Evidence that tight labor markets really will increase labor’s share of income: Economic Policy Institute Macroeconomics Newsletter
Josh Bivens, Director of Research
In a previous edition of this newsletter, I highlighted the labor share of income as a target variable the Fed should be monitoring to assess whether or not the U.S. labor market has returned to full health. Specifically, I argued that a period of above-trend growth in wages should be allowed if it leads to steady clawbacks in the share of national income that labor lost during earlier phases of the economic recovery and expansion. Figure A shows the evolution of labor’s share of income in the corporate sector in recent decades; it clearly documents that the post–Great Recession collapse in labor’s share has still largely not been reversed.1
Workers' share of corporate income hasn't recovered: Share of corporate-sector income received by workers over recent business cycles, 1979–2018
| date | Labor share |
|---|---|
| Jan-1979 | 79.08% |
| Apr-1979 | 79.52% |
| Jul-1979 | 80.29% |
| Oct-1979 | 80.81% |
| Jan-1980 | 81.28% |
| Apr-1980 | 82.76% |
| Jul-1980 | 81.96% |
| Oct-1980 | 80.65% |
| Jan-1981 | 80.38% |
| Apr-1981 | 80.46% |
| Jul-1981 | 79.67% |
| Oct-1981 | 80.48% |
| Jan-1982 | 81.52% |
| Apr-1982 | 80.90% |
| Jul-1982 | 81.02% |
| Oct-1982 | 81.59% |
| Jan-1983 | 81.00% |
| Apr-1983 | 79.95% |
| Jul-1983 | 79.47% |
| Oct-1983 | 79.07% |
| Jan-1984 | 77.85% |
| Apr-1984 | 78.02% |
| Jul-1984 | 78.52% |
| Oct-1984 | 78.41% |
| Jan-1985 | 78.50% |
| Apr-1985 | 78.73% |
| Jul-1985 | 78.43% |
| Oct-1985 | 79.77% |
| Jan-1986 | 80.14% |
| Apr-1986 | 80.99% |
| Jul-1986 | 81.75% |
| Oct-1986 | 82.02% |
| Jan-1987 | 81.98% |
| Apr-1987 | 81.16% |
| Jul-1987 | 80.66% |
| Oct-1987 | 81.23% |
| Jan-1988 | 81.24% |
| Apr-1988 | 81.20% |
| Jul-1988 | 81.07% |
| Oct-1988 | 80.46% |
| Jan-1989 | 80.93% |
| Apr-1989 | 81.15% |
| Jul-1989 | 81.20% |
| Oct-1989 | 82.18% |
| Jan-1990 | 82.04% |
| Apr-1990 | 81.91% |
| Jul-1990 | 82.95% |
| Oct-1990 | 83.44% |
| Jan-1991 | 82.47% |
| Apr-1991 | 82.72% |
| Jul-1991 | 83.04% |
| Oct-1991 | 83.54% |
| Jan-1992 | 83.17% |
| Apr-1992 | 83.35% |
| Jul-1992 | 83.77% |
| Oct-1992 | 83.19% |
| Jan-1993 | 83.67% |
| Apr-1993 | 82.89% |
| Jul-1993 | 82.86% |
| Oct-1993 | 81.60% |
| Jan-1994 | 81.59% |
| Apr-1994 | 81.44% |
| Jul-1994 | 80.82% |
| Oct-1994 | 80.51% |
| Jan-1995 | 80.82% |
| Apr-1995 | 80.55% |
| Jul-1995 | 79.69% |
| Oct-1995 | 79.86% |
| Jan-1996 | 79.30% |
| Apr-1996 | 79.26% |
| Jul-1996 | 79.40% |
| Oct-1996 | 79.48% |
| Jan-1997 | 79.13% |
| Apr-1997 | 79.05% |
| Jul-1997 | 78.40% |
| Oct-1997 | 78.69% |
| Jan-1998 | 79.81% |
| Apr-1998 | 80.08% |
| Jul-1998 | 79.99% |
| Oct-1998 | 80.64% |
| Jan-1999 | 80.45% |
| Apr-1999 | 80.71% |
