On Friday, EPI’s Larry Mishel and I joined a group of workers and community activists who are urging the Federal Reserve to resist pressures to raise interest rates before the labor market has fully recovered and who are also calling for greater public input into the selection of regional Fed bank presidents and board members.
At a press briefing outside the Fed before the meeting, organized by the Center for Popular Democracy, featuring workers and community organizers, I delivered the following remarks:
Hello, I’m Josh Bivens, the Director of Research and Policy at the Economic Policy Institute here in Washington, DC and a macroeconomist. I’m going to try to provide some economic context for today’s meeting and highlight the high stakes in this debate.
But I’ll start just by saying that I think today’s meeting with Federal Reserve Chair Yellen and this group is a hugely encouraging event.
Encouraging because the Federal Reserve is the most influential policymaking institution in the United States—and likely the world—yet far too few American realize the enormous stake they have in decisions made there.
The September Job Openings and Labor Turnover Survey (JOLTS) data released yesterday showed job openings falling as hires rose. Over the business cycle thus far, both opening and hires fell dramatically over the recession, then have been climbing back up throughout the recovery.
What’s striking from the first figure below is that openings fell at a faster rate than hires during the recession and have also returned at a faster rate over the recovery. Both are now at least back to their prerecession levels, and growth in openings has now overtaken growth in hires. However, returning to their immediate prerecession levels is not a particular milestone, because it fails to take into account the growth in the working age population.
The recent excess of openings over hires has led some to infer that this suggests a shortage for some types of workers, and evidence that a mismatch between workers’ skills and employers’ demands has become a key labor market problem. We should note that there are substantial other pieces of evidence that are inconsistent with this “skills mismatch” theory. For example, there are still 2 unemployed workers for every job opening in the economy. And, there are no sectors where jobseekers outnumber job openings. That is pretty strong evidence against any shortage of skills in the economy today, but the gap in the growth of opening and hires have led some to suggest that there is a one.
The figure below shows the number of unemployed workers and the number of job openings in September, by industry. This figure is useful for diagnosing what’s behind our sustained high unemployment. If today’s labor market woes were the result of skills shortages or mismatches, we would expect to see some sectors where there are more unemployed workers than job openings, and others where there are more job openings than unemployed workers. What we find, however, is that unemployed workers exceed jobs openings across the board.
Some sectors have been closing the gap faster than others. Health care and social assistance, which has been consistently adding jobs throughout the business cycle, has a ratio quickly approaching 1-to-1. On the other end of the spectrum, there are 6.5 unemployed construction workers for every job opening. Removing those two extremes, there are between 1.1 and 3.1 as many unemployed workers as job openings in every other industry. This demonstrates that the main problem in the labor market is a broad-based lack of demand for workers—not, as is often claimed, available workers lacking the skills needed for the sectors with job openings.
Unemployed and job openings, by industry (in millions)
|Professional and business services||1.1383||.8208|
|Health care and social assistance||.7028||.6798|
|Accommodation and food services||.9651||.5539|
|Finance and insurance||.2733||.2183|
|Durable goods manufacturing||.5034||.1746|
|Transportation, warehousing, and utilities||.3823||.1598|
|Nondurable goods manufacturing||.3262||.1081|
|Real estate and rental and leasing||.1212||.0519|
|Arts, entertainment, and recreation||.2258||.0738|
|Mining and logging||.0558||.0274|
Note: Because the data are not seasonally adjusted, these are 12-month averages, September 2013–August 2014.
Source: EPI analysis of data from the Job Openings and Labor Turnover Survey and the Current Population Survey
The September Job Openings and Labor Turnover Survey (JOLTS) data released this morning from the Bureau of Labor Statistics showed mostly positive news. The one bleak spot was job openings, which fell by 118,000 jobs, to 4.7 million. On the other hand, the hires rate and the quits rate both increased, while the layoffs rate held steady.
The figure below shows the hires rate, the quits rate, and the layoffs rate. Layoffs, which shot up during the recession, recovered quickly once the recession officially ended. Layoffs have been at prerecession levels for more than three years. This makes sense—the economy is in a recovery and businesses are no longer shedding workers at an elevated rate. The fact that this trend continued in September is a good sign.
But two things need to happen before we see a full recovery in the labor market: Layoffs need to come down and hiring needs to pick up. While it’s been generally improving, the hires rate, , has not yet come close to a full recovery—it’s well below its prerecession level.
The voluntary quits rate, which has been flat for the last seven months, saw a spike up in September. A larger number of people voluntarily quitting their job indicates a labor market in which hiring is prevalent and workers are able to leave jobs that are not right for them, and find new ones. While these series are somewhat volatile, the sharp increase in the quits rate is a positive sign. That said, there are still 5 percent fewer voluntary quits each month than there were before the recession began. A return to pre-recession levels of in voluntary quits would indicate that fewer workers are locked into jobs they would leave if they could.
Hires, quits, and layoff rates, December 2000–September 2014
|Month||Hires rate||Layoffs rate||Quits rate|
Note: Shaded areas denote recessions. The hires rate is the number of hires during the entire month as a percent of total employment. The layoff rate is the number of layoffs and discharges during the entire month as a percent of total employment. The quits rate is the number of quits during the entire month as a percent of total employment.
