In honor of EPI’s new initiative, Raising America’s Pay, we updated our wage calculator, which shows how much you would be making if wages had kept pace with productivity. Having wages for the vast majority of American workers keep pace with productivity is a key indicator of an economy that is working for all.

Economic inequality is a real and growing problem in America, but the discussion around addressing inequality too frequently sidesteps a crucial component: the key to shared prosperity is to foster wage growth for the vast majority of Americans who rely on their paychecks to make ends meet. In fact, raising the pay for most Americans is the central economic challenge of our time—essential to ameliorating income inequality, boosting living standards for the broad middle-class, reducing poverty, and sustaining economic growth.

Crucially, the large and growing wedge between productivity and typical workers’ pay is not inevitable. For example, in the three decades following World War II, wages did rise with productivity and living standards improved throughout the income distribution. Since then, however, the rewards to a growing economy over the last three-and-a-half decades have primarily accrued to those at the top (except for the period of tight labor markets in the late 1990s). Since 1979, the workforce is more educated, is working more, and produces more goods and services in every hour worked. And yet the vast majority of workers are not reaping the rewards of their increased productivity.

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The Environmental Protection Agency is scheduled to release new regulations restricting the emissions of greenhouse gases (GHGs) from existing electrical generating units (EGUs, or power plants) next week. These new regulations will almost surely inspire a lot of debate over their effect on economic growth, and particularly on employment.

It is important to note first that the overall desirability of these proposed changes is dominated by their impact in forestalling global climate change. In strict economic terms, this consideration dwarfs any plausible estimate of the rule’s impact on jobs. Yet joblessness and weak labor markets continue to loom large as chief concerns of Americans (as well they should), and debate on these grounds will surely continue. Given this, even though the employment impacts of the rule are small relative to the environmental impacts, they still should be examined correctly.

Employment channels: Net versus gross and short versus long-runs

This blog post details the various channels through which environmental regulations have the potential to affect employment levels in the U.S. economy. To begin with, the effect of regulations on the net level of overall employment in the U.S. economy is the result of the sum of larger gross employment gains and losses across industrial sectors. So, for example, even if analysis finds that the new regulations will result in small net employment gains nationwide, this does not mean that no jobs in the U.S. economy will be lost due to the rules. Instead, it simply means that the total sum of employment gains and losses across all sectors is positive.

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The Brookings Institution’s Mark Muro and Scott Andes recently published two blog posts which claim that  the problems of U.S. manufacturing demand being depressed by large trade deficits—particularly trade deficits with China—are “a manufactured chimera,” and that the problems facing U.S. manufacturing are actually just evidence of insufficient domestic innovation. By deflecting attention from China’s manufacturing surplus, and the trade and currency policies China has used to dominate the market for manufacturing exports, Muro and Andes are distracting, not educating, those genuinely concerned with giving U.S. manufacturing a chance to compete in global markets. Claiming that it’s the domestic pace of innovation that is somehow the real cause of trouble is oddly provincial, and ignores some key global facts—like the fact that China has doubled down on its currency manipulation policies in the past year, and that its manufacturing trade surplus is projected to grow in the future unless something is done about it.

The most fundamental problem facing U.S. manufacturing is a shortage of demand for U.S. manufactured products. Four years after the end of the Great Recession, real U.S. manufacturing output was 2.2 percent below its pre-recession level. Demand for U.S. manufactured products was much higher at this point in earlier business cycles: 11.1% higher in 2005 (after the end of the dot-com bubble), and 23.9 percent higher in 1995, four years after the 1990-1991 recession. In other words, our manufacturing problem today is, first and foremost, a macroeconomic problem. Without adequate demand, manufacturers will not invest in R&D, build new plants, or hire new workers. Demand for output from U.S. manufacturing can either come from domestic sources—American consumers, businesses and governments—or from foreign sources. Net foreign demand for U.S. manufacturing output is best measured simply as net exports (exports minus imports) of manufactured goods.

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The Federal Reserve, even after recent announced nominees take their jobs, will have two vacant slots on the seven-member Board of Governors. For a number of reasons, it even more vital than ever that these next two nominees be committed to using all the tools at their disposal (including the new ones provided by Dodd-Frank) to (1) generate genuine full employment in the American labor market and (2) rein in financial sector excesses that threaten economic growth and stability.

