last six graduating classes (the classes of 2009–2014) in a difficult job market.
Unemployment and underemployment rates of young high school graduates, 1994–2015*
* Data reflect 12-month moving averages; data for 2015 represent 12-month average from April 2014 to March 2015.
Note: Shaded areas denote recessions. Underemployment data are only available beginning in 1994. Data are for high school graduates age 17–20 who are not enrolled in further schooling.
Source: EPI analysis of basic monthly Current Population Survey microdata
An eye-opening story published last week by the New York Times revealed how manicurists in New York’s booming nail salon industry are subject to brazen exploitation. Workers are exposed to dangerous chemicals, expected to work excessively long hours, subject to racial and ethnic discrimination and verbal abuse, and regularly paid less than the minimum wage—if they’re paid at all. New hires are even forced to pay their employers a “training fee,” before working unpaid for weeks until their employer arbitrarily deems them worthy of getting paid.
The good news is that New York Governor Andrew Cuomo has already ordered emergency measures to investigate and combat these abuses. The bad news is that what’s happened in New York is the product of national policy failures that almost guarantee these same practices are not unique to the Empire State, or to the nail salon industry.
Many of the manicurists described in the piece are undocumented immigrants. Failure to protect any group of workers—even those without lawful immigration status—is damaging to all workers. When businesses can exploit immigrant workers who cannot speak out for fear of deportation, it lowers the wages of other workers in the same or similar fields—whether they are authorized to work or not. Regardless of how someone has entered the country, if they are engaged in employment, they should have some practical and accessible recourse against exploitative labor practices. Legalization would, by itself, raise labor standards for tens of millions of Americans, along with the immigrants most directly affected.
This morning’s Job Openings and Labor Turnover Survey (JOLTS) report rounds out the employment situation for March. Last week, we saw substantial downward revisions to payroll employment, revisions that exposed one of the slowest job gains in recent years. The job openings data reveal the same story: the recovery may be slowing. That said, April job growth was considerably stronger, but taking into account the most recent three month job-growth average, the economy won’t resemble the strength of the pre-recession economy (such as it was) until August 2017.
The total number of job openings fell slightly to 5.0 million in March and the number of unemployed workers fell slightly to 8.6 million. Taken together, the result was a job-seekers-to-job-openings ratio that held steady at 1.7. This ratio has been declining steadily from its high of 6.8-to-1 in July 2009, as shown in the figure below.
The job-seekers ratio, December 2000–March 2015
|Month||Unemployed job seekers per job opening|
Note: Shaded areas denote recessions.
Source: EPI analysis of Bureau of Labor Statistics Job Openings and Labor Turnover Survey and Current Population Survey
Barack Obama’s petulant criticism last Friday of Democrats who do not support his proposed Trans-Pacific Partnership reminds me of the old tongue-in-cheek advice to young lawyers: “If the facts are on your side, pound the facts. If the law is on your side, pound the law. If neither is on your side, pound the other lawyer.”
The facts are definitely not on the president’s side. For two decades the trade deals negotiated by the last three presidents have lowered U.S. wages, lost jobs and generated a chronic trade deficit that requires our country to borrow more money every year in order to pay for imports. The president’s main argument that exports have risen, without mentioning that imports have risen much faster, is now transparently deceitful to anyone who can add and subtract.
Neither is the law in his corner. As did his predecessors, Bill Clinton and George Bush, he assures Americans that this deal will be different because, you see, it will protect workers. But the secret draft, which had to be revealed to Americans by Wikileaks, shows that once again a trade agreement will be used to enhance the power of multinational corporate investors over people who have to work for a living. As AFL-CIO President Richard Trumka pointed out recently, the Office of the U.S. Trade Representative, which is charged with negotiating and enforcing the deal, does not even believe that murder and other brutal acts committed against labor union activists violate the “worker-protection” clauses to trade agreements.
