A Key Lesson From Piketty: You Can’t Reverse Inequality or Provide Broad-Based Prosperity While Ignoring the Top 1 Percent
EPI was lucky enough to co-host the first American event for Thomas Piketty to discuss his new book Capital in the Twenty-First Century (video from the event is online if you missed it). Piketty’s book is getting justly deserved praise, and his work suggests a dizzying array of political and policy implications.
Chief among them is something that remains surprisingly controversial, even among those genuinely concerned with the rise in American inequality: the idea that ameliorating this inequality and providing decent living standards growth, for the bottom and middle requires braking income growth at the very top.
The logic is pretty simple: given overall income growth, more income being claimed by the very top must necessarily come at the expense of families at the bottom and middle. So, when the top 1 percent’s share of income doubled between 1979 and 2007, this meant that there was much less room to provide income growth to the bottom and middle. The objection to this logic is, of course, that income growth is not given, and attempts to steer more income growth away from the top and towards the bottom and middle would have just led to slower overall growth.
But there are plenty of reasons to doubt this. Let me start with an appeal to authority: Piketty put it pretty bluntly in the EPI/WCEG event yesterday, saying “we don’t need 19th century inequality to generate 21st century growth.” And, appealing to the same authority, but this time relying on empirical evidence, Piketty and co-authors have shown that cutting taxes for the top 1 percent actually increases their own pre-tax income growth and reduces income growth at the bottom.
“’Tis impossible to be sure of any thing but Death and Taxes” -Christopher Bullock, The Cobler of Preston, 1716
“Things as certain as Death and Taxes” -Daniel Defoe, The History of the Devil, 1727
“[N]othing can be said to be certain, except death and taxes” -Benjamin Franklin, Letter to Jean-Baptiste Leroy, 1789
Every year on Tax Day, there are always jokes about death and taxes, and questions on which one is preferable. (For example, recall the character in the Hitchhiker’s Guide to the Galaxy series—Hotblack Desiato—who spent a year dead for tax purposes.) Almost no one, however, talks about the group of taxpayers who worry about neither death nor taxes: corporations.
By the end of the day, almost every individual taxpayer will be reminded of the certainty of taxes (while death has been postponed for another year). 30 percent of taxpayers fall into the 15 percent tax bracket. They can expect to pay about $3,000 in federal income taxes, on an adjusted gross income of almost $50,000. (This does not count the all the other taxes paid such as Social Security payroll taxes and state and local income taxes.) These taxpayers face a 15 percent statutory tax rate and paid a bit over 6 percent of their AGI in federal income taxes.
This morning, EPI will welcome economist Thomas Piketty to lead a panel discussion on wealth, income, and inequality. The event will be live-streamed here.
In his much talked-about book “Capital in the Twenty-First Century,” recently translated from the original French and currently a New York Times best-seller, Piketty argues that without dramatic policy changes—conducted cooperatively across international borders—wealth inequality in developed countries will only continue to increase.
One such policy change that Piketty has endorsed—and one that is quite pertinent on Tax Day—is a major increase in the top marginal income tax rate. Along with co-authors Emmanuel Saez and Stefanie Stantcheva, Piketty has written that the revenue-maximizing top tax rate is 83 percent, more than double today’s top rate here in the U.S.
Dramatically increasing the top rate is a proposal EPI has previously supported. In the context of base-broadening tax reform that aims to increase both federal revenue and tax progressivity, raising rates makes even more sense. Indeed, raising rates can be seen as a complement to, not a substitute for, broadening the base. As the tax code squeezes out opportunities for tax avoidance schemes, the revenue-maximizing top rate would increase because high-income households would have fewer chances to change their behavior in such a way as to lessen their tax liability.
Additional federal revenue is clearly needed. Even as the federal deficit continues to fall in the near term, the major parts of the federal budget (Social Security, federal health care programs, defense) continue to increase in cost, squeezing priorities like education and infrastructure to a smaller and smaller slice of the pie. Worse, Congress looks to be actively searching for ways to give the additional revenue garnered in the deal to avert the “fiscal cliff” away, mostly to corporations. Meanwhile, what individuals pay in taxes remains extremely low, compared to historic standards.
So on this Tax Day, let’s see if we can take a lesson from EPI’s guest speaker Thomas Piketty and talk about a tax policy that usually goes unmentioned—the need for tax reform that broadens the base and raises the rates.
Media Matters for America released a report this week showing that only a handful of female economists appeared on evening cable news shows in the last 12 months. They found that more than 90 percent of the economists that appeared on television in the past year were men.
EPI experts both male and female do get interviewed very often—which shows just how helpful EPI research can be. Heidi Shierholz recently discussed the incredibly hard odds for job seekers with Marketplace’s Sabri Ben-Achour, drawing on her analysis that shows that job seekers outnumbered job openings by 2.5-to-1 in February.
It’s easy to see how Heidi’s analysis made this story come alive. Now we just need to convince more television producers.
Here is some surprising and unpleasant news: enrollment rates have dropped in each of the last two years, a sharp divergence from several decades of growth. The figure below shows enrollment rates in the first quarter of every year since 1985 for people age 20-24. (Note: enrollment here is technically for college, university, or high school enrollment, but very few people age 20-24 are enrolled in high school.) Enrollment was on a general upward trend since 1985, but peaked in 2012 and has since dropped in each of the last two years. The fact that this is a two-year drop suggests that it isn’t just a one-year fluke in a volatile series.
