1. Social Security costs are escalating out of control. No. Costs are projected to rise from roughly five to six percent of GDP before leveling off.
2. Americans want benefits but aren’t willing to pay for them. Wrong again. Americans across political and demographic lines support paying Social Security taxes. They also strongly prefer raising taxes over cutting benefits as a way to close the projected shortfall. The most popular option is raising taxes on high earners, since earnings above $106,800 aren’t taxed. But Americans prefer to close the gap on the revenue side even if asked to pay more themselves.
3. Our children and grandchildren will drown in debt if we don’t cut the social safety net. No, future generations will drown in debt—their own or the federal government’s—if we don’t address health care cost inflation. Cutting Medicare or Medicaid benefits just pushes costs onto the private sector. And there’s no reason to lump Social Security in with other programs since it’s funded through dedicated taxes and prohibited by law from borrowing.
4. The Baby Boomers will sink us. No, we saw them coming. Social Security began building up a trust fund in the early 1980s in anticipation of the Boomer retirement. The trust fund will keep growing for another decade to around $3.7 trillion, enough to last through the peak Boomer retirement years.
5. We’re living longer, so we need to work longer. No—only some of us are living longer, and most of us are already working longer. Gains in life expectancy have been concentrated among people with higher incomes and more education, especially men. Meanwhile, the labor force participation of older workers is close to the postwar peak.
6. We just need to save more for retirement. That’s a reason to expand Social Security, not shrink it. The average household has a retirement income deficit of $90,000, a conservative measure of how far behind they are in saving and accumulating benefits for retirement—and that’s without further cuts to Social Security. Retirement insecurity is increasing due to earlier Social Security cuts and the shift from secure pensions to do-it-yourself retirement accounts. (If anything, budget hawks should look to trim 401(k) tax breaks, two-thirds of which go to taxpayers in the top fifth of the income distribution and have little impact on saving.)
7. Seniors are greedy. No, they’re struggling to make ends meet. By any reasonable measure, seniors and other beneficiaries are worse off than working adults, so it makes sense to increase contributions rather than cut benefits. Older households have incomes roughly half those of working-age households. The “greedy geezer” myth rests on the fact that seniors have lower official poverty rates than children and working-age adults, though an improved measure that takes into account higher medical expenses for seniors shows that the three groups have similarly high poverty rates. In any case, cutting Social Security would increase poverty for all. Also, while older households typically have accumulated more savings than younger households, these savings are not enough to maintain their pre-retirement standard of living through retirement.
8. Benefits are generous. No, they’re modest and shrinking. The average retirement benefit is $14,000 a year—less than a full-time minimum wage worker earns—and benefits constitute two-thirds of income for the average older beneficiary. For a medium earner retiring at 65, benefits replace 41 percent of pre-retirement earnings, down from 52 percent in 1981. This replacement rate is scheduled to drop in the next 15 years to a meager 36 percent.
9. We’ll just cut benefits for people who don’t need them. No, proposed cuts would hurt the middle class now and the poor later. Because benefits for high earners are modest and wealthy retirees few, supposedly “progressive” plans actually go after middle-class benefits in order to yield significant cost savings. Social Security’s enduring popularity rests on the fact that people earn the right to participate by working and contributing, in keeping with core American values. Moving from a universal social insurance program toward a need-based one would doom Social Security to the same fate as targeted programs like Medicaid, which are being squeezed even as demand for them grows. An even worse idea is cutting cost-of-living adjustments, which would have an impact on all beneficiaries, but especially the oldest old, who are also the poorest old.
   
10. Social Security won’t be there for us. Only if we fall for these arguments. Social Security can pay full promised benefits for another quarter-century. Even if nothing is done to shore up the system, Social Security can continue to pay three-fourths of promised benefits after the trust fund runs out. Though this would be far from ideal, it’s certainly no reason to preemptively cut benefits. Instead, we should devote a small portion of the economic growth projected over Social Security’s next 75 years to continuing to build economic security on the cornerstone laid by President Franklin D. Roosevelt.