So, like a lawyer trained to defend the indefensible, Obama is desperately pounding the opposition. They are “just wrong,” he says, without showing us why. He accuses them of “making stuff up”—that is, that they are liars. He whines that they are “whupping on me.” He charges, nonsensically, that they “want to pull up the drawbridge and isolate themselves.”
In January of this year, I projected that the black unemployment rate would reach single digits by mid-2015. That happened this month as job growth of 223,000 in April was more in line with the monthly average in 2014. At 9.6 percent, the black unemployment rate is the lowest it’s been since June 2008 and nearly two (1.8) percentage points below where it was this time last year. Though this is an important milestone, the rate remains above the annual average of 8.3 percent in 2007, meaning there’s still much further to go before we declare a full recovery for black workers.
Though the unemployment rate for black men fell to nearly the same rate for black women in April, black men and black women have made very unequal progress, as can be seen in Figure A. This is an amplification of the fact that although men lost more jobs than women during the recession, they have also rebounded faster in the recovery.
Black unemployment rate by gender, December 2007–April 2015
|Black Men||Black Women|
Source: EPI analysis of Bureau of Labor Statistics' Current Population Survey
Between April 2014 and April 2015, job gains for black men far outpaced those of black women (an increase of 7.6 percent and 3.9 percent, respectively). As a result, black men’s unemployment rate declined 2.3 percentage points over the last year, compared to a decline of 1.4 percentage points for black women. Since the end of 2014, employment growth for black women has slowed even further, leaving black women’s unemployment rate 0.5 percentage points higher in April 2015 than it was in December 2014. Meanwhile, black men’s unemployment rate was 2.3 percentage points lower in April 2015 than December 2014.
Although caution should always be used in placing too much emphasis on a single month of data, the last four months raise some questions about whether the recovery has stalled for black women and why.
Recent debates over the Trans-Pacific Partnership (TPP) have highlighted the failure of the treaty to include a provision to stop countries from actively weakening the value of their own currency in order to run trade surpluses.
The way this currency management works is that countries (most notably China, though there are many others as well) buy assets denominated in dollars—mostly U.S. Treasuries. This boosts the demand for dollars in global markets and weakens demand for the Chinese renminbi. This in turn increases the value of the dollar, which makes U.S. exports expensive in global markets and makes foreign imports cheaper to U.S. consumers. The result is that exports are suppressed while imports grow and the U.S. trade deficit widens.
Opponents of including a currency provision in the TPP have made a number of bad arguments, and one of them is that currency management was once a problem, but isn’t anymore. They often point to recent appreciation of the Chinese currency as evidence that the problem of currency management is behind us. But this is incorrect—the evidence that currency management is still a problem is simply that foreign purchases of dollar-denominated assets remained strong in 2014. There is zero doubt that absent this continued intervention, the U.S. dollar would weaken. Further, the nearly $1 trillion in purchases of dollar denominated assets that has characterized each year since 2008 has led to a large stock of dollar assets held by foreign investors and governments, and this large stock (over and above the annual flow of dollar purchases) also keeps the value of the dollar stronger than it would otherwise be.
Further, two pieces of recent evidence suggest strongly that excess dollar strength could be becoming a real drag on recovery. In the first quarter numbers on gross domestic product, the rising trade deficit knocked 1.3 percentage points off the economy’s annualized growth rate. Then trade data for March came in showing a very large rise in the deficit. Finally, today’s jobs report shows that growth of employment in manufacturing has stagnated in the last quarter (rising at an average monthly rate of less than 2,000 jobs), after rising at an average monthly rate of 18,000 in 2014.
Here’s a Mother’s Day gift idea for Congress: Rather than getting mom flowers or chocolate, how about passing a policy that increases economic security for families, injects billions of dollars into communities, and ensures that women and people of color are paid more fairly?