The dotted line shows the linear trend based on 1989-2007 data (the trend line since 2007 thus shows what enrollment rates would have been in the last seven years if they had simply continued on their long-run path over this period). The data are somewhat variable year-to-year, but this shows that between 2007 and 2013, there was no meaningful departure from the long term trend, but that by 2014, enrollment was substantially below the long-run trend. This drop in enrollment rates is worrisome, particularly to the extent that it is due to students being forced to drop out of school, or never enter, either because the lack of decent work in the weak recovery meant they could not put themselves through school or because their parents were unable to help them pay for school due to their own income or wealth losses during the Great Recession and its aftermath.
The Maryland state legislature took an important step Monday toward restoring the value of an honest day’s work, by raising the state minimum wage to $10.10 per hour. I’ve estimated that this increase will lift wages for nearly half a million Maryland workers, and spur an additional $456 million in otherwise unrealized output for the Maryland economy. Maryland is now the second state to raise its minimum to $10.10 per hour, matching the level set by Connecticut last month. Maryland joins 23 other states, plus the District of Columbia, that will have minimum wages higher than the federal minimum wage of $7.25 by next year. It will also join 7 other states, plus the District of Columbia, that will have minimum wages higher than $9 per hour by 2017.
While the Maryland bill is unquestionably a step in the right direction—and a praiseworthy accomplishment for all those that worked toward its passage—the final version of the bill does have a number of shortcomings that should not be overlooked.
Inflation is always eating away at the purchasing power of the dollar, so any time the minimum wage is raised in stages over several years, the purchasing power of the eventual wage is less (in real terms) than the proposed nominal dollar value. In the Maryland minimum wage proposal’s original conception, the bill would have raised the state minimum wage to $10.10 by July of 2016. Taking account for projected inflation over the next three years, this would have been equal to a minimum wage of about $9.67 in today’s dollars. Unfortunately, legislators chose to stretch out the increases over a longer period of time, thereby reducing the real value of the eventual increase. The bill that was passed will reach $10.10 by July 2018—a projected real value of $9.25 in today’s dollars. This may not seem like a big difference, but for a full-time minimum wage worker, it’s a loss of about $875 in real annual income.
Long-Term Unemployment Is Elevated Across All Education, Age, Occupation, Industry, Gender, And Racial And Ethnic Groups
Today’s Economic Snapshot shows that long-term unemployment is elevated for workers at every education level. The table below provides additional breakdowns of long-term unemployment by age, gender, race/ethnicity, occupation, and industry. For each category, the table shows the long-term unemployment rate in 2007, the long-term unemployment rate in 2013, and ratio of the two. It demonstrates that while there is considerable variation in long-term unemployment rates across groups—which is always true, in good times and bad—the long-term unemployment rate is substantially higher now than it was before the recession started for all groups. The long-term unemployment rate is between 2.9 and 4.3 times as high now as it was six years ago for all age, education, occupation, industry, gender, and racial and ethnic groups. Today’s long-term unemployment crisis is not at all confined to unlucky or inflexible workers who happen to be looking for work in specific occupations or industries where jobs aren’t available. Long-term unemployment is elevated in every group, in every occupation, in every industry, at all levels of education.
Later today and tomorrow, the House of Representatives will consider and vote on six different budget proposals—those put forth by the House leadership of both the Democratic and Republican parties, as well as by the Obama administration, the Congressional Progressive Caucus (CPC), the Congressional Black Caucus, and the Republican Study Committee.
We already know that only the Republican budget, authored by House Budget Committee Chair Paul Ryan (R-Wisc.), will pass in the House—and even then, it won’t become law—but it is still important to understand what these proposed budgets call for. While it’s true that a budget proposal is a statement of values, it is also the reflection of its supporters’ understanding of the economy.
The chart below shows the cuts and increases to various parts of the budget, as called for by the proposals made by Chairman Ryan, House Budget Committee Ranking Member Chris Van Hollen (D-Md.), and the CPC. Chairman Ryan includes deep cuts to just about every budget function, and doubles down on the unspecified sequester cuts. Rep. Van Hollen’s budget gets rid of the onerous sequestration spending cuts but otherwise primarily stays the course. Meanwhile, the CPC’s budget calls for immediate stimulus spending in order to meet its stated goal of returning the economy to full employment over the next three years.
In honor of Equal Pay Day, my colleagues Heidi Shierholz and Hilary Wething suggest a number of ways to close the pay gap between men and women, including raising the minimum wage, enacting mandatory paid leave, helping workers unionize, shoring up employment law enforcement, enacting immigration reform, and passing the Paycheck Fairness Act. I would add another modest idea: requiring employers to disclose relative pay rankings so workers can tell if they are paid more or less than comparable workers. This would allow future Lilly Ledbetters to quickly find out if they are being discriminated against. Like Heidi and Hilary’s suggestions, it would also put upward pressure on the pay of all lower-paid workers rather than closing the pay gap by dragging down the wages of lower-paid men.
