Tomorrow at Knox College, President Obama will kick off a series of speeches outlining his vision for rebuilding the U.S. economy. He is expected to talk about how the economy works best when it grows from the “middle-out,” not from the top down.
Growing from the middle out is indeed the right approach to economic growth. I hope that President Obama will get to the heart of the matter, which is that, adjusted for inflation, wages and benefits for the vast majority of workers have not grown in ten years. This is true even for college graduates, including those in business occupations or in STEM fields, whose wages have been stagnant since 2002. Low and middle-wage workers, meanwhile, have not seen much wage growth since 1979. Corporate profits, on the other hand, are at historic highs. Income growth in the United States has been captured by those in the top one percent, driven by high profitability and by the tremendous wage growth among executives and in the finance sector.
The real challenge is how to generate broad-based real wage growth, which was only present during the last three decades for a few short years at the end of the 1990s.
To generate wage growth, we will need to rapidly lower unemployment, which can only be accomplished by large scale public investments and the reestablishment of state and local public services that were cut in the Great Recession and its aftermath. The priority has to be jobs now, rather than any deficit reduction (which under current conditions will sap demand for goods and services and slow job growth). This means an aggressive increase in the minimum wage that eventually grows to half of the average workers’ wage. It means reestablishing the right to collective bargaining for higher wages and addressing workplace concerns. It means not allowing guest workers to undercut wages in both high-wage and low-wage occupations, which can be done by giving full rights to any ‘guests’ and by scaling such programs to the limited situations for which they are needed. It means taking executive action to ensure that federal dollars are not spent employing people in poverty-level wage jobs. Overall, it means paying attention to job quality and wage growth as a key priority in and of itself, and as a mechanism for economic growth and economic security for the vast majority.
If we choose not to take this path, we will fail to achieve shared prosperity and return to relying on debt and asset bubbles to fuel growth. I have seen that movie already, and I didn’t enjoy it.
I just finished complaining in an earlier blog that the media wasn’t telling enough manufacturing and supply chain stories when Bill Vlasic proved me wrong with his piece on Chryslers’ Jefferson North Assembly Plant in Detroit: Last Car Plant Brings Detroit Hope and Cash.
Only two days later, the City of Detroit filed for the nation’s largest ever municipal bankruptcy. “Hope and cash” suddenly sounded like too little too late. It’s not. In fact, the story suggests what it takes to make recovery work.
We can all picture a Jeep. But Vlasic’s piece gives the new Jeep Grand Cherokee a powerful backstory:
“There is a section of Detroit’s east side that sums up the city’s decline, a grim landscape of boarded-up stores, abandoned homes and empty lots that stretch all the way to the river.
And in the middle of it stands one of the most modern and successful auto plants in the world.”
The article paints a picture of today’s high-quality, high-tech manufacturing that can’t be underscored enough: making 300,000 vehicles a year with $2B a year in profit, the unionized Detroit facility is “on par with the most efficient luxury car plants in Germany and the best factories operated by Japanese automakers in the southern United States.” It’s a positive story for the auto industry and for Detroit: jobs at the plant have more than tripled, from 1,300 to 4,600, a third of employees live in the city, and its property taxes send $12 million a year to the city coffers.
Calling it the “last car plant” in Detroit is a bit misleading, however. Not only is GM’s Hamtramck facility arguably within the city limits, as are two engine plants, but from an industrial perspective, Chrysler’s plant is hardly alone. It is part of a huge cluster of automotive parts and assembly facilities in the greater Detroit area that still make up a significant share of US manufacturing output. If we’re going to bridge the gap between the auto industry’s recovery and Detroit’s, it would be more helpful to think of Jefferson North as a leader in a new generation.
The choice for Ben Bernanke’s replacement as the next Chair of the Federal Reserve seems, in DC’s conventional wisdom, to have come down to Janet Yellen (Bernanke’s current deputy) or Larry Summers (a former official in both the Clinton and Obama administrations, including a stint as Treasury Secretary).
For those who think that the U.S. economy remains too weak and needs as much policy support as it can get, this seems like a pretty good choice. Both Summers and Yellen have consistently argued in the past couple of years that the primary problem facing the U.S. economy currently is slack demand.
I’d argue, however, that Yellen is the clearly correct choice for the job right now.
For one, she has been far ahead of the policymakers’ curve when it comes to diagnosing macroeconomic trouble. Recently released minutes from Federal Reserve Open Market Committee meetings in December 2007 show that Yellen was nearly alone in warning that a recession was imminent—a warning that proved correct.