| Jul-1999 | 81.10% |
| Oct-1999 | 81.48% |
| Jan-2000 | 81.93% |
| Apr-2000 | 82.01% |
| Jul-2000 | 82.48% |
| Oct-2000 | 83.19% |
| Jan-2001 | 83.32% |
| Apr-2001 | 82.92% |
| Jul-2001 | 83.09% |
| Oct-2001 | 84.12% |
| Jan-2002 | 82.22% |
| Apr-2002 | 82.04% |
| Jul-2002 | 81.95% |
| Oct-2002 | 80.92% |
| Jan-2003 | 80.50% |
| Apr-2003 | 80.34% |
| Jul-2003 | 79.97% |
| Oct-2003 | 79.99% |
| Jan-2004 | 78.89% |
| Apr-2004 | 78.78% |
| Jul-2004 | 78.69% |
| Oct-2004 | 78.56% |
| Jan-2005 | 77.12% |
| Apr-2005 | 76.94% |
| Jul-2005 | 77.10% |
| Oct-2005 | 75.90% |
| Jan-2006 | 75.55% |
| Apr-2006 | 75.48% |
| Jul-2006 | 74.82% |
| Oct-2006 | 76.10% |
| Jan-2007 | 77.40% |
| Apr-2007 | 76.97% |
| Jul-2007 | 78.18% |
| Oct-2007 | 79.22% |
| Jan-2008 | 79.66% |
| Apr-2008 | 79.73% |
| Jul-2008 | 80.03% |
| Oct-2008 | 83.77% |
| Jan-2009 | 79.96% |
| Apr-2009 | 79.64% |
| Jul-2009 | 78.60% |
| Oct-2009 | 77.57% |
| Jan-2010 | 76.47% |
| Apr-2010 | 76.86% |
| Jul-2010 | 74.87% |
| Oct-2010 | 74.95% |
| Jan-2011 | 77.04% |
| Apr-2011 | 75.86% |
| Jul-2011 | 75.91% |
| Oct-2011 | 74.14% |
| Jan-2012 | 73.77% |
| Apr-2012 | 74.02% |
| Jul-2012 | 74.30% |
| Oct-2012 | 75.08% |
| Jan-2013 | 74.67% |
| Apr-2013 | 74.86% |
| Jul-2013 | 75.03% |
| Oct-2013 | 74.66% |
| Jan-2014 | 75.95% |
| Apr-2014 | 74.21% |
| Jul-2014 | 73.42% |
| Oct-2014 | 73.85% |
| Jan-2015 | 74.22% |
| Apr-2015 | 74.44% |
| Jul-2015 | 75.02% |
| Oct-2015 | 75.56% |
| Jan-2016 | 75.47% |
| Apr-2016 | 75.44% |
| Jul-2016 | 75.44% |
| Oct-2016 | 75.62% |
| Jan-2017 | 76.14% |
| Apr-2017 | 75.85% |
| Jul-2017 | 76.28% |
| Oct-2017 | 76.32% |
| Jan-2018 | 76.25% |
| Apr-2018 | 75.87% |
| Jul-2018 | 75.27% |
| Oct-2018 | 75.67% |
Notes: Shaded areas denote recessions. Federal Reserve banks’ corporate profits were netted out in the calculation of labor share.
Source: EPI analysis of Bureau of Economic Analysis National Income and Product Accounts (Tables 1.14 and 6.16D)
That newsletter wasn’t the first time I’ve stressed that the Fed should allow ever-tighter labor markets until the labor share of income normalizes or until there is an extended period of above-target price inflation. The argument, put simply, is this: If price inflation accelerates well before the clawback of labor’s share of income, this would be some evidence that structural changes (perhaps growing industrial concentration of product markets) have contributed to the fall in labor’s share, and that tighter labor markets by themselves will not be enough to return this measure to pre–Great Recession levels. However, if we don’t see this outbreak of extended above-trend price inflation well before any clawback, it means the Fed can and should strive to restore labor’s share by keeping labor markets tight.