Employers will likely cite privacy concerns and administrative costs as reasons to oppose such a measure. But the law need not require that actual wages or salaries be disclosed, just relative rankings. In any case, Congress has already placed more onerous burdens on unions, who have to disclose employee compensation in excruciating detail. You can also look up the pay of congressional staff, White House staff, and the highest-paid nonprofit employees, among others. Since the American Enterprise Institute recently used pay disclosure to tweak the White House, maybe they can join forces with us on this effort.
In the meantime, President Obama is taking meaningful steps in the right direction, signing two executive orders today that ban federal contractors from retaliating against employees who discuss their pay and requiring them to provide the government with data on employee compensation by sex and race.
Today is Equal Pay Day, a reminder that women and men are not always compensated at the same rate. While the widely reported statistic that women, on average, earn 77 cents to every man’s dollar has been is a great indicator that women are put in situations every day that for a variety of reasons mean they earn less, it has been criticized for not measuring individuals of similar characteristics, such as age, occupation, education, or experience. To try to get a better understanding of the gender wage gap among specific age groups, and given that many high school and college seniors are on the brink of graduating and entering the labor force, I thought it would be interesting look at the gender wage gap by age and education, to see how women and men fare as they enter today’s unsteady labor market.
The figures below show the entry-level wages of young college and high school graduates, as they appear in a presentation my colleague, Elise Gould, gave for a recent Senate Briefing on the Equal Rights Amendment (check it out! It’s a really good overview of the gender wage gap at various points in the wage distribution, and documents the gender wage gap by age and education). Both figures show the progress recent high school and college educated young women have made in closing the gender wage gap. In 1979, women with a high school degree made 74 cents to their male counterpart’s dollar, and women with a college degree made 79 cents. By 2013, the gap has narrowed for both groups: both high school and college educated entry-level working women make 84 cents to a man’s dollar.
To close the gender wage gap, women need to see real wage growth faster than their male counterparts. The best type of narrowing occurs when both women and men see real annual wage growth. It is possible for the gender wage gap to close because women see real wage increases, while men’s wages stagnate, but this isn’t the good kind of narrowing.
On the whole, college educated women have experienced the good closing of the gender wage gap. Between 1979 and 2013, both young college educated men and women wages saw real wage growth, but women’s wages grew slightly faster than their male counterparts (although neither groups experienced wage growth throughout the 2000s).
Conversely, the narrowing of the wage gap for high school graduate men and women occurred for all the wrong reasons. Both men and women saw real wage declines over the 1979-2013 period; high school men make 27.5 percent less in 2013 than they did in 1979, and high school women make 16.6 percent less. Because high school educated men fared much worse than their female counterparts, the gender wage gap narrowed.
We should be defining success in closing the gender wage gap by women catching up to men while both men and women share in overall growth. Congress has some great tools at their disposal to do this. Passing the Paycheck Fairness Act would be a great first step. In addition to prohibiting wage discrimination among women and men, the Paycheck Fairness Act incentivizes greater transparency between employers and employees, by collecting pay information data and providing information on how to reduce pay disparities for employers and labor organizations.
Similarly, President Obama’s executive orders to prohibit federal contractors from punishing employees for discussing their pay, and to require that contractors provide data on their employees’ compensation, will effectively provide greater transparency between employees and employers regarding pay rates. Greater transparency will in turn help employees advocate for equal pay, and fairly and substantively shift bargaining power towards employees to set stronger wage standards—ultimately closing the gender wage gap in a productive and fair way.
Today is Equal Pay Day, which means that policymakers, including the president, are talking about how to close the gender wage gap. In 2013, the typical female worker made $15.10 an hour, while the typical male worker made $18.11 an hour. And the gap in wages between women and men extends beyond those at the middle; it affects earners at all wage levels. High-wage women make less than high-wage men, and low-wage women make less than low-wage men.
A key backdrop to any discussion of how gender wage gaps have evolved is the fact that since the 1970s, the country has seen dramatically rising wage inequality among both men and women. Between 1979 and 2013, the median woman’s wages grew 21.7 percent, but the 95th percentile woman saw her wages grow more than three times that fast, while the 10th percentile woman saw her wages decline. Among men, high-wage workers also saw strong growth—the 95th percentile man saw his wages grow 40.1 percent over this period—but the entire bottom 60 percent of the male wage distribution saw wage losses. The forces holding back wage growth for low- and moderate-wage men—factors such as declining unionization, the erosion of other labor standards and institutions, the lack of full employment, trade agreements that eroded labor standards, and skyrocketing executive and finance professional pay that left less for everyone else—were also holding down the wage growth of low- and moderate-wage women. However, gains made by women over this period in educational attainment, work experience, and occupational upgrading (i.e., moving into higher-paying occupations) more than overcame these adverse forces (at least until the last decade, when the entire bottom 60 percent of female wage earners also saw wage losses).
How has the gender wage gap evolved over time? In short, while still large, it is smaller than it used to be. In the late 1970s, after a long period of holding fairly steady, the gap in wages between men and women began improving as women’s gains in education, work experience, and occupational upgrading, along with greater legal protections against discriminatory pay, began boosting their pay. Since the 1970s, the gender wage gap has improved at all parts of the wage distribution, meaning that low-wage, middle-wage, and high-wage women all saw stronger wage growth over this period their male counterparts.
