Average hourly wages of private sector workers and of production/nonsupervisory both dropped slightly in March. The chart shows year-over-year growth in hourly wages for both groups. Both are seeing growth rates far below what they were seeing before the recession started, and the “all private sector employees” series has seen no increase whatsoever in nearly three years. In recent months, many commentators have, perhaps surprisingly, raised concerns that our labor market may be tightening enough to be causing excessive wage growth that would trigger inflation. There is no sign of that here. Instead, today’s jobs report shows there remains a tremendous amount of slack in the labor market, which shifts bargaining power away from workers and keeps wages low. Employers do not have to pay substantial wage increases to get and keep the workers they need when workers lack outside options.
In an update to last month’s post, the table below shows the March unemployment rate, the unemployment rate in 2007, and the ratio of the two, for a variety of demographic categories and by occupation and industry. Again we see that while (as per usual) there is considerable variation in unemployment rates across groups, the unemployment rate is substantially higher now than it was before the recession started for all groups. The unemployment rate is between 1.3 and 1.7 times as high now as it was six-plus years ago for all age, education, occupation, industry, gender, and racial and ethnic groups. Elevated unemployment across the board, like we see today, means that the weak labor market is due to employers not seeing demand for their goods and services pick up in a way that would require them to significantly ramp up hiring, not workers lacking the right skills or education for the occupations or industries where jobs are available. This commentary provides a more in-depth look at this issue.
Unemployment rates of various demographic groups, 2007 and today
|Workers age 25 and older|
|Bachelor’s and advanced degree||2.0||3.4||1.7|
|Workers under age 25, not enrolled in further schooling|
|High school degree||12.0||18.5*||1.5|
|Bachelor’s and advanced degree||5.4||8.2*||1.5|
|Management, professional, and related occupations||2.1||3.4*||1.6|
|Sales and office occupations||4.3||6.9*||1.6|
|Construction and extraction occupations||7.6||11.6*||1.5|
|Installation, maintenance, and repair occupations||3.4||5.2*||1.5|
|Production, transportation, and material moving occupations||5.8||8.7*||1.5|
|Wholesale and retail trade||4.7||7.1*||1.5|
|Transportation and utilities||3.9||6.4*||1.6|
|Professional and business services||5.3||7.9*||1.5|
|Education and health services||3.0||4.6*||1.5|
|Leisure and hospitality||7.4||9.7*||1.3|
* This is a 12-month average (April 2013–March 2014), since this series is not seasonally adjusted.
Source: Author's analysis of the Current Population Survey public data series
The unemployment rate held steady in March, but in a departure from the usual story in this recovery, that masked some good news. The share of the working-age population with a job ticked up by one-tenth of a percent—and the share of the prime-age population with a job, which is my favorite measure of labor market trends in recent years—ticked up by two-tenths of a percent. If more people were finding work, why didn’t the unemployment rate go down? Because more people came into the labor force. The labor force participation rate rose by two-tenths of a percent. The number of “missing workers”—workers who have left, or never entered, the labor force due to weak job opportunities—dropped from 5.7 million to 5.3 million. That is still a lot of missing workers (the unemployment rate would be 9.8% if they were counted as unemployed), and there is a great deal of month-to-month variability in the number of missing workers (meaning we can’t make too much of one’s month’s drop), but this is a step in the right direction.
Interestingly, most of the decline in missing workers in March was due to the increase in labor force participation of men under age 25. Men under age 25 had seen a steep decline in labor force participation over the prior five months, and March’s increase almost entirely reverses that decline. There are still 580,000 missing men under age 25, but again, March’s drop was a step in the right direction.
Earlier this week, Senate Finance Committee Chair Ron Wyden (D-Ore.) unveiled his proposal to retroactively renew the “tax extenders”—a group of just more than fifty “temporary,” unrelated tax incentives, breaks, loopholes, and outright giveaways that Congress routinely extends as they lapse.
My earlier analysis of this abdication of responsible policymaking concluded that instead of renewing the entire slate of tax extenders, lawmakers should conduct a thorough review of each individual provision to see if it efficiently targets useful policy goals. They should then improve and make permanent the provisions that pass muster, and shelve those that don’t.
Taking a close look at each tax incentive on a case-by-case basis is absolutely necessary. Some of the policies, like the “active financing exception”—a loophole by which financial services firms and manufacturers can defer U.S. taxes on overseas income from specific types of financial transactions—are simply giveaways to some of America’s largest corporations. (There’s a reason why keeping this provision around is a “top lobbying priority for companies such as GE and JP Morgan.”) Meanwhile, other tax extenders seem to benefit society—such as the provision that lets teachers deduct $250 worth of school supplies they buy for their classrooms with their own money—but these are regressive, and could better accomplish their goals (in this case, decreasing the cost of school supplies as borne by teachers) outside of the tax code (say, by giving more money directly to schools). For still other provisions, like the ones that benefit thoroughbred racehorse owners or Puerto Rican rum distillers, the punchlines just about write themselves. And because the extenders would go into effect retroactively, it’s hard to claim they’re helping incentivize any particular desired behavior.