Most of the report simply notes that compensation, not just wages, matters to American workers, that productivity and wage (compensation) growth are often calculated using different price deflators, and that one should take depreciation into account while calculating productivity.
All these are fair enough as matters of arithmetic (though we may have more to say on our interpretation of these issues, which differs a lot from the Heritage report1), and we have generally taken these factors into account in our work showing the growing gap between wages and productivity (and so have other careful analysts). So what’s the big difference between our work and the Heritage report? It’s something they spend a lot less time on.
At EPI, we don’t look simply at average compensation, but (generally) at median compensation, the compensation of a worker in the middle of the pack who makes more than half the workforce but less than the other half. This really matters; when, say, LeBron James walks into a bar average compensation rises a lot even though the compensation of the median person in the bar is likely unaffected.
So, average compensation does indeed track productivity growth much more closely (though not perfectly) than does median compensation. But this is just another way to make what is the entire point of the compensation/productivity gap analysis: rising inequality has kept typical Americans from seeing their compensation track productivity.
There’s a heat wave in Washington this week. Here are some cool articles we read:
McDonald’s recently partnered with Visa to put out what they call the Practical Money Skills Budget Journal (pdf), a “helpful” tool for McDonald’s employees to keep track of their earnings and expenses. There have been a flurry of responses to the “McBudget” including realistic comparisons, snarky analysis, and talk of unicorns as a means for transportation. Others have defended the budget, claiming that it gives low-wage workers the necessary tools for financial planning.
Coincidentally enough, we also recently released an online tool related to family budgets—along with Elise Gould and Nicholas Finio, we developed EPI’s Family Budget Calculator, a measure of just how much income it takes for families to buy the necessities for an adequate but modest lifestyle. Our basic budgets include the cost of rent, food, health care, child care, transportation, other necessary expenses and taxes in each of 615 communities across the country. While families at these budget levels may be able to pay their bills and put food on the table, our family budgets imply a pretty austere lifestyle. There is no savings, no vacations, no cable or internet service, and, certainly, no restaurant visits.
The health insurance premiums announced today for the new health insurance exchanges for New York were far lower than their current individual health insurance market. This is great news for the thousands of New Yorkers who will see their premiums fall, and for the many more thousands who will be able to find affordable coverage when they couldn’t before. This is a promising sign that the health insurance exchanges established in the Affordable Care Act (at least in states taking implementation seriously) could work as planned and improve the range of affordable choices available to consumers.
On the flip side, today, the US House of Representatives voted to postpone implementation of the individual mandate, the provision of the ACA that requires that Americans are covered by health insurance, even if they have to buy their own. Postponing this provision would be a huge mistake.
A key feature of the ACA is that it requires that insurers offer coverage to everybody, and at a common price (subject to some variation based on age and whether or not you’re a smoker). If these requirements existed without a provision to stop free-riding (the individual mandate), too many healthy people would wait until they got sick before they enrolled in insurance and started paying premiums. This means that the insurance pool at any point in time would be less healthy, and thus more expensive, than it would be under the mandate. Simply put, the individual mandate makes health reform considerably more efficient.
Immigration Legislation Would Improve the Labor Market by Protecting Undocumented Workers from Employer Retaliation
A disturbing report in the Huffington Post serves to remind us what abuse and exploitation of undocumented immigrant workers looks like in the U.S. labor market. Antonio Vanegas, an undocumented immigrant worker who complained to the Department of Labor (DOL) and spoke out publicly by testifying to the Congressional Progressive Caucus about alleged wage and hour violations committed by his employer, Quick Pita (in Reagan National Airport), soon thereafter found himself in detention and deportation proceedings. And this happened despite the fact that DOL agreed to investigate Quick Pita based on Vanegas’s claims that he was earning $6.50 an hour (the local minimum wage is $8.25) and working 60 hours per week without being paid for overtime. Occurrences like these are probably not uncommon and are a legitimate reason for all U.S. workers to be concerned. If S.744, the comprehensive immigration reform legislation passed by the Senate, becomes law, some of the bill’s provisions would protect vulnerable undocumented workers like Vanegas and improve the labor market for American workers too.
