As cities and states pass bold increases in the minimum wage, we need to update our thinking about its costs
The last few years has seen a major shift in minimum wage policies as states like California and New York and cities like Seattle and Washington, DC, have passed laws phasing in a $15 minimum wage, targeting bolder increases than had been the pattern over the last two decades. Federal proposals such as the Raise the Wage Act of 2017, which would bring the minimum wage to $15 by 2024, are consistent with these bolder local approaches. This is bold, as it mandates a 71.9 percent real increase in the minimum wage. But even this bold increase only brings the minimum wage to 29 percent above its 1968 purchasing power, despite productivity nearly doubling over the same timeframe. Many policymakers have concluded, in effect, that years of modest or no change in the minimum wage have created a situation where bold increases are required just to move the minimum wage closer to being a living wage.
This shift in policy now necessitates a rethinking of the flawed way we have evaluated minimum wage increases over the last few decades. There have been, in particular, two flaws. One was first highlighted by economists Fiedler, Howell, and Luce, who noted that public discussion of various minimum wage proposals, including among economists, tends to center solely on whether there will be any job loss. In effect, minimum wage proposals are being evaluated according to a “no job loss” criterion, which specifies that the “right” wage floor is the one that previous research has demonstrated will pose little or no risk of future job loss, anywhere.” A no job loss criterion implies that if a minimum wage increase has any costs (whether loss of employment or work hours), regardless of benefits, then it is inappropriate.
Minnesota and Wisconsin had similar job growth trajectories leading up to the Great Recession, but not after it
Earlier this week, EPI released an analysis of economic performance in Wisconsin and Minnesota since 2010, which showed that by virtually every available measure, Minnesota has outperformed Wisconsin. This is notable because lawmakers in the two states adopted vastly different policy agendas coming out of the recession. Wisconsin adopted a highly conservative agenda of cutting taxes, shrinking government, and weakening unions. Minnesota, in contrast, enacted many key progressive priorities: raising the minimum wage, strengthening safety net programs and labor standards, and boosting public investment in infrastructure and education, financed by raising taxes, primarily on the wealthy.
Skeptical readers might argue that as much as the two states are similar, they are sufficiently different such that the diverging economic outcomes observed in our report are the result of fundamental differences in the two states’ economies and that state policy decisions were largely irrelevant. I think there’s ample evidence to indicate that such readers are wrong. In the paper, I discuss some of the policy decisions—such as those around Medicaid expansion, investment in infrastructure, and worker organizing—where one can draw a fairly straight line from the policy decision to the observed economic result. I also note that wage growth was actually stronger in Wisconsin than Minnesota in the seven years prior to Great Recession.