As we enter graduation season, the media will get flooded with stories of labor market prospects of young people, college graduates, and of course, student debt. EPI will do its fair share of flooding (with a 2014 update to our Class of 2013 paper), but one aspect that often gets overlooked are those who have started college but will never graduate. Young adults with some college but no degree are stuck in a catch-22, without the better employment opportunities and wage increases that comes with a college degree, but with a similar mountain of student debt. The number of people that fail to complete college—and the burdens this places on them—is one of the most corrosive aspects of the higher education system.
The Bureau of Labor Statistics recently released new data from their National Longitudinal Survey of Youth, a survey that follows women and men born between 1980 and 1984 in an effort to provide long-term information on the employment experiences and educational attainment of young people. The educational makeup of young adults by the time they are 27 is such: 28.1 percent have a college degree, 25.5 percent have a high school degree or equivalent with no further education, and 8.7 percent have not finished high school. That leaves nearly 40 percent of young adults who have some college education by age 27 (this includes individuals with an associate’s degree or any enrollment in college after high school). Put another way, of the 66 percent of young adults who began college, 37.5 haven’t completed their degree by age 27.
While it’s encouraging to see that more young adults are getting their foot in the door at colleges, you need to graduate to reap the higher wages of a college degree. This is seen most obviously in the entry-level wages young adults. Currently, entry-level college graduates (age 23-29) make $20 an hour, while young adults with some college (ages 21-27) make $12 an hour. An hourly wage of $12 is much closer to high school graduates’ wages of $10 an hour than to the wages of their college graduated peers.
What To Watch On Jobs Day: Returning to Pre-recession Employment in the Private Sector is Not That Great
Total employment in the U.S. labor market is currently more than 600,000 jobs below where it was when the Great Recession officially started in December 2007, and it likely won’t surpass its December 2007 level for several months.
But private sector employment is another story. The private sector is currently “only” 126,000 jobs below where it was when the Great Recession started, which means it is poised to surpass its pre-recession peak when the March jobs numbers are released on Friday.
That makes this a good time to note that re-attaining pre-recession employment levels is a pretty meaningless benchmark economically. Because the working-age population (and with it, the potential labor force) is growing all the time, the private sector should have added millions of jobs over the last six-plus years just to hold steady. That means that even when the pre-recession employment level is re-attained, there will still be a huge jobs gap. Every month when the employment numbers are released, we update the total gap in the labor market (which includes both the public and private sector). The figure below shows that gap just for the private sector, with a current shortfall of 5.9 million jobs. When the March numbers are released on Friday, that gap may drop to 5.8 or even 5.7 million, but we are still far, far from healthy labor market conditions.
Conventional wisdom holds that the American workforce lacks the specialized skills that employers are looking for, and that this “skills gap” is the main, if not the only, explanation for our persistently high unemployment rate—especially our long-term unemployment rate. Paul Krugman helpfully exploded this idea in his New York Times column on Monday, making these key points:
- The ratio of unfilled jobs to unemployed workers today is quite low by historical standards. There are always unfilled jobs, because workers leave and employers have not yet had time or opportunity to hire replacements. This is a frictional, not structural, phenomenon. There are very few, if any, jobs today that remain unfilled because employers cannot find workers with the needed skills.
- Today’s long term unemployed have skills comparable to those of recently laid-off workers “who quickly find new jobs.” The long-term unemployed face a shortage of demand for their labor, not skill requirements beyond their education and training.
- If there really were a skills shortage, we would expect to see wages increasing in job categories where skills are allegedly in short supply. But such wages are not increasing.
Nor have wages increased for quite a while. It is especially telling that wages of college graduates, not just those of non-college educated workers, have been flat for a decade, and that young college graduates have been faring poorly, even prior to the 2008 recession. According to a recent report of the New York Federal Reserve Board, the percentage of recent college graduates “who are unemployed or ‘underemployed’—working in a job that typically does not require a bachelor’s degree—has risen, particularly since the 2001 recession. Moreover, the quality of the jobs held by the underemployed has declined, with today’s recent graduates increasingly accepting low-wage jobs or working part-time.” In other words, “skills gaps” are responsible for neither our unemployment problems nor our wage problems.
In a post last month I compared nondefense discretionary spending (NDD) in three budget proposals: the Murray/Ryan budget deal, the administration’s budget, and the Congressional Progressive Caucus’s (CPC) budget. Nondefense discretionary spending is the part of the budget containing much of our spending on infrastructure, education, and public research and development—the part concerned with investments in the future.
House Budget Committee chair Paul Ryan released the House GOP fiscal year 2015 budget proposal today. The chart below shows nondefense discretionary spending as a percent of GDP in FY2007 (the year before the onset of the Great Recession) as a historical comparison to the various budget proposals.
For FY2015, the House GOP budget would adhere to the Murray/Ryan budget deal with NDD equivalent to 2.7 percent of GDP; the president’s NDD proposal is slightly higher at 2.8 percent of GDP and the CPC’s would be 3.8 percent of GDP. However, beginning in FY2016, the House GOP proposes to start slashing NDD spending. By FY2024 they propose that NDD spending shrink to 1.7 percent of GDP—almost half of what it was in 2007, and half of what it was during the Reagan Administration.
