The Fed shouldn’t give up on restoring labor’s share of income—and measure it correctly
U.S. workers’ wages have climbed modestly but noticeably over the past year. EPI’s nominal wage tracker shows that in 2015 and 2016, this growth averaged 2.4 percent, in 2017 it averaged 2.5 percent, but in 2018 it accelerated to 2.85 percent—and it surpassed 3 percent growth in the last quarter of the year. This uptick has been long-coming and it took a longer spell of low unemployment to spur it than most would have thought.
Three percent growth for a quarter, however, should not constitute “mission accomplished” in the minds of macroeconomic policymakers like the Federal Reserve. In the long run, nominal wage growth should run at a rate equal to the Fed’s inflation target (2 percent) plus the long-trend growth in potential productivity (let’s call this 1.5 percent).1 This indicates that even the recent accelerations in wage growth leave us failing to meet these long-run goals.
Even more importantly, wage growth should run substantially above these long-run targets for a spell of time after long periods of labor market slack. The arithmetic reasoning for this is straightforward: any time wage growth runs slower than current rates of inflation plus productivity, the result will be labor compensation shrinking as a share of the economy. The economic intuition is simply that extended periods of labor market slack sap workers’ ability to secure wage increases from employers.
This undermining of labor’s leverage shows up clearly in the data. EPI’s nominal wage tracker, besides charting wage growth over time, also tracks a measure of labor’s share of income, precisely to highlight the accumulated shortfall of labor income that policymakers should aim to restore.
What to Watch on Jobs Day: Furloughs and month-to-month volatility
The government shutdown adds several layers of complexity to interpreting January employment figures set for release on Friday. While I still plan to look at wage growth and the prime-age employment-to-population ratio to measure the slack that remains in the labor market, the effect of the extended partial government shutdown on the top-line employment numbers will get a lot of attention too. In this post, I will explore how the shutdown likely will and will not affect the numbers, along with a reminder about typical month-to-month volatility.
The reference period for the upcoming Current Employment Statistics (CES) and the Current Population Survey (CPS) is the pay period or week, respectively, including January 12, 2019. The 12th of January marks roughly the middle of the 35-day partial government shutdown. The shutdown directly affected three types of workers and their paychecks: government employees working without pay, government employees not working, and government contractors not working. Indirectly, the shutdown also affected workers who typically service government employees who were not working, but who are not directly paid for by government contracts—think restaurants, taxi cabs, and other services purchased by the government workforce.
Let’s start with the CES. Government workers, furloughed or not, will be counted as employed in the CES. As soon as the Government Fair Treatment Act of 2019 was signed into law, those furloughed workers were guaranteed their back pay and therefore count as employed workers. In other words, the effects of the furlough will not affect the count of federal jobs in the CES. The loss of private sector work, on the other hand, either as direct federal contractors or indirect employment that services government work, could register as a fall in private-sector employment or private-sector hours, or both.
The number of unionized U.S. workers edged lower to 16.4 million in 2018
The number of American workers represented by a labor union ticked down last year, extending a decades-long trend.
New data on union membership from the Bureau of Labor Statistics released on Friday showed 16.38 million unionized workers in 2018, down from 16.44 million in 2017. However, because employment of wage and salary workers grew by 1.6 percent between 2017 and 2018, the share of workers represented by a union declined by a more significant amount, from 11.9 percent to 11.7 percent.
In the private sector, the number of workers represented by a union ticked up slightly (+18,000). But due to the 1.7 percent increase in employment in the private sector, the share of private sector workers represented by a union declined, from 7.3 percent to 7.2 percent.
The losses were greater in the public sector. The number of public sector workers represented by a union declined by 83,000, while the share of public sector workers represented by a union declined by seven-tenths of a percentage point, from 37.9 percent to 37.2 percent. The drop was largest at the state government level, with the share of state government workers represented by a union dropping from 33.4 percent to 31.8 percent.