It’s also instructive to compare job growth in the two states in the economic expansion prior to the Great Recession. The data suggest that whatever their differences, prior to the recession, Wisconsin and Minnesota followed a very similar trajectory for employment growth.
Minnesota and Wisconsin had similar job growth trends leading up to the Great Recession, but not after it: Employment levels relative to the start of Governor Walker and Governor Dayton’s terms (Jan 2011)
| UNITED STATES | Minnesota | Wisconsin | |
|---|---|---|---|
| Nov-2001 | 100.2% | 100.5% | 101.6% |
| Dec-2001 | 100.1% | 100.2% | 101.3% |
| Jan-2002 | 100.0% | 100.2% | 101.5% |
| Feb-2002 | 99.9% | 100.2% | 101.5% |
| Mar-2002 | 99.9% | 100.0% | 101.5% |
| Apr-2002 | 99.8% | 100.0% | 101.4% |
| May-2002 | 99.8% | 100.0% | 101.4% |
| Jun-2002 | 99.9% | 100.1% | 101.4% |
| Jul-2002 | 99.8% | 100.3% | 101.3% |
| Aug-2002 | 99.8% | 100.1% | 101.4% |
| Sep-2002 | 99.7% | 100.3% | 101.2% |
| Oct-2002 | 99.8% | 100.0% | 101.6% |
| Nov-2002 | 99.8% | 100.2% | 101.8% |
| Dec-2002 | 99.7% | 100.0% | 101.5% |
| Jan-2003 | 99.8% | 100.1% | 101.2% |
| Feb-2003 | 99.7% | 100.1% | 101.3% |
| Mar-2003 | 99.5% | 100.0% | 101.1% |
| Apr-2003 | 99.5% | 100.1% | 101.2% |
| May-2003 | 99.5% | 100.1% | 101.2% |
| Jun-2003 | 99.5% | 99.9% | 101.1% |
| Jul-2003 | 99.5% | 99.9% | 100.7% |
| Aug-2003 | 99.5% | 100.0% | 100.7% |
| Sep-2003 | 99.5% | 100.0% | 100.9% |
| Oct-2003 | 99.7% | 99.8% | 101.3% |
| Nov-2003 | 99.7% | 99.7% | 101.3% |
| Dec-2003 | 99.8% | 99.9% | 101.4% |
| Jan-2004 | 99.9% | 99.8% | 101.5% |
| Feb-2004 | 100.0% | 99.9% | 101.6% |
| Mar-2004 | 100.2% | 100.0% | 101.7% |
| Apr-2004 | 100.4% | 100.6% | 101.8% |
| May-2004 | 100.6% | 100.8% | 102.0% |
| Jun-2004 | 100.7% | 100.8% | 102.1% |
| Jul-2004 | 100.7% | 100.8% | 102.5% |
| Aug-2004 | 100.8% | 100.9% | 102.8% |
| Sep-2004 | 100.9% | 101.0% | 102.4% |
| Oct-2004 | 101.2% | 101.3% | 102.8% |
| Nov-2004 | 101.3% | 101.3% | 102.8% |
| Dec-2004 | 101.4% | 101.4% | 102.8% |
| Jan-2005 | 101.5% | 100.9% | 102.8% |
| Feb-2005 | 101.7% | 101.2% | 103.1% |
| Mar-2005 | 101.8% | 101.3% | 103.2% |
| Apr-2005 | 102.0% | 102.0% | 103.5% |
| May-2005 | 102.2% | 102.3% | 103.3% |
| Jun-2005 | 102.4% | 102.1% | 103.2% |
| Jul-2005 | 102.6% | 102.6% | 103.5% |
| Aug-2005 | 102.8% | 102.7% | 103.6% |
| Sep-2005 | 102.8% | 102.9% | 103.9% |
| Oct-2005 | 102.9% | 103.0% | 103.7% |
| Nov-2005 | 103.2% | 103.1% | 103.8% |
| Dec-2005 | 103.3% | 103.2% | 104.0% |
| Jan-2006 | 103.5% | 103.6% | 104.0% |
| Feb-2006 | 103.7% | 103.7% | 104.1% |
| Mar-2006 | 104.0% | 103.9% | 104.2% |
| Apr-2006 | 104.1% | 103.7% | 104.4% |
| May-2006 | 104.1% | 103.4% | 104.2% |
| Jun-2006 | 104.2% | 103.7% | 104.5% |
| Jul-2006 | 104.3% | 103.6% | 104.4% |
| Aug-2006 | 104.5% | 103.6% | 104.4% |
| Sep-2006 | 104.6% | 103.6% | 104.5% |
| Oct-2006 | 104.6% | 103.4% | 104.4% |
| Nov-2006 | 104.7% | 103.5% | 104.5% |
| Dec-2006 | 104.9% | 103.8% | 104.6% |
| Jan-2007 | 105.1% | 104.0% | 104.7% |
