This post is the latest in a series that has aimed to question the conventional Beltway wisdom about the supposed harm to the economy inflicted by the corporate tax code. Today, we’ll take on the idea that’s long been fermenting on the right, but now increasingly popping up in more mainstream outlets, to abolish the corporate tax code entirely. While there are reasons the idea of ceasing to tax corporations makes sense, the idea’s proponents have underestimated its drawbacks.
Getting rid of the corporate code entirely has some intrinsic appeal. Because corporate taxes are ultimately paid out of individuals’ pockets, it can seem desirable to tax these individuals directly—without dealing with all of the exemptions, credits, loopholes, and deductions in the corporate code, not to mention the “tax avoidance industry” such provisions support. This could potentially be a more efficient way to raise the same amount of revenue. However, there are three main obstacles that stand in the way of getting rid of the corporate code entirely.
- The corporate tax code is a progressive revenue raiser. While the corporate code only brings in about 10 percent of federal revenue, that’s still $315 billion in 2014. It’s also really progressive; the lowest fifth of earners pay about 0.9 percent of their income in corporate income tax, while the top 0.1 percent of earners pay 9.7 percent. According to the Congressional Budget Office, about four-fifths of corporate income is held by the top fifth of the income scale, and about half is held by the top 1 percent. Thus, as Jared Bernstein points out, “Unless we could replace it with higher taxes on those same households… scrapping or even just lowering the corporate tax rate would increase after-tax income inequality.” Raising that kind of revenue from the same sources, in the absence of a corporate income tax, is tougher than it may seem. The plan cited by the New York Times’ Josh Barro would replace the corporate tax by taxing individuals’ capital gains at ordinary income tax rates—a proposal long favored by progressives—and that would still only make up half of the lost revenue.
- Unintended consequences. As we’ve seen this year in Kansas’s experiment with eliminating corporate taxation, the unintended consequences are enormous. For instance, if corporations don’t pay taxes, but people still do, what would stop individuals from simply incorporating themselves for tax reasons—thus paying no taxes until their “corporate” earnings are distributed? (Kansas lost out on almost $300 million of revenue over a two-month period this year, for just this reason.) This maneuver would be just the tip of the tax avoidance iceberg if the corporate code were abolished. Getting rid of the corporate tax code and its myriad opportunities to evade taxes would not necessarily result in a system that’s harder to game.
- If you win the race to the bottom, you’re still at the bottom. While scrapping the corporate tax code would represent a “victory” in the international race to the bottom, it would undoubtedly be short-lived, as other countries would certainly react by slashing or zeroing their rates as well. This would be like a game of prisoner’s dilemma in which each suspect ratted out the other and everyone ended up in jail for a long, long time. (Jail in this case would be a hypothetical world in which multinational corporations paid no tax to any country at all.) Currently, every developed country levies a corporate income tax. They may tax different kinds of income and at different rates, but these taxes still exist throughout the world because they provide governments with revenue that would be hard to replace by switching to another tax system.
New Wages and Salaries Data from the Employment Cost Index Show Yet Again It’s Not Quite Time To Declare Mission Accomplished
This morning, the Bureau of Labor Statistics released the 2014 third quarter data from the Employment Cost Index (ECI). Total compensation and wages and salaries for the private-sector workforce both rose 0.7 percent. This is the second straight quarter of faster-than-average growth since the recovery from the Great Recession began. While this is absolutely a move in the right direction, we shouldn’t declare “mission accomplished” in spurring decent wage growth. The figure below shows the year-over-year growth rates of wages from a variety of measures: the ECI, hourly wages of all workers and hourly wages of production and nonsupervisory workers (the latter two from the monthly payroll survey, which will be updated again in a week).
There are two clear trends to note from the graph. First, all the series move fairly consistently with each other over time. In the third quarter, they all measured between 2.0 and 2.3 percent. Second, these growth rates are still far lower than the growth rates in 2007, when the wage growth ranged from 3.1 percent for all workers in the payroll survey to 4.1 percent in the ECI.
Year-over-year growth rates of wages, 2002–2014
|Date||ECI*, all workers||CES**, production/nonsupervisory workers||CES**, all workers|
* Employer Cost Index
** Current Employment Statistics
Note: All series are for private sector workers.
Source: EPI analysis of Bureau Labor Statistics' Employer Cost Trends and Current Employment Statistics
The fact is that the weak labor market of the last seven years has put enormous downward pressure on wages, and there has been no significant and sustained pickup in nominal wage growth in recent years. Employers still don’t seem to have to offer big wage increases to get and keep the workers they need, when hiring rates and net job creation remain far slower than what’s needed to generate healthy labor market outcomes.
Next Tuesday is Election Day. For months, get out the vote campaigns have been under way in communities across the country and the public has endured an endless stream of political ads and robocalls intended to bolster typically sluggish voter turnout during midterm elections. Arguably, the biggest risk to people showing up at the polls on Tuesday is a basic disbelief that their individual vote counts or will do much to change the status quo. On one hand, voters might feel justified in holding this view given that neither party has said (or done) much this election cycle to address growing economic inequality and stagnant living standards, issues that have been top of mind for most Americans for at least the past six years. In fact, the most vocal public figure on this issue in recent months has been someone we didn’t elect – Fed Chair, Janet Yellen.