After getting into hot water for criticizing Sen. Elizabeth Warren for wanting to expand Social Security, self-styled centrist Democrats Jonathan Cowan and Jim Kessler of Third Way are testing the retirement waters again by proposing, in a New York Times op-ed, to expand savings in IRAs.
This by itself would not be blog-worthy, since every Wall Street-friendly policy wonk wants workers to put more money into IRAs. What surprised me, though, was that they propose requiring employers to contribute 50 cents per hour in these accounts. This amounts to $1,000 per year for full-time workers, and, unlike many proposals, could actually make a difference to workers’ retirement security if savings aren’t siphoned off with high fees. Cowan and Kessler’s default investment would be a low-fee lifecycle fund overseen by a Thrift Savings Plan-like board. Though TSP’s lifecycle funds, which are composed of index funds, are too aggressive—the share invested in stocks ranges from 86% to 52% during the accumulation phase—at least they’re not obvious rip-offs like many 401(k) and IRA investment options.
Cowan and Kessler take pains to assure readers that their proposal has nothing in common with President George W. Bush’s plan to privatize Social Security. But it’s not clear whether they have renounced their previous support for Social Security cuts. If not, they don’t explain why we should shrink a well-functioning social insurance system in order to expand an individual savings system that leaves families financially exposed when breadwinners die or are disabled, financial markets tank, or inflation rises. Under the Third Way plan, retirees could also outlive their savings if they opt out of the default annuity. In the end, back-door privatization may not be that much better than a frontal assault.
Larry Summers gave a talk earlier this week at the launch of the Full Employment project headed by Jared Bernstein of the Center on Budget and Policy Priorities (CBPP). In a reasonable, evidence-based world, his talk—and the paper he co-authored with Larry Ball and Brad DeLong for the event—would be deeply influential to policymakers.
The best summation of it is the first paragraph of the accompanying paper:
“At present and going forward, activist fiscal policy is likely to be essential for the American economy to operate near potential levels of output and employment. This conclusion is a substantial change in view from the near-consensus of economists that monetary policy alone could and should be left to carry out the stabilization policy mission, a view that prevailed for nearly a generation prior to the 2008 financial crisis”
Basically, what Summers et al. are saying is that the Federal Reserve won’t be able to engineer a full recovery from the Great Recession (a recovery that remains far from complete) with the monetary policy tools that they have at their disposal. And unless fiscal policy changes sharply from its current contractionary stance to one that supports growth and jobs, the U.S. economy could throw away years of potential income growth (totaling trillions of dollars) and consign millions of workers and families to years of completely needless economic misery.
Besides arguing that the Fed alone couldn’t generate a full recovery with the tools at its disposal, Summers also echoed a point made recently by Jeremy Stein, a member of the Fed’s Board of Governors: that these tools currently being used by the Fed to try to generate recovery—keeping interest rates extraordinarily low for an extended period of time—carry the danger of spurring financial market bubbles that would sow the seeds for the next economic downturn.
This week, the Urban League released the 38th edition of its annual State of Black America report, with the theme One Nation Underemployed: Jobs Rebuild America. With an emphasis on growing economic inequality, the report features the 10th installment of the Urban League’s Black-White Equality Index, and the 5th installment of the Hispanic-White Equality Index. At the national level, these numbers tell an all too familiar story of racial economic inequality in America that persists through the ups and downs of the business cycle.
Though the recession briefly narrowed the black-white unemployment rate gap to a ratio of 1.7-to-1 in 2009, the black unemployment rate is again double the rate for whites, while the Hispanic unemployment rate has remained between 1.4 and 1.5 times higher than whites since 2007. The widening disparity between low, middle, and high incomes—i.e. increasing overall inequality—has also expanded racial income gaps, since African American and Latino households are more likely to have incomes below the national median. According to the report, black median household income is about 60 percent of that of whites (down from 62 percent before the recession) and Hispanic median household income is 71 percent of that of white households (down from 74 percent before the recession).
With the addition of a metro-level analysis of unemployment and income inequality in State of Black America 2014, a slightly more nuanced picture of racial and ethnic inequality in America emerges. Based on data from the 1-year sample of the 2012 American Community Survey, the report suggests that the state of black and brown America depends on what part of America you live in—although at least for African Americans, it’s really not all that great anywhere. According to the report’s listing of metro area unemployment rates, the black unemployment rate ranged from a low of 9.0 percent in Oklahoma City, Okla. (the only metro area with a black unemployment rate under 10 percent) to a high of 24.5 percent in Sacramento, Calif. When it comes to the income gap, at best, the median black household income has 78 cents for every dollar of white income in the Riverside, Calif. metro area.
Job opportunities have been so weak for so long that jobless workers have gotten stuck in unemployment for unprecedented lengths of time. Currently more than one-third of unemployed workers (35.8 percent) have been unemployed for more than six months—which, as the figure below shows, is far higher than at any other point on record outside of the last five years. It is important to note that the cause of today’s long-term unemployment crisis is no mystery: it is entirely explained by the length and severity of the current period of labor market weakness, along with long-term trends in long-term unemployment. In other words, the long-term unemployment crisis is exactly what we would expect given how long our labor market has been as weak as it has been. It is not the fault of individual unemployed workers failing to exert enough effort or flexibility in their job search.
