Sluggish Wage Growth Continues Throughout 2014
Today, the Bureau of Labor Statistics (BLS) released the Employment Cost Index (ECI), a closely watched measure of labor costs, for the last quarter of 2014. Nominal year-over-year compensation for private industry workers rose 2.3 percent, while private sector wages and salaries rose 2.2 percent.
To put these numbers in perspective, below is a chart of the year-over-year changes in both the ECI compensation and wage series along with the monthly BLS Current Employment Statistics (CES) nominal wage series for all nonfarm employees. It’s clear that nominal wage growth (using any of these measures) has been flat for a long time—and there’s little evidence this trend has changed in recent months.
The horizontal shaded area represents growth of 3.5 to 4 percent—nominal wage growth consistent with the Fed’s 2 percent inflation target and a stable labor share of income (given a range of 1.5 to 2 percent trend productivity growth).
We need to see consistent wage growth above this range before there is a hint of upward pressure on prices stemming from too-tight labor markets. Thus, the Fed should not even consider raising interest rates to forestall inflation until wage growth is consistently above this target.
Year-over-year change in private-sector nominal average hourly earnings, 2007–2014
| CES, all private | ECI, wages and salaries | ECI, total compensation | |
|---|---|---|---|
| 2007-03-01 | 3.6427146% | 3.5749752% | 3.1746032% |
| 2007-04-01 | 3.3234127% | ||
| 2007-05-01 | 3.7257824% | ||
| 2007-06-01 | 3.8575668% | 3.3431662% | 3.1465093% |
| 2007-07-01 | 3.4482759% | ||
| 2007-08-01 | 3.5433071% | ||
| 2007-09-01 | 3.2337090% | 3.4146341% | 3.1219512% |
| 2007-10-01 | 3.2778865% | ||
| 2007-11-01 | 3.3203125% | ||
| 2007-12-01 | 3.1113272% | 3.2945736% | 3.0038760% |
| 2008-01-01 | 3.1067961% | ||
| 2008-02-01 | 3.0464217% | ||
| 2008-03-01 | 3.0332210% | 3.1639501% | 3.1730769% |
| 2008-04-01 | 2.8324532% | ||
| 2008-05-01 | 3.0172414% | ||
| 2008-06-01 | 2.6666667% | 3.1398668% | 2.9551954% |
| 2008-07-01 | 3.0000000% | ||
| 2008-08-01 | 3.2794677% | ||
| 2008-09-01 | 3.2747983% | 2.9245283% | 2.8382214% |
| 2008-10-01 | 3.3159640% | ||
| 2008-11-01 | 3.5916824% | ||
| 2008-12-01 | 3.6303630% | 2.6266417% | 2.4459078% |
| 2009-01-01 | 3.5310734% | ||
| 2009-02-01 | 3.4725481% | ||
| 2009-03-01 | 3.1775701% | 2.0446097% | 1.8639329% |
| 2009-04-01 | 3.2212885% | ||
| 2009-05-01 | 2.8358903% | ||
| 2009-06-01 | 2.7365492% | 1.5682657% | 1.4814815% |
| 2009-07-01 | 2.5889968% | ||
| 2009-08-01 | 2.4390244% | ||
| 2009-09-01 | 2.2977941% | 1.3748854% | 1.1959522% |
| 2009-10-01 | 2.3383769% | ||
| 2009-11-01 | 2.0529197% | ||
| 2009-12-01 | 1.8198362% | 1.2797075% | 1.1937557% |
| 2010-01-01 | 1.9554343% | ||
| 2010-02-01 | 1.8140590% | ||
| 2010-03-01 | 1.7663043% | 1.4571949% | 1.6468435% |
| 2010-04-01 | 1.7639077% | ||
| 2010-05-01 | 1.8987342% | ||
| 2010-06-01 | 1.7607223% | 1.6348774% | 1.9160584% |
| 2010-07-01 | 1.8476791% | ||
| 2010-08-01 | 1.7070979% | ||
| 2010-09-01 | 1.8867925% | 1.6274864% | 2.0000000% |
| 2010-10-01 | 1.8817204% | ||
| 2010-11-01 | 1.6540009% | ||
| 2010-12-01 | 1.7426273% | 1.8050542% | 2.0871143% |
| 2011-01-01 | 1.9625335% | ||
| 2011-02-01 | 1.8262806% | ||
| 2011-03-01 | 1.8246551% | 1.6157989% | 1.9801980% |
| 2011-04-01 | 1.9111111% | ||
| 2011-05-01 | 2.0408163% | ||
| 2011-06-01 | 2.1295475% | 1.6979446% | 2.3276634% |
| 2011-07-01 | 2.2566372% | ||
| 2011-08-01 | 1.9434629% | ||
