A happy (economic) 2012 is far from guaranteed

A couple of commentators have put forward reasons why 2012 might be a better-than-expected year for the economy. Matt Yglesias’ entry into the “happy days are here again” sweepstakes is a bit older, but it’s smarter than most and invokes an obscure, but important, economist of olde to make the point. Thus, it’s a good peg to use to remind people about the case for pessimism.

Yglesias’ post basically sums up multiplier-accelerator models of recovery – the idea that when recoveries begin, they will be self-sustaining and initial improvements in one sector of the economy will generate further increases in activity in other sectors (this reasoning also explains the dynamic of contractions, not just recoveries).

As Yglesias puts it:

“But every downward tick in the unemployment rate is another twentysomething moving out of his parents’ basement, stimulating a return to a more normal level of construction. Multifamily housing starts are already up 80 percent over the past year to accommodate the likely coming flood of renters, and there’ll be more to come once people have more cash in their pockets.

This increase in economic activity will boost state and local tax revenue and end the already slowing cycle of public sector layoffs. Re-employment in the construction, durable goods, and related transportation and warehousing functions will bolster income and push up spending on nondurables, restaurants, leisure and hospitality, and all the rest. Happy days, in other words, will be here again.”

This is indeed what recovery will look like when it comes. But there’s very little evidence that the process has started.

For one, “every downward tick in the unemployment rate” that we’ve seen over the past two years (i.e., since the unemployment rate peaked at 10.1 percent in Oct. 2009) has not represented somebody getting a job (and hence able to move towards independence and spending). Rather, it’s represented somebody dropping out (or choosing not to enter) the labor force. And even over the past year (since Nov. 2010), fully two-thirds of the decline in the unemployment rate was driven by a shrinking labor force and not by employment growth.

The best chart to show that a robust multiplier-accelerator process has yet to begin remains the difference between actual and potential GDP. The size of this gap is the progress that is being made (or not) towards recovery. The free-fall of this ratio that was the Great Recession has stopped, but so has the upward progress of the early part of the recovery (when, by the way, there was an actual boost to the recovery being provided by fiscal support, instead of the drag that will constitute the next year). Until one sees a rapid upward movement in the gap between actual and potential GDP (and, actually, until one sees this movement driven by improvements in actual rather than a deterioration in potential GDP), it seems awfully premature to think that a positive, self-reinforcing cumulative causation has set in or can be banked on for the coming year.

Happy Holidays from EPI

As you’ve probably noticed, Working Economics is on vacation. Unless there’s some breaking news or other pressing circumstances, we’ll resume blogging on Tuesday, Jan. 3. Until then, please take time to enjoy your families and the holiday season!

And if you find the wait for our return too unbearable, you can revisit some of our most popular posts since our launch last fall:

Worst economic idea of the year?

As my colleague Monique Morrissey highlights, Jeff Madrick has a terrific (albeit somewhat depressing) list of the 10 worst economic ideas of 2011. Doubling down on the failed supply-side experiment and making taxes more regressive is honored as the fallacious economic policy coup de grâce of the year:

“At the top of the list for sheer scandalous insensitivity are Herman Cain’s and Newt Gingrich’s tax plans for America… Gingrich’s plan wins the gold medal: his plan is both regressive and a gigantic revenue loser.”

Spot on. Cain’s plan is wildly regressive. Gingrich’s plan is grossly unaffordable and irresponsible. Cain’s “9-9-9” plan would swing the average tax rate for households in the lowest income quintile (those earning under $18,000 annually) by 18.3 percentage points, from 1.8 percent to 20.2 percent. The swing at the top end of the earnings distribution is almost as wild, with rates plunging 17.2 percentage points to 17.9 percent for the top 0.1 percent of earners (those making roughly $2.7 million or more), an average tax cut valued above $1.3 million. (See this Tax Policy Center current policy baseline table.)

As for Gingrich, Madrick notes his optional flat tax would blow a gaping hole in the federal budget: $850 billion relative to current policy and $1.28 trillion relative to current policy in 2015 alone. The price tag has (extremely misguided) purpose: The highest income 0.1 percent would see their average tax rate cut by two-thirds and fall to only 10.8 percent, a giveaway averaging $1.9 million per household.