Source: EPI analysis of Bureau of Labor Statistics Job Openings and Labor Turnover Survey
This morning’s Job Openings and Labor Turnover Summary (JOLTS) shows that the total number of job openings in September was 4.7 million, down 118,000 since August. Meanwhile, there were 9.3 million job seekers (unemployment data are from the Census’s Current Population Survey), meaning that there were 2.0 times as many job seekers as job openings in September. Put another way, job seekers so outnumbered job openings that about half of the unemployed were not going to find a job no matter what they did. In a labor market with strong job opportunities, there would be roughly as many job openings as job seekers.
While the jobs-seekers-to-job-openings ratio held steady, it has otherwise been steadily declining since its high of 6.8 to 1 in July 2009, as you can see in the figure below. The ratio has fallen by 0.9 over the last year.
At the same time, the 9.3 million unemployed workers understates how many job openings will be needed when a robust jobs recovery finally begins, due to the existence of 6.3 million would-be workers (in September) who are currently not in the labor market, but who would be if job opportunities were strong. Many of these “missing workers” will become job seekers when we enter a robust jobs recovery, so job openings will be needed for them, too.
Furthermore, a job opening when the labor market is weak often does not mean the same thing as a job opening when the labor market is strong. There is a wide range of “recruitment intensity” with which a company can deal with a job opening. For example, if a company is trying hard to fill an opening, it may increase the compensation package and/or scale back the required qualifications. Conversely, if it is not trying very hard, it may hike up the required qualifications and/or offer a meager compensation package. Perhaps unsurprisingly, research shows that recruitment intensity is cyclical—it tends to be stronger when the labor market is strong, and weaker when the labor market is weak. This means that when a job opening goes unfilled when the labor market is weak, as it is today, companies may very well be holding out for an overly qualified candidate at a cheap price.
Congress is back in session this week, following an election that saw the Democrats lose control of the Senate and fall further into the minority in the House. A number of postmortems about the election have focused on the issue of wage stagnation—the fact that wages for the bottom 70 percent of the American workforce have essentially seen no increase at all since 1979. Worse, without the full-employment period of the late 1990s that pushed up wages across the board, wages for this group of workers would have outright fallen over the past three decades.
One of the better insights in these postmortems on wages and politics came from Gene Sperling, former economic advisor to both the Clinton and Obama administrations, who told the New York Times that jump-starting wage growth “is not a silver-bullet issue.” Now, part of why I think this is such a good insight is that I’ve said it many times in the past—arguing for a wages policy agenda a long time ago—and reiterated it recently with some colleagues, arguing again for a wage policy agenda with the launch of our Raising America’s Pay project.
But I also like this insight because it’s just obviously true. Unlike, say, health reform or climate change abatement, this is not an issue that lends itself to a single omnibus piece of legislation that will pass and make the problem go away (or even ameliorate it a lot).
This week, U.S. Trade Representative Michael Froman announced a “breakthrough” agreement between the United States and China to expand the World Trade Organization’s (WTO) Information Technology Agreement (ITA), which eliminates tariffs among 54 countries in high-tech products. Froman enthusiastically noted that the ITA was last amended in 1996, when “most of the GPS technology… [and] high-tech gadgetry that we rely on in our lives didn’t even exist.” The United States has a massive and rapidly growing trade deficit in computers and electronic products and related electronic “gadgets.” The proposed expansion of the Information Technology Agreement will open the door to a massive increase in job-destroying imports of Chinese high-tech products.
The U.S. trade deficit in computers and parts increased from $19.9 billion before China entered the WTO in 2001, to an estimated $160 billion in 2014, as shown in the figure below. Job-destroying imports exceed job-supporting exports in this industry by more than 15 to 1. Further opening of the U.S. market to Chinese high tech products will cost hundreds of thousands of jobs. Growing U.S. trade deficits in computers and electronic products eliminated more than 1 million U.S. jobs between 2001 and 2011 alone. Currency manipulation by China (and other countries) acts as a subsidy to all of China’s exports of computers and other products, and as a tax on U.S. exports to China, and every country where U.S. firms compete with Chinese products. Froman is giving away access to U.S. hi-tech markets and seems unaware that the U.S. computer manufacturing and parts industry has been decimated by cheap, subsidized Chinese imports.
The macroeconomic policy question du jour is when will the Federal Reserve begin raising short-term interest rates to slow economic recovery and reduce inflationary pressures? We at EPI have been pretty clear on when they should do this: not until wage-growth is much, much stronger.
Since the economic channel through which raising rates stems inflationary pressures is slower job growth, leading to a reduction in workers’ bargaining power and reduced wage growth, this makes data on what is actually happening to wage growth crucially important to Fed decision making.
EPI economists have been tracking this a lot recently and have shown how the Fed’s target for overall price inflation (2 percent) is consistent with wage growth of at least 3.5 percent. We calculate this simply by noting that trend productivity growth is likely at least 1.5 percent and pointing out that it takes wages costs in excess of productivity growth to spur any upward pressure on prices at all. We’ve also noted that the very large decline in the overall share of national income going to labor compensation (see Figure G here) means that the economy could afford an extended period of wage growth outpacing the sum of productivity and price inflation, to allow labor income to claw back some gains it lost to capital owners earlier in the recovery.
Yesterday, the macroeconomic team at Goldman Sachs implicitly argued that this 3.5-4 percent wage growth target is too cautious. In a research note released today (no link available, sorry), they argue that trend productivity growth in the non-farm business sector is 2 percent or higher, not 1.5.