| 2011-09-01 | 1.9400353% | 1.6903915% | 2.1390374% |
| 2011-10-01 | 2.1108179% | ||
| 2011-11-01 | 2.0228672% | ||
| 2011-12-01 | 1.9762846% | 1.5957447% | 2.2222222% |
| 2012-01-01 | 1.7060367% | ||
| 2012-02-01 | 1.9247594% | ||
| 2012-03-01 | 2.1416084% | 1.8551237% | 2.1182701% |
| 2012-04-01 | 2.0497165% | ||
| 2012-05-01 | 1.7826087% | ||
| 2012-06-01 | 1.9548219% | 1.8453427% | 1.8372703% |
| 2012-07-01 | 1.7741238% | ||
| 2012-08-01 | 1.8630849% | ||
| 2012-09-01 | 1.9896194% | 1.8372703% | 1.9197208% |
| 2012-10-01 | 1.4642550% | ||
| 2012-11-01 | 1.8965517% | ||
| 2012-12-01 | 2.1102498% | 1.7452007% | 1.8260870% |
| 2013-01-01 | 2.1505376% | ||
| 2013-02-01 | 2.1030043% | ||
| 2013-03-01 | 1.8827557% | 1.7346054% | 1.9014693% |
| 2013-04-01 | 1.9658120% | ||
| 2013-05-01 | 2.0504058% | ||
| 2013-06-01 | 2.1729868% | 1.8981881% | 1.8900344% |
| 2013-07-01 | 1.9132653% | ||
| 2013-08-01 | 2.2118248% | ||
| 2013-09-01 | 2.0356234% | 1.8041237% | 1.8835616% |
| 2013-10-01 | 2.2495756% | ||
| 2013-11-01 | 2.1573604% | ||
| 2013-12-01 | 1.9401097% | 2.0583190% | 1.9641332% |
| 2014-01-01 | 1.9789474% | ||
| 2014-02-01 | 2.1017234% | ||
| 2014-03-01 | 2.1419572% | 1.7050298% | 1.6963528% |
| 2014-04-01 | 1.9698240% | ||
| 2014-05-01 | 2.0510674% | ||
| 2014-06-01 | 1.9599666% | 1.8628281% | 2.0236088% |
| 2014-07-01 | 2.0442219% | ||
| 2014-08-01 | 2.1223471% | ||
| 2014-09-01 | 1.9950125% | 2.2784810% | 2.2689076% |
| 2014-10-01 | 1.9510170% | ||
| 2014-11-01 | 1.9461698% | ||
| 2014-12-01 | 1.6549441% | 2.1848739% | 2.3450586% |
* Nominal wage growth consistent with the Federal Reserve Board's 2 percent inflation target, 1.5 percent productivity growth, and a stable labor share of income.
Source: EPI analysis of Bureau of Labor Statistics Current Employment Statistics (CES) public data series and Bureau of Labor Statistics Employment Cost Index (ECI)
Congress, Consider the Facts not Fiction before Voting to Repeal the Medical Device Tax
A priority of the new GOP-dominated Congress is to dismantle the Affordable Care Act (ACA), otherwise known as Obamacare. Having failed to repeal the ACA in the past, the GOP is now starting to nibble at the edges of the ACA, hoping to weaken it. One nibble that is likely to see congressional action soon, and which may even pass in both houses, is the repeal of the medical device tax.
The medical device tax is a small 2.3 percent excise tax on the manufacturer’s price of medical devices. It applies to manufacturers and importers of medical devices. The purpose of the tax is to raise revenue to help offset the costs of the ACA by taxing industries that benefit from health care reform: as reform leads to more people with health insurance coverage, the demand for health care—including medical devices—is likely to rise. The medical device tax became effective on January 1, 2013 and is projected to raise about $3 billion per year, or almost $30 billion over 10 years.
The medical device industry, which apparently is represented by Advanced Medical Technology Association (AdvaMed), argues this small tax is a job killer. According to a recent “study” by AdvaMed, the tax reduced industry employment by 14,000 jobs in 2013, or 3.2 percent of the employees in the industry. Furthermore, the “study” argues that R&D has been reduced in the industry, although no numbers are reported. AdvaMed says they estimated this number from a survey of 55 companies in the industry—less than a quarter of the firms in the industry.