Just in case reports of strong job growth and declining unemployment this year have lulled our elected leaders into a false sense of security about the public’s level of concern over the economy, they should be reminded that counting matters. Since January of this year, the U.S. economy has added an average of 227,000 jobs per month and the unemployment rate has fallen from 6.6 percent to 5.9 percent. But, according to EPI’s monthly measure of “missing workers,” if job opportunities were significantly stronger, there would potentially be an additional 6.3 million people either working or looking for work and the unemployment rate would be 9.6 percent.
A few years ago, sociologists Becky Petit and Bryan Sykes brought to light an important way in which counting matters when it comes to measuring African American progress. Specifically, Petit and Sykes called into question the accuracy of social and economic indicators used to gauge how well different groups within American society are doing. Most of these indicators are based on the civilian non-institutionalized population. While this is a term few people give any thought to, by definition it excludes people who are in jails, prisons, mental institutions, nursing homes or on active duty in the Armed Forces.
This post originally ran on the Wall Street Journal‘s Think Tank blog.
The Commerce Department’s Bureau of Economic Analysis reported Thursday that gross domestic product–the widest measure of U.S. economic activity–grew at an annualized rate of 3.5% in the third quarter. For the past six months GDP has been growing at a rate of 4.1%. If sustained, this would clearly constitute the recovery shifting into a higher gear.
Sadly, there’s not a lot of evidence that it will be sustained.
For one thing, even with the expansion in the two most recent quarters, growth so far in 2014 has averaged just 2%. Much of the growth in the past six months likely represents bounceback from the 2.1% contraction in the first 3 months of this year.
After dispelling some unwise conventional wisdom about corporate taxes (first that American corporations pay the highest tax rates in the developed world, and then that “tax reform,” as commonly defined by Congress and businesses alike, would be either sound policy or good politics or both), here’s another tired idea that needs to be put to bed: Taxing American multinationals’ overseas profits when they return home “traps” money overseas and is a leading cause of the American corporate code’s “anti-competitiveness.”
The U.S. corporate tax code is unlike many other developed nations’ in that it taxes its multinationals’ profits that are earned overseas. (Taxing profits no matter where they’re made is called a “worldwide” tax system.) However, American corporations may defer payment on these taxes until they bring their overseas profits back to the States in the form of dividends. American corporations are well-versed in ways to use this cash overseas (for example, if classified as “permanently reinvested” in a foreign country, those earnings are exempt from U.S. taxation), and thus avoiding “repatriating” profits and paying taxes owed.
Corporations, and those they’ve managed to bamboozle on this issue, often say that these profits are “trapped” overseas. “Being obligated to pay taxes” is not the same as “trapped.” Imagine that your employer told you he’d love to pay you, but your salary is “trapped” because if you were paid then your employer would be obligated to remit payroll taxes to the Treasury. You would be rightfully skeptical of this “trapped salary” argument. However, corporations routinely trot out this “trapped” line to call for a “repatriation holiday,” during which profits earned in a foreign country could be brought to the United States at a reduced tax rate. (The previous such holiday was granted as a “one-time” deal in 2004, but corporations’ belief that it will be repeated is part of why their overseas cash hoard has grown so large—now up to $2.1 trillion.) Moreover, the anticipated benefits of the one-time tax holiday—increased business investment and hiring here at home—did not materialize; the 15 companies that repatriated the most foreign earnings cut more than 20,000 jobs over the following three years and “slightly decreased the pace of their spending on research and development.” The tax break also cost the U.S. Treasury $3.3 billion in lost revenue.
High-income Households Pay a Large Share of US Taxes—But This Doesn’t Make Our Tax System Progressive
Perhaps the highest priority issue on the conservative agenda is keeping taxes on the highest-income Americans low. Their arguments essentially boil down to claims that raising taxes on “job creators” would doom the economy, and, besides, the government has taken so much from them already that there’s no more left to take.
In the past few weeks, the claim has been making the rounds that the U.S. tax code is already overly progressive, and much more redistributive than those of other developed nations. The line of argument following from this often seems like a tacit—or not so tacit—warning to progressives: If you want to increase public spending you’ll have to raise taxes on the middle class—because the rich just don’t have any more to give—and you’ll get hammered politically for doing so. Therefore, we can’t have any new spending. QED.
The idea that the U.S. tax system is already too progressive pops up every few years, but its persistence doesn’t mean its intellectual underpinnings are reliable. Indeed, the most recent resurgence of this theory is built on a deeply flawed foundation, consisting of a truly terrible measure of “progressivity”—namely, the fact that a relatively large percentage of all U.S. taxes collected is paid by the highest-income filers, relative to our advanced-economy peers.
The release of new Social Security Administration wage data gives us a chance to update our analysis of wage trends for the top 1.0 percent of wage earners and wage groups in the bottom 99.0 percent. There’s some surprising news this year, as top 1.0 percent wages fell, while the remainder of the workforce saw real wage improvements. In the analysis below we review these recent trends, as well as trends during the Great Recession and over the longer-term.
Wage growth from 2012 to 2013
New data for 2013 (Table 1) provide some surprising news: real average annual wages nudged down slightly, falling 0.2 percent since 2012, because wages of the top 1.0 percent of wage earners declined, although those of the bottom 99.0 percent grew. The biggest wage decline was among the top 0.1 percent of earners, whose wages fell 9.0 percent, while the next 0.9 percent saw their wages fall just 1.4 percent. In contrast, the wages of the bottom 90 percent (averaging $32,333 in 2013) rose a modest 0.4 percent (real hourly wages did grow modestly in 2013). Higher wage workers, those earning between the 90th and 99th percentiles of wages (averaging $136,820 in 2013) fared the best, with real wages rising by 2.5 percent. Thus, wage inequality between high and middle/low wage workers grew even though those at the very top—the 1 percenters—actually lost ground. David Cay Johnston wrote on this yesterday. Our analysis goes beyond his reporting by placing earners in percentile wage groups (bottom 90 percent, top 1 percent, etc.) and providing analyses of changes over the Great Recession’s downturn and recovery and the longer-term changes back to 1979.