The situation Vanegas found himself in illustrates how employers use the immigration status of undocumented workers to keep them from demanding that their employers obey the law or from engaging in union organizing activities. As cases in the past have demonstrated, however illegal its own conduct might be, an employer can simply fire an undocumented worker without justification and without worrying about being held accountable for retaliating or other legal violations, or for paying back wages. Or an employer can fire undocumented workers as the result of a “self-audit” of the company’s employment records, or after inviting the government’s immigration authorities to conduct an audit. Ultimately, the undocumented worker is terminated, deported, or both, and has limited access to legal remedies. Although ironically Vanegas worked for years in a building that also houses the Department of Homeland Security’s immigration authorities, he never had a problem until he advocated that his employer comply with the law. Almost immediately after that, he was put in a cage for four days and subjected to deportation proceedings.
Yesterday, it appeared that the Senate was on the verge of “going nuclear”—amending its rules mid-session to prevent the use of filibusters to block the president’s appointment of executive branch officials. The use of parliamentary tactics by a minority of senators to prevent the popularly elected President of the United States from appointing the heads of agencies that enforce key laws has reached unprecedented levels and threatens the ability of the president to govern. The Senate has been in gridlock ever since President Obama was re-elected. A concerted effort by Republican senators has prevented the passage of key legislation, blocked confirmation of federal appeals court judges, and blocked confirmation of President Obama’s nominees for Secretary of Labor, Administrator of the Environmental Protection Agency, Director of the Consumer Financial Protection Board, or any of the five nominees to the National Labor Relations Board (NLRB).
Today, it appears that a compromise has been reached that will allow the president most of his appointees, but not all. The Senate’s compromise forces the president to choose new nominees for the NLRB.
Happy Friday! Here’s a bit of what we read this week:
- The generation we love to dump on (CNN)
- You’ve Been Warned (New York Times)
- Sequestration Pushes Head Start Families To The Precipice (Huffington Post)
On Wednesday, the Washington, DC, City Council passed the Large Retail Accountability Act (LRAA), a bill that will require large retail corporations—specifically businesses with more than $1 billion in sales and retail locations of at least 75,000 square feet—to pay their workers a minimum wage of $12.50 per hour. The bill’s passage may only be a temporary victory for proponents, however, as there is speculation that DC Mayor Vincent Gray may veto the bill now that Walmart, the primary target of the bill, has said that they will cancel construction of three planned stores in the District if the legislation becomes law.
It’s hard to view Walmart’s threat to scuttle the three stores, made literally the day before the Council vote, as anything but outright bullying by the largest and one of the most profitable corporations in the world. Walmart has alleged that the bill unfairly singles them out, although a few other retailers—Macy’s, Costco and Home Depot—would also be affected by the bill. But Walmart does deserve special scrutiny because of their unique track record in driving out smaller retail businesses, depressing wages (pdf), and siphoning off public tax dollars.
To be clear, Walmart is not the only big-box retailer that has shut down smaller competitors, but Walmart’s market dominance in many regions, and their role as the largest private employer in the United States, gives them a unique ability to affect living standards for significant segments of the population. Unfortunately, their typical wages are abysmally low. The minimum wage of $12.50 required under the LRAA is just below the average wage of Walmart employees nationwide: $12.67 per hour. And when companies like Walmart don’t pay sufficient wages for workers to make ends meet, the American taxpayer picks up the tab. In nearly every state where it operates, Walmart has more employees on Medicaid than any other company. In some states, its employees are also the largest groups of food stamp and other cash assistance recipients.
A recently concluded trial highlights how weaknesses in the country’s guestworker programs can facilitate human trafficking. Last week, a federal jury convicted Kizzy Kalu, a Denver-area man, of “89 counts of mail fraud, visa fraud, human trafficking and money laundering.” While both progressives and conservatives have complaints about the Senate immigration bill, it’s important to point out that the Senate took an important step forward in terms of new rules that would protect vulnerable foreign workers like the ones recruited by Kalu from abroad through guestworker programs.
The workers Kalu recruited thought they were coming to the United States to work full-time at an American university as “nurse instructor supervisors” through the H-1B guestworker program, which allows U.S. employers to hire workers from abroad for occupations requiring at least a college degree. But Kalu lied to the government and the foreign workers, and with disastrous results. According to the Department of Homeland Security (DHS), the university that was supposed to be the employer “existed largely in name only and had no genuine need for nurse instructor supervisors.” Thus, the workers had no jobs, and had to look for work on their own (although Kalu would not even let them travel freely). H-1B workers are legally required to be paid a “prevailing” wage, but the workers who were able to find jobs ended up working in nursing homes (not as instructors) earning less than the prevailing wage. Some were not able to find a job at all. On top of that, Kalu required the workers to pay him “between $800 to $1,200 per month or face deportation” and required them to sign employment contracts specifying the workers would owe Kalu “$25,000 if they left his employment.”