Targeting full-employment

Since roughly the end of 2008, a large majority of monetary policy observers have agreed that the Fed should focus entirely on boosting economic activity and employment, and not worry at all about inflationary pressures.

This is not the normal state of the world. Normally, it’s thought that the Fed must walk a narrow path between providing support to economic activity and employment, but not generating such an excess of aggregate demand that the economy overheats and unleashes inflation. But the extreme economic weakness of the Great Recession crushed inflationary pressures and led to a cratering of economic activity and employment. Hence, it was correctly recognized that this delicate balancing act wasn’t necessary and that attention should instead be laser-focused simply on jumpstarting economic growth.

Now, this large majority for aggressive action in boosting growth and employment looks to be fracturing, and worries about inflation and recommendations that the Fed stop its single-minded focus on generating a full recovery are surfacing.

These are odd arguments to be making with the unemployment rate still matching the highest peak it ever reached in the 2001-03 recession and ensuing jobless recovery, especially considering that the headline unemployment rate has been driven down largely by the 6 million potential workers who are not actively searching for work but who would very likely join the labor force should job opportunities become less scarce. In essence, the arguments for a Fed “exit” from extraordinary efforts to boost recovery hinge on claims that very low rates of employment and very high rates of unused productive capacity relative to historic norms are not actually signs that the economy is operating below potential, because the resources idled by the Great Recession cannot be re-mobilized and should be just be considered gone forever from productive life. Importantly, however, this pessimistic argument has not been bolstered by any evidence showing that wages and prices are rising atypically fast. Indeed, the key measure of inflation tracked by the Fed has actually been pretty steadily decelerating in recent years—which is normally a sure sign that there is indeed lots of productive slack in the economy.

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Earlier this month, EPI released its annual “Class of 2014” paper, which examines labor market trends for recent high school and college graduates. Among other trends, authors Heidi Shierholz, Alyssa Davis and Will Kimball highlight the problems recent graduates face when they graduate with high levels of student debt. Student debt continues to be one of the biggest reasons young people postpone major purchases like cars and houses, and repayment can be difficult if students can’t secure their first job after graduation. Congress’s past failures to keep interest rates on student debt low, let alone provide a comprehensive refinancing plan (although that could change with Senator Warren’s new bill), should be cause for concern for recent college graduates.

President Obama’s 2015 budget proposal, released in March, makes college affordability a priority by broadening the scope of the Pay as You Earn (PAYE) repayment program to all student borrowers. Currently, for qualifying students, PAYE allows high-debt, low-income students to pay a lower monthly payment (10 percent of their income) than the standard 10-year repayment plan requires, and provides total loan forgiveness to graduates after 20 years of qualifying repayments.  The administration proposed expanding the program to all students beginning July 2015 and making it the only income based repayment option, providing access to affordable repayment options for all student s and simplifying the repayment experience.

While additional reforms proposed to PAYE (page 13 here) seem common sense (eliminating caps for high-income borrowers and calculating payments for married couples using combined household adjusted gross income instead of calculating payments separately), part of the budgetary cost of this expansion is recouped by capping loan forgiveness on a subset of the PAYE repayment program, graduates enrolled in the Federal Public Service Loan Forgiveness program (PSLF).

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If I told you that the legislature of State X is going to make it easier for workers in the state, including public employees, to earn overtime pay, you might wonder what effect that would have on employment in the state. What if the cost to employers from having to pay more workers time and a half for overtime is so high that it causes businesses to move to a neighboring state that has a weaker requirement? Or what if it raises costs and employers respond by laying off employees?

Those fears are being raised by groups like the National Retail Federation, the Heritage Foundation, and the CATO Institute, all of which oppose President Obama’s plan to revise the Fair Labor Standards Act regulations that govern the right to overtime pay. The president wants to make it easier for relatively low-paid employees to earn overtime pay when they work more than forty hours in a week, but the conservative business lobbyists are already yelling about job loss—with no real explanation or evidence that job loss is a realistic outcome.

Fortunately, California provides a kind of natural experiment about what happens when more workers have a right to overtime pay, and the results are reassuring. Regardless of their job duties, California law guarantees overtime pay to employees earning less than $640 per week, while its neighboring states—Arizona, Nevada, and Oregon—only guarantee overtime pay to workers paid less than $455 per week, less than a poverty level wage for a family of four. Other rules in California make it harder for employers to deny overtime pay to even better paid workers whose jobs include duties that could be considered managerial or professional. In California, but not in its neighboring states, an employee has to spend a majority of his time doing managerial or professional work in order to be excluded from the right to receive overtime pay.

