Yesterday, House Ways and Means Committee Chairman Dave Camp (R-MI) released his long-awaited (at least among budget nerds) tax reform proposal. For those used to dealing with GOP fiscal policy proposals in recent years, it was strangely careful and serious. Yet, this proposal still highlighted the excessive importance policymakers attach to “tax reform that lowers rates,” which has been a north star of fiscal policy wonks seemingly since the dawn of time. The idea is that lowering rates will spur economic efficiency, but to make up for revenue lost to lower rates, one must broaden the tax base to which the new, lower rates apply.
Lowering income tax rates, however, reduces revenue so much—especially from wealthy individuals and businesses—that it’s mathematically difficult to make up what’s missing without completely gouging the working and middle classes. This is why Republicans have shied away from the details that would make their top-line tax reform goals work. (They are then pilloried, and rightly so, for ignoring mathematical realities.) It’s easy to lower tax rates; it’s hard to then figure out where the money is going to come from to make up for it. And the payoff in terms of increased growth from all this angst is decidedly modest. Under Rep. Camp’s plan, the federal government would lose more than $1.2 trillion over the next ten years from lower tax rates for individuals and businesses, and another $1.4 trillion by repealing the Alternative Minimum Tax. Here are the good and bad of just some of the provisions that make up for the lost revenue:
I love the New York Times. But its reporters’ slant on public employee pensions has been driving me crazy, and the latest story by Mary Williams Walsh and Rick Lyman didn’t help. Walsh has been carrying a vendetta against public pensions for many years, so it is no surprise that the article makes the unsupportable claim that none of the 40 state pension overhauls has “come close to closing their pension gaps quickly enough to keep pace with a rapidly agingand retiring—public work force.” I leave it to the reader to fully decipher that statement, but it seems to reflect the story’s headline, that “Public Pension Tabs Multiply as States Defer Costs and Hard Choices.” It implies that despite the states’ pension overhauls, things are getting worse everywhere because public employees are aging and retiring faster than the financing is improving. It’s surely meant to be alarming, as is the chart of Moody’s Investor Service data showing 13 states with “unfunded pension liability greater than annual revenue.”
Moody’s, itself, tells a different story. Moody’s points out that its data are 20 months old and don’t reflect current balance sheets or the enormous market gains of the last 18-20 months. Moody’s points out that “A run-up in financial markets has helped shrink public pension shortfalls” since June 30, 2012, because “Investment returns provide the lion’s share of the retirement systems’ revenue”:
But fiscal 2012 ended for most states on June 30, 2012, and since then, a run-up in financial markets has helped shrink public pension shortfalls. Investment returns provide the lion’s share of the retirement systems’ revenue, and in 2013, pensions’ holdings reached record amounts.
That could make fiscal 2012 the high-water mark for pension problems that have rocked state governments over the last decade and led to a wave of pension reforms recently, according to Moody’s.
Pension liabilities “for 2012 may reflect a cyclical peak as a result of subsequent strong market returns and a rising interest rate trend,” the rating agency said.”
Education policy in both the Bush and Obama administrations has suffered from failure to acknowledge a critical principle of performance evaluation in all fields, public and private—if an institution has multiple goals but is held accountable only for some, its agents, acting rationally, will increase attention paid to goals for which they are evaluated, and diminish attention to those, perhaps equally important, for which they are not evaluated.
When law and policy hold schools accountable primarily for their students’ math and reading test scores, educators inevitably, and rationally, devote less instructional resources to history, the sciences, the arts and music, citizenship, physical and emotional health, social skills, a work ethic and other curricular areas.
Over the last decade, racial minority and socio-economically disadvantaged students have suffered the most from this curricular narrowing. As those with the lowest math and reading scores, theirs are the teachers and schools who are under the most pressure to devote greater time to test prep, and less to the other subjects of a balanced instructional program.
This is black history month. It is also the month that the Emergency Manager who took political power and control from the mostly African American residents of Detroit has presented his plan to bring the city out of the bankruptcy he steered it into. This is black history in the making, and I hope the nation will pay attention to who wins and who loses from the Emergency Manager’s plan.
Black people are by far the largest racial or ethnic population in Detroit, which has the highest percentage of black residents of any American city with a population over 100,000. Eighty-three percent of the city’s 701,000 residents are black. It continues to be an underreported story that a white state legislature and white governor took over the city and forced it to file for bankruptcy against the will of its elected representatives. It is also underreported that white governors and the white state legislature failed to provide Detroit with its fair share of state tax revenues – a significant contributor to the city’s current financial distress.