Earlier today, House Budget Committee Chair Paul Ryan (R-Wis.) unveiled the House Republicans’ fiscal year 2015 budget resolution. Like Chairman Ryan’s FY14 budget, this year’s model (again called “The Path to Prosperity”) aims to balance the budget within a decade—an economically nonsensical goal during a slow recovery, and one that requires damaging austerity to achieve.
In many respects, the austerity Chairman Ryan calls for this year is even more painful than in previous years. This is because Ryan is stubbornly hanging on to his goal of balancing the budget amid changing economic and political conditions, including a downward revision of $1 trillion in projected revenues over ten years and a deal he made with Senate Budget Committee Chair Patty Murray (D-Wash.) to not change discretionary spending levels in FY15 (creating the need for more draconian cuts throughout the ten-year “budget window”), as well as an unbending refusal to increase revenues.
Five years after the end of the Great Recession, our economic recovery is plodding, not because of massive deficits (which are not currently massive—they have fallen faster than at any point in the last 60 years), but due to a lack of aggregate demand. In a demand-starved economy like ours, public spending has a high multiplier effect, meaning that for each dollar the government spends, more than a dollar is added to the economy. This is especially true when that public spending is allocated in such a way that it can circulate quickly throughout the economy—for example, through low-income support programs (which are automatic stabilizers) or infrastructure investments that would create jobs rapidly.
For that reason, pulling back spending in today’s economic environment, as Chairman Ryan proposes, would have a deleterious effect on the economy and jobs. On net, I estimate that the House budget resolution would decrease GDP by 0.9 percent and decrease nonfarm payrolls by 1.1 million jobs in fiscal year 2015, relative to CBO’s current-law baseline. The following fiscal year, when Ryan’s cuts to discretionary spending kick in, “The Path to Prosperity” would decrease GDP by 2.5 percent and cost 3.0 million jobs. And if the recovery remains sluggish, large job losses could continue under the Ryan budget in 2017 and beyond.
Andy Puzder is the CEO of CKE Restaurants (Hardee’s and Carl’s Jr.). Bloomberg reported his 2012 salary and other compensation as $4.485 million, so he is doing well in what he likes to deride as the Obama economy. His restaurant chain is doing well, too, apparently, since its profits reportedly rose more than 30 percent last year. (So much for overregulation!)
But Puzder is opposed to President Obama’s proposal to update the Department of Labor’s overtime rules, an update Puzder claims would turn CKE’s poorly paid assistant managers into “glorified crew members.” Those rules have been updated only once in the last 39 years and are so obsolete that workers earning less than the poverty level can be considered “executives” and denied overtime pay even if they work so many extra hours that their pay falls below the minimum wage. But that helps Puzder make a bigger profit, so he says leave the rules alone.
One thing is certain: Puzder won’t let any rule change reduce the millions he takes home from CKE. He wants us to know he will take it out of his employees, one way or another. As Puzder says, “overtime pay has to come from somewhere, most likely reduced hours, reduced salaries or reduced bonuses.”
On Wednesday, the National Labor Relations Board (NLRB) region 13 director, Peter Sung Ohr, granted the Northwestern University football players the right to join the College Athletes Players Association (CAPA) union. The petition by the Northwestern football players was filed by their quarterback, Kain Colter, and had the support of the United Steelworkers. Ohr’s decision establishes a precedent for athletes at private colleges and universities to form or join unions. At the very least, it will allow players to join together to voice their concerns with issues that affect their well-being such as injury risk and time commitment. As of January, CAPA’s stated goals for the petition were limited to seeking more medical protections for players and guaranteeing scholarships in the event of injury. This decision, however, could also fuel growing criticism of the thriving business of college athletics and encourage the idea that the players should be paid on top of their scholarships.
Northwestern University and the NCAA have criticized the decision, arguing that college athletes are amateur athletes and students, not employees. Yet, the facts of the current system indicate that by any definition, these athletes are woefully underpaid employees. Broadly speaking, an employee is one who is compensated for one’s work and is under the control of an employer. The players at the Northwestern football team were compensated in the form of grant-in-aid of about $61,000 each academic year to cover the costs of tuition, fees, room, board, and books required for their education. As for control, Ohr touched on several aspects of the Northwestern football program’s system that are typical of many college athletic programs, in which players are under the supervision of their coaches and must follow a special set of rules. Northwestern sets strict limits on players’ ability to pursue outside employment, post on social media, or profit from their “athletic ability or reputation.” Additionally, players are required to commit 40 to 60 hours of time for conditioning, meetings, and practice for the team. “Not only is this more hours than many undisputed full-time employees work at their jobs,” Ohr noted, “it is also many more hours than the players spend on their studies.”