| Feb-2007 | 105.1% | 104.1% | 104.7% |
| Mar-2007 | 105.3% | 104.2% | 104.8% |
| Apr-2007 | 105.3% | 104.1% | 104.8% |
| May-2007 | 105.4% | 104.0% | 105.0% |
| Jun-2007 | 105.5% | 104.2% | 105.4% |
| Jul-2007 | 105.5% | 104.2% | 105.1% |
| Aug-2007 | 105.5% | 104.1% | 105.1% |
| Sep-2007 | 105.5% | 104.0% | 105.1% |
| Oct-2007 | 105.6% | 104.0% | 104.8% |
| Nov-2007 | 105.7% | 104.1% | 104.8% |
| Dec-2007 | 105.8% | 104.1% | 105.0% |
| Jan-2008 | 105.8% | 104.3% | 105.2% |
| Feb-2008 | 105.7% | 104.5% | 105.2% |
| Mar-2008 | 105.7% | 104.4% | 105.0% |
| Apr-2008 | 105.5% | 104.1% | 104.9% |
| May-2008 | 105.3% | 104.1% | 105.0% |
| Jun-2008 | 105.2% | 104.0% | 104.9% |
| Jul-2008 | 105.1% | 103.9% | 104.8% |
| Aug-2008 | 104.9% | 103.8% | 104.6% |
| Sep-2008 | 104.5% | 103.6% | 104.7% |
| Oct-2008 | 104.1% | 103.4% | 104.3% |
| Nov-2008 | 103.6% | 103.0% | 104.0% |
| Dec-2008 | 103.0% | 102.5% | 103.4% |
| Jan-2009 | 102.4% | 101.8% | 102.5% |
| Feb-2009 | 101.9% | 101.2% | 101.9% |
| Mar-2009 | 101.3% | 100.6% | 101.1% |
| Apr-2009 | 100.7% | 100.0% | 100.3% |
| May-2009 | 100.5% | 100.0% | 100.3% |
| Jun-2009 | 100.1% | 99.4% | 99.8% |
| Jul-2009 | 99.8% | 99.3% | 99.4% |
| Aug-2009 | 99.7% | 99.0% | 99.1% |
| Sep-2009 | 99.5% | 98.4% | 99.1% |
| Oct-2009 | 99.4% | 98.8% | 99.1% |
| Nov-2009 | 99.4% | 98.8% | 98.9% |
| Dec-2009 | 99.2% | 98.9% | 98.9% |
| Jan-2010 | 99.2% | 98.7% | 98.9% |
| Feb-2010 | 99.1% | 98.6% | 98.9% |
| Mar-2010 | 99.3% | 98.7% | 99.0% |
| Apr-2010 | 99.4% | 99.0% | 99.4% |
| May-2010 | 99.8% | 99.2% | 99.5% |
| Jun-2010 | 99.7% | 99.2% | 99.4% |
| Jul-2010 | 99.7% | 99.1% | 99.5% |
| Aug-2010 | 99.7% | 99.3% | 99.6% |
| Sep-2010 | 99.6% | 98.9% | 99.6% |
| Oct-2010 | 99.8% | 99.6% | 99.9% |
| Nov-2010 | 99.9% | 99.7% | 99.9% |
| Dec-2010 | 100.0% | 99.7% | 99.9% |
| Jan-2011 | 100.0% | 100.0% | 100.0% |
| Feb-2011 | 100.1% | 100.1% | 100.1% |
| Mar-2011 | 100.3% | 100.3% | 100.2% |
| Apr-2011 | 100.6% | 100.5% | 100.3% |
| May-2011 | 100.6% | 100.8% | 100.3% |
| Jun-2011 | 100.8% | 100.8% | 100.2% |
| Jul-2011 | 100.9% | 100.2% | 100.7% |
| Aug-2011 | 101.0% | 101.1% | 100.6% |
| Sep-2011 | 101.1% | 101.6% | 100.7% |
| Oct-2011 | 101.3% | 101.4% | 100.5% |
| Nov-2011 | 101.4% | 101.5% | 100.5% |
| Dec-2011 | 101.6% | 101.6% | 100.8% |
| Jan-2012 | 101.8% | 101.7% | 100.6% |
| Feb-2012 | 102.0% | 101.8% | 100.8% |
| Mar-2012 | 102.2% | 102.2% | 101.4% |
| Apr-2012 | 102.3% | 102.5% | 101.7% |
| May-2012 | 102.4% | 102.1% | 101.6% |
| Jun-2012 | 102.4% | 102.3% | 101.6% |
| Jul-2012 | 102.5% | 102.0% | 101.2% |
| Aug-2012 | 102.7% | 102.4% | 101.4% |
| Sep-2012 | 102.8% | 103.0% | 101.6% |
| Oct-2012 | 102.9% | 103.0% | 101.8% |
| Nov-2012 | 103.0% | 103.2% | 102.1% |
| Dec-2012 | 103.2% | 103.3% | 101.9% |
| Jan-2013 | 103.4% | 103.7% | 101.6% |
| Feb-2013 | 103.6% | 104.0% | 102.2% |
| Mar-2013 | 103.7% | 104.1% | 102.3% |
| Apr-2013 | 103.8% | 103.4% | 101.9% |
| May-2013 | 104.0% | 104.0% | 102.3% |
| Jun-2013 | 104.1% | 104.2% | 102.5% |
| Jul-2013 | 104.2% | 103.7% | 102.5% |
| Aug-2013 | 104.4% | 104.2% | 102.7% |
| Sep-2013 | 104.6% | 104.7% | 102.9% |
| Oct-2013 | 104.7% | 104.8% | 103.0% |