Myths and Facts About Corporate Taxes, Part 2: Will Congress’s Idea of “Base-Broadening, Rate-Lowering Tax Reform” Fix What’s Wrong With Our Corporate Tax Code?
A few weeks back, we examined whether the conventional wisdom that the U.S. has the highest corporate tax rate in the world is indeed true. (Hint: No.) Now let’s take another look at what’s become another “truism” about taxes in Washingtonese: that “fundamental corporate tax reform” would be both desirable policy and achievable politics.
(Hint 2: Still no.)
When politicians (of both parties) talk about “corporate tax reform,” what they tend to mean is ridding the code of many exemptions, deductions, credits, and loopholes, and then lowering the top rate to maintain revenue neutrality. For example, see these nearly identical quotes from Speaker Boehner (“Let’s grow the economy and create jobs and broaden the tax base and lower rates”) and President Obama (“By broadening the base, we can actually lower rates to encourage more companies to hire here”).
The public policy argument against this kind of tax reform is simple: The idea that we should reform the tax code but not get any additional revenue out of it is simply absurd. Additional federal revenue is sorely needed, both to finance infrastructure investment and public-sector jobs in the short- and medium-term, but also to continue to pay for our social safety net (which is quite modest, by international standards) in the long-term. Our corporate tax code has features that make it an excellent source of such revenue. First, the incidence of the corporate tax is very progressive: The lowest fifth of earners pay about 0.9 percent of their income in corporate income tax, while the top 0.1 percent of earners pay 9.7 percent. And second, after-tax corporate profits are at an all-time high. The code also has a bug that, if fixed, could help produce additional progressive revenue: Many large American multinationals take advantage of the myriad loopholes, deductions, exemptions, and whatnots in the code so as to pay little or no federal taxes.
When I read recently that General Mills had tried to impose binding arbitration on people who used Facebook to like its cereals, I thought the company was stupid, and didn’t much care because I don’t buy their products anyway. But when I learned that an ever-increasing number of corporations are sneaking forced arbitration clauses into the fine print of their purchase agreements, I became more concerned. How can I be forced to give up the right to sue if a product hurts me or my family, just because I bought the product?
Today, I’m totally alarmed and outraged, after watching the Alliance of Justice’s film “Lost in the Fine Print.” The film tells the story of consumers who were harmed by for-profit schools, credit card companies, and employers, but were then prevented from suing in court by the arbitration clauses hidden in the fine print of their contracts. Denied any access to the courts, their only choice was arbitration before an arbitrator hand-picked by the company. The consumers all lost, but one of them lost more than just her case: she was forced to pay the company’s $362,000 in legal fees and costs! It’s no surprise the outcomes are so lopsidedly in favor of the corporations, given that they choose and pay the arbitrators, who depend on the corporations for business.
AFJ’s Nan Aron, who hosted a showing of the film at the Women’s National Democratic Club, told us that 93% of consumers who try to use company-mandated arbitration lose. Worse, when a small business in California challenged the imposition of a forced arbitration clause by American Express, the US Supreme Court upheld the clause last year, despite a stinging dissent by Justice Elena Kagan. Now, as far as the companies are concerned, there’s nothing to stop them: Comcast, Wells Fargo, AT&T, Amazon, and Verizon are just a few of the companies that impose binding arbitration on their customers. The Court vindicated the arbitration clause even though by requiring individual arbitration actions it made it so expensive for Amex’s small business customers to challenge unfair fees that they effectively had no remedy. According to Justice Scalia, under the Federal Arbitration Act, the fact that there is no remedy is irrelevant. Now, as far as the companies are concerned, there’s nothing to stop them: Comcast, Wells Fargo, AT&T, Amazon, and Verizon are just a few of the corporations that prohibit class actions and impose binding arbitration on their customers, without their knowledge.
Fed Chair Janet Yellen gave a speech this week, ”Perspectives on Inequality and Opportunity from the Survey of Consumer Finances”, and she deserves our applause for speaking some truths about social mobility and income inequality that are frequently overlooked. I am going to focus on one aspect of her speech in particular—the relationship between income and wealth inequality and opportunity.
First, there was no mincing of words as to what has happened:
“It is no secret that the past few decades of widening inequality can be summed up as significant income and wealth gains for those at the very top and stagnant living standards for the majority. I think it is appropriate to ask whether this trend is compatible with values rooted in our nation’s history, among them the high value Americans have traditionally placed on equality of opportunity.”
I appreciate both the straightforward description of the rise of both income and wealth inequality, and the explicit connection between these growing inequalities and the threat this poses to future generations’ upward mobility and opportunity. Our current economic discourse on these matters is very confused. Let’s be clear on our terms. When we talk about social mobility, or ”opportunity,” we are talking about the ability of the members of the next generation who are starting at the bottom of the income ladder (i.e. growing up poor) to climb that ladder and be better off than their parents in either an absolute sense (having more money) or a relative one (ranking higher in the income distribution, such as being in the middle or the top fifth rather than the bottom fifth). Income inequality, meanwhile, is how far apart the rungs on the income ladder are, and whether the incomes produced over the next ten or twenty years are narrowly or widely shared. Conservatives seem to only be concerned with facilitating opportunity or social mobility, and consider income inequality itself not a worthy focus of policy—presumably because markets have produced these outcomes and markets know best. Some on the center-left also seem to want to focus solely on social mobility, because they think ”income inequality” polls poorly. Or perhaps they want to help the poor, and feel that we can do so without addressing income inequality more generally, which would involve tackling the oversized income gains of the top one percent (after all, one must raise campaign funds from them). Along these lines, various reporters have noted the Obama administration backing away from making ”income inequality” a key issue and shifting to a focus on opportunity or mobility.