The Supreme Court is deliberating in a case that will decide whether in-home personal care and home health aides are allowed to unionize and bargain agreements with government agencies. The case will also decide whether their contracts can require every aide who benefits from the collective bargaining agreement to pay her fair share in agency fees (or dues, if she is a union member). These collective bargaining agreements have made a huge difference in the lives of the overwhelmingly female and disproportionately minority workforce that cares for the sick and disabled, the frail elderly and small children in their homes or in the homes of the customers.
Until the 1990’s, when states and counties across the nation began creating public entities to act as employers and bargain collectively with the workers’ unions, the in-home care workers rarely were paid more than the minimum wage, they had no coverage for health or dental insurance and no pension or retirement plan. Even today, after almost two decades of progress, half of these workers have incomes less than twice the poverty level and they earn far less than workers in other occupations – even after taking into account gender, age, race, education, and geography.
But where in-home aides have been permitted to unionize and bargain collectively they have improved pay and benefits, training, retention, and the safety of clients and workers alike. In Illinois, where the Supreme Court case challenging unionization arose, the latest contract includes $13.00 an hour pay, health and dental insurance, a grievance procedure, and paid training hours – a huge improvement over what was formerly minimum wage work with no benefits and no respect.
In the context of a lost decade of wage growth for women, two recent proposals—to increase the federal minimum wage to $10.10 per hour (including increasing the separate minimum wage for tipped workers), and to increase the threshold salary for overtime pay to $50,000 annually—can provide much needed relief to women.
Increasing the minimum wage requires that Congress pass a law. The current minimum wage of $7.25 was set in 2007 and went into effect in 2009, but President Obama has already acted by executive order to require firms that hold contracts with the federal government to pay their workers a minimum of $10.10 per hour. In contrast, increasing the salary threshold for receiving overtime pay does not require congressional action, but does require action by the Secretary of Labor. The Fair Labor Standards Act sets the overtime pay premium at 50 percent more than the regular wage or salary, also known as “time-and-a-half.” Currently, if workers are classified as executive, administrative, or professional, and they earn more than the salary threshold of about $23,000 a year ($455 per week), they do not need to be paid overtime. President Obama recently directed Secretary Perez to consider how to update the rules so that workers are paid fairly for their overtime hours.
Because women earn less than men on average, it is not surprising that women are the majority—64 percent—of those who earn the minimum wage and would thus benefit disproportionately from an increase in the minimum wage. Economists expect that employers will also increase the pay of workers earning somewhat above the minimum, in keeping with past experience of minimum wage increases. An EPI analysis shows that 15.3 million women—9.6 million directly and 5.7 million through the spillover effect—would receive a pay increase were the minimum wage to be raised to $10.10 per hour. EPI also finds that nearly one-third of all working single mothers—or 2.3 million women—would receive a direct or indirect pay increase. Overall 55 percent of workers who would benefit from the increase are women.
Twice a year, the Institute for Women’s Policy Research (IWPR) updates its fact sheet, “The Gender Wage Gap,” to report the latest data as they become available from the Bureau of Labor Statistics and the Census Bureau. This year, we noticed something new when we added the latest figure for median weekly earnings for men and women who work full-time—a virtual standstill in women’s real wages for the past ten years. This was true when looking at trends in both usual weekly earnings and annual earnings for those who work full-time, year-round.
For several decades, as new Fed chair Janet Yellen notes, women have been the success story in the economy. Women increasingly pursued higher education, eventually surpassing men in college graduation rates. Women also joined the labor force in larger numbers, worked more throughout their lives, and entered a variety of occupations that had been formerly virtually closed to them, becoming bus drivers, mail carriers, fire fighters, police officers, bankers, lawyers, doctors, and many others.
These gains in education and work experience (what economists call human capital) contributed to narrowing the wage gap, and the equal opportunity legislation of the 1960s and 1970s helped too. The gender wage gap closed from 40 percent in 1960 to 23 percent in 2012 (in terms of annual earnings). Women’s real earnings—meaning wages adjusted for inflation—grew as well, from $22,418 in 1960 to $28,496 in 1970, $30,136 in 1980, $34,247 in 1990, $37,146 in 2000, and $38,345 in 2012.
This commentary first appeared in Spotlight on Poverty and Opportunity.
The pressing importance of jobs and economic growth – rather than the misplaced obsession with austerity – finally seems to be gaining recognition inside Washington. President Obama illustrated this renewed focus in his State of the Union address, emphasizing the need to “do more to make sure our economy honors the dignity of work, and hard work pays off for every single American.” The president’s fiscal year 2015 budget, released this month, builds off these ideas. It provides a robust vision for building a sustainable platform for economic growth with shared prosperity and security.
These priorities are front and center in the budget. The president proposes an additional $28 billion in nondefense discretionary funding (plus $28 billion in defense spending) in 2015. Much of this new spending – offset by the closing of tax loopholes – would focus on improving the well-being of low- and middle-income Americans through job creation and making work pay (wages have been stagnant since 2000).
A major budgetary focus is getting people back to work, with a particular emphasis on helping the long-term unemployed re-enter the workforce. Such assistance is desperately needed. Research by the Boston Federal Reserve showed that employers were extremely unlikely to call back job seekers who had been out of work for at least six months, even if their qualifications were better than other applicants’.