This appears to be pretty damning evidence against the medical device tax, but how does it square with what really happened? Every year, Ernst & Young (E&Y) issues a report on the financial condition of the industry; the E&Y data come from a variety of sources including company financial reports. E&Y shows that industry revenues increased by 4 percent between 2012 and 2013, R&D spending increased by 6 percent, and employment increased by 5 percent. In the first year of the medical device tax, the industry created over 20,000 jobs! Oh, and profits were up by 32 percent.
Of course, it is impossible to say what would have happened in the absence of the medical device tax; perhaps more jobs would have been created. But, contrary to AdvaMed’s fictions, it is clear that the number of jobs in the industry has not fallen.
At about the same time the AdvaMed “study” was released, the Congressional Research Service issued an updated report on this tax. The report concludes: “The analysis suggests that most of the tax will fall on consumer prices, and not on profits of medical device companies. The effect on the price of health care, however, will most likely be negligible because of the small size of the tax and small share of health care spending attributable to medical devices.”
Unless Congress is willing to replace lost revenue from the repeal of the medical device tax, they should keep this small tax on one group that benefits from the ACA.
New Data Show Top 1 Percent Really are Different from You and Me
On Monday, we released new estimates of top incomes by state for 2012, based on the work done by Thomas Piketty and Emmanuel Saez. Coincidentally, Saez just released a preliminary update to 2013 of the national top income time series. Saez’s key finding is that the average income of the top 1 percent in the U.S. fell in 2013 by 14.9%. This decline at the top was large enough to lower overall average incomes in 2013 by 3.2%. The good news is, the bottom 99% saw their earnings climb—but by a very modest and somewhat disappointing 0.2%.
Illustrating that the top 1 percent really are different from you and me, Saez notes the fall in income at the top is due to high income earners shifting income from 2013 to 2012 in an effort to reduce their tax liabilities in anticipation of higher top marginal tax rates which took effect in 2013. In an earlier EPI analysis in October 2014, Lawrence Mishel and Will Kimball reported on the decline of wages among the top 1 percent of wage earners, which prefigured these results for households. Similarly, Mishel and Kimball also noted the changes in taxes and suggested this decline was probably only temporary.
Saez expects top incomes to rebound in 2014, but fall short of their 2012 values. Indeed, James Parrott of the Fiscal Policy Institute noted in his summary of New York State top income trends (look up your state’s top income trends here) that data from the New York State Division of the Budget indicate that the top 1 percent’s share of New York personal income tax liability is expected to reach 42.5% in 2015—just shy of its 2012 value of 43.2%.
Trade Agreements or Boosting Wages? We Can’t Do Both
It’s widely expected that in tonight’s State of the Union address President Obama will call for actions to boost wages for low- and moderate-wage Americans, and also for moving forward on two trade agreements—the Trans-Pacific Partnership (TPP) and the Trans-Atlantic Trade and Investment Partnership (TTIP).
These two calls are deeply contradictory. To put it plainly, if policymakers—including the President—are really serious about boosting wage growth for low and moderate-wage Americans, then the push to fast-track TPP and TTIP makes no sense.
The steady integration of the United States and generally much-poorer global economy over the past generation is a non-trivial reason why wages for the vast majority of American workers have become de-linked from overall economic growth. This is not a novel economic theory—the most staid textbook models argue precisely that for a country like the United States, expanded trade should be expected to (yes) lift overall national incomes, but should redistribute so much from labor to capital owners, so that wages actually fall. So, it can boost national income even while leaving the incomes of most people in the nation lower than otherwise.
The intuition on how is pretty easy. Take the most caricatured example of how expanded trade works: the United States produces and exports more capital-intensive goods (say airplanes) and imports more labor-intensive goods (say apparel). By focusing on what we’re relatively better at producing (capital-intensive airplanes)and trading this extra output for what our trading partners are relatively better at producing (labor-intensive apparel), we can see national incomes rise in both countries. This specialization in the United States requires shifting resources (i.e., workers and capital) out of apparel production and into airplane production. But each $1 in apparel production lost requires more labor and less capital than the $1 in airplane production gained—causing an excess supply of labor and an excess demand for capital. Capital’s return rises while labor’s wage falls.
The President’s Twofer
In the weeks leading up to the State of the Union address, President Obama has gradually laid out his vision for America. I am particularly impressed with his proposal to make two years of community college free for students who are willing to work for it. This program would help young adults from lower-income families get a needed start toward a four year college education or vocation training for a career.