Nevertheless, Congress allowed federal unemployment insurance to expire in at the end of 2013. In the first sign of progress in months, the Senate is expected to approve a temporary extension of federal unemployment insurance next week. It would be retroactive to January 1st and would extend federal jobless aid through May 31st, but is expected to face an uphill battle in the House.
The share of the unemployed who have been jobless for six months or more, 1948–2014
|Date||Share of the unemployed|
Source: Author's analysis of Bureau of Labor Statistics Current Population Survey public data series
Average hourly wages of private sector workers and of production/nonsupervisory both dropped slightly in March. The chart shows year-over-year growth in hourly wages for both groups. Both are seeing growth rates far below what they were seeing before the recession started, and the “all private sector employees” series has seen no increase whatsoever in nearly three years. In recent months, many commentators have, perhaps surprisingly, raised concerns that our labor market may be tightening enough to be causing excessive wage growth that would trigger inflation. There is no sign of that here. Instead, today’s jobs report shows there remains a tremendous amount of slack in the labor market, which shifts bargaining power away from workers and keeps wages low. Employers do not have to pay substantial wage increases to get and keep the workers they need when workers lack outside options.
In an update to last month’s post, the table below shows the March unemployment rate, the unemployment rate in 2007, and the ratio of the two, for a variety of demographic categories and by occupation and industry. Again we see that while (as per usual) there is considerable variation in unemployment rates across groups, the unemployment rate is substantially higher now than it was before the recession started for all groups. The unemployment rate is between 1.3 and 1.7 times as high now as it was six-plus years ago for all age, education, occupation, industry, gender, and racial and ethnic groups. Elevated unemployment across the board, like we see today, means that the weak labor market is due to employers not seeing demand for their goods and services pick up in a way that would require them to significantly ramp up hiring, not workers lacking the right skills or education for the occupations or industries where jobs are available. This commentary provides a more in-depth look at this issue.
Unemployment rates of various demographic groups, 2007 and today
|Workers age 25 and older|
|Bachelor’s and advanced degree||2.0||3.4||1.7|
|Workers under age 25, not enrolled in further schooling|
|High school degree||12.0||18.5*||1.5|
|Bachelor’s and advanced degree||5.4||8.2*||1.5|
|Management, professional, and related occupations||2.1||3.4*||1.6|
|Sales and office occupations||4.3||6.9*||1.6|
|Construction and extraction occupations||7.6||11.6*||1.5|
|Installation, maintenance, and repair occupations||3.4||5.2*||1.5|
|Production, transportation, and material moving occupations||5.8||8.7*||1.5|
|Wholesale and retail trade||4.7||7.1*||1.5|
|Transportation and utilities||3.9||6.4*||1.6|
|Professional and business services||5.3||7.9*||1.5|
|Education and health services||3.0||4.6*||1.5|
|Leisure and hospitality||7.4||9.7*||1.3|
* This is a 12-month average (April 2013–March 2014), since this series is not seasonally adjusted.
Source: Author's analysis of the Current Population Survey public data series
The unemployment rate held steady in March, but in a departure from the usual story in this recovery, that masked some good news. The share of the working-age population with a job ticked up by one-tenth of a percent—and the share of the prime-age population with a job, which is my favorite measure of labor market trends in recent years—ticked up by two-tenths of a percent. If more people were finding work, why didn’t the unemployment rate go down? Because more people came into the labor force. The labor force participation rate rose by two-tenths of a percent. The number of “missing workers”—workers who have left, or never entered, the labor force due to weak job opportunities—dropped from 5.7 million to 5.3 million. That is still a lot of missing workers (the unemployment rate would be 9.8% if they were counted as unemployed), and there is a great deal of month-to-month variability in the number of missing workers (meaning we can’t make too much of one’s month’s drop), but this is a step in the right direction.
Interestingly, most of the decline in missing workers in March was due to the increase in labor force participation of men under age 25. Men under age 25 had seen a steep decline in labor force participation over the prior five months, and March’s increase almost entirely reverses that decline. There are still 580,000 missing men under age 25, but again, March’s drop was a step in the right direction.
Earlier this week, Senate Finance Committee Chair Ron Wyden (D-Ore.) unveiled his proposal to retroactively renew the “tax extenders”—a group of just more than fifty “temporary,” unrelated tax incentives, breaks, loopholes, and outright giveaways that Congress routinely extends as they lapse.
My earlier analysis of this abdication of responsible policymaking concluded that instead of renewing the entire slate of tax extenders, lawmakers should conduct a thorough review of each individual provision to see if it efficiently targets useful policy goals. They should then improve and make permanent the provisions that pass muster, and shelve those that don’t.