Now, you need to discount a little of this (roughly 0.2 percentage points) to translate productivity in the non-farm business sector to total economy productivity, but the fact remains that even extraordinarily cautious estimates of labor productivity growth (i.e., ours) still means that wage-growth could almost double from today’s levels for an extended period before it puts enough upward pressure on wages to force the Fed to act.
In an article just published in the journal Race and Social Policy, I reviewed why education policy is inseparable from civil rights policy. Failure to recognize this connection is the greatest impediment to improving the academic performance of disadvantaged African American and other minority and low-income children.
For years now, education policymakers and advocates have attempted to close the black-white achievement gap by reforming schools. The primary vehicles have been greater accountability for schools and teachers, higher expectations for students, deregulation and semi-privatization by charter schools, and more recently, curricular reform with the Common Core.
All efforts, however, have come up short. The racial achievement gap remains.
At least 650,000 college-educated temporary foreign workers are employed in the United States through the H-1B visa program, mostly in the high-tech industry. The H-1B is a well-known guestworker program that is inadequately—but at least minimally—regulated, with an annual limit and a requirement that employers pay a “prevailing” wage. Other visa programs, like the L-1 and the F-1 Optional Practical Training (OPT) program, have almost no rules and receive little scrutiny, but are used to employ hundreds of thousands of foreign tech workers. Behind the scenes, the tech industry is pushing President Obama to expand them both as part of executive actions he’s considering on immigration. He should resist.
Twenty years ago, the radical wing of the Republican Party announced its “Contract With America,” a set of policies and actions Rep. Newt Gingrich and his caucus pledged to accomplish if they were elected to a majority in Congress. The Contract included eight internal reforms to change congressional operations (things like applying labor laws to Congress and putting term limits on committee chairmen) and ten bills affecting national policy that would be brought to the floor and voted on within the first 100 days of the new Congress.
Gingrich’s early battles ultimately ended in victory for the public and for the environmental and consumer protections he wanted to undo. Gingrich’s bills were made worse as they moved through committee and were amended in the House and Senate, finally resulting in what one senior Republican Senate staffer called “a revolution”—a system that would allow any corporation to escape enforcement through legal or procedural loopholes. Every regulation would be effectively voluntary, and the polluters and producers of unsafe products would have nothing to fear from the EPA, the Consumer Product Safety Commission, OSHA, or any other regulatory agency.
The vehicle for this revolution was one of the first bills considered and passed in the House in 1995, “The Job Creation and Wage Enhancement Act.” Its goal was to subject federal regulations—regardless of statutory mandates to the contrary—to new risk assessment and cost-benefit analysis requirements and to create multiple opportunities for businesses to block federal rules and interfere with their enforcement. Big chemical and pharmaceutical manufacturers didn’t want clean water laws interfering with their profits, the meat industry wanted to prevent new rules about bacteria and contamination, and construction companies didn’t want to have to comply with new workplace safety standards. The legislation would have stopped new rules in their tracks.
What adjective should we use when we talk about job growth of 214,000 in October? Is it strong, weak, solid? Is it enough? Enough for what?
Take an amble with me through some calculations. If you don’t care to take a walk, the punchline is that if we extrapolate this rate of jobs growth into the future, it will be 2018 before we return to a labor market resembling the one we had before the recession began.
Now for the math. Employment fell dramatically through the recession and its aftermath. The economy has been consistently adding jobs over the last four and a half years. But, we are still experiencing a 6.1 million job shortfall. That’s the amount of jobs needed to keep up with the growth in the potential labor force, shown in the figure below.
Today’s jobs report from the Bureau of Labor Statistics shows that payroll employment has increased by more than 200,000 jobs for nine consecutive months (since February 2014) and the average rate of growth this year has been 232,000 jobs per month, compared to 197,000 jobs per month over the same period last year.
At this stage in the recovery, these numbers demonstrate an important point about the importance of pursuing full employment in lowering unemployment among people of color. The point to be made here is that the longer the economy continues to add jobs, the greater the impact on labor market outcomes for people of color. Over the past twelve months (since October 2013), African Americans and Hispanics have seen larger relative improvements than whites in all the major labor market indicators— unemployment rate, labor force participation, and employment-population (EPOP) ratio. And, most if not all of those improvements have taken place this year (since January 2014). The following chart shows these relative changes over the period of interest.
Starting with the unemployment rate, whites have seen a 1.5 percentage point decline since October 2013, compared to 2.1 and 2.2 percentage points for African Americans and Latinos, respectively. While improvements in the unemployment rate can be distorted by people leaving the labor force, this has not been the case for people of color. The labor force participation rates for African Americans and Latinos have increased over the past year, but declined for whites. In fact, as whites have left the labor force at a higher rate since January 2014, African Americans have entered at a greater rate.
Percentage-point change in unemployment rate, labor force participation rate, and employment-to-population ratio, by race and ethnicity, Oct. 2013–Oct. 2014
|Measure||Race/ethnicity||Oct. 2013–Oct. 2014||Jan. 2014–Oct. 2014|
|Labor force participation rate||White||-0.1||-0.5|
Source: EPI analysis of Current Population Survey public data series
The top line story coming out of today’s jobs report should be about wages. Nominal wage growth remains sluggish—far too slow to set a time frame for raising interest rates, or even start a conversation about it. For more on that, see the most recent monthly wages figure and quarterly data and this explainer.