In today’s newsletter, I follow up on those arguments, looking specifically at whether there really is a reliable positive effect of tight labor markets on labor income shares. If there is such a reliable effect, this provides a strong argument that the Fed should keep labor markets tight until labor’s share moves much closer to its pre-recession levels.
Social Security trustees report shows modest improvement in financial outlook
The big news in the Social Security trustees report released yesterday is that the Social Security Disability Insurance (SSDI) trust fund depletion date was extended 20 years, to 2052. Recent declines in SSDI applications and in assumed SSDI take-up going forward contribute to a small improvement in Social Security’s overall financial status, as did higher-than-projected mortality in recent years.
Other demographic factors—recent and projected declines in the birth rate and immigration—had negative effects on the program’s finances, though not enough to offset higher-than-expected mortality. However, when combined with the “valuation period” effect—the retirement of the large Baby Boomer cohort and subsequent slowdown in the growth rate of the working-age population—the demographic factors are essentially a wash—reducing the projected long-term deficit by .01 percent of payroll.
Economic factors included both positive and negative factors, but on balance increased the projected deficit by .04 percent of payroll. The positive factors include lower expected inflation, slightly higher long-term wage growth, and the current strong economy as a starting point for projections. The negative factors were lower productivity growth and interest rate assumptions. With the aforementioned positive effect of changes to disability experience and assumptions, which reduced the projected deficit by .07 percent of payroll, and minor technical adjustments, the overall effect was to shrink the projected deficit by .06 percent of payroll over the 75-year window.
Is this good news? Yes, in the sense that the annual release of the report often serves as an excuse for fearmongering. It’s more challenging to put a doom-and-gloom spin on an improved financial outlook—though some will inevitably try. One possible news hook is the fact that the combined “old age” and “disability” trust funds (often simply referred to as “the [combined] trust fund”) will start to shrink next year as more Baby Boomers retire. This is entirely proper and predictable—the Baby Boomers are the reason we built up the trust fund in the first place—but it has never stopped anyone from yelling “Social Security is going bankrupt!” in a crowded theater of bad ideas. (The challenge for the doomsayers, rather, is that they’ve been saying this ever since Social Security revenues minus the interest on trust fund assets weren’t enough to cover benefit payments, so this talking point has become a bit dull with time.)
And if you believe this, I’ve got a great deal to sell you: The economic impacts of the revised NAFTA (USMCA) Agreement
The North American Free Trade Agreement resulted in growing trade deficits with Mexico and steep U.S. job losses after it was implemented in 1994, increasing the bilateral trade gap by at least $97.2 billion and costing at least 682,900 jobs through 2010.
Can NAFTA 2.0 do any better?
The U.S. International Trade Commission’s (ITC) new report on the economic impact of the U.S.—Mexico–Canada Trade Agreement, released last week, projects that the revised NAFTA (USMCA) will have tiny impacts on the economy. The ITC estimates the deal will increase GDP by 0.35% when it is fully implemented (six years after it takes effect), or roughly 10 weeks of growth. Similarly, it projects that 175,000 jobs will be added in the domestic economy, a 0.1 percent increase in total employment (based on CBO projections for the economy in 2025), or roughly as many jobs as the economy adds in a normal month, over the next six years. And it claims real wages will rise about one-quarter of a percentage point (0.27 percent), roughly 4 percent of what workers are expected to gain, in real terms, over the next six years, if promised gains in output and employment are realized.
But there are strong reasons to doubt that these gains will be achieved. The ITC results show that the deal will yield remarkably small gains, and those gains rest on questionable assumptions about how the deal will help workers and the economy. Perhaps the most problematic finding in the ITC study (p. 25) was that labor provisions in the USMCA “would increase Mexico union wages by 17.2 percent, assuming that these provisions are enforced.” Given that unionization rates in the durable goods sectors of Mexican manufacturing are reported to be 20.2 percent (Table F.4), these would be massive impacts, indeed. Yet Mexican workers will not benefit unless there are mechanisms to ensure that labor rights enforcement does improve, but those provisions do not yet exist in the agreement.