It looks like House Republicans are at it again. With another deadline for a congressional vote to raise the debt ceiling looming this fall, recent reporting confirms that House Republicans are strategizing on how to best hold hostage the full faith and credit of the United States in return for even more spending cuts. (Note: The CBO reports that congressional action on the debt ceiling will be necessary sometime in October or November, after the Treasury has exhausted its full arsenal of extraordinary measures to stay under the current debt limit, which is just under $17 trillion.)
Recall that in August 2011 the GOP threatened sovereign default in order to force their agenda—dollar for dollar spending cuts in exchange for their votes to raise the debt ceiling, a habitually pro forma vote (see Table 7.3 for a record of how many times the debt ceiling has been voted on). President Obama ultimately capitulated to this bribe, signing the Budget Control Act (BCA) in exchange for a debt ceiling increase and thus solidifying our country’s pivot from prioritizing post-recession job creation policies to instead pushing policies of austerity. That debt ceiling showdown and the legislation it generated has not only stymied our recovery, but additionally led to a slew of other bad stuff, including the downgrading of our credit rating and the implementation of one of the worst pieces of fiscal legislation to come out of the Obama Administration: sequestration and the discretionary spending caps.
On July 1, North Carolina pulled the safety net out from under the long-term unemployed. Workers in the state with the nation’s fifth-highest unemployment rate will now be eligible for only 19 weeks of unemployment compensation benefits. This is shortest duration of any state, and is well below even the pre-recession standard of 26 weeks. Furthermore, North Carolina’s politicians have disqualified their own state for over half a billion dollars in free federal unemployment aid—and all because they were determined to slash the weekly benefits provided to the unemployed.
North Carolina’s policymakers have made it clear that they have little empathy for the suffering created by the state’s stagnant labor market, which has left 8.8 percent of its workforce without a job. But if policymakers think that they can further disadvantage job seekers without damaging North Carolina’s prospects for economic recovery, they’re dead wrong. As Paul Krugman writes, the move to slash unemployment benefits is a huge mistake on both humanitarian and economic grounds.
The unemployment benefit slashers demonstrate a fundamental misunderstanding about how aid to the unemployed helps the economy. First and foremost, unemployment assistance helps workers and their families keep their heads above water in the event of a job loss until they can find another job. That’s the “private” benefit. But secondly, there are benefits that we all share when the government assists job seekers. Unemployment compensation is an extremely effective means of economic stimulus, because that compensation puts money directly in the hands of people who are most likely to spend it immediately. That’s the “public” benefit: such spending props up local economies at times (like now!) when the economy is suffering from a massive shortfall in aggregate demand.
Two weeks ago, Senators Baucus and Hatch, respectively the chairman and ranking minority member of the Senate Finance Committee, sent a “Dear Colleague” letter to solicit input on which tax expenditures to keep in the tax code. They are proposing a “blank-slate” approach for tax reform—eliminate all tax expenditures from the tax code and then add in the ones that can be justified. It’s a positive development that the senators aren’t constraining the initiative to be revenue neutral, but what sounds like a novel and fresh approach to tax reform that broadens the tax base and simplifies the tax code, both laudable goals, will likely obtain neither.
My guess is the “blank-slate” approach to tax reform is doomed to failure. 100 senators, backed by thousands of lobbyists, are all but guaranteed to come up with a plan as complicated as the current tax code. Perhaps serious tax reform is not in the cards for the 113th Congress.
Tax expenditures are tax credits, tax deductions, and exclusions embedded in the tax code, which reduce a taxpayer’s tax liability; they are often referred to as loopholes. According to the Joint Committee on Taxation, there are over 200 tax expenditures affecting individuals, and they are estimated to reduce Fiscal Year 2014 tax revenues by $1.1 trillion. “Broadening the base” refers to the elimination or reduction of these expenditures, and is held up as the gold standard for tax reform. Depending on who you ask, increased revenue from broadening the base should be used to reduce tax rates, reduce deficits, or increase expenditures on education, infrastructure and the social safety net.