Taking a close look at each tax incentive on a case-by-case basis is absolutely necessary. Some of the policies, like the “active financing exception”—a loophole by which financial services firms and manufacturers can defer U.S. taxes on overseas income from specific types of financial transactions—are simply giveaways to some of America’s largest corporations. (There’s a reason why keeping this provision around is a “top lobbying priority for companies such as GE and JP Morgan.”) Meanwhile, other tax extenders seem to benefit society—such as the provision that lets teachers deduct $250 worth of school supplies they buy for their classrooms with their own money—but these are regressive, and could better accomplish their goals (in this case, decreasing the cost of school supplies as borne by teachers) outside of the tax code (say, by giving more money directly to schools). For still other provisions, like the ones that benefit thoroughbred racehorse owners or Puerto Rican rum distillers, the punchlines just about write themselves. And because the extenders would go into effect retroactively, it’s hard to claim they’re helping incentivize any particular desired behavior.
As we enter graduation season, the media will get flooded with stories of labor market prospects of young people, college graduates, and of course, student debt. EPI will do its fair share of flooding (with a 2014 update to our Class of 2013 paper), but one aspect that often gets overlooked are those who have started college but will never graduate. Young adults with some college but no degree are stuck in a catch-22, without the better employment opportunities and wage increases that comes with a college degree, but with a similar mountain of student debt. The number of people that fail to complete college—and the burdens this places on them—is one of the most corrosive aspects of the higher education system.
The Bureau of Labor Statistics recently released new data from their National Longitudinal Survey of Youth, a survey that follows women and men born between 1980 and 1984 in an effort to provide long-term information on the employment experiences and educational attainment of young people. The educational makeup of young adults by the time they are 27 is such: 28.1 percent have a college degree, 25.5 percent have a high school degree or equivalent with no further education, and 8.7 percent have not finished high school. That leaves nearly 40 percent of young adults who have some college education by age 27 (this includes individuals with an associate’s degree or any enrollment in college after high school). Put another way, of the 66 percent of young adults who began college, 37.5 haven’t completed their degree by age 27.
While it’s encouraging to see that more young adults are getting their foot in the door at colleges, you need to graduate to reap the higher wages of a college degree. This is seen most obviously in the entry-level wages young adults. Currently, entry-level college graduates (age 23-29) make $20 an hour, while young adults with some college (ages 21-27) make $12 an hour. An hourly wage of $12 is much closer to high school graduates’ wages of $10 an hour than to the wages of their college graduated peers.
What To Watch On Jobs Day: Returning to Pre-recession Employment in the Private Sector is Not That Great
Total employment in the U.S. labor market is currently more than 600,000 jobs below where it was when the Great Recession officially started in December 2007, and it likely won’t surpass its December 2007 level for several months.
But private sector employment is another story. The private sector is currently “only” 126,000 jobs below where it was when the Great Recession started, which means it is poised to surpass its pre-recession peak when the March jobs numbers are released on Friday.
That makes this a good time to note that re-attaining pre-recession employment levels is a pretty meaningless benchmark economically. Because the working-age population (and with it, the potential labor force) is growing all the time, the private sector should have added millions of jobs over the last six-plus years just to hold steady. That means that even when the pre-recession employment level is re-attained, there will still be a huge jobs gap. Every month when the employment numbers are released, we update the total gap in the labor market (which includes both the public and private sector). The figure below shows that gap just for the private sector, with a current shortfall of 5.9 million jobs. When the March numbers are released on Friday, that gap may drop to 5.8 or even 5.7 million, but we are still far, far from healthy labor market conditions.
Conventional wisdom holds that the American workforce lacks the specialized skills that employers are looking for, and that this “skills gap” is the main, if not the only, explanation for our persistently high unemployment rate—especially our long-term unemployment rate. Paul Krugman helpfully exploded this idea in his New York Times column on Monday, making these key points:
- The ratio of unfilled jobs to unemployed workers today is quite low by historical standards. There are always unfilled jobs, because workers leave and employers have not yet had time or opportunity to hire replacements. This is a frictional, not structural, phenomenon. There are very few, if any, jobs today that remain unfilled because employers cannot find workers with the needed skills.
- Today’s long term unemployed have skills comparable to those of recently laid-off workers “who quickly find new jobs.” The long-term unemployed face a shortage of demand for their labor, not skill requirements beyond their education and training.
- If there really were a skills shortage, we would expect to see wages increasing in job categories where skills are allegedly in short supply. But such wages are not increasing.
Nor have wages increased for quite a while. It is especially telling that wages of college graduates, not just those of non-college educated workers, have been flat for a decade, and that young college graduates have been faring poorly, even prior to the 2008 recession. According to a recent report of the New York Federal Reserve Board, the percentage of recent college graduates “who are unemployed or ‘underemployed’—working in a job that typically does not require a bachelor’s degree—has risen, particularly since the 2001 recession. Moreover, the quality of the jobs held by the underemployed has declined, with today’s recent graduates increasingly accepting low-wage jobs or working part-time.” In other words, “skills gaps” are responsible for neither our unemployment problems nor our wage problems.
In a post last month I compared nondefense discretionary spending (NDD) in three budget proposals: the Murray/Ryan budget deal, the administration’s budget, and the Congressional Progressive Caucus’s (CPC) budget. Nondefense discretionary spending is the part of the budget containing much of our spending on infrastructure, education, and public research and development—the part concerned with investments in the future.
House Budget Committee chair Paul Ryan released the House GOP fiscal year 2015 budget proposal today. The chart below shows nondefense discretionary spending as a percent of GDP in FY2007 (the year before the onset of the Great Recession) as a historical comparison to the various budget proposals.