Critics have argued it is easy to propose a new program without paying for it. Well, last Saturday, the president said how he will pay for it: raise taxes. What is great about his tax proposal is it is a twofer. First, it would raise needed revenue—$320 billion over 10 years—to pay for the policies that would help low- and middle-income families. Second, it would make the tax code fairer and help reduce the growth in the share of income going to the top 1 percent by increasing taxes on capital income—bringing taxes levied on income gained from wealth closer to income gained from working. The administration estimates that 99 percent of the impact of this proposal would affect the richest 1 percent and more than 80 percent would affect just the richest 0.1 percent.
The main tax proposal is changing how capital gains are taxed. The tax rate on capital gains and dividends is increased to 28 percent—the rate under President Reagan. Currently, the tax rate on capital gains and dividends is 20 percent plus a 3.8 percent surtax. The president’s proposal would increase the tax rate to 24.2 percent plus the 3.8 percent surtax.
In addition, the proposal removes a loophole—the “stepped-up basis” loophole—that allows the wealthiest taxpayers to escape paying tax on inherited assets. We at EPI have been pushing for this change for years. Currently, when assets are transferred, say in a bequest, no taxes are due on appreciated assets. For example, suppose an individual purchases $10 million in stock. That person would have to pay taxes on any realized capital gains when the stock is sold (if the stock was sold for $100 million then the individual would pay taxes on the difference between the purchase price—the basis—and the sales price or $90 million). But if the individual never sells the assets and passes on the $100 million of stock to an heir, no capital gains taxes are due on the $90 million gain. Furthermore, when the individual receiving the assets sells the assets, the basis is stepped-up to $100 million rather than $10 million. The president’s proposals would retain the $10 million basis for the heir (called carry-over basis) and taxes would be paid on any gains when the assets are inherited. In an era with a deeply eroded estate tax, removing this “stepped-up basis” loophole would help us tax large blocks of inherited wealth—essentially adopting some of Thomas Piketty’s ideas for pushing back against rising income and wealth inequality.
What I Want to Hear in the State of the Union Address
On Tuesday, President Obama will deliver his State of the Union address, which gives him an opportunity to lay out his priorities and set an agenda for the year ahead.
At EPI, we have argued that raising wages is the central economic challenge. It is terrific news that the president will address wage stagnation in his speech. After a year of strong job creation but continued stagnant wage growth, many economists and commentators—not to mention the American people—are beginning to focus on wages. Even the new GOP-controlled Congress is paying lip service to the middle class squeeze (but is offering no program to address these challenges). So we are now entering into a great debate about what can be done to raise wages. Ross Eisenbrey and I offered our solutions in a recent interview in The New Republic.
Given congressional obstruction, the president has done his best to address our most pressing economic challenges through executive action:
Paid Leave is Vital to Families’ Economic Security
Yesterday, President Obama proposed a fundamental right to earned paid sick leave for all workers in this country. He also directed federal agencies to offer paid family leave to their workers. This is welcome news.
The fact is, we are behind all of our economic peers in the world in terms of providing what should be a bare minimum standard: paid leave when workers are sick, have doctor’s appointments, or need to care for family members. We also fall short when it comes to family leave—although California has had great success with their paid family leave initiative. Meanwhile, Bloomberg put out a great graphic comparing maternity leave in the United States with other countries in the world. It’s easy to see how far we have to go.
Employers, workers, and the public would all benefit from paid sick and family leave. My colleagues and I have shown through a series of studies on cities and states that paid sick leave is of negligible cost to employers, and we have presented this evidence at state legislative hearings. Mandatory paid sick time would mean that the many employers that already provide paid sick days would have a level playing field with their competitors, and all employers would be able to more easily maintain healthy workplaces. While any new labor standard generates concerns about the business climate and job creation, the evidence from jurisdictions that require paid sick days has all been positive.
Average Real Hourly Wage Growth in 2014 Was No Better Than 2013
The Bureau of Labor Statistics released the Consumer Price Index for December 2014 today, which lets us look at trends in real (inflation-adjusted) wages over the year. In the aftermath of the Great Recession, the U.S. economy has seen very little real wage growth. Real hourly wage growth fell 1.0 percent in 2011, and then 0.1 percent in 2012. Over the last two years, real wage growth has been positive, but slow: real wages rose 0.5 percent in 2013 and 0.4 percent in 2014. Even with the drop in inflation over the last couple of months, average wages increased in 2014 slightly less than in 2013. This means that, by definition, there has been no acceleration in wage growth. Decent wage growth would look like inflation plus productivity growth (around 1.5 to 2.0 percent). Given this, it is clear that the Federal Reserve should not take action to slow the economy down.