As the debate over continuing extended unemployment insurance (UI) benefits rages in Washington, there has been an endless barrage of claims that UI is bad for the labor market because, among other things, these benefits make people lazy and keep them from looking for work or accepting jobs (see e.g., the last few paragraphs from this The Hill blog post).

THIS IS NOT TRUE. The macroeconomic benefits of UI (keeping spending power in the economy from falling as far as it otherwise would) are large and completely unambiguous, while the microeconomic impacts (for example, the incentive it may provide people to search either more or less hard for work while collecting benefits) are small and can actually cut in very useful directions for the economy.

Let’s look at the evidence. Jesse Rothstein has written the most careful study available on the microeconomic effects of UI extensions in the Great Recession. Note that an unemployed worker can leave unemployment in one of two ways – by either getting a job, or by giving up looking for work (and thereby dropping out of the labor force and no longer being counted as unemployed). Rothstein finds that in the fourth quarter of 2010, the average monthly rate of leaving unemployment for a displaced worker was 22.4 percent. He finds that it would have been around – wait for it – 24.0 percent if UI benefits hadn’t been extended. Furthermore, he finds that about two-thirds of the decline in the rate of leaving unemployment that can be attributed to UI comes from reduced labor force exit, rather than reduced reemployment. In other words, about two-thirds of the very small reduction in the rate of leaving unemployment is due to people not giving up looking for work! Let me say that again – most of the increase in unemployment duration that can be attributed to the UI extensions comes from increased job search, since UI gives people a reason to continue looking for work even though job prospects are so bleak (which will likely increase the share of displaced workers who ultimately find work).

Of course, only reduced reemployment – i.e., a slower rate of displaced workers actually finding a new job – is what policy makers are worried about. What does Rothstein find there? In the fourth quarter of 2010, the monthly rate of reemployment for a displaced worker was 13.4 percent. He finds that it would have been around 13.9 percent if UI benefits hadn’t been extended, an extremely small effect. Furthermore, other research shows that most of the increase in time-to-reemployment that can be attributed to UI is not a harmful work disincentive effect, but rather a beneficial “liquidity” effect. In particular, it is actually efficiency enhancing to give liquidity-constrained displaced workers the needed space to find a job that matches their skills and experience and meets their family’s needs. This is of course more important now than ever, when job openings are so scarce.

Finally, as mentioned above, UI has large, positive macroeconomic effects. Spending on extended UI benefits is a very effective way to inject money into the economy, since that money gets immediately spent by cash-strapped, long-term unemployed workers. This spending creates demand for goods and services, which take workers to provide, so it generates new jobs. The spending of extended benefit checks will create over a half-million jobs in 2012. If the extended benefits aren’t continued, those jobs will be lost, and, all else equal, the loss of those jobs would increase the unemployment rate by around 0.3 percentage points.

Claims that continuing the UI extensions will further weaken the labor market are simply not supported by the evidence.  Continuing extended UI benefits will create jobs, incentivize people to keep looking for work who otherwise would have given up, and provide a lifeline to the families of workers who lost their job during the worst, and ongoing, labor market downturn in seven decades.

On Friday, the Environmental Protection Agency finalized the “air toxics rule” – a regulation mandating the reduction of toxic emissions (including mercury and arsenic) from the nation’s power plants, with some details concerning this rule made available to Washington Post. The EPA is expected to provide full information on the rule later this week.

The cost and other data on the final rule that have been released differ little from information available about the proposed rule.  It is thus very unlikely that the final Regulatory Impact Analysis (RIA) describing the expected impacts of the final rule will differ significantly from the proposed Regulatory Impact Analysis and other information released with the proposed rule in March of this year. This information makes clear that with benefits exceeding costs by at least 5-to-1, the rule is well worth doing – with up to 17,000 lives saved per year after its implementation and 850,000 additional days of work added to the economy because workers are healthier and would require fewer sick days.