| Nov-2013 | 104.9% | 104.9% | 103.0% |
| Dec-2013 | 105.0% | 105.0% | 103.1% |
| Jan-2014 | 105.1% | 104.9% | 103.3% |
| Feb-2014 | 105.2% | 105.0% | 103.3% |
| Mar-2014 | 105.4% | 105.0% | 103.4% |
| Apr-2014 | 105.7% | 105.0% | 103.6% |
| May-2014 | 105.9% | 105.6% | 103.8% |
| Jun-2014 | 106.1% | 105.8% | 104.0% |
| Jul-2014 | 106.3% | 105.9% | 104.1% |
| Aug-2014 | 106.4% | 106.0% | 104.5% |
| Sep-2014 | 106.6% | 105.9% | 104.5% |
| Oct-2014 | 106.8% | 106.1% | 104.5% |
| Nov-2014 | 107.1% | 106.3% | 104.9% |
| Dec-2014 | 107.3% | 106.4% | 104.8% |
| Jan-2015 | 107.4% | 106.4% | 104.9% |
| Feb-2015 | 107.6% | 106.6% | 105.0% |
| Mar-2015 | 107.7% | 106.7% | 105.1% |
| Apr-2015 | 107.9% | 106.9% | 105.2% |
| May-2015 | 108.2% | 107.3% | 105.4% |
| Jun-2015 | 108.3% | 107.4% | 105.5% |
| Jul-2015 | 108.5% | 107.6% | 105.7% |
| Aug-2015 | 108.6% | 107.5% | 105.7% |
| Sep-2015 | 108.7% | 107.4% | 105.8% |
| Oct-2015 | 109.0% | 107.8% | 105.9% |
| Nov-2015 | 109.2% | 108.0% | 105.9% |
| Dec-2015 | 109.3% | 108.0% | 106.2% |
| Jan-2016 | 109.4% | 108.1% | 106.5% |
| Feb-2016 | 109.6% | 108.3% | 106.6% |
| Mar-2016 | 109.8% | 108.3% | 106.6% |
| Apr-2016 | 109.9% | 108.5% | 106.8% |
| May-2016 | 109.9% | 108.5% | 106.6% |
| Jun-2016 | 110.2% | 108.2% | 106.5% |
| Jul-2016 | 110.4% | 109.0% | 106.9% |
| Aug-2016 | 110.5% | 109.2% | 107.1% |
| Sep-2016 | 110.7% | 109.2% | 107.0% |
| Oct-2016 | 110.9% | 109.1% | 106.9% |
| Nov-2016 | 111.0% | 109.3% | 107.2% |
| Dec-2016 | 111.1% | 109.2% | 107.0% |
| Jan-2017 | 111.3% | 109.9% | 107.3% |
| Feb-2017 | 111.5% | 110.0% | 107.4% |
| Mar-2017 | 111.5% | 110.2% | 107.4% |
| Apr-2017 | 111.7% | 109.9% | 107.4% |
| May-2017 | 111.8% | 110.0% | 107.4% |
| Jun-2017 | 112.0% | 110.1% | 107.5% |
| Jul-2017 | 112.1% | 110.3% | 107.5% |
| Aug-2017 | 112.3% | 110.2% | 107.4% |
| Sep-2017 | 112.3% | 110.3% | 107.4% |
| Oct-2017 | 112.5% | 110.6% | 107.5% |
| Nov-2017 | 112.7% | 110.6% | 107.5% |
| Dec-2017 | 112.8% | 110.7% | 107.8% |
Source: EPI analysis of Current Employment Statistics data from the Bureau of Labor Statistics
Figure A shows the number of jobs in Wisconsin, Minnesota, and the United States from November 2001 to December 2017, relative to the number of jobs in each geography in January 2011, the month that Governors Walker and Dayton took office. As you can see from the figure, changes in the level of jobs throughout the business cycle leading up to the Great Recession were remarkably similar between the two states. Both Minnesota and Wisconsin had modest job losses in the beginning of the period in the wake of the early 2000s recession, followed by modest job growth that tracked the U.S. average for a while and then flattened out for roughly the last two years prior to the onset of the Great Recession. In that earlier business cycle from November 2001 to December 2007, cumulative job growth was 3.7 percent in Minnesota and 3.3 percent in Wisconsin. Subsequently, the two states suffered losses in the recession that were similar, albeit slightly more severe in Wisconsin—with losses of 4.3 percent and 4.9 percent in Minnesota and Wisconsin, respectively, from December 2007 to December 2010.