The New York Times obituary for Douglas C. Englebart, identified as the “Computer Visionary Who Invented the Mouse,” is fascinating reading, in part because Englebart, an Oregon farm boy, was in many ways the father of modern networked computing. Beginning in the early 1960s, he put together a team of engineers and computer scientists, funded by the federal government, that developed a prototype for most of the computer tools we all take for granted today. He unveiled them at a conference in San Francisco in December 1968, which “set the computing world on fire.” In the words of the Times obituary:
“Dr. Engelbart was developing a raft of revolutionary interactive computer technologies and chose the conference as the proper moment to unveil them.
For the event, he sat on stage in front of a mouse, a keyboard and other controls and projected the computer display onto a 22-foot-high video screen behind him. In little more than an hour, he showed how a networked, interactive computing system would allow information to be shared rapidly among collaborating scientists. He demonstrated how a mouse, which he invented just four years earlier, could be used to control a computer. He demonstrated text editing, video conferencing, hypertext and windowing.”
Englebart was a visionary, but his ground-breaking work was not supported by venture capital and his innovations were not the result of the private market or corporate enterprise. His innovations were not spurred by the prospects of incredible income and wealth, all lightly taxed. Rather, the work was funded and organized by a visionary bureaucracy in the U.S. government. As the Times describes it, “during the Vietnam War, he established an experimental research group at Stanford Research Institute (later renamed SRI and then SRI International). The unit, the Augmentation Research Center, known as ARC, had the financial backing of the Air Force, NASA and the Advanced Research Projects Agency, an arm of the Defense Department.”
The drumbeat of doom-and-gloom about American education continues. The latest entry is a June report by the Council on Foreign Relations, warning that the “real scourge of the U.S. education system–and its greatest competitive weakness–is the deep and growing achievement gap between socioeconomic groups that begins early and lasts through a student’s academic career.”
Every industrialized country has an achievement gap between higher and lower-class children. In the United States, we have a similar and overlapping gap between whites and blacks. These gaps have narrowed, but not much, because both races have posted remarkable gains in recent generations.
Consider this: black achievement has improved so much that in elementary school mathematics, blacks now perform better than whites did only a generation ago. Improvements have been less great but still substantial for black elementary and middle schoolers in reading and for black 12th graders in both math and reading. White students have also improved in this time, however, so the gap remains.
The Council on Foreign Relations acknowledges that American student achievement is “higher than ever,” but says gains have been small. In fact, gains have been quite large, and for disadvantaged students, have outpaced gains in comparable industrial countries. One country with which we are typically and unfavorably compared is Finland. Yet although Finland’s scores remain high, achievement of its disadvantaged students has plummeted in the last decade, while that of comparable U.S. students has surged.
The Organization for Economic Cooperation and Development (OECD) and the World Trade Organization (WTO) have reported that significant portions of China’s exports to the United States contain non-Chinese value added, including some small fraction of parts and materials originating in the United States. The OECD and WTO have proposed new estimates of trade in value-added (VA), a measure of trade that is net of foreign value-added. They claim that “China’s bilateral trade surplus with the United States shrinks by 25% on a value-added basis, reflecting the high level of foreign-sourced content in Chinese exports.” But, my new EPI report shows that the OECD-WTO analysis is “fundamentally flawed and should not be used in anti-dumping or other types of fair trade cases.”
The OECD-WTO analysis suffers from at least three critical flaws:
- The OECD-WTO analysis fails to account for rapid technological change and the fact that China is rapidly moving up the value chain and increasing the domestic content of its exports.
- The OECD relies, in part, on flawed Chinese data on its own trade flows. Estimates developed in the EPI report show that China’s global trade surplus was 117 percent to 250 percent (i.e., 2 to 3.5 times) larger than reported by China in the 2005-2009 period.
- The OECD-WTO estimates do not accurately reflect the flow of Chinese exports coming into the United States through third countries. China became the world’s largest exporter in 2006, and roughly half of its exports are intermediate products and transshipped goods. As a result, the United States absorbed $54.2 billion to $77.9 billion per year in additional, indirect imports originating in China and imported from the rest of the world between 2005 and 2009 that were not reflected in the OECD estimates. When indirect imports are included, U.S. VA trade with China exceeds conventional measures of the gross bilateral trade deficit in this period.
Happy Fifth of July. Here’s what we read this week:
- War on the Unemployed (New York Times)
- The Fall of the American Worker (The New Yorker)
- Upgrade or Die (The New Yorker)
- Instituting Economic Cooperation in a Noncooperative World (Center for American Progress)
There are not enough thumbs-up graphics on the internet to show how much I agree with and how important I think this Paul Krugman blog post is. He goes through all of the obvious indicators signaling that the economy is far from healed from the Great Recession, as well as all of the puzzling ways policymakers seem determined to ignore this, and ends with:
“I guess what I’m saying is that I worry that a more or less permanent depression could end up simply becoming accepted as the way things are, that we could suffer endless, gratuitous suffering, yet the political and policy elite would feel no need to change its ways.”