That’s just what the Raise the Wage Act would do. Introduced last week by Sen. Patty Murray (D-WA) and Rep. Robert “Bobby” Scott (D-VA), the Raise the Wage Act would increase the minimum wage from $7.25 to $12 per hour by 2020 and then “index” it to median wages, so that the minimum would automatically go up as overall wages rose, beginning in 2021. It also would gradually phase out the lower tipped minimum cash wage so that tipped workers would be paid the regular minimum wage before tips—something that only happens in a handful of states today. Federal law currently allows employers to pay tipped workers a pre-tip wage of just $2.13 per hour, a policy that leaves tipped workers nearly twice as likely to live in poverty as other workers.
Passing the Raise the Wage Act would especially help women, particularly women of color. Women are the majority (56 percent) of workers who would benefit from increasing the federal minimum wage to $12 by 2020. As shown in the figure below, 30 percent of working women—roughly 20 million—would get a raise. The gains are even more substantial for working women of color, 37 percent of whom—8.6 million—would see their pay increase. (All of these statistics are available in EPI’s analysis of the proposal.)
Share of selected groups that would get a raise by increasing the federal minimum wage to $12 by 2020
|Share of each group that would get a raise by increasing the federal minimum wage to $12 by 2020|
|Women of color||37.1%|
Source: EPI analysis of Raise the Wage Act using Current Population Survey Outgoing Rotation Group microdata
Recent weeks have seen a raft of pretty bad economic news. Last month’s jobs report showed a marked slowdown in employment growth—with 126,000 new jobs reported in March, down from the 269,000 average pace of growth that had characterized the previous 12 months. And gross domestic product (GDP) in the first quarter was essentially stagnant—rising at just a 0.2 percent annualized rate. March trade data showed an enormous rise in the trade deficit, which will likely drive the revised numbers on GDP into negative territory.
Given this backdrop, there was a bit more at stake than usual in today’s monthly jobs report. So, what’s the verdict? Mixed.
Job growth in April was 223,000—much closer to the 2014 year-round average than March’s numbers. And the unemployment rate ticked down (insignificantly) to 5.4 percent. Both of these numbers are good news.
But the weak March job growth was revised down even further, to 85,000. The prime-age employment-to-population ratio remains slightly off its February peak (77.2 percent down from 77.3).
Worse, some very nascent signs of pickup in wage growth seem to have melted away. The three-month change in average hourly earnings picked up to 2.7 percent in the March jobs report, but receded down to 2.3 percent in this month’s data. For the year, average hourly earnings rose 2.2 percent—the same desultory pace that has characterized essentially the entire recovery. For production workers (80 percent of the private sector workforce) wage growth was even weaker, increasing just 1.9 percent over the past year.
Where does all of this leave us?
While policy makers in Washington are at least paying lip service to the need to lift the stagnant wages of America’s middle class, politicians in state capitals across the country are cutting the wages and benefits of public employees and school teachers, passing so-called “right-to-work” laws to weaken unions, and cutting back on unemployment insurance with the aim of forcing jobless workers to take any job, no matter how poor.
Indiana is a leader in this sorry parade. It passed right-to-work two years ago, and now the legislature has repealed (with the support of a governor with aspirations for national office) the state’s eight-decade old prevailing-wage law, which required contractors on state-funded construction projects to pay their construction workers the average wage in the locality where the work is done. Like the federal Davis-Bacon Act, the rationale for the law was straightforward: The state government should not be in the business of driving down wages. When it pays for construction work, rather than forcing a race to the bottom, it should respect local area standards.
But powerful interests, from the Koch Brothers and the American Legislative Exchange Council to the Associated Builders and Contractors, like the idea of a race to the bottom. From their perspective, the best wage is the lowest wage they can get away with, since companies’ profit margins will be higher with every dollar that isn’t paid to a construction worker. Indiana politicians are dancing to the tune the Kochs are calling.