I’d like to attract your attention to this report from WJHG, a local news affiliate in Panama City, Florida. It’s a stark reminder of everything that’s wrong with the State Department’s large de facto guestworker program, the Summer Work Travel (SWT) program. For those not familiar with SWT, it is one of many “cultural exchange” programs in State’s J-1 visa Exchange Visitor Program; each year it allows around a hundred thousand foreign college students from around the world to come to the United States to work for four months in hotels, beach resorts, restaurants, and various other mostly seasonal businesses, in a variety of lesser-skill jobs.
In Guestworker Diplomacy and numerous commentaries, I’ve explained in detail how this temporary foreign worker program disguised as an exchange program was designed and is administered by an agency with zero expertise in regulating, monitoring, or enforcing labor- and employment-law related issues and is thus entirely unqualified to manage the program. This in turn results in a dysfunctional program where severe abuses and exploitation of vulnerable foreign student workers, and even human trafficking, takes place. The Southern Poverty Law Center has a new report, Culture Shock: The Exploitation of J-1 Cultural Exchange Workers, which provides numerous real-world examples of such abuse, exploitation, and criminal activity. But the perspective we get in the WJHG report from Scott Springer, the U.S. Immigration & Customs Enforcement/Homeland Security Investigations Resident Agent in Charge in Panama City, Florida, shows just how deep the problems are.
Agent Springer took the initiative to reach out to local J-1 “sponsors”—the private organizations to which the State Department has outsourced management and oversight of the Exchange Visitor Program—and offered to conduct information sessions along with local law enforcement and victims’ advocacy groups. His intention was to better inform J-1 student workers about what can go wrong in the program and how they can protect themselves. Agent Springer should be applauded for his candor and for working to protect the safety of vulnerable young student workers. Here’s what he’s observed that motivated him to offer his services:
J-1 Visa students are probably among our most exploited individuals on the beach. We kept seeing such a large number of problems here with the J-1 community, not with the students, but with the students being exploited by egregious employers.
By most economic measures, Washington’s preoccupation with shrinking deficits through budget austerity has failed to improve economic outcomes for anyone but the already well off. Most Americans would agree with this sentiment, unequivocally.
Strong majorities of Americans consider a flagging economy to be our top priority, and that the creation of an abundance of quality jobs is the most effective remedy to our economic malaise. And while Americans want government to reduce deficits, we reject the ideas that safety net programs like SNAP and unemployment insurance ought to be diminished, or that Social Security and Medicare benefits ought to be cut. Instead we endorse raising revenues through increases in taxes paid by high earners and profitable corporations.
These mainstream perspectives have a sound basis in economic research and are reflected in the Congressional Progressive Caucus’s Better Off Budget. While the media generally presents the progressive budget as a fringe alternative to the Ryan and Obama budgets, in actuality, the Better Off Budget is the only budget that reflects the mainstream priorities listed above.
It does so by aggressively spurring job creation to close the output gap, reach full employment, and set the stage for sustained broad based wage growth. EPI analyst Joshua Smith assessed the macroeconomic impact of the budget and determined that it would create 4.6 million jobs within one year of implementation.
Current Maryland Minimum Wage Law and Proposed House Version of Reform Have Too Many Loopholes and Exemptions
A couple of my EPI colleagues have recently shown and testified twice that raising the state minimum wage to $10.10 would greatly benefit Maryland workers. In my opinion, it’s not nearly enough of a raise, but it’s what’s on the table, and there’s no doubt it would help hundreds of thousands of workers. In any case, the legislative saga to make it a reality continues. On March 3, the Maryland House of Delegates’ Economic Matters Committee approved a number of changes to legislation proposed by Governor O’Malley to raise the minimum wage to $10.10. The changes weaken the law and exempt certain employers and industries from having to pay the increased wage. Two days later the full House considered over a dozen amendments—most of which were seeking to expand the committee’s exemptions—but none passed. That version of the bill was then passed by the House on March 7. What you should know is that the bill could have been much better, but a number of delegates in a Democratic-controlled House managed to greatly water down the scope and impact of the bill, and the bill also did not remove a number of exemptions that exist in current law.
The worst change to the originally proposed House version of the minimum wage law was the committee’s deletion of the provision that would index the minimum wage to inflation after 2016. That provision would have ensured that the bottom of the wage scale kept pace with the cost of living over time. Gov. O’Malley expressed his disappointment with this and plans to do all he can to get it reinserted during the remaining stages of the legislative process. Another unfortunate modification is a six-month extension of the time it will take for the minimum wage to reach its peak of $10.10. Workers earning the minimum wage are hurting now and earning near or below the poverty line; they need a raise as soon as possible, not one that’s slowly phased in through 2017.
This Saturday is the second anniversary of the U.S.-Korea Free Trade Agreement (KORUS), which took effect on March 15, 2012. President Obama said at the time that KORUS would increase US goods exports by $10 to $11 billion, supporting 70,000 American jobs from increased exports alone. Things are not turning out as predicted.