Reliable data is one of the many victims of the government shutdown
One of the many things we rely on the federal government for is timely, accurate, independent, and publicly available data that is used by households, businesses, and policymakers to make informed economic decisions. Of the many negative effects of the government shutdown, there have been some “data casualties,” including the release of Current Population Survey (CPS) public microdata files. These files are the source data for monthly reports on the unemployment and labor force participation rates, key timely barometers of the nation’s economic health. This microdata also forms the basis of much of the research that EPI and other research organizations and academics conduct. EPI urges the president to end the government shutdown so that federal employees and contractors can receive their paychecks again, researchers at EPI and elsewhere can continue to provide current economic analysis, businesses and households can make economic plans with fuller information, and the new Congress can make well-researched policy choices.
The Current Population Survey (aka the Household Survey), which is used to measure the nation’s unemployment rate (along with many other measures of labor market health), is collected and analyzed through a partnership between the Bureau of Labor Statistics (BLS) and the Census Bureau. Every month, a few weeks after BLS releases the monthly jobs report with CPS-derived estimates of unemployment and labor force participation, Census releases a version of the CPS microdata for public use. These public-use extracts allow for analysis beyond what’s available in tables published by BLS. For example, the jobs report includes an enormous amount of information on employment status by race/ethnicity, gender, age, education, and a variety of other demographic characteristics. However, to look at how the employment status of young people with a high school degree differs by race, you need to use the CPS microdata to run your own analysis. The CPS microdata is also a key source for assessing trends in wage growth for workers at different points in the wage distribution—an assessment we make annually at EPI and which will be delayed by this week’s announcement.
Au pair lawsuit reveals collusion and large-scale wage theft from migrant women through State Department’s J-1 visa program
Last week, the Associated Press (AP) reported on a proposed settlement agreement for $65.5 million between a dozen former au pairs from Colombia, Australia, Germany, South Africa, and Mexico who were brave enough to bring a lawsuit against the companies that recruited them to work the United States. Thanks to the former au pairs and the tireless efforts of the smart lawyers at Towards Justice, a nonprofit organization in Denver, nearly 100,000 young migrant workers (mostly women) will finally receive some portion of the wages they should have been paid while working in the United States providing low-cost child care to Americans.
The migrant au pairs doing this work as in-home caretakers were employed in the United States through the U.S. State Department’s Au Pair program, one of 15 programs in State’s J-1 visa Exchange Visitor Program. Each year about 20,000 au pairs are hired by American families, assisted by J-1 “sponsors,” which can be either for-profit companies or nonprofit organizations that act as labor recruiters for families looking to hire foreign au pairs, and to which the State Department has mostly outsourced the management and oversight of the J-1 visa program. The sponsors make money by charging the au pairs to participate in the program, as well as by charging fees to families in order to connect them to au pairs. According to the AP, in the lawsuit the au pairs claimed that the:
15 companies authorized to bring au pairs to the United States colluded to keep their wages low, ignoring overtime and state minimum wage laws and treating the federal minimum wage for au pairs as a maximum amount they can earn. In some cases, the lawsuit said, families pushed the limits of their duties, requiring au pairs to do things like feed backyard chickens, help families move and do gardening, and not allowing them to eat with the family.
The economy has made great strides since the recession, but some weakness lingers
With today’s Bureau of Labor Statistics (BLS) jobs report we can look at the entirety of 2018—putting the year as a whole in perspective and comparing 2018 with other years. Yesterday, I provided a fairly broad overview of the first 11 months of 2018 including context since the last business cycle peak before the Great Recession (2007) and the last time the U.S. economy was at full employment (2000).
As the recovery has strengthened we’ve seen improvements in all measures of employment, unemployment, and wage growth. These measures tell a consistent story—an economy on its way to full employment, but not there yet. Taking a data-driven approach to policymaking would mean continuing to push to reduce slack, keeping interest rates from rising further and letting the economy recover for Americans across races, ethnicities, ages, levels of educational attainment, and areas of the country.