What to Watch on Jobs Day: Looking for a Pickup in Job Growth, Signs of Wage Growth, and a Glimpse at the Future for the Graduating Class of 2015
Last month’s jobs numbers—plus the downward revisions to previous months—were disappointing at best. When the latest jobs report comes out this Friday, we’ll be watching the top-line employment numbers to see if that’s just a blip or a new trend. The recent slowdown in job growth could be largely due to unseasonably harsh weather. If that’s the case, then we can expect a solid bounce back this month. If not, and slower growth in recent months is actually the start of a new trend, more trouble may lie ahead—and policymakers should take the need to spur a stronger recovery more seriously.
Before the recent slowdown in job growth, it looked like the main lagging indicator was wage growth. Last week, the Employment Cost Index showed a pick-up in growth with year-over-year civilian nominal compensation rising 2.6 percent. While this is a bit faster growth than some other wage series indicate, it’s still far below thresholds that should prompt the Federal Reserve to begin raising interest rates to slow down the economy out of fear of wage-led inflationary pressure. It is true that real (inflation-adjusted) wage growth has been healthy in recent months, but this is driven by rapidly decelerating inflation, not strong nominal wage growth. The rapid price disinflation is driven in turn by a combination of transitory shocks (e.g., oil price declines) which will likely not continue and overall economic weakness. And, the fact remains that there is a long history of poor wages to make up. All indicators of wage growth need to be consistently stronger for a full recovery.
In We Can Afford a $12 Federal Minimum Wage in 2020, Larry Mishel, John Schmitt, and I explain that raising the federal minimum wage to $12 by 2020 is an eminently achievable and worthwhile goal. As the paper explains, $12 in 2020 would equal a modest 11 percent increase in purchasing power over the 1968 minimum wage, yet would essentially be the same as the 1968 minimum’s value as a percentage of the typical worker’s wage. In other words, raising the minimum wage to $12 by 2020 would simply restore the 1968 relationship between what minimum-wage workers were paid relative to what typical workers were paid—and in doing so, would raise the wages of more than a quarter of all working Americans.
Raising the federal minimum wage to $12 by 2020 would also bring the U.S. minimum wage more in line with the rest of the developed world. This relationship between the minimum wage and the median wage—also known as the “Kaitz index”—is tracked by the Organisation for Economic Co-operation and Development (OECD). As shown in the figure below, according to the OECD, in 2013, the United States had the third-lowest minimum-to-median wage ratio among developed countries—only Mexico and the Czech Republic had lower Kaitz indices. However, if the United States raised its minimum wage to $12, and other countries’ minimum-to-median ratios were to remain unchanged, the United States would move to the eleventh spot. 1
The White House Council of Economic Advisers (CEA) released a report last Friday touting the benefits of international trade for the American economy. The paper provides an interesting review of research on a range of trade’s economic effects, yet the report is largely irrelevant to current trade policy debates. Worse, when its findings are related to current trade policy debates, they are often reported in ways that could mislead readers.
The weaknesses of the report generally fall into one of three areas.
First, the overwhelming focus of the report touts the benefits of trade flows qua trade flows, and often even compares outcomes relative to a hypothetical scenario where trade barriers were raised so high that the U.S. economy became completely autarkic. Academics might find this interesting, but nobody in today’s economic debate argues for increasing U.S. trade barriers, let alone to historically never-seen levels. The CEA acknowledges this explicitly by noting that barriers to foreign imports coming into the U.S. economy are already extremely low and unlikely to be reduced significantly by treaties like the Trans-Pacific Partnership (TPP). Several times, the report alludes to potential benefits of the TPP and other treaties in pulling down barriers to U.S. exports abroad, but fails to mention what is by far the most important barrier to U.S. export success—several major trading partners (including some proposed TPP partners) managing the value of their own currencies for competitive gain vis-à-vis the United States.