Opponents of the act predictably characterized the air toxics rule as a “job-killer.” Even normall,y this is pretty bad economics – no serious economist thinks that regulatory changes on the scale of the air toxics rule have non-trivial impacts on national job growth. And during times like now – with the economy mired in a “liquidity trap” (very large amounts of productive slack persist even as short-term interest rates are stuck at zero) – this is completely upside-down economics. In today’s circumstances (with very high rates of unemployment) the jobs directly created by the need to install pollution abatement and control technologies will almost surely not be offset by rising interest rates or prices, as could happen if these regulations took effect in an economy with no productive slack.

Our own earlier research, based on the information provided with the proposed rule, indicated that it would lead to roughly 92,000 net new jobs by 2015. The nature of this estimate is likely to apply to the final rule as well. To be clear, this rule isn’t a significant jobs policy that would put a large dent in the current unemployment crisis. But, it is a very valuable rule that would only push in the correct direction in the labor market.

We will re-examine the job impacts of the final rule when full information is available.

Class matters in educational performance. Helen F. Ladd and Edward B. Fiske have recently persuasively argued this point in the New York Times and at a recent conference. One analysis Ladd conducted in the conference paper included academically high-performing countries like South Korea and Finland. As Ladd illustrates, in these two countries (as well as in lower-performing countries) the most privileged students do best academically and the least privileged do worst.

This gradient of academic achievement exists despite the fact that South Korean and Finnish students have among the highest median test scores in the world. The students cannot be accused of coming from cultures that do not value education. Both countries are also racially and ethnically homogenous. Thus, neither culture nor race can be used to explain why poorer Korean and Finnish children do worse in school than their richer peers. Class matters.

Class matters in the United States also. Ladd and Fiske report that “data from the National Assessment of Educational Progress [in the United States] show that more than 40 percent of the variation in average reading scores and 46 percent of the variation in average math scores across states is associated with variation in child poverty rates.”

This information helps us to understand the black-white achievement gap and its persistence. The child poverty rate for African Americans is regularly more than three times the rate for whites. Since class matters for educational achievement, it is not realistic to expect to close the black-white achievement gap while the economic gaps between blacks and whites are so large.

This is why I argue in A jobs-centered approach to African American community development that a jobs program for black communities is an important part of improving educational outcomes for black children. As the figure shows, there is a fairly strong relationship between the black child poverty rate and the black unemployment rate. In the early 1980s, the increase in black unemployment corresponds with an increase in black child poverty. In the late 1990s, the decrease in black unemployment matches a downward trend in black child poverty. The uptick in black unemployment in recent years is reflected in a recent rise in black child poverty.

If we reduce black unemployment, we reduce black child poverty. Fewer black children in poverty set the stage for higher black student achievement.

Some people believe that education is the key to lift blacks out of poverty, but it is important to realize the role that poverty and other forms of economic disadvantage play in black educational outcomes. Economic inequality plays an important role in unequal educational outcomes.

The incomes of the top 1 percent have fallen in the last two recessions because their incomes were disproportionately affected (through capital gains and stock options, among other things) by the steep decline in the stock market that occurred in the early 2000s and in the recent financial crisis. This decline in the stock market and incomes linked to it are disproportionately claimed by the rich, so this led to a temporary reduction in income inequality. After the early 2000s episode, high incomes and inequality rose quickly during the upturn as the stock market recovered. There is little reason to expect this not to be replicated in coming years after the sharp 2009 fall.

People would be well-advised to keep this in mind – too many observers, such as Megan McArdle, have highlighted this drop in top incomes by 2009 and suggested that maybe income inequality has stopped growing, saying “We don’t want to spend years focused on income inequality, only to learn that the financial crisis fixed it for us.” A New York Times article echoed this perspective. EPI countered in a post yesterday with new data showing that wages for top earners have restarted their upward march after hitting a post-recession low in 2009 – meaning that income inequality (or at least inequality of wages) is, not surprisingly, already rising again.