Job growth, meanwhile, has been solid, but not strong. The unemployment rate is still slowly moving in the right direction. But, we are still far from the economy we had before the great recession began. At the rate jobs were added in October (214,000), it will be 2018 before we return to 2007 normalcy.
The employment-to-population ratio for prime-age workers is a great measure of the economy—and a favorite of my predecessor—which captures a variety of different labor market components. The employment-to-population ratio (or EPOP) is simply the share of the population with a job. This allows us to sidestep the issue of whether potential workers are in the labor force—though we know there are still a lot of missing workers out there (5.75 million at last count). Also, when we restrict our attention to prime-age workers (25-54 years old), it serves the important purpose of avoiding confounding changes in employment that are not due to labor market conditions, but are instead due to longer-run structural factors, such as baby boomers hitting retirement age.
From the figure below, it is clear that jobs are returning—EPOPs have been on the rise. Growing shares of prime-age workers are getting jobs. That is good news, but it’s clear how far we have to go—look at the sharp drop in the EPOP during the great recession. Then, it is clear that we are slowing climbing out, but we have far to go.
In the BLS report this morning, overall jobs numbers were solid and the unemployment rate continued to show signs of improvement. However, the unfortunate downside of this morning’s release is that wage growth has continued to be sluggish. Average hourly earnings of all employees on nonfarm payrolls and average hourly earnings of production and nonsupervisory employees on private nonfarm payrolls saw 2.0 percent and 2.2 percent growth, respectively, over this last year.
Despite fears from some inflation hawks, the fact is that the weak labor market of the last seven years has put enormous downward pressure on wages, and there has been no significant pickup in nominal wage growth in recent years. Wage growth is far below the 3.5 percent rate consistent with the Federal Reserve Board’s inflation target of 2 percent, and far below the 4 percent rate that could easily be absorbed for a while to restore labor’s share of national income from its current historic lows.
This lackluster wage growth is a clear indicator that there’s still considerable slack in the labor market. With so many Americans looking for work—and millions more who would be looking for work if job opportunities were stronger—employers simply don’t have to offer wage increases to get and keep the workers they need. It’s a positive sign that the economy is growing, but it’s simply not enough for workers to feel the effects in their paychecks.
Year-over-year change in nominal average hourly earnings of all private nonfarm employees and private production/nonsupervisory workers, 2007–2014
|Month||All private employees||Production/nonsupervisory workers|
Note: Wage target consistent with Federal Reserve Board's 2 percent inflation target and 1.5% labor productivity growth assumption. Light shaded area denotes recession.
Source: Authors' analysis of Bureau of Labor Statistics' Current Employment Statistics, public data series.
On Friday, the Bureau of Labor Statistics will release the October numbers on employment, unemployment, and nominal wages. Consensus forecasts are that that unemployment rate will hold steady, while total employment continues to rise, likely adding over 200,000 jobs. If job growth continues on this trajectory, it will likely keep on the front burner debates over just how much “slack” remains in the labor market, and whether the Federal Reserve should begin raising rates sooner or later.
But the most reliable indicator of slack at this point is not employment growth or unemployment—it’s the nominal wage series. The numbers on nominal wage growth from the Employment Situation, and other related government data, are likely to be the single most important indicator driving the Fed’s decisions in coming months.
Despite fears from some inflation hawks, the fact is that the weak labor market of the last seven years has put enormous downward pressure on wages, and there has been no significant pickup in nominal wage growth in recent years.
The figure below shows year over year nominal wage growth from a variety of data sources.
Quarterly wage series, 2000Q1–2014Q3
|Average hourly earnings of production/nonsupervisory workers||Average hourly earnings of all private employees||CPS-ORG median*||ECI, wages and salaries, all private workers||ECEC, wages and salaries, all private workers|
Note: Wage target consistent with Fed 2% inflation target and 1.5% productivity growth assumption. CPS-ORG median is a six-month moving average.
Source: Author's analysis of Bureau of Labor Statistics' Current Establishment Survey, Current Population Survey (CPS), Total Economy Productivity (unpublished), Employment Cost Index (ECI), and Employment Costs for Employee Compensation (ECEC).
As you can see in the figure, even quarterly wage measures exhibit a fair amount of volatility. Taken together, however, it is clear that wage growth is far below the 3.5 percent rate consistent with the Federal Reserve Board’s inflation target of 2 percent, and far below 4 percent rate that could easily be absorbed for a while to restore labor’s share of national income from its current historic lows. It’s clear that Fed policymakers should continue its low interest rate policy until the wage data really turns around. For a longer analysis of the Fed target and what to watch for in upcoming months on wage growth, see this earlier explainer. On Friday, we will continue to track any changes in monthly nominal wages and put them in broader economic context.
This post is the latest in a series that has aimed to question the conventional Beltway wisdom about the supposed harm to the economy inflicted by the corporate tax code. Today, we’ll take on the idea that’s long been fermenting on the right, but now increasingly popping up in more mainstream outlets, to abolish the corporate tax code entirely. While there are reasons the idea of ceasing to tax corporations makes sense, the idea’s proponents have underestimated its drawbacks.
Getting rid of the corporate code entirely has some intrinsic appeal. Because corporate taxes are ultimately paid out of individuals’ pockets, it can seem desirable to tax these individuals directly—without dealing with all of the exemptions, credits, loopholes, and deductions in the corporate code, not to mention the “tax avoidance industry” such provisions support. This could potentially be a more efficient way to raise the same amount of revenue. However, there are three main obstacles that stand in the way of getting rid of the corporate code entirely.