Second, the report spends very little time on the most important non-currency issue regarding trade policy: the distribution of gains and losses. When the report does cite research on distribution, it is woefully incomplete, looking only at how the benefits from trade are distributed while ignoring the costs. The research on the comprehensive costs and benefits of this issue is pretty clear: trade with labor abundant trading partners, like many of those in the proposed TPP, tends to lower wages for the majority of U.S. workers and provide gains only to the upper end of the income distribution.
Social or labor market policies are measured by their reach, their adequacy, and their costs. By these metrics, a minimum wage increase is a slam dunk. A generation of research now demonstrates pretty decisively that markets can accommodate a reasonably higher minimum at no significant threat to job creation—especially when ancillary gains (productivity gains, less turnover, increase in aggregate demand) are taken into account. Raising the minimum wage makes almost no demands on the public purse, and could in fact recoup much of the current public subsidy (through working families’ reliance on means-tested tax credits, cash assistance, health care, and food security programs) of low-wage employment. Even a small increase promises to make a big difference: in 2013, Arin Dube estimated that an increase to $10.10 would raise the incomes of poor families (those at the 10th percentile) by 12 percent and lift five to seven million out of poverty. An increase to $12 would likely have even larger poverty-fighting effects.
While much of our social and tax policy is either poorly targeted (it reaches the poor unevenly) or aimed in in the wrong direction (it benefits those who don’t need it), a minimum wage increase hits the bull’s-eye. As EPI’s new estimates of the impact of the “Raise the Wage Act” (bringing the minimum to $12.00/hour by 2020) underscore, the benefits of an increase would flow overwhelmingly to those—young workers, single parents, workers of color—who need it the most. The interactive graphic below summarizes this important new work: the first menu sorts workers by race, the second by income, age, family status, labor force participation, and educational attainment.
After more than five years of litigation in numerous jurisdictions by immigrant and worker advocates who challenged the Bush administration’s illegally promulgated regulations for the H-2B temporary foreign worker program, the Department of Homeland Security (DHS) and the Department of Labor (DOL) have jointly promulgated two new rules—the H-2B “Comprehensive Interim Final Rule” and the “Wage Methodology Final Rule”—which establish important but modest protections for low-wage U.S. workers and guestworkers.
The H-2B temporary foreign worker program—which has been only minimally regulated since 2008—has facilitated the exploitation and human trafficking of guestworkers who work for U.S. employers in various industries, including landscaping, hospitality, forestry, seafood, fairs and carnivals, and construction. A judgment of $14 million in damages was recently awarded to five Indian H-2B guestworkers by a federal jury in Louisiana; the case is just one example of the many abuses that have been inflicted upon H-2B workers over the years.
EPI applauds the new worker protections provided by the H-2B Comprehensive Interim Final Rule, which goes into effect immediately but will be finalized after a 60-day comment period. This rule was originally proposed and finalized in 2012, after notice to the public and the collection and analysis of comments, but was postponed by congressional appropriations riders and enjoined by federal courts at the request of employer associations. While the rules impose some new duties on H-2B employers, the burdens are minimal and justified. The rules will result in more U.S. workers being hired for open positions and prevent the exploitation of H-2B workers. We echo the sentiment of 10 senators who asked DHS and DOL to “mirror the 2012 rule as much as possible” when the rule is finalized after 60 days.
The new protections for H-2B guestworkers include: the right to a copy of their work contract in a language they can understand; a guarantee that they will be paid for at least three-quarters of the hours promised in their work contracts; and reimbursement for inbound travel expenses after a worker completes 50 percent of the employment contract, and employer-paid outbound transportation if the worker remains employed until the end of the job order or if the worker is dismissed before the end of the job order.