Detroit’s bankruptcy plan calls for the near-elimination of the retiree health benefits that city workers earned over the years, as well as drastic cuts in the pensions that retired and current workers have earned and counted on. It is telling, I think, that for the first time since the Michigan constitution was adopted 50 years ago, the governor chose in this case to ignore the Michigan constitution’s guarantee that public employee pension benefits will be paid in full, given that Detroit’s public workforce is majority black and represented by unions that opposed the governor’s election.
This piece originally appeared on the Huffington Post.
The recent defeat of its effort to unionize workers at Volkwagen’s Chattanooga, Tennessee factory was a crushing blow to the United Auto Workers, and a setback to the embattled U.S. labor movement, which could have used the morale boost of a high-profile victory.
It was also a big loss for the vast majority of Americans who must work for a living, whether they are union members or not. Without a large robust unionized sector, there is little hope that the relentless spread of low-wage work, job insecurity and economic inequality will be reversed.
Labor unions were key to the post-World War II social contract under which the benefits of economic growth were broadly shared. Collective bargaining agreements set industry-wide standards for wages and working conditions, which put pressure on nonunion firms to keep up or face union organizing drives. Politically, unions were the most important force supporting Social Security, Medicare, unemployment compensation, overtime, job safety, progressive taxes and full employment policies that promoted prosperity far beyond their membership.
This is a story about misdirection, how authors contort their analysis to answer a question no one is asking but make it seem as if they are answering an important current question, such as ‘why has income inequality increased?’. The consequence is to be grossly misleading or, worse, to present conclusions that are directly opposite of what one’s data show.
The paper in question is titled “US income inequality and assortative marriages” and written by Jeremy Greenwood, Nezih Guner, Georgi Kocharkov, and Cezar Santos for VoxEU.org. The research relates to an increase in positive assortative mating: “how likely a person is to marry someone of similar educational background. Since education is an important determinant of income, these patterns of matching might have an impact on the economy’s distribution of income.” Basically, if higher income men are now more likely to marry higher income women then household income inequality will grow.
The authors conclude that “rising assortative mating together with increasing labour-force participation by married women [emphasis added by me] are important in order to account for the determinants of growth in household income inequality in the US.” So, right out of the gate, a key influence not trumpeted in the headline (rising labour-force participation by married women) is introduced. But we’ll stick with the findings on assortative mating for now. The authors compare assortative mating in 2005 to that of 1960. The selection of the dates for comparison, 1960 and 2005, determines their story and they choose a misleading one. They show their key finding in the very first graph, presented below, which uses Kendall’s tau statistic to measure the relationship between husband’s and wife’s educational levels. The higher the tau statistic ‘the higher is the degree of positive assortative mating.”
I was glad to see the United Auto Workers (UAW) file objections with the National Labor Relations Board (NLRB) over the nasty campaign by anti-union Tennessee politicians to affect the results of the union election at Volkswagen last week. It would be so enlightening for the NLRB to question Sen. Corker (R-Tenn.) under oath about his alleged conversations with the “real decision makers” at VW, the supposed source of his threat/promise that voting in the UAW would doom the VW plant’s hopes for expansion. Was Corker lying, or were VW executives breaking their neutrality agreement with the UAW and using Corker to help defeat the union? If he was VW’s secret agent, the election should be set aside.
In a Wall Street Journal op-ed last month, Sylvester Schieber and Andrew Biggs said that census data failed to capture much of the income Americans derive from 401(k) and IRA plans. Though no one denies that the data don’t include some distributions from retirement accounts, the extent of the under-reporting is under dispute, with Biggs and Schieber claiming census data ignore 60% or more of the money that seniors receive.
In an earlier blog post, I noted that Schieber and Biggs may be basing this attention-grabbing claim on Internal Revenue Service measures that count rollovers from one retirement account to another as “income.” At an American Enterprise Institute event today, Paul Van de Water of the Center on Budget and Policy Priorities, who first brought the rollover issue to my attention, asked Schieber whether he based his claims on IRS measures of total or taxable income from retirement plans. Whereas taxable income measures exclude Roth IRA distributions, total income measures include these distributions, but also rollovers. As Federal Reserve and IRS researchers have explained, rollovers are included in some IRS income measures even if taxes aren’t owed on the amounts (and whether or not households report the transactions) because financial service providers report them to the IRS.
So, which measures are Schieber and Biggs using—total or taxable income from retirement plans? Schieber wasn’t able to answer, deferring to a coauthor, Billie Jean Miller, who wasn’t present. This should raise eyebrows, since Schieber has been making the same point for years and Social Security Administration researcher John Woods raised the rollover issue back in 1996.