The fall in incomes at the top between 2007 and 2009 had much to do with the fall in realized capital gains and EPI pointed out that capital gains actually fell far more than the stock market decline. That makes sense since households would not want to sell off their stock when prices are low. The graph below plots average capital gains income for the top 1 percent of income earners along with the S&P 500 index (both indexed to 1989) and shows that this “overreaction” of realized capital gains relative to stock market movements is far from unusual.

This dynamic was very much at play in the 1990s and 2000s. Capital gains income for top earners skyrocketed faster in the 1990s than the growth of the stock market and then fell faster after the technology bubble crash. This was followed by capital gains growth faster than the stock market in the recovery period from 2003 to 2007. Unfortunately, the data from Emmanuel Saez and Thomas Piketty on incomes used in this graph only extend to 2008, but it isn’t difficult to see what is happening here. The behavior of the S&P 500 since 2008 is shown, with the recovery from the 2009 bottom clearly visible. As reported in our blog post yesterday, we know that capital gains fell further in 2009, which surely helps to explain the dip in the top 1 percent of incomes that McCardle highlights.

But we also can see the stock market increase in 2010 and 2011, which is surely driving capital gains income for the top 1 percent higher. The important part of the inequality debate is not to cherry-pick individual years where the rich suffer, or do exceptionally well, but to show the unmistakable trend over time. Temporary reductions in the relative income of the very rich are a common feature during recessions – but so far, the long-run trend of growing income concentration has re-established itself quickly after these cyclical downturns. Given this, it is most unlikely that the financial crisis has fixed income inequality.

(Wonky note: The spike in capital gains income in 1986 was due to a change in tax law in 1986: The Tax Reform Act of 1986. The law raised the rate on capital gains income, effective January 1 1987, from 20 percent to 28 percent.  Long-term capital gains on corporate stock were seven times their December 1985 levels in December 1986. For more, see “The Labyrinth of Capital Gains Tax Policy: A guide for the perplexed” by Leonard Burman, Brookings Institution Press, 1999.)

Yesterday, the House of Representatives passed legislation authored by Rep. Dave Camp (R-Mich.) that would reduce the maximum number of weeks of unemployment insurance benefits that the federal government provides to jobless workers from 73 weeks to 33 weeks.

Claims that unemployment insurance benefits dissuade the jobless from looking for work are untrue, as the accompanying chart shows. Research by Carl Van Horn and the Heldrich Center at Rutgers University shows that unemployed workers who receive unemployment compensation do more to find a job than those who never receive benefits. They do more online job searching, are more likely to look at newspaper classified ads, and are more likely to send email inquiries and applications to prospective employers.

The reason unemployed Americans can’t find jobs isn’t a failure to look. As EPI economist Heidi Shierholz points out, they can’t find jobs because there are 10.6 million more unemployed workers than there are available jobs.

—with research assistance from Hilary Wething

Given presidential contender Newt Gingrich’s recent surge to frontrunner status in the polls, it was only a matter of time before the Tax Policy Center dug into Gingrich’s doozy of a tax plan. Howard Gleckman’s analysis on TaxVox notes that Gingrich’s plan represents such a gargantuan tax cut for upper-income households that it will blow a hole of nearly $1 trillion in the federal budget annually (more than doubling projected budget deficits). To date, Gingrich is winning the voodoo economics derby for peddling the steepest tax cuts for top earners and the biggest deterioration in the fiscal outlook.

According to TPC, the Gingrich plan would reduce revenue in 2015 by $850 billion relative to current policy and $1.28 trillion relative to current law; it’s important to remember that the difference in revenue levels projected under current policy and current law represents the difference between an unsustainable and sustainable budget outlook in the next decade.

Like Rick Perry’s tax plan, Gingrich has proposed an optional flat income tax but at a lower rate of 15 percent (to Perry’s 20 percent) beyond personal deductions of $12,000 for filers and dependents. Optional tax schemes are always a recipe for revenue loss, and this is especially true when they offer a 20 percentage point reduction in the top marginal tax rate. Again like the Perry plan, Gingrich’s alternative income tax would preserve deductions for charitable giving and home mortgage interest (though, unlike the Perry plan, maintain the earned income tax credit and child tax credit). Like almost every one of the GOP candidates’ tax plans, Gingrich would eliminate all taxes on capital gains, dividends, and large estates and gifts. (See this TPC summary table of the GOP presidential candidates’ tax plans.)