But this is more than a two-pronged onslaught of voodoo economic practitioners. Remember Rick Perry’s tax plan? Eerily similar nostrum: Gut the central tenant of a progressive tax code that effective tax rates are supposed to rise with income, give the highest income 0.1 percent a tax cut of $1.5 million, and drain the Treasury of $995 billion relative to current law ($570 billion relative to current policy) in 2015 alone. The presidential campaign trail has been inundated with plans to slash corporate tax rates, cut capital gains and dividends taxes, and eliminate the estate tax. (See this great comparison table detailing and contrasting all the GOP presidential candidates’ tax plans, produced by the good folks at TPC.)

It’s also worth noting that House Budget Committee Chairman Paul Ryan was paving this path in 2010 when he released his Roadmap for America’s Future, which proposed shifting the distribution of taxes from upper-income households to the middle class by replacing the corporate income tax with a regressive subtraction-method value added tax that forces up middle-class tax rates. (Ryan would end all taxation of corporate profits by also eliminating taxes on capital gains and dividends.)

This is the bedrock of conservative economic policy. It’s even politically enshrined in Grover Norquist’s Taxpayer Protection Pledge. Never mind that it hasn’t improved economic performance, it has and continues to defund government, and it would continue to exacerbate income inequality. Unfortunately, with the election looming, it’s a safe bet that sweeping regressive tax cuts will be a top contender for 2012’s worst economic policy ideas.

The whole list is worth a read. Other highlights include the fallacy of expansionary austerity and arbitrarily capping federal expenditures as a share of the economy (somewhere between 16.6 percent to 21 percent, none of which would be tenable levels).

Thanks, grandma!

Jeff Madrick rightly dubbed cutting Social Security and raising the Medicare eligibility age two of the 10 worst economic ideas of 2011. Nevertheless, the idea that we need to work into our late 60s or even 70s has become an obsession of many inside the Beltway, who prefer to close Social Security’s modest projected shortfall on the cost side rather than the revenue side. Likewise, self-styled budget hawks are more concerned with reducing government spending on health care than addressing inefficiencies in the overall system, which are worse in the private sector.

Among other problems, an obsession with working longer ignores the fact that women, at least, are working more at younger ages. Not only does this help Social Security’s finances, but it turns out that forcing seniors to keep working into old age might actually reduce the number of younger women who are able to work (this assumes there are jobs for everyone). A new working paper by economists Janice Compton and Robert A. Pollak finds that proximity to grandmothers increases mothers’ employment, presumably because grandparents are able to help with childcare. (Though the study only directly measures the impact on women who live near their mothers and mothers-in-law, it also indirectly captures some of the effect of doting grandfathers and other relatives.) Though the study doesn’t take into account whether the grandmothers are working or retired, retirees have more time to spend on care-giving, which can oftentimes allow their children the flexibility to return to, or remain in, the workplace.

This study resonated with me because, like a lot of new parents, my ability to return to work this year depended not only on a paid caregiver, but also on grandparents. My husband and I were lucky to have both a friend looking for a flexible job and parents living nearby who offered to pitch in one day a week and as needed. Not only is my daughter blossoming under her grandparents’ and my friend’s care, but my parents’ help indirectly boosted the economy by allowing both my friend and me to return to work. (Admittedly, in some cases grandparent care may reduce the paid workforce, and GDP, to the extent that it simply replaces paid care-giving with unpaid care-giving, but as feminist economists like to point out, GDP is not a good measure of social welfare.)

A minimum wage milestone

On Jan. 1, 2012, Washington will become the first state in the nation to have a minimum wage above $9 per hour ($9.04/hour to be precise). Washington is one of 10 states with some form of minimum wage indexing, requiring that the state minimum wage grow at the same rate as inflation, thereby ensuring that the real value of the lowest-paid workers’ wages does not shrink as normal costs of living go up. Eight of these states will have automatic increases take effect on New Year’s Day: Arizona, Colorado, Florida, Montana, Ohio, Oregon, Vermont, and Washington.

You may be thinking that $9 per hour seems like a lot, especially for the neighbor’s teenage son who works part-time down at the local fast food chain, right? Well this may be the perception that some have of minimum-wage workers, but it is wrong on a number of levels. First, the typical minimum-wage worker is not a teenager, nor is she a man. According to data from the Current Population Survey, 80 percent of minimum-wage workers are over the age of 20. This is true not just in the eight states seeing an increase on Jan. 1, but nationwide as well. At the same time, roughly 60 percent of minimum-wage workers are female, despite the fact that women make up only 48 percent of the national workforce. See the table below for more details.