Without claiming any familiarity with IRS data, it appears to me that Schieber and Miller are using measures of total income from these accounts, at least with respect to pension and annuity income. In Exhibit 5 of their Journal of Retirement article, for example, Schieber and Miller cite an IRS measure of pension and annuity income of $812 billion for 2008. According to summary statistics published by the IRS, total pension and annuity income was $845 billion in 2008, whereas taxable pension and annuity income was $506 billion (all figures have been rounded). Though Schieber and Miller’s figure is somewhat smaller than the IRS measure of total pension and annuity income, the difference could be due to revisions or differences between the internal IRS data and micro-data made available for public use.
Over the last six years, the labor force participation rate dropped by several percentage points. There is a debate over how much of that drop is a direct result of the lack of job opportunities in the Great Recession and its aftermath (changes that are generally labeled cyclical), and how much is instead a result of long-run trends, such as baby boomers beginning to retire (changes that are generally labeled structural). A recent blog post in the Wall Street Journal said that among Federal Reserve officials, the view that much of the decline is structural is gaining traction. If true, that’s a problem. My read of the data shows that most of the decline is cyclical, so if the Fed believes it’s structural, it means they believe there’s less slack in the economy than there really is.
Part of the misunderstanding is that there are two components of structural change. First, there are population shifts. Age groups that tend to have lower labor force participation rates are now a larger share of the population (think retiring boomers). These are called “compositional” shifts. Accounting for purely compositional changes by gender and age, more than 40 percent of the decline in the labor force participation rate over the last six years can be accounted for. Many people doing a quick analysis on this topic tend to stop there.
However, the other component of structural change is made up of long-run trends in labor force participation within age/gender groups. The labor force participation rate among people under age 25 has been declining since the 1980s, in part due to increasing college and university enrollment. The continuation of that long-run trend accounts for an additional structural decline in the overall labor force participation rate over the last six years. The projected trend in labor force participation rate of workers age 25-54 was virtually flat, so that trend did not meaningfully contribute to structural changes over the last six years. The trend labor force participation of workers age 55+, however, was expected to rise significantly over this period, particularly for women, as cohorts with much stronger labor force attachment throughout their 20’s, 30’s, and 40’s than the cohorts that preceded them began aging into this age bracket. In other words, that’s a structural change that should have substantially contributed to an increase in labor force participation over this period.
Putting these factors together—the compositional changes between gender/age groups and the structural trends within gender/age groups—the result is that only around a quarter of the total drop in labor force participation over the last six years is structural. This means that around 75 percent of it is cyclical. In other words, there are now around 5.8 million workers who are not in the labor force but who would be if job opportunities were strong. If these workers were in the labor market looking for work, the unemployment rate right now would be 10.0 percent instead of 6.6 percent. That is a lot of additional slack in the labor market.
It has been pointed out that it is likely that at least some of the workers who are out of the labor force due to cyclical factors are people who gave up and decided to retire early. Given that retirees are less likely to reenter the labor force when job opportunities improve, improving economic conditions may not draw these workers back in. This means that labeling them as being out of the labor force due to cyclical factors may not be very useful. However, it is important to note that there are large participation gaps for workers age 54 or younger, who are unlikely to be early retirees. In fact, more than 70 percent of the 5.8 million missing workers are under age 55. These missing workers under age 55—4.2 million of them—are therefore unlikely to be deterred from entering or re-entering the labor force when job opportunities strengthen.
While much of the reaction to the most recent CBO Budget and Economic Outlook (released earlier this month) focused on the labor market impacts of the Affordable Care Act, it’s important to note that this report actually contained a multitude of interesting findings and updated projections. Among the most important is CBO’s revised projection of the costs of federal health care programs—Medicare, Medicaid, ACA subsidies, and some smaller programs as well—over the next decade. For the fourth year in a row, CBO revised these cost projections downward. The figure below shows CBO’s projections of these costs in the decade following each Budget and Economic Outlook published since 2011.
While health care costs remain the fastest growing portion of the federal budget, and are still projected by CBO to grow significantly faster than the overall economy over the next decade, the downward revisions of the past three years are quite significant. Put simply, since 2011, CBO’s projection of what the level of federal health spending will be in 2021 has dropped by $183 billion, or about 10.4 percent.
To put this in perspective, when lawmakers passed the counterproductive, indiscriminate sequestration spending cuts as part of 2011’s Budget Control Act (BCA), they were looking at projections of federal health spending over the following decade that the latest estimates indicate were $900 billion too high. The $1.2 trillion in “sequestration” cuts over the decade, with their damaging effect to public investment and to the still-incomplete economic recovery, look even more unnecessary in this light.