- The corporate tax code is a progressive revenue raiser. While the corporate code only brings in about 10 percent of federal revenue, that’s still $315 billion in 2014. It’s also really progressive; the lowest fifth of earners pay about 0.9 percent of their income in corporate income tax, while the top 0.1 percent of earners pay 9.7 percent. According to the Congressional Budget Office, about four-fifths of corporate income is held by the top fifth of the income scale, and about half is held by the top 1 percent. Thus, as Jared Bernstein points out, “Unless we could replace it with higher taxes on those same households… scrapping or even just lowering the corporate tax rate would increase after-tax income inequality.” Raising that kind of revenue from the same sources, in the absence of a corporate income tax, is tougher than it may seem. The plan cited by the New York Times’ Josh Barro would replace the corporate tax by taxing individuals’ capital gains at ordinary income tax rates—a proposal long favored by progressives—and that would still only make up half of the lost revenue.
- Unintended consequences. As we’ve seen this year in Kansas’s experiment with eliminating corporate taxation, the unintended consequences are enormous. For instance, if corporations don’t pay taxes, but people still do, what would stop individuals from simply incorporating themselves for tax reasons—thus paying no taxes until their “corporate” earnings are distributed? (Kansas lost out on almost $300 million of revenue over a two-month period this year, for just this reason.) This maneuver would be just the tip of the tax avoidance iceberg if the corporate code were abolished. Getting rid of the corporate tax code and its myriad opportunities to evade taxes would not necessarily result in a system that’s harder to game.
- If you win the race to the bottom, you’re still at the bottom. While scrapping the corporate tax code would represent a “victory” in the international race to the bottom, it would undoubtedly be short-lived, as other countries would certainly react by slashing or zeroing their rates as well. This would be like a game of prisoner’s dilemma in which each suspect ratted out the other and everyone ended up in jail for a long, long time. (Jail in this case would be a hypothetical world in which multinational corporations paid no tax to any country at all.) Currently, every developed country levies a corporate income tax. They may tax different kinds of income and at different rates, but these taxes still exist throughout the world because they provide governments with revenue that would be hard to replace by switching to another tax system.
New Wages and Salaries Data from the Employment Cost Index Show Yet Again It’s Not Quite Time To Declare Mission Accomplished
This morning, the Bureau of Labor Statistics released the 2014 third quarter data from the Employment Cost Index (ECI). Total compensation and wages and salaries for the private-sector workforce both rose 0.7 percent. This is the second straight quarter of faster-than-average growth since the recovery from the Great Recession began. While this is absolutely a move in the right direction, we shouldn’t declare “mission accomplished” in spurring decent wage growth. The figure below shows the year-over-year growth rates of wages from a variety of measures: the ECI, hourly wages of all workers and hourly wages of production and nonsupervisory workers (the latter two from the monthly payroll survey, which will be updated again in a week).
There are two clear trends to note from the graph. First, all the series move fairly consistently with each other over time. In the third quarter, they all measured between 2.0 and 2.3 percent. Second, these growth rates are still far lower than the growth rates in 2007, when the wage growth ranged from 3.1 percent for all workers in the payroll survey to 4.1 percent in the ECI.
Year-over-year growth rates of wages, 2002–2014
|Date||ECI*, all workers||CES**, production/nonsupervisory workers||CES**, all workers|
* Employer Cost Index
** Current Employment Statistics
Note: All series are for private sector workers.
Source: EPI analysis of Bureau Labor Statistics' Employer Cost Trends and Current Employment Statistics
The fact is that the weak labor market of the last seven years has put enormous downward pressure on wages, and there has been no significant and sustained pickup in nominal wage growth in recent years. Employers still don’t seem to have to offer big wage increases to get and keep the workers they need, when hiring rates and net job creation remain far slower than what’s needed to generate healthy labor market outcomes.
Next Tuesday is Election Day. For months, get out the vote campaigns have been under way in communities across the country and the public has endured an endless stream of political ads and robocalls intended to bolster typically sluggish voter turnout during midterm elections. Arguably, the biggest risk to people showing up at the polls on Tuesday is a basic disbelief that their individual vote counts or will do much to change the status quo. On one hand, voters might feel justified in holding this view given that neither party has said (or done) much this election cycle to address growing economic inequality and stagnant living standards, issues that have been top of mind for most Americans for at least the past six years. In fact, the most vocal public figure on this issue in recent months has been someone we didn’t elect – Fed Chair, Janet Yellen.
Just in case reports of strong job growth and declining unemployment this year have lulled our elected leaders into a false sense of security about the public’s level of concern over the economy, they should be reminded that counting matters. Since January of this year, the U.S. economy has added an average of 227,000 jobs per month and the unemployment rate has fallen from 6.6 percent to 5.9 percent. But, according to EPI’s monthly measure of “missing workers,” if job opportunities were significantly stronger, there would potentially be an additional 6.3 million people either working or looking for work and the unemployment rate would be 9.6 percent.
A few years ago, sociologists Becky Petit and Bryan Sykes brought to light an important way in which counting matters when it comes to measuring African American progress. Specifically, Petit and Sykes called into question the accuracy of social and economic indicators used to gauge how well different groups within American society are doing. Most of these indicators are based on the civilian non-institutionalized population. While this is a term few people give any thought to, by definition it excludes people who are in jails, prisons, mental institutions, nursing homes or on active duty in the Armed Forces.