In 1993, it seemed obvious to me that NAFTA was about one main thing: providing a huge new (and much cheaper) labor force to U.S. manufacturers by making it safe for them to build factories in Mexico without fear of expropriation or profit-limiting regulation. But the Clinton administration claimed it would open a new market to U.S. business, and U.S. Trade Representative Mickey Kantor, President Clinton, and even Labor Secretary Bob Reich argued that it would create jobs for American workers and even increase job creation in the U.S. auto and steel industries. They said NAFTA would benefit Mexican workers and help create a bigger Mexican middle class, while deterring migrant workers from crossing the border to seek jobs in the United States with better wages. They also argued an alternative theory: that NAFTA would help keep U.S. manufacturers from moving to Southeast Asia, and that it was better to keep that off-shored work in our hemisphere and along our border.
What actually happened?
- The trade balance with Mexico went from positive to very negative, resulting in the loss of more than 600,000 jobs in the United States.
- Mexico’s corn farmers were overwhelmed by a flood of cheaper U.S. corn and almost 2 million agricultural workers were displaced. Most of them migrated illegally to the United States and remain here as exploited, undocumented workers.
- Wages fell for Mexican industrial workers, to the point that autoworkers in Mexico now make less than Chinese autoworkers. Some Japanese carmakers start paying Mexican workers at 90 to 150 pesos per day, or $6 to $10.
- U.S. auto companies shifted investment to Mexico to exploit its much cheaper labor. AP reports that “Mexican auto production more than doubled in the past 10 years. The consulting firm IHS Automotive expects it to rise another 50 percent to just under 5 million by 2022. U.S. production is expected to increase only 3 percent, to 12.2 million vehicles, in the next 7 years.” Since NAFTA’s enactment, employment in the U.S. motor vehicle and parts industry has declined by more than 200,000 jobs.
More recent claims about the expected benefits of free trade agreement with Korea have proven hollow, too. Instead of creating 70,000 jobs, the net effect has been a higher trade deficit and the loss of 60,000 jobs. Worse, the harshest impact of that deal won’t be felt for several more years, when protective tariffs on pickup trucks are eliminated, making Korean imports 25 percent cheaper than they are today. U.S. auto workers will be hard hit.
And then there’s Permanent Normal Trade Relations with China and China’s admission to the WTO, which led to an explosion of imports and the loss of more than 3 million jobs, mostly in manufacturing and mostly in occupations that paid more than the jobs created in exports industries.
One bad experience after another: that’s why so many are so opposed to fast track and more NAFTA-style free trade deals.
In Baltimore in 1910, a black Yale law school graduate purchased a home in a previously all-white neighborhood. The Baltimore city government reacted by adopting a residential segregation ordinance, restricting African Americans to designated blocks. Explaining the policy, Baltimore’s mayor proclaimed, “Blacks should be quarantined in isolated slums in order to reduce the incidence of civil disturbance, to prevent the spread of communicable disease into the nearby White neighborhoods, and to protect property values among the White majority.”
Thus began a century of federal, state, and local policies to quarantine Baltimore’s black population in isolated slums—policies that continue to the present day, as federal housing subsidy policies still disproportionately direct low-income black families to segregated neighborhoods and away from middle class suburbs.
Whenever young black men riot in response to police brutality or murder, as they have done in Baltimore this week, we’re tempted to think we can address the problem by improving police quality—training officers not to use excessive force, implementing community policing, encouraging police to be more sensitive, prohibiting racial profiling, and so on. These are all good, necessary, and important things to do. But such proposals ignore the obvious reality that the protests are not really (or primarily) about policing.
In 1968, following hundreds of similar riots nationwide, a commission appointed by President Lyndon Johnson concluded that “[o]ur nation is moving toward two societies, one black, one white—separate and unequal” and that “[s]egregation and poverty have created in the racial ghetto a destructive environment totally unknown to most white Americans.” The Kerner Commission (headed by Illinois Governor Otto Kerner) added that “[w]hat white Americans have never fully understood—but what the Negro can never forget—is that white society is deeply implicated in the ghetto. White institutions created it, white institutions maintain it, and white society condones it.”