Our nominal wage tracker shows just how much wage growth has been falling short of reasonable targets. The labor market and the economy could withstand even higher wage growth because labor’s share of corporate sector income yet to rise in this recovery, and profits are still at record highs. Therefore, real wage growth can be accomplished without putting pressure on prices.
Turning to monthly wages, the figure below shows real average hourly earnings of all private employees (top line) and production/nonsupervisory workers (bottom line) since the recession began in December 2007. For both series, you can see that real wages fell during the recession, then jumped up in late 2008, in direct response to a drop in inflation. When inflation falls and nominal wages hold steady, the mathematical result is a rise in inflation-adjusted wages. After the deflation leading up to 2009 stopped boosting real wages, wage growth has been flat.
White House Breaks Silence on Disability Rule
The White House finally weighed in on the new House rule preventing a simple fix to extend the life of Social Security’s Disability Insurance (DI) trust fund. The fund is projected to run out next year, and if revenue isn’t reallocated from the larger Old Age and Survivors Insurance (OASI) program, disability benefits, already meager, will be reduced by a fifth, as taxes allocated to the program aren’t enough to cover promised benefits. Though a routine reapportionment of payroll taxes would address the problem, the new rule prohibits such a move unless steps are taken to extend the solvency of the Social Security system as a whole.
Since a simple majority is required to overturn the rule or vote for benefit cuts, the rule appears largely symbolic. But depending on whom you talk to, it may or may not have real political repercussions. One thing seems clear: It’s an attempt to pit retirees against disabled beneficiaries, with Republicans positioning themselves as advocates of seniors and reformers of a disability system supposedly rife with fraud and abuse.
What happens when this comes to a head in an election year? Though Republicans may be hoping to force benefit cuts by creating an artificial crisis, it seems unlikely that they’ll let 11 million disabled beneficiaries and their dependents, who disproportionately live in red states, experience sharp benefit cuts, which would cause the average benefit to drop below the federal poverty line.
How to Increase Revenue Without Increasing Taxes
Rep. Lloyd Doggett and Sen. Sheldon Whitehouse introduced the Stop Tax Haven Abuse Act earlier this week (Rep. Doggett and former-Sen. Carl Levin introduced a similar bill in the 113th Congress). The bill would strengthen reporting standards for multinational corporations, strengthen various enforcement provisions, and end certain loopholes that allow corporations to avoid paying U.S. taxes as well as “check-the-box rules.” An explanation of these rules can be found here. It would also deal with what’s known as the “Ugland House” problem.
Though most people are aware of the nice beaches in the Cayman Islands, they are probably unaware of the Ugland House. The Cayman Islands is a tax haven for many profitable U.S. multinational corporations, who claim to earn substantial profits there but pay no taxes to Cayman authorities. In 2008, foreign subsidiaries of U.S. multinational corporations reported they earned $43 billion in the Cayman Islands, which is rather interesting, because this amount is 20 times the Cayman Islands’ GDP. It is simply not possible that this amount could reflect legitimate business activities in the Caymans. This is where the Ugland House comes in.
The Ugland House (on South Church Street in George Town on Grand Cayman) is home to the law firm of Maples and Calder. It is also the legal “home” to over 18,000 corporations, many of which are foreign subsidiaries of U.S. corporations. The Ugland House serves as nothing more than a mailing address for these corporations—their only contact with the Cayman Islands. Their actual business operations are located in other countries, like the United States. A lot of money, however, is credited to this address. (It is worth noting there is a building in another well-known tax haven that serves the same purpose: 1209 North Orange Street in Wilmington, Delaware.)
So far, Congress has been uninterested in doing anything about this tax avoidance problem. The Stop Tax Haven Abuse Act would address this problem by categorizing corporations worth more than $50 million which are managed and controlled in the United States as U.S. taxpayers, no matter where they are incorporated. It is estimated that this act would raise almost $300 billion in revenue over 10 years. While some members appear to think that making U.S. taxpayers pay what they owe amounts to a tax hike, Rep. Doggett and Sen. Whitehouse are to be congratulated on their efforts to curb the flagrant abuse of tax loopholes by profitable companies that can afford to pay their fair share.