The period from January 2011 to December 2017, after Governors Walker and Dayton assumed office, shows a starkly different picture. From early on in the recovery, Minnesota’s job growth accelerated noticeably more quickly than Wisconsin’s and the gap between the two states has increased fairly steadily ever since.
The Workplace Democracy Act restores workers’ bargaining power
Last Friday’s jobs report showed that the unemployment rate fell to 3.9 percent, the first time is has dipped below 4.0 percent since 2000. While many factors contribute to the overall unemployment rate—including labor force participation rates—policymakers should take note that a tightening labor market is not resulting in higher wages for working people. Nominal wage growth continues to fall short, rising only 2.6 percent over the year. One significant reason workers have been unable to insist on an increase in their paychecks is the uniquely low bargaining clout of U.S. workers.
While 60 percent of adults have a favorable view of labor unions, the most recent data available on union membership shows that, as of 2017, only 10.7 percent of wage and salary workers were union members. This disconnect is the result of decades of fierce opposition to unions and collective bargaining. These efforts have led to the enactment of state laws weakening—and even repealing—collective bargaining rights. At the federal level, corporate lobbyists have blocked attempts to reform outdated labor laws, enabling employers to exploit loopholes in the law and defeat workers’ organizing efforts. It is now standard practice for private employers to hire union avoidance consultants to quash workers’ efforts to unionize. Nearly ten years ago, a study found that roughly one-third of private sector employers fire workers during an organizing effort and over half of employers threaten to close the worksite if workers unionize. It is likely that employer opposition has intensified over the last decade, leaving more workers vulnerable to unlawful retaliation for exercising rights promised them over 80 years ago.
The Workplace Democracy Act, introduced today by Senator Bernie Sanders and several Democratic cosponsors, would begin to restore workers’ right to join together to improve their wages and working conditions. The legislation includes many critical reforms including closing loopholes in the law that enable employers to misclassify workers, denying them the right to organize. The bill also ensures that employers cannot subcontract their way out collective bargaining. And, the legislation ensures that working people have meaningful leverage in the workplace. These reforms would give U.S. workers more bargaining clout which is necessary to ensure a just economy.
The Supreme Court is poised to make forced arbitration nearly inescapable
The Supreme Court will soon decide whether employers can lawfully require workers to sign mandatory arbitration agreements that include class and collective action waivers. A ruling in NLRB v. Murphy Oil USA, Inc., Epic Systems Corp. v. Lewis, and Ernst & Young LLP v. Morris will have significant impacts on working people. If the Court sides with employers and the Trump administration, it is likely that the majority of workers in this country will be required, as a condition of employment, to sign away their right to pursue workplace disputes on a collective or class basis. In fact, available data suggest that it may take only six years for more than 80 percent of workplaces to adopt mandatory arbitration with class and collective action waivers.