But the real coup de grâce lies on the corporate side, where Gingrich would drop the corporate income tax rate from 35 percent to 12.5 percent, allow immediate expensing of capital investments, and eliminate all taxes on corporations’ foreign income (i.e., moving to a territorial tax system). There is much talk of reducing the top corporate income rate in exchange for eliminating business tax loopholes and broadening the tax base, but there is no base-broadening in the Gingrich plan—only base-narrowing coupled with rate reductions. Economists Thomas Piketty and Emmanuel Saez found that the decline in corporate income taxation has been a prime driver of declining progressivity in the U.S. federal tax code since the 1960s, a trend that would be greatly exacerbated by Gingrich’s tax plan.

Rather than shifting the burden of taxation from upper-income households to the middle class, the Gingrich plan would lower average tax rates across every income level. Effective tax rates would peak for households earning between $100,000 and $200,000 and then fall precipitously (see chart below). Households earning over $1 million annually would see the effective tax rate plunge to 11.9 percent—below that levied on families earning $40,000 to $50,000 a year, according to TPC. Gingrich would go all in on the failed supply-side experiment by more than quadrupling millionaires’ tax cuts from $141,000 under the Bush-era tax cuts to $748,000 (relative to current law). Relative to current tax policies, millionaires would see a tax cut of $607,000 in 2015, further reducing their tax bill by 62 percent.

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Of course, pushing massive tax cuts for the highest-income households is par for the course among this year’s GOP presidential field. Ezra Klein compares the impact on average taxes under the tax plans of Gingrich, Perry, and Herman Cain, nicely depicting the unambiguous theme of massive tax cuts at the upper-end of the earnings distribution. Yet, as President Obama noted in his speech in Osawatomie, Kan., we’ve tested the trickledown theory before and it didn’t work; the Bush-era tax cuts were an ineffective, unfair, and expensive failure that presided over the weakest economic expansion since World War II. (This economic legacy hasn’t dissuaded Gingrich from crediting himself with helping “Ronald Reagan and Jack Kemp develop supply-side economics.”)

But Gingrich’s tax plan surpasses the supply side experiments of the past and those proposed by his rivals in terms of defunding government. I somehow doubt that Gingrich’s proposed lunar mineral mining colony would pay for a fraction of these highly regressive and dear tax cuts. Not even eliminating Medicare (and its projected $688 billion expenditure for 2015) would pay for this tax proposal.

In his recent speech in Osawatomie, Kan., President Obama spoke to the challenges of rebuilding the middle class, drawing a clear distinction between policies that foster shared prosperity and those that stack the deck against middle-class Americans. In a sharp rebuke of supply-side economic policies, the president stressed that the costly Bush-era tax cuts produced the “slowest job growth in half a century” while making it harder to pay for public investments as well as the economic security programs forming the backbone of the middle class. As our colleague Ross Eisenbrey wrote last week, the president flatly rejected the “failed ‘you’re on your own’ economic policies that got us into the worst recession in 75 years.” The deterioration of the middle class necessitates that economic policy focus on promoting economic opportunity and mobility rather than prioritizing those already at the top of the earnings distribution.

The first step to rebuilding the middle class is restoring full employment. Beyond the scarring effects wrought on the families of 24 million un- and underemployed workers, massive and persistent slack in the labor market will preclude employed workers from negotiating real wage increases (needed to reverse the decade-long trend of falling real median household income). Yet fiscal policy is poised to drag heavily on economic growth and employment entering 2012; Congress should be expanding efforts to accelerate growth and hiring, but a litany of meaningful job creation measures have instead been filibustered in the Senate. As Congress bickers over continuing the payroll tax holiday and Emergency Unemployment Compensation (EUC) program (set to expire at the end of the month),  a new bill has been put forth that would meaningfully address the jobs crisis and begin restoring economic security for the middle class.