The last barricades in the right wing’s fight to prevent increases in the minimum wage are starting to fall, as even the businesses that minimum wage opponents are supposedly protecting from having to pay a decent wage are saying, “Enough! It’s time to raise the minimum wage.”
The American Sustainable Business Council and Business for a Fair Minimum Wage conducted a national phone poll of 555 small business employers and found support for raising the minimum wage to $10.10 an hour in every region of the country. Two thirds of surveyed businesses in the Northeast were in favor, and even in the South, 58 percent of small businesses approve of President Obama’s proposal to raise the minimum wage in steps and then index it to inflation.
Unsurprisingly, these business owners are not simply being altruistic. Most of them understand that their businesses will benefit in two ways when millions of poorly paid employees get a raise. First, higher pay would mean lower employee turnover, increased productivity and higher customer satisfaction—all of which helps employers’ bottom line. Second, most of the owners surveyed agree that a higher minimum wage would increase consumer purchasing power and help the economy. Putting money in the pockets of millions of potential customers means more sales and higher profits.
This post originally ran on the Wall Street Journal‘s Think Tank blog.
According to the Federal Reserve’s now-famous “dot charts,” most members of the Fed’s board of governors and regional Fed presidents believe that short-term interest rates should be raised in 2015. But should this week’s stock market declines lead the Fed to postpone monetary tightening?
To be clear, tightening should almost surely be postponed past 2015—but the stock market really shouldn’t have much to do with that. For one thing, even after this week’s declines, stocks do not look particularly undervalued. One could argue that they were getting slightly overpriced in recent months (not a bubble, just on the high side).
Further, a much healthier recovery will almost inevitably involve an increase in wages and a reduction in the share of income claimed by corporate profits instead of workers. This means that economic growth would stop so disproportionately benefiting capital owners (including holders of stock) and should moderate the increase in stock prices.
Finally, focusing on the stock market one way or the other risks distracting policymakers from the important question: How much labor market slack remains in the economy? If one looks at wage growth—the most relevant measure of slack—the answer is that there is lots of slack left. Given that fiscal policy and international developments are providing no boost (or are actively dragging) on growth in the next year, it would be premature for the Fed to raise short-term rates before the labor market was back to healthy.
The dictum to not overreact to stock market changes should apply to policymakers, not just investors. And this is true even when the daily reaction to market changes happens to correspond with more measured judgments. In short, even when you end up doing the right thing, you should do it for the right reason. And trying to stem stock market declines is the wrong reason for the Fed to act.
The U.S. Treasury announced today, for the 12th time, that the Obama Administration has determined that neither China, nor any other “major trading partner of the United States met the standard of manipulating the rate of exchange between their currency and the United States dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade…”
This political document ignores the fact that China purchased $681 billion in total foreign exchange reserves between December 2012 and June 2014, and more than $2 trillion since this Administration took office. Currency manipulation by China and approximately 20 other countries has increased the U.S. trade deficit by $200 to $500 billion. Elimination of currency manipulation would create 2.3 million to 5.8 million U.S. jobs, without raising public spending at all (indeed, reducing the trade deficit through currency re-alignment would reduce the federal budget deficit).
A Wall Street Journal blog post this morning describes an Obama administration initiative to combat long-term unemployment. In the opening sentence, the author follows a too-common convention in describing the long-term unemployment rate as “sticky.” Sometimes the adjective is “stubborn.”
I know that this will sound like quibbling, but in this case adjectives really matter for understanding the problem. As a paper I co-wrote shows pretty clearly, the long-term unemployment rate (LTUR) has not been sticky or stubborn for years. In fact, the LTUR has fallen faster than one would expect given the overall pace of labor market improvement. It is true that the LTUR remains too high, but that is because it skyrocketed during the Great Recession and in the six months after its official end. But the LTUR has since then not become resistant to wider labor market improvement.
The concrete policy implication of recognizing this is that by far the most important thing that can be done to lower the still too-high LTUR is to maintain support for economic recovery more broadly. In today’s far too narrow macroeconomic policy debate, this simply means the Fed should not boost short-term interest rates until the labor market is much, much healthier (including a much lower LTUR).
In regards to the Obama administration effort as described in the WSJ, it seems to mostly consist of jawboning corporations to discard human resources strategies that might disadvantage the long-term unemployed for no reason other than their long duration of joblessness. This is a good idea. There seems to be some real evidence that employers have begun using automatic filters based on the duration of joblessness to screen potential hires—and this can disadvantage the long-term unemployed even though there is no evidence that the productivity or employability of long-term unemployed workers has been damaged by the Great Recession and long recovery.
Basically, because there have been so many potential hires for each vacancy in the economy for so long, employers figured they had to sort these potential hires somehow. Many seem to have chosen a pretty dysfunctional strategy of simply sorting based on unemployment duration. The Obama administration initiative is in a sense an effort to save employers from their own bad decisions.