Thus, it is not surprising to find that the AFL-CIO, other labor unions, and many members of Congress are demanding that “swift [and] certain enforcement tools” are included in the deal before it is submitted to Congress. These concerns also apply to segments of the agreement that pertain to the environment, access to medicines. Furthermore, the assumption that Mexican union wages will increase 17.2 percent seems especially heroic, within the 6-year adjustment period in the ITC model (p 23.), in light of the struggles that will be required to unionize such a large share of the labor force.
The ITC’s economic impact projections are built on a series of heroic assumptions that are built into its “computable general equilibrium (CGE) model.” The ITC model assumes the economy is always at full employment; that trade deals do not cause trade imbalances, job losses, growing income inequality, or downward pressure on the wages of most workers, and environmental damages;, and that the more expensive drugs, movies and software don’t otherwise harm consumers or the economy.
In particular, the ITC study assumes that the overall U.S. trade balance is unchanged by the deal (despite its significant changes in the rules of governing, trade, labor and the environment). Peter Dorman pointed out the problems with CGE models nearly two decades ago, as have many others, and yet the ITC staff, and other economists keep using them anyway.
Ex-Obama economic adviser Romer says fiscal stimulus is central to combatting recessions
For all the wrong reasons, the term “fiscal stimulus” became a dirty word in the wake of the Great Recession. Policymakers need to work hard to counter that perception before the next downturn hits.
President Barack Obama’s $800 billion spending plan is often criticized as having been ineffective. In reality, the plan played a crucial role in stemming a deepening economic slump, and if it fell short, it was because the aggressive one-time boost ultimately proved too small to counter the magnitude of the shocks at hand.
The fiscal boost during the latest expansion has been extraordinarily weak: Average annual fiscal impulse over five business cycles
| Peak-to-peak | 3 years from trough | |
|---|---|---|
| 1960s | 0.817810% | 0.981295% |
| 1980s | 0.456157 | 0.532855 |
| 1990s | -0.107879 | 0.480713 |
| 2000s | 0.772504 | 1.156552 |
| 2010s | 0.393282 | 0.074817 |
Note: For each fiscal component (taxes, transfers, and government consumption and investment), the quarterly growth rate is multiplied by its share relative to overall GDP to get a quarterly contribution to growth. For taxes, this calculation is then multiplied by negative one—highlighting that tax cuts boost spending while tax increases slow spending. The figure shows these quarterly contributions expressed as annualized rates. Government consumption and investment spending is adjusted for inflation with the component-specific price deflator available in the NIPA data. For taxes and transfers, the price deflator for personal consumption expenditures (PCE) is used.
Source: EPI analysis of data from Tables 1.1.4, 2.1, 3.1, and 3.9.4 from the National Income and Product Accounts (NIPA) of the Bureau of Economic Analysis (BEA).
Speaking at EPI’s Next Recession event this past Thursday, Christina Romer, who was Chair of the Council of Economic Advisers during the crisis, asked “What made it possible to use fiscal policy so aggressively at that particular moment in time?”
Bonuses are up one cent in 2018 since the GOP tax cuts passed
Data from the Bureau of Labor Statistics’ Employer Costs for Employee Compensation gives us a chance to look at workers’ bonuses in 2017 and 2018, to gauge the impact of the GOP’s Tax Cuts and Jobs Act of 2017. Last year, our analysis showed that bonuses rose by $0.02 between December 2017 and September 2018 (all calculations in this analysis are inflation-adjusted). The new data show that bonuses actually fell $0.22 between December 2017 and December 2018 and the average bonus for 2018 was just $0.01 higher than in 2017.
This is not what the tax cutters promised, or bragged about soon after the tax bill passed. They claimed that their bill would raise the wages of rank-and-file workers, with congressional Republicans and members of the Trump administration promising raises of many thousands of dollars within ten years. The Trump administration’s chair of the Council of Economic Advisers argued last April that we were already seeing the positive wage impact of the tax cuts:
A flurry of corporate announcements provide further evidence of tax reform’s positive impact on wages. As of April 8, nearly 500 American employers have announced bonuses or pay increases, affecting more than 5.5 million American workers.