We said much the same thing in the introductory chapter to State of Working America, 12th Edition published last Labor Day:
“We should be very clear about the danger of this complacency in the face of elevated unemployment. It’s not simply that full recovery to pre-recession health will come too slowly—though this delay alone does indeed inflict a considerable cost. Instead, the danger is that full recovery does not come at all. Nations have thrown away decades of growth because policymakers failed to ensure complete recovery. Japan has been forfeiting potential output—trillions of dollars’ worth, cumulatively—for most of the past 20 years. Recent research (Schettkat and Sun 2008) has suggested that the German economy operated below potential in 23 of 30 years between 1973 and 2002 because monetary policymakers were excessively inflation-averse. Lastly, U.S. economic history provides the exemplar of what can happen to a depressed economy when policymakers fail to respond correctly: The level of industrial production in the United States was the same in 1940 as it was 11 years before.”
And today’s jobs-numbers, while a nice mild boost above recent trends, really don’t change this assessment at all.
The official start of the recovery from the Great Recession began in June 2009. This coming Friday will mark the release of employment data for June 2013, allowing us to assess how this recovery stacks up against earlier recoveries 4 years in, as well as letting us diagnose obvious areas of economic weakness in the current recovery.
The figure below (also here) compares the current recovery to the three prior recoveries. Recessions are marked by the lines to the left of the zero point on the x-axis, while recoveries are to the right. The figure shows that job growth in the current recovery is slightly stronger than the job growth following the recession of 2001. However, it is slower than in the prior two recoveries and is in fact slower than in any other previous recovery dating back to World War II. Furthermore, jobs fell much further and faster during the Great Recession than in any other recession over that period, meaning that we are stuck in a much larger jobs-hole four years into recovery than in any previous business cycle. The fact that four years into the recovery we still have not yet come close to making up the jobs lost in the downturn, (much less the jobs needed to keep up with growth in the potential workforce over that time), is a grimmer situation than anything our labor market has seen in seven decades.
The interest rates on government-backed student loans are set to double if Congress does not act today. Currently, low- and middle-income students can take out federal loans—called Stafford Loans—at a rate of 3.4 percent. Today, under current law, this rate will increase to 6.8 percent—a rate that will make repayment on student debt much more difficult than it is already. PLUS loans, which are issued to parents and graduate students at a rate of 7.9 percent, will become more costly, as well. If Congress continues to stall, millions of college students will see their future loan obligations increase substantially, putting further strain on upcoming graduates who already face a bleak job market.
If this crisis sounds familiar, that’s because it is. Congress made the same deliberations last summer, and eventually extended the low interest rates for an additional year. This year, there is bipartisan agreement that a long-term solution—rather than yet another year-long extension—is needed. The question what long-term rate is appropriate for student debt is a complicated one—but allowing rates to double today would hurt both current and future students in an already ailing economy. Unemployment for young college graduates is close to 9 percent and underemployment is near 18 percent. What’s more, for recent graduates, wages increased 1.5 percent cumulatively between 1989 and 2012. For men, the increase was 4.8 percent, but women actually saw their real earnings decrease by 1.6 percent in this time period.
Escalating CEO compensation is a major contributor to income inequality. Along with financial sector pay, growing CEO compensation has helped more than double the income share of the top 1 percent over the past three decades. Moreover, the fact that CEO pay has risen so quickly since the end of the Great Recession is an indicator that the top 1 percent is doing far better than ordinary Americans in the recovery.
One way to illustrate the increased divergence between CEO pay and an average worker’s pay over time is to examine the ratio of CEO compensation to that of a typical worker, the CEO-to-worker compensation ratio. Our new EPI paper, CEO Pay in 2012 Was Extraordinarily High Relative to Typical Workers and Other High Earners, presents this analysis of CEO compensation based on our tabulations of Compustat’s ExecuComp data. The ratio measures the distance between the compensation of CEOs in the 350 largest firms and the workers in the key industry of the firms of the particular CEOs.
The CEO-to-worker compensation ratio1 in 2012 of 272.9 is far above the ratio in 1995 (122.6), 1989 (58.5), 1978 (29.0), and 1965 (20.1), as shown in the figure below. This illustrates that CEOs have fared far better than the average worker over the last several decades. It is also true that CEO compensation has grown far faster than the stock market or the productivity of the economy.