Last year, EPI commissioned a survey that found that 53.9 percent of nonunion private-sector employers already have mandatory arbitration procedures. Prior to that study, the one major governmental effort to investigate the extent of mandatory arbitration was a 1995 GAO survey. That survey, conducted between April 1994 and April 1995, found that just 7.6 percent of employers had mandatory arbitration agreements. In other words, the use of mandatory arbitration agreements grew by more than 600 percent between 1994 and 2017. Using the growth rates between the two surveys to forecast future expansion suggests that by 2024, more than 80 percent of private sector, non-union establishments will adopt mandatory arbitration with class and collective action waiver of employment disputes, if the Court finds that such agreements are lawful.1 That will leave more than 85 million workers subject to mandatory arbitration agreements with class and collective action waivers. This means that the vast majority of workers will be forced to sign away their right to act with their colleagues to resolve workplace disputes—as well as their right to go to court for these matters. As a result, even if many workers face the same type of issue at work, each individual worker will be forced to hire their own lawyer, and resolve their dispute out of court, behind closed doors, with only their employer and a private arbitrator.
What to Watch on Jobs Day: Stronger wage growth as labor market slack continues to decline
While payroll employment growth was particularly weak in March, over the longer-term employment growth has been more than enough to keep up with growth in the working age population and even pull additional people off the sidelines and into the labor market. Labor force participation still has a way to go to reach full employment levels, but the trend continues to move in the right direction. And, make no mistake, we’ve never thought these displaced workers would be sitting on the sidelines forever. In fact, we’ve been expecting the workers to return to the labor force for years.
As those sidelined workers start dwindling in numbers, we should expect stronger and stronger wage growth. Continued slow wage growth tells us that employers still hold most of the cards, and don’t have to offer higher wages to attract workers. In other words, workers have very little leverage to bid up their wages. Therefore, wage growth remains one of the most important indicators to watch in Friday’s jobs report. The fact that nominal wage growth is still below target levels is a clear sign that the economy has yet to clearly reach full employment.
Alas, nominal wage growth for private-sector workers and even nominal wage growth for production/nonsupervisory workers offers only a limited view on wage growth in the economy today. One of the major benefits of a full employment economy is that wage growth isn’t simply strong for workers at the top of the wage distribution or for workers with more educational attainment. Younger workers, black workers, workers with lower levels of educational attainment, and workers at the middle and bottom of the wage distribution are disproportionately boosted in a stronger economy just as they are disproportionately harmed in a weaker one. Research has shown that for each percentage point decline in the unemployment rate, there is stronger wage growth in the lower part of the wage distribution than in the higher part (in particular, see Figure F here). Similarly, black workers saw disproportionately stronger opportunities for employment and wage growth in the latter part of the 1990s recovery than white workers did. Workers whose prospects fall farther in recessions see these prospects grow faster when times are good.
Let’s fight for working people on Workers’ Memorial Day
April 28 is Workers’ Memorial Day, an international remembrance day set aside to “mourn for the dead, and fight like hell for the living,” in the words of the immortal labor organizer Mother Jones.
In 2016, nearly 5,200 workers were killed on the job in the United States—14 workers every day—the highest number of workplace deaths in years. But that is only a part of the deadly toll: each year, more than 50,000 workers die from work-related disease. With this awful trend, any rational government would be proposing a significant increase in the budgets of our worker protection agencies and a rapid expansion of regulatory protections for workers.
Unless you’re just waking up from a 15-month nap, you know that workers’ rights—and especially worker safety and health—are under attack by the Trump administration like never before. And not only are workers under attack in their workplaces, but thanks to actions by the Environmental Protection Agency (EPA), the Interior Department, the Department of Agriculture and others, they’re also under attack where they live, where they eat, and where they vacation.
But these attacks didn’t originate in the fevered dreams of Donald Trump. What we’re seeing is the attempted wholesale implementation of the long-standing wish list of the conservative anti-worker Republicans, the Chamber of Commerce, and its anti-worker corporate allies.
And the attacks are not just aimed at the Occupational Safety and Health Administration (OSHA), but at a variety of other agencies— and even the scientific process underlying the ability of government agencies to legally protect workers from getting injured, killed, or sickened in the workplace.
It would take a long time to detail every attack on worker safety and the safety of the communities they live in, but I’ll list just a few here:
One of Donald Trump’s first actions as president was to issue an executive order requiring agencies to repeal two protections for every new one issued.