Following the bill’s passage, a number of corporations made conveniently-timed announcements that their workers would be getting raises or bonuses (some of which were in the works well before the tax cuts passed). But as EPI analysis has shown there are many reasons to be skeptical of the claim that the TCJA, particularly its corporate tax cuts, will produce significant wage gains.
Restraining the power of the rich with a 10 percent surtax on incomes over $2 million*
Excessive wealth and power commanded by a small group of multi-millionaires and billionaires pose an existential threat to America’s economic vitality, democracy and civil society.
It’s well-known by now that the richest 1 percent of American households have essentially doubled the share of national income they claim since the late 1970s. Less well-known is that inequality has even risen sharply within the top 1 percent, with the top 10 percent of that overall group—or the top 0.1 percent—accounting for half of all income within the top 1 percent.1 In 2016, the latest year of available data, households with adjusted gross income (AGI) of over $2 million made up just over 0.1 percent of tax filers, but accounted for 100 times as much (10 percent) of total AGI.
The political clout of this topmost sliver of households is likely even more outsized then their share of overall income. This group’s incomes overwhelmingly stem from owning financial assets, not working in labor markets.2 This means that they benefit from the preferential tax treatment given to income from wealth relative to income from work. The Trump tax cut at the end of 2017 was tailor-made for very rich, as its largest cuts accrue to business owners—both corporate and non-corporate business.3
Cleaning up administrative records or targeting immigrants?
The Trump administration recently began implementing a “no-match” policy of flagging administrative records that don’t match what the Social Security Administration (SSA) has on file.
If you’ve been following the news in Georgia, you might think this is a reference to a tactic used by Georgia Secretary of State Brian Kemp to purge minorities from the state’s voter rolls right before the gubernatorial election he narrowly won against his Democratic opponent, Stacey Abrams. Not exactly, but both are related—and have civil rights implications.
Voter suppression efforts in Georgia and elsewhere have used a range of strategies to purge voters, including striking those whose names loosely matched those of dead people and felons and those whose names didn’t exactly match SSA or drivers’ license records (so much for consistency). In a legal challenge, civil rights groups noted that an estimated 80 percent of voters affected by the “exact match” policy were African American, Latino, or Asian American.
Now the Trump administration is reviving a failed policy of sending letters to employers informing them of apparent discrepancies between employee W-2 forms and SSA records. In this case, the ostensible goal is checking tax forms, not voter registrations, but both efforts use SSA data as a validity check and both disproportionately impact immigrants and people of color.
Housing discrimination underpins the staggering wealth gap between blacks and whites
Wealth is a crucially important measure of economic health—it allows families to transfer income earned in the past to meet spending demands in the future, such as by building up savings to finance a child’s college education.
That’s why it’s so alarming to see that, today still, the median white American family has twelve times the wealth that their black counterparts have. And that only begins to tell the story of how deeply racism has defined American economic history.
Enter EPI Distinguished Fellow Richard Rothstein’s widely praised book, “The Color of Law,” which delves into the very tangible but underappreciated root of the problem: systemic, legalized housing discrimination over a period of three decades—starting in the 1940s—prevented black families from having a piece of the American Dream of homeownership.
Research is vital to the moral integrity of social movements
The faith community has a long history of involvement in social movements for economic justice, bringing into focus the moral failings of our political and economic systems. I’m always struck when people say to me, “But you’re talking about morality, and we’re talking about money.” I answer, “You really think they’re different? You don’t recognize that a budget is a moral document? That policies are about moral decisions? That morality is not just about inspiration but about information?”