In first two years after KORUS took effect, U.S. domestic exports to Korea fell (decreased) by $3.1 billion, a decline of 7.5%, as shown in the figure below. Imports from Korea increased $5.6 billion, an increase of 9.8%. Although rising exports could, in theory, support more U.S. jobs, the decline in US exports to Korea has actually cost American jobs in the past two years. Worse yet, the rapid growth of Korean imports has eliminated even more U.S. jobs. Overall, the U.S. trade deficit with Korea has increased $8.7 billion, or 59.6%, costing nearly 60,000 U.S. jobs. Most of the nearly 60,000 jobs lost were in manufacturing.
Trade deals do more than cut tariffs, they promote foreign direct investment (FDI) and a surge in outsourcing by U.S. and foreign multinational companies (MNCs). FDI leads to growing trade deficits and job losses. U.S. multinationals were responsible for nearly one quarter (26.9 percent) of the U.S. trade deficit in 2011. Foreign multinationals operating in the United States (companies like Kia and Hyundai) were responsible for nearly half (44.2 percent) of the U.S. goods trade deficit in that same year. Taken together, U.S. and foreign MNCs were responsible for nearly three-fourths (77.1 percent) of the U.S. goods trade deficit in 2011.
Representative Dave Camp, the Republican Chairman of the House Ways and Means Committee, recently unveiled his long awaited comprehensive tax reform proposal. It is one of the very few serious congressional tax reform proposals in several years (Senators Wyden and Coates are probably the only others with a serious tax reform plan in recent years). Like any proposal of substance, there is much to like in Camp’s proposal and much to dislike. Much has been written on what is good and bad about it and more will undoubtedly follow. In this post, I’ll focus on the macroeconomic growth outcomes of the plan which are, after all, the whole point of what is supposed to make politically difficult “tax reform” worth it in the end. The bottom line is, estimates of the plan’s macroeconomic outcomes mostly tell us that dynamic scoring models are still not ready to be used as guides to policy.
The Camp plan reduces the statutory tax rate on corporations from 35 percent to 25 percent, reduces the statutory tax rate for most individuals (the top tax rate is reduced from 39.6 percent to 35 percent—a 12 percent reduction—but the rate reductions are far from simple to quantify), and eliminates many tax loopholes in order to reduce tax rates (all under the current Washington mantra of “lower rates and broaden the base”). The plan is revenue neutral over the next 10 years, but most likely increases deficits after that, because of various gimmicks that shift tax revenue inside the 10-year budget window. In addition to revenue neutrality, the plan aims to be distributionally neutral as well. (Non-economists may well wonder what the point of a revenue and distributionally neutral tax reform could possibly be. The answer suggested by many economists is the tax rate reductions made possible by tax reform will dramatically increase economic growth and employment.)
A Glimmer of Sanity on Unemployment Insurance in the Senate—Hopefully It Won’t Be Snuffed out in the House
The Senate reached a deal yesterday on extending unemployment insurance benefits that expired at the end of 2013. It’s not perfect—it only lasts for six-months, the length of benefit eligibility remains too low, and a range of pretty silly “pay-fors” are included. These pay-fors are not earth-shakingly bad, but the idea that one needs to find offsets to pay for emergency unemployment benefits is truly bad policymaking. These benefits are supposed to be deficit-financed, because that’s what optimizes their “automatic stabilizer” properties.
But as far as DC policymaking goes, this is a deal I’d vote for in a second, obviously. Unemployment today stands at 6.7 percent. Before the Great Recession, we last saw unemployment this high in October 1993—and yes, the extended unemployment benefits program triggered by the 1990-1991 recession was still in effect in that month. And long-term unemployment (the reason extended benefits are relevant) remains at levels that dwarf anything we’ve seen pre Great Recession.
The arguments for extending these benefits are as clear a slam-dunk as exists in policymaking. Unemployment and long-term unemployment remain high. Extended benefits keep people actively searching for work instead of dropping out of the labor force entirely. And unemployment insurance is some of the most efficient economic stimulus there is. If we go all of 2014 without renewing benefits, the drag on the economy will likely cost us roughly 310,000 jobs over the year.
One question that often comes up is “what do people do when their benefits run out?” There is, of course, a myth that when UI benefits are exhausted, people simply stop enjoying their subsidized vacation and go find work. It’s not true (see this paper, among plenty of others that have looked at this effect). And the reason that it’s not true is simply because there remains a huge excess of unemployed workers relative to job openings. This ratio of job seekers to job openings has indeed improved a lot from the brutal levels reached during the height of labor market distress following the Great Recession, but it’s still a very ugly game of musical chairs for job seekers.
So what do people do when their UI benefits are exhausted? Some new research by Jesse Rothstein and Rob Valletta provides the depressing and completely predictable answer: they suffer. The probability of falling into poverty almost doubles following exhaustion of UI benefits.
It’s great that the Senates decided to do something useful for the American people yesterday. It’d be even better if the House followed their lead.