Genuinely informed budget wonks know that the BCA cuts were particularly perverse because they took an ax to the portion of the budget— discretionary spending—that is not projected to grow in coming years, relative to the economy. To the extent that long-run budget projections highlight a need for restraining spending, this is entirely driven by the rapid rise in health care costs—both public and private. And these health care costs have rapidly decelerated in recent years. This deceleration began even before the provisions of the Affordable Care Act (ACA) meant to restrain cost-growth went into effect. Health care costs are so important in driving long-run budget trends that if the cost-growth slowdown of the past five years continues, there will be no long-run budget deficit problem. Lawmakers who actually cared about long-run budget deficits, not to mention living standards of typical Americans, would reverse the damaging cuts to discretionary spending and instead continue to press for efficiencies that further slow health care cost growth.
Mark Price and Estelle Sommeiller’s new paper traces the trajectory of top incomes in American states and regions from 1917 through 2011. Mapping this data across the continental United States and over the last century suggests both important similarities across states, and some key differences.
On the map below, the states tip from green to red when the top 10 percent’s share of income exceeds one-third. In the early years, inequality (as measured by the high income share of top earners), is starkest in the Northeast. This inequality is generalized by the impact of depression and war in the 1930s and 1940s, but once the policy innovations of the New Deal (collective bargaining, retirement security, labor standards, and financial regulation) take hold, inequality eases: by the middle 1950s, only New York and the Deep South are still colored red.
The pattern across the last generation is just as telling. Of the sixteen states to top this threshold in 1972, the only ones outside the South were the tri-state home of big finance—New York, New Jersey, and Connecticut. As we scroll forward from there, the states in which the top 10 percent claim less than a third of total income gradually diminish, disappearing entirely by 1989. By 2011, the top 10 percent are claiming almost 60 percent of income in New York and Connecticut, and over 40 percent in all but three states (Iowa, Nebraska, and South Dakota).
Tuesday’s CBO report on the effects of increasing the minimum wage has generated a lot of discussion. While some of the CBO’s findings are consistent with our own analysis, we have some serious disagreements. Here’s our take on the report, particularly CBO’s estimates on employment and income (we focus on their estimates of the effects of increasing the minimum wage to $10.10 by 2016).
The report finds that 16.5 million workers who make below $10.10 would get a raise, and an additional 8 million workers who make slightly above $10.10 would also likely get a bump (since employers like to preserve internal wage ladders). This is right in line with our estimates of the likely impact.
They found that the increase in the minimum wage would benefit mostly adults who need the earnings from their minimum wage job to make ends meet: less than 12 percent of the people who would get a raise are under age 20 and more than 70 percent of the total earnings would go to workers in families whose income is less than three times the poverty threshold. For context, in 2013, three times the poverty threshold for a family of three was around $55,700. This too is right in line with our analysis.
CBO also found that 900,000 people would be lifted out of poverty. We agree that raising the minimum will lift a significant number of people out of poverty, and if anything, CBO’s estimate here seems conservative. CBO is a bit vague on how they came to their conclusion about the effect on poverty levels, but from what we can tell, it seems that they looked at current income levels, expected poverty levels in 2016, simulated how peoples’ incomes would change following the minimum wage hike, and estimated the change in the number of people in poverty. This is a perfectly reasonable approach; however, there’s a good body of research that has looked at the real-world experience of how minimum wage hikes have affected poverty levels. A recent paper by Arin Dube looks specifically at this question and estimates that in the past, for every 10 percent increase in the minimum wage, we’ve seen a 2.4 percent decrease in the number of people in poverty. This implies that increasing the minimum wage to $10.10 could reduce the number of people in poverty by as much as 4.5 million.
In The Increasingly Unequal States of America: Income Inequality by State, Mark Price and Estelle Sommeiller develop estimates for top income shares, from 1917 through 2011, for American states and regions. The national version of this story is now quite familiar: the iconic Piketty and Saez curve that starts high in the early years of the twentieth century (with the top 10 percent claiming about half of all income and the top 1 percent claiming about one-fifth), drops with the political innovations of the New Deal, and then climbs again—returning, by 2012, to its early-century heights—as those innovations are dismantled. So what does the state and regional breakdown tell us?
The full results are plotted below. For each year, the states (the light blue dots) are plotted by top income shares. The middle of the shaded box marks the median state (half are lower on the chosen measure, half are higher), and then the states are broken into quartiles: the middle quartiles (marked by the boxes) surround the median, the outer quartiles run along the lines between the boxes and the outer tick marks.
A few patterns stand out. First, the general sweep of the graph echoes the national story. The arc of inequality from Gilded Age to New Deal and back again is experienced across every state, not just in a few of them. Second, the policy innovations that dampened inequality—collective bargaining, retirement and unemployment security, labor standards, financial regulation, progressive taxation—also narrowed the variation across states. In the middle years of the last century strong federal policies trumped (or overcame) the economic and political differences among the states. And third, the erosion of those policies, beginning in the 1970s, saw both inequality and the variation across states widen again.