Payroll employment growth in December was 312,000, bringing average job growth in 2018 up to 220,000. As shown in the figure below, job growth during this time period was a bit higher than in 2017. This can be attributed to the shift in federal policy from austerity to stimulus in the form of both tax cuts and a nearly $300 billion increase in government spending.
Average monthly total nonfarm employment growth, 2006–2018
| Year | Average monthly total nonfarm employment growth |
|---|---|
| 2006 | 175 |
| 2007 | 96 |
| 2008 | -297 |
| 2009 | -422 |
| 2010 | 88 |
| 2011 | 174 |
| 2012 | 179 |
| 2013 | 192 |
| 2014 | 250 |
| 2015 | 226 |
| 2016 | 195 |
| 2017 | 182 |
| 2018 | 220 |
Source: Data are from the Current Employment Statistics (CES) series of the Bureau of Labor Statistics and are subject to occasional revisions.
What to Watch on Jobs Day: An assessment of the 2018 labor market, 11 years since the start of the Great Recession
The last Bureau of Labor Statistics (BLS) jobs report of 2018 comes out on Friday, giving us a chance to step back and look at how working people fared over the entire year. The report also marks the 11th anniversary of the official start of the Great Recession. My expectation is that the December data will confirm that, while by some measures the economy has nearly recovered its immediate pre-Great Recession health, by other measures it is still somewhat weaker than in 2007—the last year before the Great Recession hit. Further, as I have often noted, 2007 should not be considered a benchmark for a fully healthy economy for America’s workers. Almost all labor market measures were notably weaker in 2007 than they were at the previous business cycle peak in 2000. There was very little reason to think that the U.S. economy in 2007 was at full employment. If one looks at the stronger business cycle peak of 2000 as a more appropriate benchmark, the economy in 2018 looks even further from full employment. Many working people are still not seeing the recovery reflected in their paychecks—and the economy will not be at genuine full employment until employers are consistently offering workers meaningfully higher wages.
In this blog post—and Friday when the December numbers come out—I’m going to look at average payroll employment growth over the last several years. Because there is always a bit of volatility in the monthly data—especially in the household series that has a smaller sample size—taking a year-long approach allows us to smooth out the bumps and take stock of the key measures: payroll employment growth, the unemployment rate, the employment-to-population ratio, and nominal wage growth.
Over 5 million workers will have higher pay on January 1 thanks to state minimum wage increases
On January 1, 2019, 19 states will raise their minimum wages, lifting pay for 5.2 million workers across the country.1 The increases, which range from a $0.05 inflation adjustment in Alaska to a $2.00 per hour increase in New York City, will give affected workers approximately $5.3 billion in increased wages over the course of 2019. Affected workers who work year-round will see their annual pay go up between $90 and $1,300, on average, depending on the size of the minimum wage change in their state.
The map below describes the impacts of each state increase, which are also summarized in Table 1. Note that these estimates do not account for changes in local minimum wages.2 There are 24 cities and counties with higher local minimum wages taking effect on January 1, all of which can be found in EPI’s Minimum Wage Tracker. They also do not include any “indirectly affected workers” already making more than the new minimum wage who receive raises as employers adjust their overall pay scales.
Increases in eight states are the result of automatic adjustments for inflation. In Alaska, Florida, Minnesota, Montana, New Jersey, Ohio, South Dakota, and Vermont, the minimum wage is adjusted each year to reflect changes in prices over the preceding year—thereby ensuring that the minimum wage supports the same level of spending year after year.
In five states—California, Delaware, Massachusetts, New York, and Rhode Island—the increases reflect new minimum wage levels set by state legislatures. Several of these increases, such as those in California, Massachusetts, and New York, are intermediate steps as these states gradually raise their minimum wages to $15 per hour. In 2017, congressional Democrats proposed raising the federal minimum wage to $15 by 2024, which would lift pay for an estimated 41 million U.S. workers, but the bill was never allowed to come to a vote. Lawmakers in Congress have not raised the federal minimum wage since 2007, and since the last federal increase took effect, the purchasing power of the federal minimum wage has declined by over 12 percent.