Stagnant GDP at the Start of 2015 is the Latest Evidence That the Economy Hasn’t Reached Escape Velocity
The Commerce Department estimates that U.S. gross domestic product (GDP, the widest measure of overall economic activity) was near stagnant in the first three months of 2015, growing at only a 0.2 percent annualized rate. This is a clear deceleration from the 2.2 percent growth rate in the previous quarter. Final sales (GDP minus the volatile inventory components of GDP) actually declined in the first quarter.
Most of this deceleration is likely transitory—due in part to particularly bad weather in the first quarter. Growth in the rest of 2015 will most likely be faster than previously projected, as the economy bounces back from this weak start to the year. Yet data on GDP in recent years confirms that the U.S. economy has not reached escape velocity—growth rates have not broken past the 2-2.5 pace that normally is associated with rapid declines in economic slack. Because growth has been steady for years, it might be tempting for some policymakers to shrug their shoulders and declare that this is the “new normal” and the best we can do. The economic evidence clearly suggests otherwise—this economy still needs active measures to boost demand to achieve a full recovery. At a minimum, this means the Federal Reserve should put off interest rate increases for the rest of 2015.
Here are a few recent reports about the grim toll of industrial fatalities and the hazards workers are exposed to every day, from the Cal-OSHA Reporter and other sources. Hopefully, they will remind you why we need a strong federal enforcement effort and much better programs of workers compensation for occupational injuries and illnesses. A recent NPR/ProPublica report was a wake-up call about how state legislatures are gutting the programs that compensate employees for lost limbs, lost eyes and damaged hearing, compensate them for lost wages, and pay for the medical care of injured workers.
Bumble Bee Foods facing criminal charges over worker death: “Los Angeles County District Attorney Jackie Lacey on April 27 announced that Bumble Bee Foods LLC and two others are facing criminal charges related to willfully violating worker safety rules and causing the 2012 death of an employee who became trapped inside an industrial oven at the company’s Santa Fe Springs plant.”
OSHA: York workers exposed to asbestos: “A York County company is facing a nearly half-million-dollar fine for allegedly failing to protect employees from asbestos. The York City-based First Capital Insulation Inc. allowed workers to remove asbestos improperly, failed to make sure employees’ respirators fit correctly and did not decontaminate employees and their clothing before they left a work site, the Occupational Safety and Health Administration stated in a news release this week.”
Police: Man dies in Oklahoma City industrial accident: “Oklahoma City police say a worker has died at an area commercial printing business after being trapped under a piece of machinery.”
Worker killed in cinder block wall collapse, Ramsey police say: “A 56-year-old construction worker was killed in a wall collapse at a Ramsey, New Jersey building on Wednesday, officials said.”
Last week, the president claimed that critics who say that the Trans-Pacific Partnership (TPP) “is bad for working families… don’t know what they are talking about.”
But the truth is, there is an emerging consensus that globalization has put downward pressure on the wages of most working Americans, and has redistributed income from the bottom to the top. My colleague Josh Bivens has shown that expanded trade with low-wage countries has reduced the annual wages of a typical worker 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 to roughly $180 billion. Trade and investment deals such as the Korea-U.S. Free Trade Agreement (completed by President Obama), and the agreement to bring China into the World Trade Organization in 2001 (negotiated by President Clinton), have contributed these lost wages. It’s not surprising that one commentator concluded that “the Trans-Pacific Partnership trade deal is an abomination,” precisely because of its impacts on “low-skilled manufacturing workers and income inequality.”
Over the last year, and, in fact, over the last five years, nominal wage growth has been slow—slow by historic standards and slow relative to wage growth that would be consistent with the Fed’s 2 percent overall price inflation target. Hourly wage growth has run at about 2 percent a year and, as we’ve discussed in great length, 2 percent hourly wage growth is far below the 3.5-4 percent target growth that is consistent with the Fed’s target of 2 percent price inflation and a 1.5 to 2.0 percent trend in productivity growth.