The bill that does this, the Restore the American Dream for the 99% Act (H.R. 3638), was rolled out by Congressional Progressive Caucus co-chairs Keith Ellison (D-Minn.) and Raul Grijalva (D-Ariz.) earlier today. Our analysis of the bill’s job creation measures shows that it would meaningfully boost near-term employment – to the tune of almost 2.3 million jobs in fiscal 2012 and 3.1 million jobs in fiscal 2013 – all while improving the long-term fiscal outlook.

The Act for the 99% would continue the EUC program and replace the payroll tax holiday with the more targeted Making Work Pay tax credit. But the act spans far beyond the scope of job creation measure currently being considered. The bill would also fund direct job creation programs, increase federal surface transportation investments, reinstate higher federal matching rates for Medicaid, and defuse the automatic spending cuts scheduled under the Budget Control Act (which, if triggered, will greatly amplify the fiscal headwinds impeding recovery).

The job creation elements of the bill would be more than financed by accompanying deficit-reduction proposals, which include enacting a millionaire surcharge, reducing spending by the Department of Defense, closing oil and gas loopholes, and taxing financial speculation. As President Obama said in his recent speech, “This isn’t about class warfare. This is about the nation’s welfare. It’s about making the choices that benefit not just the people who’ve done fantastically well over the last few decades, but that benefits the middle class, and those fighting to get into the middle class, and the economy as a whole.”

By focusing on boosting employment and economic growth—and by financing these measures with offsets that will have relatively little adverse impact on either the economic recovery or the economic security of the middle class—the Congressional Progressive Caucus has offered a legislative blueprint to meet President Obama’s vision for rebuilding the middle class.

In Jason DeParle’s New York Times article today, it appears that some folks are claiming that the inequality that Occupy Wall Street has called attention to is a thing of the past and of no concern, all because income inequality declined during the recession between 2007 and 2009. Bunk! That decline is the result of the stock market decline and the very same trend occurred in the early 2000s recession only to end with inequality reestablishing and exceeding its previous heights by 2007 (as DeParle quoted Jared Bernstein saying in the article. Go Jared!).

Wage and salary data show wage inequality rising from 2009 to 2010 (recovering more than a third of lost ground), suggesting that it is too early to shed crocodile tears for the top 1 percent. Regardless of last year’s trend, it remains the case that income inequality in 2009 was still substantially greater than it was in the late 1970s. Moreover, the conclusion that a lion’s share of income gains accrued to the top 1 percent or even the top 0.1 percent, while income growth was modest for the bottom 90 percent (as Josh Bivens and I recently wrote) remains absolutely true.

As Josh and I explained, there are three dynamics at play in the shift of income up to the top 1 percent and the top 0.1 percent. First, there’s the shift upwards in the distribution of wage and salaries, which also reflects the “realized option income” provided to CEOs that are counted as wage income. Second, there’s the shift upwards in the distribution of capital income (capital gains, interest, dividends): According to the Congressional Budget Office, the top 1 percent reaped 57 percent of capital income in 2007, up from 38 percent in 1979. Last, there is a shift toward greater capital income and proportionately less labor compensation since 1979.

What’s happened to these dynamics in the recession? We know the stock market declined more than a third from 2007 to 2009 (judged by the NYSE and the S&P indices) and the realized capital gains at the top fell over 70 percent (according to the IRS data for those  with incomes $500,000 or more, which I will refer to as those with top incomes). Though capital gains comprised 36 percent of top incomes in 2007, the stock market decline and an even far greater drop in capital gains meant that capital gains contributed only 16 percent of their income in 2009. That explains a lot of the fall in inequality between 2007 and 2009. However, the 20 percent gain in the stock market in 2010 should have helped top incomes recover a bunch of lost ground, don’t you think? I would expect gains in the stock market and realized capital gains to fare better than real wages over the next few years, fueling greater inequality.