The United States clearly does not have a short-term federal budget deficit problem—unless that problem is that it is closing too quickly to support rapid recovery. To the degree we do have a fiscal challenge requiring some sacrifice, it is in long-term projections of federal debt. The primary sources of the long-term projected problem are simply insufficient revenues and excessive national health expenditures. Under the “extended baseline” projection included in CBO’s last long-term budget outlook, federal outlays relative to GDP increase by 5.4 percentage points between 2013 and 2038, while federal revenues relative to GDP increase by only 2.7 percentage points; outlays and revenues are projected to diverge thereafter. Revenues have not been keeping up with spending and are not likely to keep up as far as the eye can see.
Most of the growth in outlays is due to increased spending on health care programs, primarily Medicare and Medicaid. However, what is happening with Medicare and Medicaid is just a symptom of what is happening to total national health care expenditures—the growth in Medicare and Medicaid outlays just reflect this growth in health care spending. These total expenditures rose extraordinarily fast over most of the past three decades, and this has led CBO to project they will rise significantly faster than overall economic growth for the foreseeable future. As a matter of fact, spending on Medicare and Medicaid has increased at a slower rate than private health care expenditures over the past 40 years.
None of this is news to anybody closely following budget policy. What was news is that in CBO’s most recent (and now-infamous) Budget and Economic Outlook, released last week, there was an increase in the projected accumulated deficits over the next decade. It’s worth examining the reason for this deterioration in a little detail, since too many will reflexively interpret it as a failure to contain spending. But in fact, it’s really a failure to lay the conditions for economic growth, and a resulting hemorrhaging of projected tax revenues.
Cheers for the Recovery Act on its 5th Birthday, Jeers for the Anti-Recovery Act We’ve (Implicitly) Passed in the Past Three Years
Today marks the fifth anniversary of the signing of the American Recovery and Reinvestment Act (ARRA, or simply the Recovery Act). Passed after a six-month stretch during which the economy lost an average of 750,000 jobs each month, ARRA was the single biggest contributor to stopping the economic freefall that followed the bursting of the housing bubble. To be clear, the assessment that the ARRA contributed significantly to ending the Great Recession is not a contested opinion among macroeconomists, or at least not among those macroeconomists whose paycheck depends on correctly predicting what will impact economic activity. (For example, figure C in this briefing paper shows a set of estimates from both private and public macroeconomic forecasters of ARRA’s impact on gross domestic product during its peak quarter of effectiveness.)
Further, ARRA’s overall impact was significantly blunted by the fact that a significant portion of its overall cost was absorbed by tax cuts for business and higher-income households (see tables 1 and 2 in this White House factsheet, for example)—a significantly less effective form of stimulus than either direct government spending or safety net programs. Research since ARRA has confirmed that the effective parts of ARRA—aid to state and local governments to finance Medicaid payments or build infrastructure projects—provided even better stimulus than ex ante estimates indicated.
Why is it important to remember this history? Because in a reasonable policymaking environment we would be trying to enact more fiscal stimulus today, to complete the road to full recovery from the Great Recession.
Janet Yellen testified before Congress for the first time Tuesday as the Federal Reserve Chair. Besides the excruciatingly long time that the House Financial Services Committee extended the hearing, a couple of other things stood out.
First, in terms of having a Fed chair display good judgment about the real problems facing the economy, yesterday’s testimony was awfully encouraging. Previously, the Fed had highlighted a 6.5 percent unemployment rate as a threshold (not an automatic trigger) indicating that the economy was recovering well, and hence short-term interest rates might be raised. But over the past year, the overall unemployment rate has improved much faster than other labor market indicators, and may well be painting too rosy a picture about the overall health of the economy.
Yellen made it clear that she thinks one needs to look at a wide range of indicators—particularly wage and price inflation—to assess the underlying degree of slack. And this wider range of indicators argues pretty strongly against monetary tightening anytime soon, and she seemed pretty upfront about this. By the way, for those wanting a look at some of these alternative indicators, you can check out this page on our State of Working America site. We think the employment to population ratio for prime-age workers is about as good as a single indicator gets in assessing the overall degree of labor market slack. And while it has started moving encouragingly up in recent months, it remains very far away from its pre-recession peak.
It is curious that some economists, like Harry Holzer, are so totally focused on the possibility that there could be some quantitatively small loss of employment due to a higher minimum wage that they implicitly downplay a wider universal finding: a higher minimum wage will substantially lift the average annual earnings of low-wage workers (because even if there is a small negative employment effect—which the weight of the evidence shows there isn’t—that effect is swamped by the much higher wage). Consequently, we know that low-wage workers and their families will be better off financially, no ifs, ands, or buts.