The Congressional Progressive Caucus (CPC) released their budget proposal yesterday. And, unlike other budget proposals, the CPC proposal recognizes and acts on the need for sustained investment in our future. As is well-known, unless Congress acts to change the Murray-Ryan budget, fiscal year 2015 overall spending levels are already set. But the policy debate over fiscal priorities has (rightly) continued. For example, President Obama released his proposed budget last week, in which he calls for $28 billion in increased nondefense discretionary spending over Murray-Ryan. It is worth taking a closer look at the various budget proposals and compare them to each other and with historical nondefense discretionary spending.
This blog post focuses on nondefense discretionary spending—the part of the budget containing much of our spending on infrastructure, education, and public research and development.* Increasing this spending is important due to years of underinvestment. The American Society of Civil Engineers estimates that over the next 10 years the gap between needed funding for infrastructure and what is planned to be spent is over $1.6 trillion (their overall grade on the state of current U.S. infrastructure is D+). The National Center for Education Statistics estimates that $200 billion is now needed for repairs, renovation, and modernization of public school facilities.
Evan Soltas asks some questions about how much slack remains in the economy, some directed at my recent deck on the issue (which has been edited—grabbed the wrong quarter as the trough for a couple of series—all that really changes is lower relative growth in business investment in the current recovery).
Jared and Dean have largely answered his first question on quits, but since he re-poses it in his latest, here goes my answer, largely mirroring theirs—the quit-rate is actually about where it was in the middle of the recession. It’s headed generally up, but in the latest month’s data is back to where it was in September, so I can’t really look at this and think that slack is fading so fast we’ll run up against capacity constraints soon. As an aside, I’d just note that Evan occasionally implies that I’m arguing that there has been no reduction in slack since the recession. That’s not true—I don’t argue that anywhere.
Further, I’m not exactly sure what to make of his linear projection of unemployment combined with futures markets’ expectations of short-term rate hikes in coming years. He finds that combining the two imply short-term interest rates will still be very low even when unemployment is very low, and takes this as evidence that monetary policy is actually on a very (maybe even riskily?) accommodative path. But isn’t the more likely interpretation of these series simply that futures markets don’t believe his linear unemployment projection is likely to come to pass?
Are African Americans disadvantaged—for example, having lower school achievement—because they have lower family incomes, on average, than whites, or because they continue to suffer from an American caste system based on race?
Both are involved. Certainly, in a color-blind society, African American students would have lower average achievement simply because a higher proportion of African American than white students have income and other socioeconomic disadvantages that depress their ability to take full advantage of schooling.
Therefore, policies that attempt to offset the disadvantages that impede the success of all lower class children, regardless of race or ethnicity, can benefit black children disproportionately. But we should not delude ourselves that by narrowing socioeconomic inequality, we have also significantly addressed racial subjugation, the continuing American dilemma.
For decades, Americans’ wages have been stagnant—hardly growing at all, even as the economy becomes increasingly productive. Do you ever wonder why your paycheck is so thin? One reason might be that employers routinely ask workers to work long hours without extra compensation. President Obama has decided to fix this problem and will direct the U.S. Department of Labor to update its overtime regulations, which allow employers to deny overtime pay to millions of white collar workers who ought to receive it.
The salary threshold is supposed to be set at a level high enough to guarantee that regular employees can’t be misclassified by their employers as exempt executives, administrators or professionals, as a way to get around having to pay time-and-a-half for overtime work. Back in the days when the level was regularly adjusted, it was set at about $50,000-$60,000 a year in today’s dollars, which is reasonable and was high enough to protect most secretaries from being classified as exempt administrators, for example, and research assistants from being classified as exempt professionals. Today, the threshold is set at $455 a week, or $23,660 a year—$190 less than the poverty threshold for a family of four. Quite frankly, it’s a joke.
The second installment of the Netflix original series, House of Cards, became available recently to the delight of binge watchers everywhere. In the backdrop of Frank Underwood’s (played by Kevin Spacey) uncompromising assent to power is a very relevant debate about trade policy with China. Specifically, one of the primary sources of tension between the two countries is the U.S.’ contention that China artificially keeps the value of their currency down to gain an advantage in trade. Defining currency manipulation is an ongoing debate, but Bergsten and Gagnon laid out their own criterion and found China to be one of the “most significant currency manipulators.” The effort to label China a currency manipulator falls by the wayside in Underwood’s duplicitous schemes to push his own personal agenda, but China’s currency manipulation has real effects on trade, and the United States can take real actions to reduce the trade deficit and create jobs. In fact, EPI’s Robert Scott just released a paper which found that ending currency manipulation across 20 of the most prominent practitioners (including the linchpin, China) would create between 2.3 million to 5.8 million jobs in the United States over the next three years.
So how is “currency manipulation” defined? Bergsten and Gagnon categorize a country as a currency manipulator if it meets the following four criteria:
- They held federal exchange (FX) reserves that exceed six months of goods and services imports.
- They maintained a total (global) current-account surplus between 2001 and 2011.
- Their total FX reserves grew faster than their GDP between 2001 and 2011.