However, we should be clear that even this employer discrimination has not kept the LTUR from falling faster than overall labor market improvement would predict. And, we should also be clear what would be the most powerful tool to rob employers of the ability to sort potential hires in the queue for vacancies like this: a return to genuine full employment.
I’ve spent several years studying the evolution of residential segregation nationwide, motivated in part by convictions that the black-white achievement gap cannot be closed while low-income black children are isolated in segregated schools, that schools cannot be integrated unless neighborhoods are integrated, and that neighborhoods cannot be integrated unless we remedy the public policies that have created and support neighborhood segregation.
When Ferguson, Missouri, erupted in August, I suspected that federal, state and local policy had purposefully segregated St. Louis County, because this had occurred in so many other metropolises. After looking into the history of Ferguson, St. Louis, and the city’s other suburbs, I confirmed these were no different. In The Making of Ferguson: Public Policies at the Root of its Troubles, the Economic Policy Institute has now published a report documenting the basis for this conclusion, and The American Prospect has published a summary in an article in the current issue.
Since a Ferguson policeman shot and killed an unarmed black teenager, we’ve paid considerable attention to that town. If we’ve not been looking closely at our evolving demographic patterns, we were surprised to see ghetto conditions we had come to associate with inner cities now duplicated in almost every respect in a formerly white suburban community: racially segregated neighborhoods with high poverty and unemployment, poor student achievement in overwhelmingly black schools, oppressive policing, abandoned homes, and community powerlessness.
Another Measure of the Staggering Wage Gaps in the United States: Comparing Walton Family Wealth to Typical Households by Race and Ethnicity
Last week, I noted that two recent data releases—the Federal Reserve’s Survey of Consumer Finances and the Forbes 400—painted a stark picture of growing wealth concentration in the U.S. economy. Specifically, I looked at the single largest conglomeration of family financial wealth in the Forbes 400, the combined net worth of the six Walmart heirs, and compared it to that held by typical American families.
If you arrange American families by net worth in ascending order, you would have to aggregate the net worth of the bottom 42.9 percent (52.5 million) of American families to equal the net worth held by the six Waltons. Further, you would need to add together more than 1.7 million American families that all had the median U.S. net worth ($81,200 in 2013) to equal the Walton family holdings.1
In this post, I’ll do the same calculations, but look just at non-white families. It is a stark fact that racial wealth gaps in the U.S. economy are enormous. For example, the median white family had net worth of roughly $142,000 in 2013, while the median net worth of non-white families was just $18,100.
So, arranging non-white families by ascending order of net worth, one would need to aggregate the net worth of the bottom 67.4 percent of non-white families to match the net worth of the Waltons.2 And it would take 7.9 million families that had the median net worth of non-white families to match the Waltons’ wealth.
New Website Contratados.org Brings Transparency Where It’s Lacking: The International Labor Recruitment Industry
For most foreign workers who come to work temporarily in the United States, paying private labor recruitment agencies or individual recruiters (also known as foreign labor contractors or FLCs) in order to find and get a job—as a landscaper, teacher, computer programmer, or almost any other occupation—has become an inescapable part of the process. Recruiters connect workers abroad—who may sometimes be in remote locations and rural villages—with employers in the United States for a fee, which is either collected from the employer, the worker, or both. As the Migration Policy Institute has noted, this cross-border and cross-jurisdiction contracting activity “creates many opportunities for exploitation and abuse.” The UN International Labour Office’s Director-General Guy Ryder has gone further, calling this market “anarchic and in need of proper coordinated regulation.”
The principal reasons that the recruitment market is “anarchic” are its almost total lack of transparency, and the absence of any regulation to ensure fairness and accountability. One result is that migrants can be charged unreasonably high fees to get hired for short-term jobs. The migrants either have to get loans from friends and family, or take out mortgages on their home or land, or borrow the money directly from recruiters at exorbitant interest rates, which leaves the migrant workers heavily indebted.
In most temporary foreign worker programs, workers don’t have the right to switch employers, regardless of whether the employer steals their wages, confiscates their passports, or locks them inside of a factory. Because the employer controls the visa, if the migrant worker decides to quit or escape, he or she becomes instantly deportable. This arrangement leaves workers vulnerable to debt bondage. Countless examples can be cited of abuse and human trafficking perpetrated by recruiters and facilitated by the international labor recruitment system.
The Bureau of Labor Statistics reported another month of solid job growth in September, bringing this year’s average to over 225,000 jobs per month—the highest average monthly job growth since 1999. As the jobs recovery consistently grinds on, more attention is shifting toward the absence of wage growth in the recovery. Wage stagnation is part of a longer-term trend that has been well-documented in EPI’s research. Last month’s Census Bureau report on income, poverty and health insurance coverage in 2013 provided more evidence of weak wage growth following the recession. In my previous analysis of data from the Census report, I also identified how uneven that growth has been for different groups of women. Median real (ie, inflation-adjusted) annual earnings for African American women working full-time full-year in 2013 were 3.3 percent below the 2009 level, compared to 0.2 percent and 0.5 percent lower for white and Hispanic women, respectively.
Given the magnitude of that disparity, I sought to confirm it using hourly wage data for full-time full-year workers from the CPS ORG files, the data source for EPI’s signature research on wage trends. Based on that analysis, I identified similar racial disparities in women’s hourly wage growth.
The Financial Times recently reported that the U.S. Chamber of Commerce has spent $30 million to influence the upcoming elections, backing mostly Republicans candidates. The Chamber, upset with the so-called anti-business attitude of the Obama administration, wants a Congress that will cut corporate taxes. This rhetoric suggests that U.S. corporations have become so unprofitable they need tax relief in order to stay in business. So let’s take a look at corporate profitability.