The failure of Trump’s trade and manufacturing policy
A shorter version of this post appeared in the Detroit News on 12/2/2018: GM Cutbacks a result of overvalued dollar.
Last month, General Motors announced plant closures in the U.S. that could lead to roughly 14,700 layoffs by the end of 2019. The shutdowns will have the biggest impact in industrial states like Ohio and Michigan, where key plants in Detroit-Hamtramck, Lordstown, and Warren are being closed. But the closures also have wider implications for American industry—and not just the machine shops and fabricators that produce rubber, steel, and glass components for auto assembly. America’s manufacturers are all struggling with the same issue—an overvalued dollar that puts them at risk from rising trade deficits. And it all derives from flawed Trump administration economic policies.
Trump’s tax cuts and increased government spending for defense and nondefense needs are widening the U.S. budget deficit, which will top $1 trillion in 2020 (5 percent of GDP). On top of that, Trump’s tariffs on China have backfired. China has reduced the value of the yuan 10 percent this year, and its trade surplus with the United States has increased 10 percent over the same period last year—even faster than the overall U.S. goods trade deficit, which is up 9.4 percent in the same period. The IMF projects that the overall U.S. current account deficit (the broadest measure of trade in goods, services and income) will nearly double over the next four years.
As a result of the rising dollar and increasing current account deficit, the U.S. goods trade deficit will increase to between $1.2 trillion and $2 trillion by 2020, an increase of $400 billion to $1.2 trillion above the $807 billion U.S. goods trade deficit in 2017, as shown below. This will directly eliminate between 2.5 and 7.5 million U.S. jobs, mostly in manufacturing (because 85 percent of U.S. goods trade consists of manufactured products). The collapse in output, especially in the capital intensive manufacturing sector, will decimate investment—and taken together, both will result in large additional job losses as income and spending collapse, resulting in a steep recession if nothing is done to reduce the over-valued dollar. The dollar must fall by at least 25 to 30 percent (on a real, trade-weighted basis) to rebalance U.S. trade and avert the coming trade tsunami that’s baked into the economy as a result of the rising trade deficit.
The bad economics of PAYGO swamp any strategic gain from adopting it
The obscure Congressional budget rule known as PAYGO (“pay as you go”) has burst into the news lately. A PAYGO rule means that any tax cut or spending increase passed into law needs to be offset in the same spending cycle with tax increases or spending cuts elsewhere in the budget. Incoming House Speaker Nancy Pelosi has indicated that the House of Representatives will abide by PAYGO in the next Congress, and this decision has sparked much controversy.
Many Washington insiders assert forcefully that committing to PAYGO rules in the House for the next Congress is good politics. The argument is that it assuages fears of politicians who believe they must make public commitments to lower deficits to avoid being punished by voters who care deeply about this issue. If voters do indeed have strong preferences for reducing deficits, then policymakers—even those who want to use fiscal policy to reduce inequality by expanding public spending and investment—must first commit to PAYGO to convince these voters that budget measures can both reduce inequality and be fiscally “responsible.”
The strength of evidence supporting this political claim is debatable. What’s less debatable is that PAYGO really has hindered progressive policymaking in the not-so-recent past. For example, it was commitments to adhere to PAYGO that led to the Affordable Care Act (ACA) having underpowered subsidies for purchasing insurance and, even more importantly, having a long lag in implementation; the law passed in January 2010 yet the exchanges with subsidies only were up and running by 2014. This implementation lag meant that the ACA’s benefits were not as sunk into Americans’ economic lives by the time a hostile Republican Congress and administration began launching attacks on it following the 2016 elections. It is a real testament to how much better the ACA made life for Americans that it has been stubbornly resistant to these attacks. But it would have been helpful to have a couple more years to have it running smoothly, but that didn’t happen largely because the ACA’s architects wanted to meet PAYGO rules over the 10-year budget window.