We also know that corporate profits are now substantially greater than they were before the recession. In fact, as Heidi Shierholz and I wrote in August, “In 2010 the share of corporate income going to profits was 26.2%, the highest share since the years during World War II, when national policy used wage and price controls to consciously suppress wage growth.” So, it seems that one of the dynamics causing greater inequality is certainly going strong.

I (along with research assistant Nicholas Finio) have been tracking the trends in top wages using the historical data produced by Wojciech Kopczuk, Emmanuel Saez, and Jae Song for 1979 through 2004 (developed with access to Social Security earnings microdata) and updating their analysis using wage data published by the Social Security Administration. These wage data are available for 2010 so we can get a look at part of the overall income picture to see how quickly, if at all, income inequality is recovering lost ground. As the graph shows, the share of wages earned by the top 1 percent fell from its historic high in 2007 of 14.1 percent to 12.2 percent in 2009. That is what the top 1 percent’s share of wages was back in 2003 in the last recession and what it was in 1996, seemingly reversing more than a decade of wage inequality. However, the top 1 percent’s share of wages was just 7.3 percent in 1979 so the drop by 2009 was nowhere close to reversing the three-decades growth of wage inequality.

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In 2010, the wages of those in the top 1 percent grew 6.8 percent in inflation-adjusted terms while those in the bottom 90 percent saw their real annual earnings fall 0.7 percent. Consequently, the top 1 percent’s share of wages grew to 12.9 percent, the same as in 2004, and recovered more than a third of the loss from 2007 to 2009. The shift in wage distribution has mostly occurred among the top 5 percent and hasn’t really trickled down to the bottom 90 percent, whose wage share in 2010 was 61.5 percent. That puts the bottom 90 percent’s wage share back to where it was in 2006 when it was the lowest in any year (dating back to 1937). Note, that the bottom 90 percent had 69.8 percent of all wages in 1979; so there certainly has been a tremendous growth of wage inequality since 1979 despite whatever drop there’s been in the recession. Clearly, this much ballyhooed reversal of wage inequality hasn’t meant much to the vast majority.Read more

Ezra Klein made an excellent point this morning – one that we’ve been making virtually every month since early 2009 – that the “official” unemployment rate is currently understating weakness in the labor market because job prospects are so bad that literally millions of would-be workers have given up looking for work or simply never began looking.  (Interestingly, the shrinkage in the labor force over the last two years has been occurring among the more-educated groups in the labor market but not amongst those with the least education.)

For the record, I don’t blame the Bureau of Labor Statistics for the shortcomings of the unemployment rate – they do a fine job of measuring the unemployment rate as it is defined (namely, as the number of people available to work who are not working but are actively looking for work out of the total number of people who are either working or actively looking for work in a given month). The problem is that the information provided by the unemployment rate is difficult to interpret anytime the labor force is not growing normally, like right now. However, BLS produces a number of other measures that can help round out the picture of the labor market at a time like this, including measures of underemployment,  duration of unemployment, the employment-to-population ratio, and the number of people who experience unemployment at some point during a year.  All of these measures paint a much bleaker picture right now than the unemployment rate.

If I had to pick one, I think the best measure for assessing recent labor market trends is the employment-to-population ratio of 25-54-year-olds, which is simply the share of the age 25-54 population that has a job.  (I like using the 25-54-year-old population, because then we are certain that any trends we see are not being driven by retiring baby-boomers or increased college enrollment of young people, but the basic picture using the entire working-age population is the same.)

As the figure shows, the labor market plunged dramatically through the fourth quarter of 2009, and then, for the last two years, has basically bumped around at the bottom of that extremely deep hole. In other words, the improvement in the unemployment rate over the last two years, from 10 percent in the fourth quarter of 2009 to 8.6 percent today, is due virtually entirely to people dropping out of, or not entering, the labor force – not to a larger share of potential workers finding work. It goes without saying that that kind of improvement in the unemployment rate is not what we’re looking for.

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