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In a blog post, Martin Kessler and Arvind Subramanian of the Peterson Institute claim that, contrary to popular belief, the Chinese renminbi is not undervalued. Their assertion is based on new estimates of prices and income in China relative those in the United States. The Wall Street Journal concludes that the world should “stop bugging China on the undervaluation of its currency.”

However, by failing to consider the effects of China’s purchases of foreign exchange reserves and its significant trade surplus, the Kessler-Subramanian model appears fatally flawed. China invested more than half a trillion dollars in purchasing foreign exchange reserves in 2013 alone—a new record. But for those purchases, the value of the RMB would have been significantly higher. Kessler and Subramanian claim that the RMB was “only slightly undervalued in 2011” is simply not credible, when that exchange rate is being sustained with such massive purchases of foreign exchange reserves.

In fact, China’s currency needs to rise in value every year because productivity growth in manufacturing is so much higher than in the United States and other countries. Between 1995 and 2009, China experienced manufacturing productivity growth that ranged between 6.7 percent and 9.6 percent per year. Over the same period, productivity growth in U.S. manufacturing averaged only 2.4 percent per year. Thus, China must allow its currency to rise by four to seven percent a year simply to keep its trade surplus from expanding.

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Earlier this month, we released our “Class of 2014” report on the labor market and earnings prospects for the high school and college graduates of 2014. In short, things don’t look great. The prolonged slack in labor demand—unemployment for college graduates is 8.5 percent compared to their 2007 levels of 5.5 percent—has depressed earnings for the majority of recent graduates. To make matters worse, student loan debt reached an all-time high of about $1.2 trillion. Coupled with young college graduates’ stagnant wages, student debt poses an obstacle to graduates seeking financial security.

The figure below shows the real average hourly wages of young college graduates (ages 21-24) by gender. Inflation-adjusted hourly wages fell by 6.9 percent for college graduates since 2007, which means full-time, year-round workers are earning $2,600 less in total annual wages. What’s more, the downturn has only exacerbated the wage stagnation young college graduates were already experiencing. Wages for all college graduates fell 0.9 percent between 2000 and 2007, from $18.41 in 2000 to $18.24 in 2007. Female college graduates saw their wages decline by 4.6 percent over that time period ($17.82 to $17.00). Male college graduates did experience a 3.7 percent increase in hourly wages from 2000 to 2007, but those mild gains were quickly erased by the Great Recession. College graduates simply did not see any signs of consistent wage growth prior to the Great Recession. Clearly, it is not necessarily the case that as long as you obtain a college degree, you’ll be gainfully employed and well compensated.

The class of 2014—most of whom started college after the Great Recession was officially over—likely figured that by the time they graduated the labor market would have recovered to the point that their job prospects and future earnings would make their student debt manageable. Sadly, this has not been the case, and the effects will likely be long lasting.

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The media buzz surrounding the 50^th anniversary of Lyndon Johnson’s May 1964 speech announcing his Great Society has focused on the question, did it “work?” In other words, did the 200-odd pieces of legislation passed over the following two years succeed in their goals of reducing poverty, improving education, providing health care for the elderly, etc. Judgments as to how the programs worked are supposed to answer the bigger question, should government intervene in the economy to make life better for its people?

It is a safe bet that the components of the Great Society—especially those dealing with the War on Poverty—are the most studied in the history of social science. For half a century, a vast army of economists, sociologists, political scientists, lawyers, and policy analysts have poured over the data. There is little doubt that almost all of the programs had benefits. The debate between conservatives and liberals is whether the benefits were worth the “costs.” But if by this time the research has not reached convincing definitive conclusions, it is unlikely that it ever will.

Part of the problem is that such efforts to quantify cost and benefits, while useful, are inherently flawed by their reliance on market prices to establish the human value of, for example, living longer, educating a poor child, or breathing cleaner air.

They also miss the point. The Great Society was much more than the sum of its parts. Like the New Deal before it, the Great Society changed the way Americans thought about the relationship of the government to the economy.

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