Second, over three-quarters of minimum-wage workers work more than 20 hours per week, and just over half are full-time employees. In fact, my colleague Heidi Shierholz has calculated that families with a minimum-wage worker rely on those minimum-wage earnings for nearly half (45.9 percent) of their income.

Third, make no mistake, $9 per hour is not a lot of money. Assuming they work 40 hours per week, 52 weeks a year, a minimum wage worker earns $18,720 a year. For comparison, the 2011 federal poverty line for a family of three—such as a single mother with two children—is $18,530 a year. (Note: If you were only making the federal minimum wage of $7.25 per hour, your annual income would be $15,080 – not enough to be above the poverty line for a family of three, and just barely over  the poverty line for a family of two.)

Finally, in a historical context, the minimum wage has been considerably higher. In inflation-adjusted terms, the federal minimum wage was highest in 1968, at a value of roughly $9.85 per hour in 2011 dollars. So even at $9 per hour, the Washington minimum is well below historical highs, not to say anything of the federal minimum wage, which at $7.25 has declined in value by more than 26 percent since 1968. With inequality at record levels, and still on the rise, indexing the federal minimum wage would be one very basic protection of workers at the very bottom of the income distribution. The question we should be asking then is not whether Washington’s minimum wage is too high, but why isn’t the federal minimum wage just as high or even higher?

At least for the approximately 194,000 workers in Washington state, and the 1 million across all eight states, who will be directly affected by these increases, the value of their paychecks will hold steady for one more year. Roughly another 400,000 workers across the eight states, whose wages are just above the minimum, will also see a small pay increase as employers adjust their overall pay scales to reflect the new minimum. (These are the “indirectly affected” workers in the table below.) It’s a shame that low-wage workers nationwide will not see this same minimal protection of their wages, but at least for this New Year, we can toast the Evergreen State.

Click to view in full-size:

Some ugly views about the unemployed among congressional Republicans

Robert Pear’s story in the New York Times yesterday about the impasse in Congress over renewing the federal emergency unemployment benefits program was a mixed bag. It did a good job of demonstrating how differently Republicans and Democrats view the unemployed, making clear that some Republican politicians have decided to scapegoat the unemployed and blame the victims rather than those truly responsible for our economic woes. But Pear also inadvertently contributed to misunderstandings and misinformation about the unemployment insurance (UI) program and failed to point out essential facts about its operations and justification.

Pear reports that 3 million people could lose their unemployment benefits in the near future if Congress fails to renew federal assistance. That’s true, and it would not only be painful to disastrous to these individuals and their families, it would be bad for the economy, as everyone from Goldman Sachs to EPI recognizes.

Well almost everyone. As Pear reports, House and Senate Republicans think a lot of people ought to lose their benefits because they’ve received them too long and are essentially just taking a long vacation. He quotes Michigan Republican Dave Camp, who heads the tax-writing committee that’s in charge of UI, and who wants to chop 40 weeks off the maximum benefit duration: “This reflects a more normal level of benefits typically available after recessions.” Rep. Camp somehow has forgotten that there’s little normal about the current economy, which with an 8.6 percent unemployment rate is still struggling to recover from the Great Recession, the worst economic downturn in 80 years.

But Sen. Orrin Hatch (R-Utah) expresses what may be on the minds of many of the Republicans who want to kill or reduce the emergency UI benefits: “I don’t see why you have to go more than 59 weeks. In fact, we need some incentives for people to get back to work. A lot of these people don’t want to work unless they get really high-paying jobs, and they’re not going to get them ever. So they just stay home and watch television. I don’t mean to malign people, but far too many are doing that.”

Republican Congressmen Orrin Hatch, left, and Dave Camp are outspoken critics of extended unemployment insurance benefits. (From Flickr Creative Commons by Michael.Jolley)

Pear could do his readers and Sen. Hatch a service by letting them know that workers receiving the last 20 weeks of benefits possible – Extended Benefits – have no choice about what job they’ll take.  The law says their benefits are cut off if they refuse even a minimum wage job, so they aren’t holding out for “really high-paying jobs.”