Here’s what we read today. Did we miss something interesting? Share it in the comments.
- Why Liberals Should Oppose the Immigration Bill (New Republic)
- For true immigration reform, hire labor inspectors, not border guards (Newsday)
- Forced to Work Sick? That’s Fine With Disney, Red Lobster, and Their Friends at ALEC (Mother Jones)
- The U.S. will stop financing coal plants abroad. That’s a huge shift. (Washington Post)
We just launched a new website, inequality.is. I want to take an opportunity to tell you a little about it. What this website does is help everyday people see themselves in the economy.
My team here at EPI and at Periscopic worked hard to make inequality.is fun, accessible and informative. Generally, people get that inequality exists, what we are trying to do is explain why it matters.
The website takes people through a series of pages where they can see themselves in the story of inequality. There’s a great video, narrated by Robert Reich, which tells the story of how inequality was and is being created.
The site begins with a look at the income distribution and users can visualize how much money the top 10% takes home in income versus the bottom 90%. That’s inequality.is/real.
inequality.is/personal lets users see themselves through the eyes of their particular demographic characteristics—age, gender, race/ethnicity, and education—and sees how average wages differ depending on your personal characteristics. Users can play with this interactive feature, putting in different comparisons and seeing how things are different.
Any differences found in the inequality.is/personal section are dwarfed by the differences between the vast majority of Americans and what’s happened with wages and incomes in the top 1%
The word “minimum” is not difficult to define. Several synonyms immediately come to mind: lowest, least, smallest, littlest…
So you might reasonably assume that the “minimum wage” is the lowest wage employers can legally pay their workers, right?
Wrong. Some 3.3 million workers are paid the sub-minimum wage—often called the “tipped minimum wage”—of only $2.13 per hour. For these workers, employers may claim a “tip credit,” by converting tips received by the worker into income. So long as this tip credit, when combined with the tipped minimum wage, adds up to the minimum wage, the employer need not pay more than $2.13 per hour. If tips fall short of this amount, the employer is supposed to make up the difference. The federal minimum wage is currently $7.25 per hour, so the maximum tip credit that an employer can claim is $5.12 per hour at the federal level. The law effectively transforms tips earned by the worker into a subsidy for the employer.
The tipped minimum wage hasn’t been raised in 22 years.
Early Thursday, the New York City council successfully overrode Mayor Bloomberg’s veto of a bill giving New York workers access to paid sick leave, at long last. The bill phases in over two years, beginning in April 2014 for businesses with 20 workers or more.
The bill’s passage after a three year battle comes after supporters were able to broker a deal with City Council Speaker Christine Quinn in March. New York will now be the fifth city in the United States to require private sector employers to provide a minimum amount of earned paid sick time to their employers, joining Portland, San Francisco, Seattle and Washington, DC (the Philadelphia City Council has twice passed paid sick leave legislation. Philadelphia Mayor Michael Nutter has vetoed the bill both times). Connecticut remains the only state with this distinction. This is a big win for the people of New York City. Overall, it’s a wise investment for employers, workers and the general public.
Nearly 40% of the private sector workforce in the United States has no ability to earn paid sick time. Furthermore, access to paid sick days has historically been far more common among high-income workers, leaving low-income families with little protection when they get sick or need to visit the doctor. This important legislation not only protects workers from lost pay or potential job loss when they or their family members get sick, it also protects the public by keeping sick workers, who feel economically compelled to work, from spreading illness to co-workers and customers.
Furthermore, the great benefits of earned sick days far outweigh the costs. The costs to business are often overstated, when the reality is that earned paid sick days cost very little when compared to business sales, as we showed in the case of Connecticut (and as we testified before the New York City Committee on Civil Service and Labor in March of this year).
While the lack of a national paid sick days policy has continued to erode family economic security, the efforts of jurisdictions around the country that have stepped up for workers and their families serve as models for cities and states throughout the nation.
Greg Mankiw, in his defense of the top one percent (pdf), notes that “the key issue is the extent to which the high incomes of the top 1 percent reflect high productivity rather than some market imperfection,” and quickly turns to a discussion of CEO pay. Mankiw’s got a point—so let’s discuss whether or not CEO pay simply reflects compensation for ‘talent’ and productivity.