This post originally ran on the Wall Street Journal‘s Think Tank blog.
The Commerce Department’s Bureau of Economic Analysis reported Thursday that gross domestic product–the widest measure of U.S. economic activity–grew at an annualized rate of 3.5% in the third quarter. For the past six months GDP has been growing at a rate of 4.1%. If sustained, this would clearly constitute the recovery shifting into a higher gear.
Sadly, there’s not a lot of evidence that it will be sustained.
For one thing, even with the expansion in the two most recent quarters, growth so far in 2014 has averaged just 2%. Much of the growth in the past six months likely represents bounceback from the 2.1% contraction in the first 3 months of this year.
After dispelling some unwise conventional wisdom about corporate taxes (first that American corporations pay the highest tax rates in the developed world, and then that “tax reform,” as commonly defined by Congress and businesses alike, would be either sound policy or good politics or both), here’s another tired idea that needs to be put to bed: Taxing American multinationals’ overseas profits when they return home “traps” money overseas and is a leading cause of the American corporate code’s “anti-competitiveness.”
The U.S. corporate tax code is unlike many other developed nations’ in that it taxes its multinationals’ profits that are earned overseas. (Taxing profits no matter where they’re made is called a “worldwide” tax system.) However, American corporations may defer payment on these taxes until they bring their overseas profits back to the States in the form of dividends. American corporations are well-versed in ways to use this cash overseas (for example, if classified as “permanently reinvested” in a foreign country, those earnings are exempt from U.S. taxation), and thus avoiding “repatriating” profits and paying taxes owed.
Corporations, and those they’ve managed to bamboozle on this issue, often say that these profits are “trapped” overseas. “Being obligated to pay taxes” is not the same as “trapped.” Imagine that your employer told you he’d love to pay you, but your salary is “trapped” because if you were paid then your employer would be obligated to remit payroll taxes to the Treasury. You would be rightfully skeptical of this “trapped salary” argument. However, corporations routinely trot out this “trapped” line to call for a “repatriation holiday,” during which profits earned in a foreign country could be brought to the United States at a reduced tax rate. (The previous such holiday was granted as a “one-time” deal in 2004, but corporations’ belief that it will be repeated is part of why their overseas cash hoard has grown so large—now up to $2.1 trillion.) Moreover, the anticipated benefits of the one-time tax holiday—increased business investment and hiring here at home—did not materialize; the 15 companies that repatriated the most foreign earnings cut more than 20,000 jobs over the following three years and “slightly decreased the pace of their spending on research and development.” The tax break also cost the U.S. Treasury $3.3 billion in lost revenue.
High-income Households Pay a Large Share of US Taxes—But This Doesn’t Make Our Tax System Progressive
Perhaps the highest priority issue on the conservative agenda is keeping taxes on the highest-income Americans low. Their arguments essentially boil down to claims that raising taxes on “job creators” would doom the economy, and, besides, the government has taken so much from them already that there’s no more left to take.
In the past few weeks, the claim has been making the rounds that the U.S. tax code is already overly progressive, and much more redistributive than those of other developed nations. The line of argument following from this often seems like a tacit—or not so tacit—warning to progressives: If you want to increase public spending you’ll have to raise taxes on the middle class—because the rich just don’t have any more to give—and you’ll get hammered politically for doing so. Therefore, we can’t have any new spending. QED.
The idea that the U.S. tax system is already too progressive pops up every few years, but its persistence doesn’t mean its intellectual underpinnings are reliable. Indeed, the most recent resurgence of this theory is built on a deeply flawed foundation, consisting of a truly terrible measure of “progressivity”—namely, the fact that a relatively large percentage of all U.S. taxes collected is paid by the highest-income filers, relative to our advanced-economy peers.
The release of new Social Security Administration wage data gives us a chance to update our analysis of wage trends for the top 1.0 percent of wage earners and wage groups in the bottom 99.0 percent. There’s some surprising news this year, as top 1.0 percent wages fell, while the remainder of the workforce saw real wage improvements. In the analysis below we review these recent trends, as well as trends during the Great Recession and over the longer-term.
Wage growth from 2012 to 2013
New data for 2013 (Table 1) provide some surprising news: real average annual wages nudged down slightly, falling 0.2 percent since 2012, because wages of the top 1.0 percent of wage earners declined, although those of the bottom 99.0 percent grew. The biggest wage decline was among the top 0.1 percent of earners, whose wages fell 9.0 percent, while the next 0.9 percent saw their wages fall just 1.4 percent. In contrast, the wages of the bottom 90 percent (averaging $32,333 in 2013) rose a modest 0.4 percent (real hourly wages did grow modestly in 2013). Higher wage workers, those earning between the 90th and 99th percentiles of wages (averaging $136,820 in 2013) fared the best, with real wages rising by 2.5 percent. Thus, wage inequality between high and middle/low wage workers grew even though those at the very top—the 1 percenters—actually lost ground. David Cay Johnston wrote on this yesterday. Our analysis goes beyond his reporting by placing earners in percentile wage groups (bottom 90 percent, top 1 percent, etc.) and providing analyses of changes over the Great Recession’s downturn and recovery and the longer-term changes back to 1979.