Further, the weight of the evidence does in fact show that the employment effects of increasing the minimum wage are indistinguishable from zero. There is a vast literature on the effects of increases in the minimum wage on employment that spans many decades and has gone through countless methodological improvements, with each new round of literature incorporating lessons learned from the last. In the last several years, a new series of rigorous, peer-reviewed papers on the effects of the minimum wage has been published in top academic journals, and represents the best in methodological practices (see for example here and here). These studies find that increases in the minimum wage have raised wages, but have had essentially no effect on employment, even in times when the labor market is weak. In other words, incorporating decades of work that came before, the state of the literature is that increasing the minimum wage improves the earnings of low-wage workers without significant adverse employment effects.
Does increasing the minimum wage lead to job losses? What does economics literature say?
Based on the economic multiplier effect that results from putting additional income in the hands of lower-income workers, raising the minimum wage will likely have a modest but positive impact on job creation, leading to an additional 85,000 net new jobs when fully phased in. Lower-income earners spend their income more immediately, more completely, and more locally, than do higher income earners, and therefore generate more economic activity. Increasing the wages of 27.8 million workers by $35 billion over the phase-in period generates an additional GDP impact of $22 billion.1
This finding is consistent with the most recent, highly rigorous, peer-reviewed economic literature based on an analysis of real-world minimum wage increases across counties on state borders that shows essentially no disemployment effect resulting from raising the minimum wage.2
Mobility Needs To Do More Than Stagnate To Indicate U.S. Economy Is Performing for Low- and Moderate-Income Families
A recent paper by Raj Chetty et al found that young adults entering the labor market in recent years (they were children in roughly the 1990s) have the same chances of moving higher (or lower!) in the income distribution than their parents did as did children born in the 1970s. Some have claimed that this study somehow blunts or even overturns any narrative that the U.S. economy has performed poorly for low- and moderate-income households over the past generation. This is reading a judgment into the Chetty et al. results that just is not there.
First, some context on the mobility research literature. The Chetty et al. results are part of a recent resurgence in research about intergenerational mobility—or the likelihood that children will be in a different position in the income distribution than their parents. If where you start on the income scale as a child has a strong influence on where you wind up as an adult, then the degree of economic mobility is low. If, on the other hand, where you start is largely unrelated to where you end, then mobility is high. Chetty et al. find that the probability that a child reaches the top fifth of the income distribution given that their parents are in the bottom fifth of the income distribution is about 9 percent and also now famously found that this probability has not changed much over time.
So, do these Chetty et al. results really overturn the argument that the U.S. economy has performed poorly for low- and moderate-income families over most of the past generation? Not really.
It’s well-covered ground that declines in the unemployment rate have been overstating improvements in labor market conditions in this recovery, due to the fact that so many potential workers have dropped out of, or never entered, the labor force because job opportunities are so weak. By my estimates, about a third of the decline in the unemployment rate since its peak in the fall of 2009 was due to potential workers being sidelined, not potential workers finding work. (Note, workers being sidelined was not what caused the drop in the unemployment rate in January, but it has been the dominant factor for the last four+ years.)
Given that declines in the unemployment rate are providing a murky picture of trends in labor market health in this recovery, I think a much more useful indicator is the employment-to-population ratio of “prime-age” workers (workers age 25–54). (In fact, I’ve sometimes referred to this as my “desert island” measure—i.e. if I were headed to a desert island and could only take one measure with me to judge current trends in labor market conditions, this would be it.) The employment-to-population ratio (or EPOP) is simply the share of the population with a job, so this measure entirely sidesteps the issue of whether potential workers are in the labor force. Restricting our attention to prime-age workers serves the important purpose of avoiding confounding changes in employment that are not due to labor market conditions but are instead due to longer-run structural factors, such as baby boomers hitting retirement age and declining employment of young adults due to increased college enrollment.
Lately, the prime-age EPOP is showing a little spunk! There was a big jump up between December and January, but you shouldn’t focus on that because the new January population controls might be at play. If you look over the past year, the prime-age EPOP increased by eight-tenths of a percentage point, which isn’t exactly fast, but it is something.
The January jobs report was pretty bad—the economy added just 113,000. But there has nevertheless been some excitement on social media today about how close we are getting to regaining the pre-recession level of employment. We lost 8,695,000 jobs in the downturn, but we have since gained back 7,844,000, so we are now “only” 851,000 jobs below where we were when the recession began in December 2007. Yay?
No. The December 2007 level of employment is way below where we should be now.
The working-age population—and with it, the potential labor force—is growing all the time. Over the last six years and one month, we should have added 6.7 million jobs to keep up with growth in the potential labor force. Instead, we are down 851,000 jobs. This means that the total gap in the labor market—the number of jobs we need to get back to pre-recession labor market conditions—is 7.6 million. To fill that gap in three years—which would mean, all told, the Great Recession would have caused more than nine years of weak job opportunities and incomes for American workers—we would have to be adding 280,000 jobs per month.