Mankiw does not present any evidence on whether CEO pay reflects high productivity: rather, he offers an argument that corporate governance is not problematic, using research by University of Chicago business school professor Steve Kaplan as his evidence. In fact, the chief claim that CEO pay tracks that of other talented workers also comes from Kaplan, who has a paper (not yet public) in the forthcoming Journal of Economic Perspectives issue along with Mankiw’s contribution and a paper from me and my colleague Josh Bivens. In this post, as promised in a prior one on Mankiw’s data claims, I draw on the evidence presented in our paper to show that CEO pay has grown far faster than that of other very high wage earners (the top 1/1000th) and that the CEO advantage relative to other very high wage earners has grown more than the college wage premium. We also demonstrate that Kaplan’s own data series shows the same pattern. A fair-minded review of these data, in our view, leads to the conclusion that the spectacular growth of CEO pay does not simply, or even primarily, reflect the market for talent, or some imagined increase in CEO productivity.
The Supreme Court yesterday did not, for the time being, prevent the University of Texas from continuing its affirmative action plan.
Nonetheless, like the voting rights decision issued today, the Fisher case decision was another setback for racial justice. For one thing, the Court invited another challenge after the case again goes through the lower courts. There, the University will have to prove that it could find no other way to get a diverse student body without explicitly considering race, and will have to prove that it used “good faith” in use of race to achieve diversity. If challengers can show that the University’s examination of applicants’ overall qualifications is really a cover for enrolling black and other minority students—for example, if it is more intent on having black students than violin players, or students from different parts of the state, or other “diverse” factors—affirmative action will be in trouble.
The University and its civil rights group allies have, from an understandable tactical need to defend affirmative action by whatever means are available, accepted a Supreme Court framework that undermines equal rights in the long run.
That framework is “diversity.” According to it, we pursue affirmative action not to remedy the legacy of slavery, Jim Crow, and continuing discrimination, not because equal opportunity for African Americans is an end in itself, but because
- having a diverse student body improves the educational experience for white students, and because
- it trains corporate and military leaders who will be more effective if they look like and have a better understanding of those they lead.
Forgotten has been the idea that African Americans are underrepresented at the University of Texas and at other elite institutions because, as Justice Ginsburg put it in her lonely dissent, they suffer from “the lingering effects of an overtly discriminatory past, the legacy of centuries of law-sanctioned inequality.” In reality, affirmative action is necessary not to make white students more comfortable in the presence of blacks, but to remedy those effects.
Seventy-five years ago today, President Roosevelt signed into law the historic Fair Labor Standards Act. The Fair Labor Standards Act established the minimum wage, legislated a standard workweek, and outlawed oppressive child labor. President Roosevelt called it, after the Social Security Act, “the most far-reaching, far-sighted program for the benefit of workers here or in any other country.”
Prior to the passage of the Fair Labor Standards Act, both adults and young children often worked brutally long hours only to earn starvation wages. This was especially true during the Great Depression. As the Depression endured, firms not only laid off hundreds of thousands of workers, but also implemented significant wage rate cuts. Despite low wages, or perhaps because of them, many workers (including children) continued to work long hours in unjust conditions. Workers often labored in what were essentially sweatshops, only to earn low wages. While campaigning for a second term, President Roosevelt received a note from a young girl that read: “I wish you could do something to help us girls….We have been working in a sewing factory,… and up to a few months ago we were getting our minimum pay of $11 a week… Today the 200 of us girls have been cut down to $4 and $5 and $6 a week.” Thousands of children, as young as seven years old, were denied a basic education and instead worked in mines, mills and factories for a pittance. During his first re-election campaign, President Roosevelt publically committed to eliminating child labor and improving labor standards for all working Americans.
Roosevelt and Frances Perkins, U.S. Secretary of Labor from 1933 to 1945 and the first woman appointed to the U.S. Cabinet, devised the Fair Labor Standards Act with two goals in mind. First, the administration aimed to improve job quality through the abolition of child labor, the establishment of a floor on wages, and a ceiling over hours worked. Second, the administration hoped the Fair Labor Standards Act would create new jobs for millions of the nation’s unemployed by reducing overtime and forcing employers to hire more employees to compensate. The ultimate version of the Fair Labor Standards Act, signed into law by President Roosevelt on June 25, 1938, established a 25-cent minimum wage (that would rise to 30 cents beginning in October 1939), introduced a 44-hour maximum work week (that would first fall to 42 hours in October 1939 and would then fall to 40 hours in October 1940), and set the general age of workforce entry at 16.