For FY2015, the House GOP budget would adhere to the Murray/Ryan budget deal with NDD equivalent to 2.7 percent of GDP; the president’s NDD proposal is slightly higher at 2.8 percent of GDP and the CPC’s would be 3.8 percent of GDP. However, beginning in FY2016, the House GOP proposes to start slashing NDD spending. By FY2024 they propose that NDD spending shrink to 1.7 percent of GDP—almost half of what it was in 2007, and half of what it was during the Reagan Administration.
Earlier today, House Budget Committee Chair Paul Ryan (R-Wis.) unveiled the House Republicans’ fiscal year 2015 budget resolution. Like Chairman Ryan’s FY14 budget, this year’s model (again called “The Path to Prosperity”) aims to balance the budget within a decade—an economically nonsensical goal during a slow recovery, and one that requires damaging austerity to achieve.
In many respects, the austerity Chairman Ryan calls for this year is even more painful than in previous years. This is because Ryan is stubbornly hanging on to his goal of balancing the budget amid changing economic and political conditions, including a downward revision of $1 trillion in projected revenues over ten years and a deal he made with Senate Budget Committee Chair Patty Murray (D-Wash.) to not change discretionary spending levels in FY15 (creating the need for more draconian cuts throughout the ten-year “budget window”), as well as an unbending refusal to increase revenues.
Five years after the end of the Great Recession, our economic recovery is plodding, not because of massive deficits (which are not currently massive—they have fallen faster than at any point in the last 60 years), but due to a lack of aggregate demand. In a demand-starved economy like ours, public spending has a high multiplier effect, meaning that for each dollar the government spends, more than a dollar is added to the economy. This is especially true when that public spending is allocated in such a way that it can circulate quickly throughout the economy—for example, through low-income support programs (which are automatic stabilizers) or infrastructure investments that would create jobs rapidly.
For that reason, pulling back spending in today’s economic environment, as Chairman Ryan proposes, would have a deleterious effect on the economy and jobs. On net, I estimate that the House budget resolution would decrease GDP by 0.9 percent and decrease nonfarm payrolls by 1.1 million jobs in fiscal year 2015, relative to CBO’s current-law baseline. The following fiscal year, when Ryan’s cuts to discretionary spending kick in, “The Path to Prosperity” would decrease GDP by 2.5 percent and cost 3.0 million jobs. And if the recovery remains sluggish, large job losses could continue under the Ryan budget in 2017 and beyond.
Andy Puzder is the CEO of CKE Restaurants (Hardee’s and Carl’s Jr.). Bloomberg reported his 2012 salary and other compensation as $4.485 million, so he is doing well in what he likes to deride as the Obama economy. His restaurant chain is doing well, too, apparently, since its profits reportedly rose more than 30 percent last year. (So much for overregulation!)
But Puzder is opposed to President Obama’s proposal to update the Department of Labor’s overtime rules, an update Puzder claims would turn CKE’s poorly paid assistant managers into “glorified crew members.” Those rules have been updated only once in the last 39 years and are so obsolete that workers earning less than the poverty level can be considered “executives” and denied overtime pay even if they work so many extra hours that their pay falls below the minimum wage. But that helps Puzder make a bigger profit, so he says leave the rules alone.
One thing is certain: Puzder won’t let any rule change reduce the millions he takes home from CKE. He wants us to know he will take it out of his employees, one way or another. As Puzder says, “overtime pay has to come from somewhere, most likely reduced hours, reduced salaries or reduced bonuses.”
On Wednesday, the National Labor Relations Board (NLRB) region 13 director, Peter Sung Ohr, granted the Northwestern University football players the right to join the College Athletes Players Association (CAPA) union. The petition by the Northwestern football players was filed by their quarterback, Kain Colter, and had the support of the United Steelworkers. Ohr’s decision establishes a precedent for athletes at private colleges and universities to form or join unions. At the very least, it will allow players to join together to voice their concerns with issues that affect their well-being such as injury risk and time commitment. As of January, CAPA’s stated goals for the petition were limited to seeking more medical protections for players and guaranteeing scholarships in the event of injury. This decision, however, could also fuel growing criticism of the thriving business of college athletics and encourage the idea that the players should be paid on top of their scholarships.
Northwestern University and the NCAA have criticized the decision, arguing that college athletes are amateur athletes and students, not employees. Yet, the facts of the current system indicate that by any definition, these athletes are woefully underpaid employees. Broadly speaking, an employee is one who is compensated for one’s work and is under the control of an employer. The players at the Northwestern football team were compensated in the form of grant-in-aid of about $61,000 each academic year to cover the costs of tuition, fees, room, board, and books required for their education. As for control, Ohr touched on several aspects of the Northwestern football program’s system that are typical of many college athletic programs, in which players are under the supervision of their coaches and must follow a special set of rules. Northwestern sets strict limits on players’ ability to pursue outside employment, post on social media, or profit from their “athletic ability or reputation.” Additionally, players are required to commit 40 to 60 hours of time for conditioning, meetings, and practice for the team. “Not only is this more hours than many undisputed full-time employees work at their jobs,” Ohr noted, “it is also many more hours than the players spend on their studies.”