In a recent column, David Brooks argued that increasing the minimum wage is an ineffective response to income inequality because it would do little to raise workers above the poverty level. Instead, he contends, most of the benefits would go to those higher up the income scale. But Brooks’s understanding of the minimum wage’s role is too narrow. The central purpose of the minimum wage is not to lift the poor above the poverty line—it’s to raise the incomes of low-income workers and their families, not just those below the poverty threshold. Current research suggests that minimum-wage increases are well targeted to improving lower-income individuals’ economic condition. This is contrary to the persistent myth that the minimum wage primarily benefits young workers in high-income households.
The argument made by Brooks, and others who focus narrowly on poverty, is specious for several reasons. First, it conflates poverty and inequality. While related, they are not one and the same. Second, the poverty line is both arbitrary and woefully lacking as a measure of well-being. As currently defined, the poverty line is more descriptive of destitution than mere poverty. At $22,111 for a family of two adults and two children, it is less than a quarter of the income needed for a modest but secure living standard in New York City, and just 37 percent of the income needed in rural Nebraska. Third, it is not a weakness but a strength of the minimum wage that it not only improves the well-being workers above the poverty level who are nevertheless struggling to make ends meet. After all, its purpose is to be a floor that supports broad-based wage growth.
Well, that was fast. Last week Speaker John Boehner released a draft set of “standards” (essentially, principles) on immigration reform, which I analyzed in detail. The standards are supposed to set out what the priorities are on immigration for Republicans in the House, presumably so that new House immigration legislation can be based upon them, and to signal to Democrats in the Senate the parameters for future negotiations between the two chambers to reform the immigration system. But this week, the speaker’s office has released a new one-page document, which compares the draft House standards side-by-side with the corresponding sections of the Senate’s bipartisan comprehensive immigration bill that passed in the summer (also known by its bill number, S.744), as well as a “Q&A.” Unfortunately, the side-by-side comparison document makes a number of misleading claims about the provisions in S. 744. In fact, it’s so bad that it’s difficult to take it seriously—and although I’m not in the business of making political predictions or of trying to guess how political parties will behave—as a result it’s hard to believe that the Republican Party and Speaker Boehner are serious about negotiating on immigration.
I won’t address all of the characterizations of the Senate bill in the speaker’s side-by-side document, but I’ll analyze a few notable ones:
The comparison document says the House Standards “mandate a secure border” while the Senate bill “does not guarantee the border will be secure before giving all illegal immigrants citizenship.” Perhaps S. 744 doesn’t exactly use language that “mandates” the border be secure first, but it authorizes the spending of a whopping $46 billion on militarizing the border and ports of entry, and doubling the number of border patrol agents, in order to prevent future flows of unauthorized migrants. As far as the granting of citizenship is concerned, most unauthorized immigrants who pay all the penalties and fees and are able meet the strict income and employment requirements for citizenship still would not be eligible for 13 years. That should be more than enough time to implement $46 billion in new security measures that Republican senators insisted be included in S. 744.
January is the month for “benchmark revisions,” which is when BLS revises its sample-based estimates to match other comprehensive data sources. Preliminary estimates of the benchmark revision, released last fall, showed that with this benchmark revision, the over-the-year change in employment between March 2012 and March 2013 is likely to be revised downward by 124,000. This means that we are likely to find that the gap in the labor market due to the Great Recession and its aftermath is larger than we think it is. Right now, the gap is estimated to be 7.7 million, if the preliminary estimates hold, the gap is instead over 7.8 million.
Another thing happening with this benchmark revision is a code change that moves nearly half a million in employment from the Private Household industry—which is not counted in the establishment survey—to the Education and Health Care Services industry, which is. This means the level of employment in the establishment survey will increase to reflect this coding change. I checked with BLS and they reported they will be revising employment, hours, and wage data back to 1979 to reflect this change.
The household data (which is where the unemployment rate and the labor force participation rate come from) will also be affected by new population controls, but in accordance with standard practice, earlier household data will not be revised to reflect these changes. This means that if you want to know the change in unemployment and labor force participation between December and January, you can’t look at the regular published data, and instead must look at the extra information provided, which will show the over-the-month change after removing the effect of the new controls. Look to tables B and C here to see what information was provided last year at this time.
The U.S. Court of Appeals for the Third Circuit ruled yesterday that the Department of Labor’s H-2B visa wage methodology regulation is valid, handing a defeat to a coalition of employers who want to keep wages low for employees in forestry, seafood, hospitality, landscaping and other physically demanding jobs. In Louisiana Forestry Association v. Secretary, U.S. Department of Labor, the court held that the Immigration and Nationality Act gives the Department of Homeland Security the authority to rely on the Labor Department’s decisions about whether U.S. workers are available for jobs that employers want to offer to foreign workers, and whether U.S. workers will be adversely affected if foreign workers are admitted to the U.S. to do particular jobs.