Myths and Facts About Corporate Taxes, Part 2: Will Congress’s Idea of “Base-Broadening, Rate-Lowering Tax Reform” Fix What’s Wrong With Our Corporate Tax Code?
A few weeks back, we examined whether the conventional wisdom that the U.S. has the highest corporate tax rate in the world is indeed true. (Hint: No.) Now let’s take another look at what’s become another “truism” about taxes in Washingtonese: that “fundamental corporate tax reform” would be both desirable policy and achievable politics.
(Hint 2: Still no.)
When politicians (of both parties) talk about “corporate tax reform,” what they tend to mean is ridding the code of many exemptions, deductions, credits, and loopholes, and then lowering the top rate to maintain revenue neutrality. For example, see these nearly identical quotes from Speaker Boehner (“Let’s grow the economy and create jobs and broaden the tax base and lower rates”) and President Obama (“By broadening the base, we can actually lower rates to encourage more companies to hire here”).
The public policy argument against this kind of tax reform is simple: The idea that we should reform the tax code but not get any additional revenue out of it is simply absurd. Additional federal revenue is sorely needed, both to finance infrastructure investment and public-sector jobs in the short- and medium-term, but also to continue to pay for our social safety net (which is quite modest, by international standards) in the long-term. Our corporate tax code has features that make it an excellent source of such revenue. First, the incidence of the corporate tax is very progressive: The lowest fifth of earners pay about 0.9 percent of their income in corporate income tax, while the top 0.1 percent of earners pay 9.7 percent. And second, after-tax corporate profits are at an all-time high. The code also has a bug that, if fixed, could help produce additional progressive revenue: Many large American multinationals take advantage of the myriad loopholes, deductions, exemptions, and whatnots in the code so as to pay little or no federal taxes.
When I read recently that General Mills had tried to impose binding arbitration on people who used Facebook to like its cereals, I thought the company was stupid, and didn’t much care because I don’t buy their products anyway. But when I learned that an ever-increasing number of corporations are sneaking forced arbitration clauses into the fine print of their purchase agreements, I became more concerned. How can I be forced to give up the right to sue if a product hurts me or my family, just because I bought the product?
Today, I’m totally alarmed and outraged, after watching the Alliance of Justice’s film “Lost in the Fine Print.” The film tells the story of consumers who were harmed by for-profit schools, credit card companies, and employers, but were then prevented from suing in court by the arbitration clauses hidden in the fine print of their contracts. Denied any access to the courts, their only choice was arbitration before an arbitrator hand-picked by the company. The consumers all lost, but one of them lost more than just her case: she was forced to pay the company’s $362,000 in legal fees and costs! It’s no surprise the outcomes are so lopsidedly in favor of the corporations, given that they choose and pay the arbitrators, who depend on the corporations for business.
AFJ’s Nan Aron, who hosted a showing of the film at the Women’s National Democratic Club, told us that 93% of consumers who try to use company-mandated arbitration lose. Worse, when a small business in California challenged the imposition of a forced arbitration clause by American Express, the US Supreme Court upheld the clause last year, despite a stinging dissent by Justice Elena Kagan. Now, as far as the companies are concerned, there’s nothing to stop them: Comcast, Wells Fargo, AT&T, Amazon, and Verizon are just a few of the companies that impose binding arbitration on their customers. The Court vindicated the arbitration clause even though by requiring individual arbitration actions it made it so expensive for Amex’s small business customers to challenge unfair fees that they effectively had no remedy. According to Justice Scalia, under the Federal Arbitration Act, the fact that there is no remedy is irrelevant. Now, as far as the companies are concerned, there’s nothing to stop them: Comcast, Wells Fargo, AT&T, Amazon, and Verizon are just a few of the corporations that prohibit class actions and impose binding arbitration on their customers, without their knowledge.
Fed Chair Janet Yellen gave a speech this week, ”Perspectives on Inequality and Opportunity from the Survey of Consumer Finances”, and she deserves our applause for speaking some truths about social mobility and income inequality that are frequently overlooked. I am going to focus on one aspect of her speech in particular—the relationship between income and wealth inequality and opportunity.
First, there was no mincing of words as to what has happened:
“It is no secret that the past few decades of widening inequality can be summed up as significant income and wealth gains for those at the very top and stagnant living standards for the majority. I think it is appropriate to ask whether this trend is compatible with values rooted in our nation’s history, among them the high value Americans have traditionally placed on equality of opportunity.”
I appreciate both the straightforward description of the rise of both income and wealth inequality, and the explicit connection between these growing inequalities and the threat this poses to future generations’ upward mobility and opportunity. Our current economic discourse on these matters is very confused. Let’s be clear on our terms. When we talk about social mobility, or ”opportunity,” we are talking about the ability of the members of the next generation who are starting at the bottom of the income ladder (i.e. growing up poor) to climb that ladder and be better off than their parents in either an absolute sense (having more money) or a relative one (ranking higher in the income distribution, such as being in the middle or the top fifth rather than the bottom fifth). Income inequality, meanwhile, is how far apart the rungs on the income ladder are, and whether the incomes produced over the next ten or twenty years are narrowly or widely shared. Conservatives seem to only be concerned with facilitating opportunity or social mobility, and consider income inequality itself not a worthy focus of policy—presumably because markets have produced these outcomes and markets know best. Some on the center-left also seem to want to focus solely on social mobility, because they think ”income inequality” polls poorly. Or perhaps they want to help the poor, and feel that we can do so without addressing income inequality more generally, which would involve tackling the oversized income gains of the top one percent (after all, one must raise campaign funds from them). Along these lines, various reporters have noted the Obama administration backing away from making ”income inequality” a key issue and shifting to a focus on opportunity or mobility.