The Supreme Court is deliberating in a case that will decide whether in-home personal care and home health aides are allowed to unionize and bargain agreements with government agencies. The case will also decide whether their contracts can require every aide who benefits from the collective bargaining agreement to pay her fair share in agency fees (or dues, if she is a union member). These collective bargaining agreements have made a huge difference in the lives of the overwhelmingly female and disproportionately minority workforce that cares for the sick and disabled, the frail elderly and small children in their homes or in the homes of the customers.
Until the 1990’s, when states and counties across the nation began creating public entities to act as employers and bargain collectively with the workers’ unions, the in-home care workers rarely were paid more than the minimum wage, they had no coverage for health or dental insurance and no pension or retirement plan. Even today, after almost two decades of progress, half of these workers have incomes less than twice the poverty level and they earn far less than workers in other occupations – even after taking into account gender, age, race, education, and geography.
But where in-home aides have been permitted to unionize and bargain collectively they have improved pay and benefits, training, retention, and the safety of clients and workers alike. In Illinois, where the Supreme Court case challenging unionization arose, the latest contract includes $13.00 an hour pay, health and dental insurance, a grievance procedure, and paid training hours – a huge improvement over what was formerly minimum wage work with no benefits and no respect.
In the context of a lost decade of wage growth for women, two recent proposals—to increase the federal minimum wage to $10.10 per hour (including increasing the separate minimum wage for tipped workers), and to increase the threshold salary for overtime pay to $50,000 annually—can provide much needed relief to women.
Increasing the minimum wage requires that Congress pass a law. The current minimum wage of $7.25 was set in 2007 and went into effect in 2009, but President Obama has already acted by executive order to require firms that hold contracts with the federal government to pay their workers a minimum of $10.10 per hour. In contrast, increasing the salary threshold for receiving overtime pay does not require congressional action, but does require action by the Secretary of Labor. The Fair Labor Standards Act sets the overtime pay premium at 50 percent more than the regular wage or salary, also known as “time-and-a-half.” Currently, if workers are classified as executive, administrative, or professional, and they earn more than the salary threshold of about $23,000 a year ($455 per week), they do not need to be paid overtime. President Obama recently directed Secretary Perez to consider how to update the rules so that workers are paid fairly for their overtime hours.
Because women earn less than men on average, it is not surprising that women are the majority—64 percent—of those who earn the minimum wage and would thus benefit disproportionately from an increase in the minimum wage. Economists expect that employers will also increase the pay of workers earning somewhat above the minimum, in keeping with past experience of minimum wage increases. An EPI analysis shows that 15.3 million women—9.6 million directly and 5.7 million through the spillover effect—would receive a pay increase were the minimum wage to be raised to $10.10 per hour. EPI also finds that nearly one-third of all working single mothers—or 2.3 million women—would receive a direct or indirect pay increase. Overall 55 percent of workers who would benefit from the increase are women.
Twice a year, the Institute for Women’s Policy Research (IWPR) updates its fact sheet, “The Gender Wage Gap,” to report the latest data as they become available from the Bureau of Labor Statistics and the Census Bureau. This year, we noticed something new when we added the latest figure for median weekly earnings for men and women who work full-time—a virtual standstill in women’s real wages for the past ten years. This was true when looking at trends in both usual weekly earnings and annual earnings for those who work full-time, year-round.
For several decades, as new Fed chair Janet Yellen notes, women have been the success story in the economy. Women increasingly pursued higher education, eventually surpassing men in college graduation rates. Women also joined the labor force in larger numbers, worked more throughout their lives, and entered a variety of occupations that had been formerly virtually closed to them, becoming bus drivers, mail carriers, fire fighters, police officers, bankers, lawyers, doctors, and many others.
These gains in education and work experience (what economists call human capital) contributed to narrowing the wage gap, and the equal opportunity legislation of the 1960s and 1970s helped too. The gender wage gap closed from 40 percent in 1960 to 23 percent in 2012 (in terms of annual earnings). Women’s real earnings—meaning wages adjusted for inflation—grew as well, from $22,418 in 1960 to $28,496 in 1970, $30,136 in 1980, $34,247 in 1990, $37,146 in 2000, and $38,345 in 2012.
This commentary first appeared in Spotlight on Poverty and Opportunity.
The pressing importance of jobs and economic growth – rather than the misplaced obsession with austerity – finally seems to be gaining recognition inside Washington. President Obama illustrated this renewed focus in his State of the Union address, emphasizing the need to “do more to make sure our economy honors the dignity of work, and hard work pays off for every single American.” The president’s fiscal year 2015 budget, released this month, builds off these ideas. It provides a robust vision for building a sustainable platform for economic growth with shared prosperity and security.
These priorities are front and center in the budget. The president proposes an additional $28 billion in nondefense discretionary funding (plus $28 billion in defense spending) in 2015. Much of this new spending – offset by the closing of tax loopholes – would focus on improving the well-being of low- and middle-income Americans through job creation and making work pay (wages have been stagnant since 2000).
A major budgetary focus is getting people back to work, with a particular emphasis on helping the long-term unemployed re-enter the workforce. Such assistance is desperately needed. Research by the Boston Federal Reserve showed that employers were extremely unlikely to call back job seekers who had been out of work for at least six months, even if their qualifications were better than other applicants’.