Eliminating the forced transfer of technology and production to China is critical
Late last month, the Office of the United States Trade Representative (USTR) issued its “Findings on the Investigation Into China’s Acts, Policies, and Practices Related to Technology Transfers, Intellectual Property, and Innovation Under Section 301 of the Trade Act of 1974”. The report re-confirmed previous findings concerning China’s reliance on forced transfer of technology and production from U.S. aerospace companies in return for market access. Just this week, USTR released its list of proposed tariffs on Chinese products.
While the findings of the report and the proposed tariff list represent steps forward in addressing this critical matter, findings and proposed lists alone won’t stop China from engaging in this unfair trade practice. The Trump administration should move quickly to implement a comprehensive strategy which includes:
- Placing tariffs on Chinese aerospace parts, components, and subassemblies that cost U.S. jobs;
- Filing a complaint (preferably joined by the European Union) at the World Trade Organization (WTO) against China’s unfair trade practices regarding forced transfers and subsidies to its aerospace industry; and,
- Making the elimination of forced transfers of technology and production a priority in bilateral and multilateral dialogues, including discussions over the U.S.-EU Transatlantic Trade and Investment Partnership (T-TIP).
Transfers of production and technology from U.S. aerospace and related companies are a serious matter. Among other things, they cost U.S. aerospace jobs and lead to a further decline in our aerospace industrial base in at least four different but related ways: First, jobs that may be associated with the transfer of technology and production are lost; second, the skills that accompany the transfers are lost leading to a further decline in our industrial base; third, future jobs are lost as China (and other countries) utilizes the transfer from the United States to create and strengthen their own aerospace companies that compete directly with U.S. companies; and fourth, the technology and production that would have led to more U.S. jobs through the development of innovative products is lost.
While China continues to utilize every tool available to establish a strong aerospace industry, up until now, the United States has done little to stop China from forcing the transfer of technology and manufacturing to develop its own industry. Far from implementing any strategic policy to stem this transfer, the U.S. government has largely left it up to U.S. aerospace companies to either comply with China’s forced transfer demands, or be shut out of China’s market. While the precise details of these transactions are not public, numerous reports shed light on how China plays the world’s two large commercial aircraft producers, Boeing and Airbus, against one another.
Social Security is looking like a pretty good investment these days
In 2005, President George W. Bush attempted to partially privatize Social Security. He centered his argument for this change on the claim that people would fare better investing in asset markets than contributing to Social Security. The privatization push proved highly unpopular, as research from EPI and others highlighted the high transition costs and investment risks.
Nevertheless, the belief that Social Security amounts to a low-risk but low-return investment persists, hampering proposals to expand the popular program. This is unfortunate, as Social Security looks better than ever in comparison to low-performing 401(k)s and IRAs.
As shown below, a young worker today with average career earnings will receive Social Security retirement benefits equivalent to total employer and employee retirement contributions plus a 5.7 percent annual rate of return. This “internal rate of return” is not much lower than the 7.0 percent net return for 401(k)-style defined contribution plans between 1990 and 2012, and it’s higher than more recent returns for these plans and IRAs (3.1 percent and 2.2 percent, respectively, over the 2000–2012 period).
Social Security internal rate of return, medium earner aged 21 in 2018 with average life expectancy at retirement (retirement benefits only)
| Medium Earner | |
|---|---|
| Based on Current Contribution Rate | 5.7% |
| Based on Contribution Rate after Eliminating Shortfall | 5.0% |
| Based on Full Cost Rate | 4.5% |
Source: Author's calculations based on inflation, average wage, and cohort life expectancy projections in single-year tables underlying the 2017 Social Security Trustees Report; and the "medium earner" in Michael Clingman and Kyle Burkhalter, "Scaled Factors for Hypothetical Earnings Examples Under the 2017 Trustees Report Assumptions," Social Security Administration Actuarial Note, July 2017. Assumes retirement at normal retirement age (67).
This calculation doesn’t take Social Security’s projected long-term shortfall into account. But even if we closed the shortfall by raising the contribution rate from 10.0 percent to 12.6 percent (excluding contributions going toward disability benefits), the internal rate of return for a medium earner would be 5.0 percent.