The first figure below shows corporate profits (left axis) and corporate taxes (right axis) as a percent of national income since 1946. Corporate profits have bounced around over the last 68 years between 8 percent of national income and 14 percent. The high point over this period, however, was just last year. Furthermore, corporate profits as a percent of national income have been steadily rising since President Obama took office, though much of that is due to the recovery in corporate profits after the Great Recession. At least before taxes, corporations appear to be doing rather well in terms of profitability.
The figure also shows total taxes on corporate income as a percent of national income. Since 1946, corporate taxes have steadily decreased in relation to national income. In 2013, corporate taxes were at a level below the high point reached in the last Republican administration. The data suggests that corporate taxes have not been keeping up with corporate profitability.
Integrity Staffing Solutions, which runs a warehouse operation for Amazon, makes employees go through a “security check” at the end of each working day, where they are searched for stolen goods. Even though employees spend 25 minutes being processed—and would be fired if they tried to skip the screening—Integrity doesn’t pay them a penny for their time. The employees sued and won, and the case has gone to the U.S. Supreme Court. Now, the Justice Department and Labor Department have filed a brief that takes the side of the Amazon subcontractor over its employees. This is a shame.
Over the past year, President Obama and Secretary of Labor Tom Perez have seemingly done everything within their power to lift wages and discourage the exploitation of workers. Obama has issued executive orders raising the minimum wage and requiring decent labor practices from federal contractors, Perez has issued a rule covering home-care workers under the minimum wage and overtime rules, and Obama directed Perez to update overtime rules so more salaried employees would have the right to overtime pay. So why are they fighting the employees in this case?
It doesn’t look like a matter of legal principle to me. Certainly, the application of the Portal to Portal Act, which frees employers from the obligation to pay for certain preliminary and postliminary activities such as traveling to the work site or changing from a uniform into civilian clothes, isn’t obvious in this case. The court of appeals found that the search for stolen property was integral and necessary to the business operation of the warehouse, and that seems right to me. If the screening isn’t “integral and necessary” to the business operation, why would the employer fire employees who skip it? If making employees remove work clothes and shower after work to remove toxins has to be compensated (and the Supreme Court has said that it does), why isn’t making them remove belts and shoes and other clothing to prevent theft? (Cases finding that making employees—and everyone else—go through airport security screenings aren’t analogous because the employees are only being required to do what everyone has to do. It isn’t integral and necessary to the business operation, it’s a general requirement of federal law.)
So if it’s a close legal question, why didn’t the Obama administration side with the workers and ask the Supreme Court to uphold the Court of Appeals decision in their favor? I’m afraid it’s because the federal government is doing the same thing as Integrity, and doesn’t want to be sued. The brief of the United States includes a “Statement of Interest” explaining why it wanted to file a friend of the court brief. Here’s what it says, in part:
“The United States also employs many employees who are covered by the FLSA, 29 U.S.C. 203(e)(2)(A), and requires physical-security checks in many settings. The United States accordingly has a substantial interest in the resolution of the question presented.”
In other words, as an employer, the government wants to be able to get away without paying its own workers for their time. This is wrong.
Last night, the American Enterprise Institute’s Jim Pethokoukis, with whom I occasionally agree on matters of fiscal policy, took to Twitter to “clarify” the fiscal implications of many progressive priorities.
Basically, Pethokoukis is arguing that federal spending levels as high as some (slightly-caricatured version of) progressives have called for would require a broad-based tax hike on all Americans.
There’s plenty to dislike about this claim, but the most important issue is that no progressives I know are arguing for a specific federal spending level for all occasions. Instead, we want federal spending levels that are consistent with our policy priorities. So, for example, in times of weak aggregate demand, spending should temporarily rise to finance safety net programs, aid to state and local governments, and public investments to put people back to work. When the economy gets going again and we are near full employment, federal spending should then pull back. Over the longer run, spending levels should be sufficient to preserve the social insurance programs we have (which are not particularly generous), as well as finance needed public investments, vital safety net programs, and the efficient running of government. (So no phony savings like slashing the budget of the IRS.)
The liberal end game is 30% of GDP spending, financed by a VAT and other taxes.
— James Pethokoukis (@JimPethokoukis) October 6, 2014
The figure below shows the number of unemployed workers and the number of job openings by industry. This figure is useful for diagnosing what’s behind our sustained high unemployment. If our current elevated unemployment were due to skills shortages or mismatches, we would expect to find some sectors where there are more unemployed workers than job openings, and some where there are more job openings than unemployed workers. What we find, however, is that unemployed workers dramatically outnumber job openings across the board. There are between 1.1 and 6.5 times as many unemployed workers as job openings in every industry. In other words, even in the industry with the most favorable ratio of unemployed workers to job openings (health care and social assistance), there are still about 10 percent more unemployed workers than job openings. This demonstrates that the main problem in the labor market is a broad-based lack of demand for workers—not, as is often claimed, available workers lacking the skills needed for the sectors with job openings.
Unemployed and job openings, by industry (in millions)
|Professional and business services||1.151667||0.792083|
|Health care and social assistance||0.719667||0.665667|
|Accommodation and food services||0.975167||0.544|
|Finance and insurance||0.27225||0.216333|
|Durable goods manufacturing||0.518667||0.174417|
|Transportation, warehousing, and utilities||0.38375||0.157833|
|Nondurable goods manufacturing||0.343667||0.10575|
|Real estate and rental and leasing||0.126||0.052|
|Arts, entertainment, and recreation||0.226167||0.074583|
|Mining and logging||0.05425||0.026833|
Note: Because the data are not seasonally adjusted, these are 12-month averages, September 2013–August 2014.