The Labor Department issued a regulation in 2011 that sets out the most important element for making that determination: setting a prevailing wage rate for each occupation and requiring businesses to advertise jobs to workers in the United States at that rate before hiring foreign workers. The court held that the regulation is valid and rejected the businesses’ argument that the Department of Labor cannot set wages at a level high enough to attract U.S. workers.
The employment data last month showed that just 74,000 payroll jobs were added in December. It is unlikely that the underlying job growth rate is this weak, so the January data, which comes out on Friday, should look substantially better. However, beating 74,000 jobs is a very low bar. To get back to pre-recession labor market conditions in three years, we would need to be adding 285,000 jobs per month. It’s more likely that we’ll see something closer to the average number of jobs added per month in 2013, which was 182,000. At that rate it will take well over five more years to get back to health in the labor market.
Another thing to watch is the labor force participation rate (LFPR), which has dropped from 66.0% to 62.8% over the last six years. My estimates suggest that about one-quarter of that drop is due to long-run factors like baby boomers hitting retirement age and increasing college enrollment of young people, and had nothing to do the Great Recession or the weak recovery. That means about three-quarters of the drop in LFPR is due to potential workers either dropping out of, or never entering, the labor force because job opportunities are so weak.
The labor force may have dropped further in January, due to the expiration of federal unemployment insurance benefits in December. Careful research (here and here) shows that these benefits were keeping people in the labor force. To receive unemployment insurance, workers must be actively seeking work, so receiving UI was giving people a reason to keep looking for work even though job prospects are bleak. (This is actually a good thing because it may increase the share of displaced workers who ultimately find work). A drop in labor force participation due to the expiration of UI extensions would likely lead to another “bad” kind of drop in the unemployment rate—one that comes from potential workers giving up looking for work, not potential workers finding work. This would compound an already serious issue—there are already 6 million “missing workers,” who, because of weak job opportunities, are neither employed nor actively seeking a job. If these missing workers were in the labor market looking for work, the unemployment rate would be 10.2% instead of 6.7%.
The Congressional Budget Office’s new 10-year Budget and Economic Outlook, released this morning, is truly the bearer of bad news. Compared with CBO’s previous outlook, released last May, spending over the next decade is projected to fall, revenues are projected to dramatically fall, and economic growth is projected to plummet.
On the spending side, a combination of policy changes and slower projected economic growth has led to a downward revision of $594 billion in projected outlays over the next decade. And on the other side of the ledger, projected federal revenues have decreased by $1.4 trillion, all due to newly anticipated slower GDP growth and lower inflation (not to mention a further $200 billion decrease in revenues due to technical corrections). The result is almost a $1 trillion increase in federal deficits over the next ten years.
As this morning’s CBO numbers make clear, economic growth is the largest driver of federal revenue, and hence, the key to bringing down deficits. In the short-run, spurring more growth through fiscal policy is easy from an economic perspective—allow the budget deficit to rise to finance spending that spurs aggregate demand in our still demand-starved economy, fostering a full recovery from the Great Recession. In the longer run, improving overall productivity and growth is key. As the CBO report states, “if the growth of real GDP and taxable income was 0.1 percentage point higher or lower per year than in CBO’s baseline projections, revenues would be roughly $270 billion higher or lower over the 2015-2024 period.”
So how did we get in such dire straits regarding growth?
For years, health and labor economists have studied the inefficiencies created by the fact that most Americans under 65 get health insurance through their job. One potentially large inefficiency is “job lock”—people making decisions to take and/or keep a particular job because without it, they wouldn’t have affordable health insurance. The research literature tells us that job lock occurs among workers who would otherwise be entrepreneurs, those who would rather retire, and full-time workers who would rather work part-time, as well as for a host of other reasons.
The value of the employer-sponsored health insurance system is two-fold (and please bear with the oversimplification). First, it pools risk and charges the same price for workers within an organization regardless of their or their dependents’ health status. Second, it’s far better than what’s historically been offered in the individual health insurance market (e.g. denied policies, excluded conditions, discriminatory pricing, etc.). Enter the Affordable Care Act, which has now established state-based health insurance exchanges that significantly reform the individual insurance market and make it possible for many workers and their families to find affordable health insurance coverage outside the employment-based market.
Which brings us to today. The Congressional Budget Office released its Budget and Economic Outlook, and, in Appendix C, one can find an expanded discussion of the labor market effects of the Affordable Care Act.