Wage growth that exceeds this 3.5 to 4 percent target for a period of time is not an economic problem to be solved. Rather, it is a normal pattern of the labor share of corporate sector income finally recovering its pre Great Recession levels. If last month’s weak job growth is just a blip and healthy job growth continues in the next year, this should eventually lead to a labor market tight enough to finally provide workers with the bargaining power necessary to bid up their wages.
There has been some discussion that the sluggish wage growth we’ve seen since the recovery began in 2009 is driven in large part by the mix of jobs being created, as if we have lower wages simply because the economy is adding more low-wage jobs. Earlier in the recovery there was likely some truth to this, as lower-wage sectors saw the first pickup in job growth. However, over the last year jobs have been created throughout the economy in high-, low-, and middle- wage sectors. The evidence suggests that the economy has been adding jobs in proportion to the rate that those jobs already exist in the economy.
It’s a scary thing when powerful government officials misuse their power, and especially when they misuse it to afflict the needy and comfort the comfortable. This appears to be what’s happening now as the chairmen of the two congressional tax-writing committees seek to change the tax status of various worker centers that have annoyed politically active corporations like Walmart, Darden Restaurants, and McDonalds.
I am not a tax lawyer and can’t say with any certainty whether a worker center formed to provide services such as job training, education, and legal assistance to low wage workers should suddenly be transformed from a 501(c)(3) charity into a labor organization if it challenges wage theft or other labor problems caused by a store or corporation. I don’t think the law should operate that way, but the law has a lot of problems.
What I can say is that it’s a shame that Sen. Orrin Hatch and Rep. Paul Ryan are spending their time on a matter of importance only to huge corporations that need no help from Congress in crushing worker organizations, fighting wage increases, and profiting immensely from weak labor standards and high unemployment. As their letter to IRS Commissioner John Koskinen shows, Ryan and Hatch don’t like the fact that worker centers have exercised their constitutionally protected right to “protest and picket against targeted businesses.”
One of the protests the congressmen cited was a Restaurant Opportunity Center protest over the takeover of Olive Garden restaurants by a hedge fund, Starboard, that wanted to cut labor costs by $48 million and transfer the savings to the pockets of investors. The workers and the worker center weren’t asking for the right to be the exclusive bargaining representative: they just didn’t want their wages cut and didn’t want to be changed from waged employees to tipped employees. But Ryan and Hatch want the IRS to investigate the workers.
Right to Work (RTW) laws weaken unions by depriving them of the funding they need to be effective, and workers, both union and non-union alike, in RTW states have lower wages. No one really disputes the first fact—workers in non-RTW states are more than twice as likely (2.4 times) to be in a union or protected by a union contract. And wages in RTW states are far lower—almost 16 percent on average. This isn’t surprising, since RTW’s proponents are anti-union hate groups and business organizations that oppose every effort to help workers organize or raise wages. In fact, their key pitch to legislators (outside of campaign contributions) is that RTW will lower labor costs, improve the “business climate,” and encourage out-of-state businesses to relocate.
So it was surprising to see the Heritage Foundation challenge the notion that RTW has no effect on a state’s wage levels. Yes, they say, wages are lower in RTW states, but it isn’t because of RTW. If true, it would leave proponents with no argument for RTW except its core purpose—weakening unions.
But in fact, it’s not true. EPI senior economist Elise Gould and co-author Will Kimball examined the Heritage report and found it to be deeply flawed. Heritage’s finding depends on statistical tricks—the removal of relevant and standard labor market controls such as the worker’s industry, and the inclusion of nonstandard and irrelevant worker characteristics and state-level amenities. Using only standard and relevant factors in the regression analysis yields a consistent finding: wages in RTW states are 3.1 percent lower than those in non-RTW states, after controlling for a full complement of individual demographic and socioeconomic factors as well as state macroeconomic indicators. This translates into RTW being associated with $1,558 lower annual wages for a typical full-time, full-year worker.