Source: EPI analysis of data from the Job Openings and Labor Turnover Survey and the Current Population Survey
In August, the total number of job openings was 4.8 million, up from a revised 4.6 million in July. In August, there were 9.6 million job seekers (unemployment data are from the Current Population Survey), meaning that there were 2.0 times as many job seekers as job openings. Put another way, job seekers so outnumbered job openings that about half of the unemployed were not going to find a job in August no matter what they did. In a labor market with strong job opportunities, there would be roughly as many job openings as job seekers.
The decline of the job seekers to job openings ratio to 2.0 continues the overall downward trend since the high of 6.8 to 1 in July 2009 (see Figure A). The ratio has steadily declined, falling by about 1.0 over the last year.
While this is clearly a move in the right direction, the 9.6 million unemployed workers understate how many job openings will be needed when a robust jobs recovery finally begins, due to the existence of 5.9 million would-be workers (in August) who are currently not in the labor market, but who would be if job opportunities were strong. Many of these “missing workers” will become job seekers when we enter a robust jobs recovery, so job openings will be needed for them, too.
The job-seekers ratio, December 2000–August 2014
|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
Even further, a job opening when the labor market is weak often does not mean the same thing as a job opening when the labor market is strong. There is a wide range of “recruitment intensity” with which a company can deal with a job opening. For example, if a company is trying hard to fill an opening, it may increase the compensation package and/or scale back the required qualifications. Conversely, if it is not trying very hard, it may hike up the required qualifications and/or offer a meager compensation package. Perhaps unsurprisingly, research shows that recruitment intensity is cyclical; it tends to be stronger when the labor market is strong, and weaker when the labor market is weak. This means that when a job opening goes unfilled when the labor market is weak, as it is today, companies may very well be holding out for an overly qualified candidate at a cheap price.
The August Job Openings and Labor Turnover Survey (JOLTS) data release this morning from the Bureau of Labor Statistics showed mixed results. While the job openings rose, the hires rate fell. Layoffs continue to trend downwards, while the quits rate remained flat—it’s been flat now since February.
The figure below shows the hires rate, the quits rate, and the layoffs rate. The first thing to note is that layoffs, which shot up during the recession, recovered quickly once the recession officially ended. Layoffs have been at prerecession levels for more than three years. This makes sense—the economy is in a recovery and businesses are no longer shedding workers at an elevated rate. And the continued trend downward in August is a good sign.
But for a full recovery in the labor market to occur, two key things need to happen: Layoffs need to come down, and hiring needs to pick up. Hiring is the side of that equation that, while generally improving, has not yet come close to a full recovery. The hires rate remains well below its prerecession level.
Another piece of the puzzle is voluntary quits (shown by the quits rate in the figure below). A larger number of people voluntarily quitting their job indicates a labor market in which hiring is prevalent and workers are able to leave jobs that are not right for them, and find new ones. The voluntary quits rate, which has been flat for the last seven months, is also nowhere near a full recovery. There are 14 percent percent fewer voluntary quits each month than there were before the recession began, and the quits rate is the same as it was last October. Low voluntary quits indicate that there are a large number of workers who are locked into jobs who would leave if they could.
Hires, quits, and layoff rates, December 2000–August 2014
|Month||Hires rate||Layoffs rate||Quits rate|
Note: Shaded areas denote recessions. The hires rate is the number of hires during the entire month as a percent of total employment. The layoff rate is the number of layoffs and discharges during the entire month as a percent of total employment. The quits rate is the number of quits during the entire month as a percent of total employment.
Source: EPI analysis of Bureau of Labor Statistics Job Openings and Labor Turnover Survey
In September, public-sector employment increased by 12,000, with the majority of that growth coming from local government education—an increase of 6,700 jobs. Local government education is largely jobs in public K-12 education (the majority of which are teachers, but also teacher aides, librarians, guidance counselors, administrators, support staff, etc.).
While this is clearly a positive sign, unfortunately, the number of teachers and related education staffers fell dramatically in the recession and has failed to get anywhere near its pre-recession level, let alone the level that would be required to keep up with the expanding student population. The figure below breaks down the teacher gap. The dark blue line illustrates the level of teacher employment. While the most recent positive trend is obvious, the longer term losses are also readily apparently.
Along with dismal trends in public sector employment in general, about a quarter million public education jobs were lost in the great recession and its aftermath. If we add to that the number of public education jobs that should have been added simply to keep up with growing enrollment, then we are currently experiencing a 377,000 job shortfall in local public education. The costs of a significant teacher gap are measurable: larger class sizes, fewer teacher aides, fewer extracurricular activities, and changes to the curriculum.
Let’s put the pieces of the puzzle together. The unemployment rate fell in September by 0.2 percent points, from 6.1 to 5.9 percent. There was also a decrease in the sheer number of unemployed people—down 329,000 from August. On its face, this sounds like good news.
At the same time, the employment-to-population ratio has remained 59.0 percent for four months running. If the unemployment rate dropped and the employment-to-population ratio remained the same, the missing part of the puzzle is the labor force participation rate. In September, the labor force participation rate dropped to 62.7 percent. The last time the labor force participation rate was this low was February 1978. And, the biggest drop in labor force participation was among prime-age workers, 25-54 years old.