I realize that for some, the concept of a preacher writing for an economics blog might seem odd, but the link between what I do—as a pastor, architect of the Moral Monday movement and co-leader of The Poor People’s Campaign—and the research done by EPI is absolutely vital. One of the quickest ways for a movement to lose its integrity is to be loud and wrong. We’ve seen too many movements that have bumper sticker sayings but no stats and no depth. Researchers help to protect the moral integrity of a movement by providing sound analysis of the facts and issues at hand. Armed with this information, we’re able to pull back the cover and force society to see the hurt and the harm of the decisions that people are making.
In fact, I believe we find evidence of a relationship between religion, activism, and research that dates back to the prophets of the Bible. The prophets of the Bible were the social activists of their time. I say that because the only time prophets in ancient Israel rose to the fore was when the kings or the politicians and their court chaplains weren’t doing their job.
Progressive tax reform requires a healthy IRS
Internal Revenue Service (IRS) funding was in the news at the end of last year, after a series of articles by ProPublica detailed just how badly its resources had been gutted by cuts enacted by the Republican-controlled Congress. And the IRS remains in the news with ongoing pressure to release President Trump’s tax returns. Complaining about the IRS is a popular pastime for lots of Americans, and we would certainly agree that in recent years the IRS has spent too much time auditing low-income households—a recent ProPublica story notes, “the IRS audits Earned Income Tax Credit (EITC) recipients at higher rates than all but the richest Americans.” But the IRS needs mended not ended, with a large infusion of resources as well as a reorientation of its enforcement priorities. The reason for not giving up on having a functional IRS is simple: if we want a country where rich people and powerful corporations pay their fair share, we will need a higher-functioning IRS, and we should be willing to pay for it. The chart below shows the substantial budget and employment cuts at the IRS since 1994. IRS operating costs (in 2017 dollars) have declined 29 percent between 1994 and 2017 as a share of total returns filed. And those budget cuts have real consequences for IRS staffing; full time equivalent employees as a share of total returns filed has fallen by 42 percent since 1994.
IRS funding and employment have been cut drastically: IRS operating costs (in 2017 dollars) and average positions realized as a share of total returns, 1994–2017
| Average positions realized | Operating costs | |
|---|---|---|
| 1994 | 0.054% | 6.631% |
| 1995 | 0.054% | 6.528% |
| 1996 | 0.051% | 6.097% |
| 1997 | 0.047% | 5.624% |
| 1998 | 0.044% | 5.455% |
| 1999 | 0.044% | 5.662% |
| 2000 | 0.043% | 5.328% |
| 2001 | 0.043% | 5.452% |
| 2002 | 0.044% | 5.519% |
| 2003 | 0.044% | 5.679% |
| 2004 | 0.043% | 5.627% |
| 2005 | 0.042% | 5.722% |
| 2006 | 0.040% | 5.629% |
| 2007 | 0.039% | 5.395% |
| 2008 | 0.036% | 5.295% |
| 2009 | 0.039% | 5.903% |
| 2010 | 0.041% | 6.326% |
| 2011 | 0.040% | 6.080% |
| 2012 | 0.038% | 5.781% |
| 2013 | 0.036% | 5.422% |
| 2014 | 0.035% | 5.293% |
| 2015 | 0.033% | 4.939% |
| 2016 | 0.032% | 4.916% |
| 2017 | 0.031% | 4.697% |
Source: EPI analysis of data from table 2.3.3 from the National Income and Product Accounts (NIPA) from the Bureau of Economic Analysis (BEA) and IRS data books, 1995–2017
Since 2011, GAO found that the shrinking IRS workforce has come largely in enforcement, leading to agency officials telling GAO that declining staff was a key contributor to scaled back enforcement activities. Shrinking IRS enforcement is a boon largely for rich individuals and corporations, who have far greater opportunities to dodge taxes through creative accounting.
The IRS has not always been so hamstrung. A too-brief spell of increased budget and staff capacity from around 2008 to 2011 led to about a threefold increase in audit rates on households making over $1 million, while audit rates overall increased by just 11 percent, as did audit rates for EITC recipients making under $25,000. Overall audit rates for EITC recipients increased by just 4 percent. In short, when resources were adequate, the IRS (properly) focused its enforcement gaze where the money was.