- They have gross national income in 2010 of at least $3,000 per capita, the median among 215 countries ranked by the World Bank (this criterion excludes low-incoming developing economies).
It is remarkable that until this week, no American politician has had the guts or vision to speak out against one of the most destructive trends in our troubled labor market—the scourge of illegal unpaid internships. But thank goodness for Hillary Clinton, who, as reported by Politico, “spoke passionately about millennials, blasting businesses that take advantage of unpaid interns.”
The Fair Labor Standards Act makes most unpaid internships in for-profit businesses illegal because the so-called internships are usually nothing more than employment, with no special educational purpose or structure and no pay. The U.S. Department of Labor has made clear that interns must be paid at least the minimum wage unless the business that hires them meets six criteria:
- The internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment;
- The internship experience is for the benefit of the intern;
- The intern does not displace regular employees, but works under close supervision of existing staff;
- The employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded;
- The intern is not necessarily entitled to a job at the conclusion of the internship; and
- The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.
According to the National Journal, Clinton, who was addressing an audience at UCLA, “warned there is a “youth unemployment crisis” created by the weak economy they inherited, and stressed the need for more opportunities such as paid job training. She decried—to applause from the audience—businesses that have “taken advantage” of young people with unpaid internships.”
The table below shows the current unemployment rate and the unemployment rate in 2007, along with the ratio of those two values, for various demographic and occupational categories. One thing that is immediately obvious from the table is that there is substantial variation in unemployment rates across groups. This is always the case—it was true in 2007, before the recession began, and it is true now. But the main point of the table is that the unemployment rate is between 1.4 and 1.7 times as high now as it was six years ago for all age, education, occupation, gender, and racial and ethnic groups. Today’s sustained high unemployment relative to 2007, across all major groups, underscores the fact that the jobs crisis stems from a broad-based lack of demand. In particular, unemployment is not high because workers lack adequate education or skills; rather, a lack of demand for goods and services makes it unnecessary for employers to significantly ramp up hiring.
Weak demand for workers has kept wage growth very sluggish. Average hourly wages for all private-sector workers grew by 2.2% over the last year, which is just slightly higher than the rate of inflation. The economic link between high unemployment and low wage growth is straightforward; employers do not need to pay sizable wage increases to get and keep the workers they need when job opportunities are so weak that workers lack other options.
Growing trade deficits have cost US workers millions of jobs over the past two decades, (these were good jobs in manufacturing industries). Currency manipulation by more than 20 countries, of which China is by far the largest, is the single most important reason why U.S. trade deficits have not decisively reversed. Currency manipulation lowers the value of foreign currencies, relative to the U.S. dollar, which acts like a subsidy to their exports, and a tax on U.S. exports to China and every other country where the U.S. competes with the exports of currency manipulators.
In an era of fiscal austerity, ending global currency manipulation is the best way to reduce trade deficits, create jobs, and rebuild the U.S. economy, as shown in Stop Currency Manipulation and Create Millions of Jobs. Eliminating currency manipulation would reduce the U.S. trade deficit by between $200 billion and $500 billion in three years. This would increase annual U.S. GDP by between $288 billion and $720 billion and create 2.3 million to 5.8 million jobs. About 40 percent of the jobs gained would be in manufacturing.
Ending currency manipulation would not require any government spending – a key political virtue during this time of Congressional gridlock. In fact, it would reduce the federal budget deficit by up to $266 billion dollars per year as the extra economic activity and employment it creates boosts tax revenues and reduces safety net spending. Ending currency manipulation would create jobs in every state, with gains from 8,200 jobs (2.64 percent of total employment) in the District of Columbia to 687,100 jobs (4.18 percent of employment) in California. Ending currency manipulation would likely create jobs in every Congressional District, with gains of up to 24,400 jobs (7.05 percent of employment) in the 17th District in CA.
The Atlantic’s Derek Thompson wrote a great review of Claudia Goldin’s latest work on closing the wage gap at the upper level of the distribution. Goldin postulates that the final steps to closing the gender wage gap begin at the top rungs of the income distribution. Goldin examines MBA graduates’ earnings over their life span, and finds that the wage gap would start to close if firms didn’t have an incentive to disproportionately reward individuals “who worked long hours and who worked particular hours.” Men may be more able to choose to work long hours in a way that women, particularly in their first 10-15 years of work, may not choose to do for any number of reasons (most obviously: having kids), and whoever is willing to work these longer hours (usually men) gets disproportionately rewarded. To close the gap, Goldin calls for changes to the way jobs are structured—in short, greater work time flexibility.
While Goldin’s analysis is currently my favorite analysis for understanding gender wage inequality at the top—and I applaud her call to give high wage professionals more autonomy and encourage more flexible work schedules—her analysis doesn’t solve the question of how to close the wage gap for the majority of American workers, those who earn low- and middle-wages. (I’m also skeptical of the idea that there aren’t substantial incentives among those in power to keep the structure of high wage professions as it is or that work time flexibility will be enforced by companies even if it’s created.) For the majority of women, gender wage gaps are one way that women get the raw deal, but it is not the only way.