Over the last year, the labor force participation rate fell 0.5 percentage points. Therefore, it’s not surprising that missing workers—potential workers who are neither working nor actively seeking work due to the weak labor market—are at an all-time-high of 6.3 million. The vast majority of them (3.4 million) are 25 to 54 years old.
To put the official unemployment rate in perspective, the figure below shows the actual unemployment rate and the unemployment rate if the missing workers were in the labor force looking for work and thus counted as unemployed. The unemployment rate including the missing workers sits at 9.6 percent, the same rate for the last four months. Perhaps, this is a better indication of the slack in the labor market and the reason why wage growth has remained so sluggish even with a falling unemployment rate.
The unemployment rate is vastly understating weakness in today’s labor market: Unemployment rate, actual and if missing workers* were looking for work, January 2006–November 2014
|Date||Actual||If missing workers were looking for work|
* Potential workers who, due to weak job opportunities, are neither employed nor actively seeking work
Source: EPI analysis of Mitra Toossi, “Labor Force Projections to 2016: More Workers in Their Golden Years,” Bureau of Labor Statistics Monthly Labor Review, November 2007; and Current Population Survey public data series
While the BLS reported positive overall jobs numbers for September, one notable downside of this morning’s release is that wages grew not at all in the last month. Average hourly earnings of all employees on nonfarm payrolls were little changed (a one cent decline) and average hourly earnings of production and nonsupervisory employees on private nonfarm payrolls saw zero growth. That said, I’d caution reading too much into one month’s numbers because monthly changes can be volatile and longer term trends are more indicative of the overall health of the economy. The fact is that wage growth for both series has been hovering just above 2 percent over the last year.
As shown in the figure below, wage growth is far below the 3.5 percent rate consistent with the Federal Reserve Board’s inflation target of 2 percent. It’s clear that Fed policymakers should abandon notions of slowing the economy. (For a longer analysis of what to watch for in upcoming months on wage growth, see this explainer.)
Walton Family Net Worth is a Case Study Why Growing Wealth Concentration Isn’t Just an Academic Worry
Earlier this year, economist Thomas Piketty caused a stir with a book arguing that the future in advanced economies could see a relentless concentration of wealth among a small sliver of families, whose fortunes would increasingly dwarf those of the typical citizen. The last couple of weeks have seen the release of a couple of key barometers of wealth inequality in America, and combining them, it’s easy to see that this hypothesis of ever-concentrating wealth seems likely indeed. In the past month, the Federal Reserve released its triennial Survey of Consumer Finance (SCF) for 2013, while Forbes magazine released their annual list of the 400 wealthiest Americans.
The SFC is the most comprehensive and high-quality measure of Americans’ wealth up and down the distribution. It makes a special effort to sample very high wealth American households, but actually explicitly excludes listed members of the Forbes 400 (for reasons of confidentiality). The Forbes 400, as is well known, puts a dollar value on the net worth of the 400 wealthiest Americans. There is plenty of material in these releases to assess the current state of wealth inequality in America.
Take one example, that we’ve calculated before: comparing the family wealth of six of the wealthiest members of the Walton family (reported at just under $145 billion in 2013) with the number of American families that you could add together and still have their net worth come in less than the 6 Walton heirs: 52.5 million, or 42.9 percent of American families.
Some have objected to this statistic on the grounds that the negative net worth families (11.5 percent of all American families) somehow shouldn’t count in this calculation. So, try another statistic: how many families that held the median wealth would you need to add together to equal the holdings of the six Walton heirs: more than 1.7 million. The median wealthholder in the United States, remember, has more wealth than half of all American families and less wealth than half (around $81,200 in 2013).
So, what this statistic means is that you’d essentially need a large city’s worth of these typical American families to equal the wealth of the six Walton heirs. And this number has grown steadily over time, as the figure below shows. The falling wealth of the median family (driven largely by the housing bubble burst) and the steadily rising wealth at the very top—including the Walton heirs—have combined to make the gap between them larger and larger over time.
Myths and Facts about Corporate Taxes, Part 1: Do American Corporations Pay the Highest Taxes in the World?
It’s become conventional wisdom that American corporate tax rates are the highest in the developed world, leaving American businesses at a competitive disadvantage—and that the only solution is fundamental tax reform (a phrase used by both Republicans and Democrats). Just yesterday, the Washington Post reported offhandedly that U.S. businesses “currently labor under the highest corporate tax rate in the developed world.” The fact is there are a lot of myths about the corporate tax code—myths that are repeated by corporations that stand to benefit from them. So, let’s look at the facts.
Myth: American corporations pay more in taxes than their competitors in any other country.
Fact: Any claim that the United States has the highest corporate tax rate in the world should be accompanied by a clarification that the rate American companies actually pay, on average, is comparable to what their foreign competitors pay.
Yes, the tax rates on the books (the “statutory” rates) in the United States are high relative to our international peers, but the U.S. corporate tax code has become so riddled with loopholes—and American corporations so adept at exploiting them—that the total amount of taxes actually paid by U.S. corporations (the “effective” corporate tax rate) is far less.
The Government Accountability Office found that large, profitable American corporations pay an effective rate of less than 13 percent in U.S. federal taxes; when state and foreign taxes are included, the rate only increases to 17 percent—a far cry from the statutory 39 percent. Meanwhile, the Congressional Research Service found that the effective rate here is nearly identical to the weighted average of corporate taxes in the world’s other most developed economies. (EPI’s Thomas Hungerford found the same thing.)