Though Social Security is primarily funded through worker contributions, a small share of the cost is paid for by taxes on the benefits of better-off retirees that revert to the program. If these taxes on high earners were eliminated so that the entire cost of retirement benefits were funded by worker contributions, the internal rate of return for a medium earner would be a healthy 4.5 percent, still an excellent return for such a low-risk investment.
Rates of return on 401(k)-style plans vary widely and are subject to market downturns. To reduce the risk of worse outcomes, most investors, especially retirement savers, would choose a secure 5 percent return over a volatile return averaging 7 percent, since, contrary to popular belief, investment risk doesn’t disappear over long time horizons.
The SEC’s “Regulation Best Interest” is in the best interest of Wall Street, not retirement savers and other investors
On Wednesday, the Securities and Exchange Commission (SEC) issued over 1,000 pages of proposed regulations relating to the conduct of financial professionals. Among other things, the proposals specify that brokers must act in the best interest of clients, limit the use of terms like “financial adviser,” and require financial professionals to provide clients with short descriptions of their legal obligations to the client and of their compensation structure.
At first blush, these appear to be positive, albeit incremental, steps. In fact, their purpose is not to protect investors, but to present an alternative to the much stronger protections in a Department of Labor (DOL) rule that requires financial professional offering investment advice to retirement savers to adhere to a fiduciary standard. While the DOL rule remains in place for the time being, the Trump administration has delayed its full implementation and enforcement, and it has been challenged in court by financial industry players. EPI has estimated that these delays will cost investors $18.5 billion in higher fees and lower net returns over the next 30 years.
The SEC’s proposed “best interest” standard, which to unsuspecting investors may sound similar to the DOL’s fiduciary standard, is in fact much weaker. Though it would prohibit brokers and other financial professionals from steering clients toward clearly unsuitable investments, financial professionals are already prohibited from doing so under current rules. While these rules prevent brokers from—say—recommending highly risky investments to risk-averse clients, they don’t prevent them from promoting higher-cost but “suitable” investments when similar lower-cost investments are available.
The SEC proposals, unlike the DOL rule, do not prohibit commissions and other forms of compensation that create conflicts of interest between financial professionals offering advice and their clients. Though some egregious practices may be curbed, the practical impact of the SEC proposals is unclear because the Commission does not define “best interest.” If anything, dissenting Commissioner Kara Stein says the proposed regulations appear designed to provide financial professionals with guidelines on how to adhere to the letter of the law with written disclosures, policies, and procedures—but no meaningful changes to actual practices. Moreover, enforcement is likely to be weak, because investors would not be able to sue brokers for violating the “best interest” standard, but would only have recourse to private arbitration under the auspices of the Financial Industry Regulatory Authority (FINRA), an industry-funded body. As Commissioner Stein put it, a better name for these proposals is “Regulation Status Quo.”
Teacher unions and students’ long-term economic prospects
A recent academic paper by economists Michael Lovenheim and Alexander Willén argues that men who lived as school-age children in states where teachers were allowed to bargain collectively are less likely to work as adults and, when they do work, they earn significantly less than men who grew up in states where teachers were not allowed to bargain collectively.
There are at least three reasons to be deeply skeptical of their findings.
First, the chain of causal links is extremely circuitous. The reasoning runs from a student’s initial potential “exposure” to teachers’ right to collective bargaining all the way through to the conclusion that this “exposure” significantly worsened labor market outcomes decades later as an adult. In most of their analysis, the authors rely on data that let them know the state where a person was born and the employment situation of that same person in a single year between the ages of 35 and 49. The researchers use this information to construct a simulated educational history for each adult, where they assume that the person attended K-12 school in the state where they were born. The researchers, however, don’t actually know that an individual lived in the state of birth while at school age, or whether the school the individual attended was unionized, or even whether the individual attended a public or private school. Instead, the paper’s conclusions hinge on the idea that students born in states with collective bargaining for teachers were more likely to be “treated” by collective bargaining than students in “control” states where teacher collective bargaining was not permitted. This is possible, of course, but the methodology leaves substantial room for other factors that might explain the observed differences in labor market outcomes of adults who were born in different states. The states that denied teachers the right to bargain collectively, for example, include 11 southern states, which have many long-term trends in common other than collective bargaining rights, including industry and age structure, income distribution, climate, and rapid population growth.