The last barricades in the right wing’s fight to prevent increases in the minimum wage are starting to fall, as even the businesses that minimum wage opponents are supposedly protecting from having to pay a decent wage are saying, “Enough! It’s time to raise the minimum wage.”
The American Sustainable Business Council and Business for a Fair Minimum Wage conducted a national phone poll of 555 small business employers and found support for raising the minimum wage to $10.10 an hour in every region of the country. Two thirds of surveyed businesses in the Northeast were in favor, and even in the South, 58 percent of small businesses approve of President Obama’s proposal to raise the minimum wage in steps and then index it to inflation.
Unsurprisingly, these business owners are not simply being altruistic. Most of them understand that their businesses will benefit in two ways when millions of poorly paid employees get a raise. First, higher pay would mean lower employee turnover, increased productivity and higher customer satisfaction—all of which helps employers’ bottom line. Second, most of the owners surveyed agree that a higher minimum wage would increase consumer purchasing power and help the economy. Putting money in the pockets of millions of potential customers means more sales and higher profits.
This post originally ran on the Wall Street Journal‘s Think Tank blog.
According to the Federal Reserve’s now-famous “dot charts,” most members of the Fed’s board of governors and regional Fed presidents believe that short-term interest rates should be raised in 2015. But should this week’s stock market declines lead the Fed to postpone monetary tightening?
To be clear, tightening should almost surely be postponed past 2015—but the stock market really shouldn’t have much to do with that. For one thing, even after this week’s declines, stocks do not look particularly undervalued. One could argue that they were getting slightly overpriced in recent months (not a bubble, just on the high side).
Further, a much healthier recovery will almost inevitably involve an increase in wages and a reduction in the share of income claimed by corporate profits instead of workers. This means that economic growth would stop so disproportionately benefiting capital owners (including holders of stock) and should moderate the increase in stock prices.
Finally, focusing on the stock market one way or the other risks distracting policymakers from the important question: How much labor market slack remains in the economy? If one looks at wage growth—the most relevant measure of slack—the answer is that there is lots of slack left. Given that fiscal policy and international developments are providing no boost (or are actively dragging) on growth in the next year, it would be premature for the Fed to raise short-term rates before the labor market was back to healthy.
The dictum to not overreact to stock market changes should apply to policymakers, not just investors. And this is true even when the daily reaction to market changes happens to correspond with more measured judgments. In short, even when you end up doing the right thing, you should do it for the right reason. And trying to stem stock market declines is the wrong reason for the Fed to act.
The U.S. Treasury announced today, for the 12th time, that the Obama Administration has determined that neither China, nor any other “major trading partner of the United States met the standard of manipulating the rate of exchange between their currency and the United States dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade…”
This political document ignores the fact that China purchased $681 billion in total foreign exchange reserves between December 2012 and June 2014, and more than $2 trillion since this Administration took office. Currency manipulation by China and approximately 20 other countries has increased the U.S. trade deficit by $200 to $500 billion. Elimination of currency manipulation would create 2.3 million to 5.8 million U.S. jobs, without raising public spending at all (indeed, reducing the trade deficit through currency re-alignment would reduce the federal budget deficit).
A Wall Street Journal blog post this morning describes an Obama administration initiative to combat long-term unemployment. In the opening sentence, the author follows a too-common convention in describing the long-term unemployment rate as “sticky.” Sometimes the adjective is “stubborn.”
I know that this will sound like quibbling, but in this case adjectives really matter for understanding the problem. As a paper I co-wrote shows pretty clearly, the long-term unemployment rate (LTUR) has not been sticky or stubborn for years. In fact, the LTUR has fallen faster than one would expect given the overall pace of labor market improvement. It is true that the LTUR remains too high, but that is because it skyrocketed during the Great Recession and in the six months after its official end. But the LTUR has since then not become resistant to wider labor market improvement.
The concrete policy implication of recognizing this is that by far the most important thing that can be done to lower the still too-high LTUR is to maintain support for economic recovery more broadly. In today’s far too narrow macroeconomic policy debate, this simply means the Fed should not boost short-term interest rates until the labor market is much, much healthier (including a much lower LTUR).
In regards to the Obama administration effort as described in the WSJ, it seems to mostly consist of jawboning corporations to discard human resources strategies that might disadvantage the long-term unemployed for no reason other than their long duration of joblessness. This is a good idea. There seems to be some real evidence that employers have begun using automatic filters based on the duration of joblessness to screen potential hires—and this can disadvantage the long-term unemployed even though there is no evidence that the productivity or employability of long-term unemployed workers has been damaged by the Great Recession and long recovery.
Basically, because there have been so many potential hires for each vacancy in the economy for so long, employers figured they had to sort these potential hires somehow. Many seem to have chosen a pretty dysfunctional strategy of simply sorting based on unemployment duration. The Obama administration initiative is in a sense an effort to save employers from their own bad decisions.
However, we should be clear that even this employer discrimination has not kept the LTUR from falling faster than overall labor market improvement would predict. And, we should also be clear what would be the most powerful tool to rob employers of the ability to sort potential hires in the queue for vacancies like this: a return to genuine full employment.