This would also have been a good moment for the article to have mentioned that there are more than four unemployed workers for every available job. The experience of most unemployed workers is that they call and write and email employers and never hear a word back. Indeed, the evidence suggests that workers who receive UI do more job search than those who never receive benefits. They have every incentive to look hard because: a) their benefits are cut off if they don’t look, b) the benefits are so low (averaging less than $300) they barely amount to the minimum wage for a 40-hour work week, and c) most people are embarrassed or even ashamed to be jobless, even though the fault lies with the economy and not them.

More damaging, Pear leaves an impression that there are no job search requirements for UI at all. He describes the Republican position as imposing job search requirements for the first time: “House Republicans said they wanted a full-year extension, with additional requirements to prevent abuse of the program. They would require most recipients of jobless benefits to search for work…” Job search is not “an additional requirement.” Every UI recipient already is required to look for and accept suitable employment, until they begin receiving Extended Benefits, at which point they are required to accept even minimum wage work for which they are totally overqualified.

The Republicans want to set new and punitive barriers to benefits in front of the unemployed, including drug tests and high school GED requirements, perhaps to paint a picture of them as undeserving. There’s no good reason to subject people to humiliation who have worked hard and earned insurance benefits. They are not the reason employers are sitting on record profits and refusing to hire. They did not engineer the $8 trillion housing bubble that crashed the economy.

They want to work. There are no jobs. They have been punished enough.

WSJ swings and misses on tax policy

In a scathing critique of the House Republicans’ strategy regarding the payroll tax cut, the Wall Street Journal’s editorial board really botched the underlying economics:

“House Republicans yesterday voted down the Senate’s two-month extension of the two-percentage-point payroll tax holiday to 4.2% from 6.2%. They say the short extension makes no economic sense, but then neither does a one-year extension. No employer is going to hire a worker based on such a small and temporary decrease in employment costs, as this year’s tax holiday has demonstrated. The entire exercise is political, but Republicans have thoroughly botched the politics.” (Bold added.)

The Journal‘s editorial page inverts the economics of the payroll tax cut by confusing the enacted employee-side tax cut (being considered for extension) with an employer-side tax cut. The objective behind the employee-side payroll tax cut extension is to put $120 billion worth of disposable income into the hands of consumers, creating and sustaining demand for goods and services, rather than altering marginal hiring costs.

The two-month extension that passed the Senate with overwhelming bipartisan support would increase disposable income by $20 billion via the payroll tax cut and pump another $8 billion into the economy through emergency unemployment benefits. Short of assigning a zero (or negative) fiscal multiplier to these programs, it can’t be argued that this will have no impact on an economy running $918 billion (5.7 percent) below potential output. And recent research by Berkeley professors Alan Auerbach and Yuriy Gorodnichenko, among others, finds that large output gaps imply large multipliers; a zero fiscal multiplier for government spending in a depressed economy is entirely unsubstantiated. (A legitimate critique would be that serious infrastructure investment or public works employment would be a better way to generate demand than the payroll tax cut, some of which will undoubtedly be saved.)

With regard to the duration of extension, Howard Gleckman aptly notes that setting tax policy in two-month increments makes little sense, but I think the Journal’s editorial board would agree with Gleckman that House Republicans only have themselves to blame for that situation.

House vote will hurt millions of unemployed workers

Turning their backs on millions of unemployed workers who can’t make ends meet without the help of their unemployment insurance (UI) benefits, 229 Republican House members voted not to renew federal emergency benefits for the long-term unemployed. In a bipartisan vote, the Senate had agreed to continue the emergency benefits until the end of February, along with an extension of the payroll tax cut that expires at the end of December. But the House refused to consider that bill yesterday, killing hopes for the unemployed as winter begins.

What does the House vote mean for the unemployed?

Regular state UI benefits generally last no more than 26 weeks. The average benefit is less than $300 a week, but an individual’s benefit varies depending on previous earnings and state law. The maximum state-provided benefit currently ranges from $235 in Mississippi to $629 ($943 with dependents) in Massachusetts.

The federal legislation the House was voting on provides up to 73 weeks of additional benefits; workers in any state who exhaust their regular UI benefits before they can find a job can receive up to 34 additional weeks of benefits through the temporary federal Emergency Unemployment Compensation (EUC) program enacted in 2008. That number rises to 53 weeks in states with especially high unemployment rates. Workers who exhaust both their regular UI and EUC benefits can receive up to 20 additional weeks of benefits through the Extended Benefits (EB) program.

The House vote will terminate all of the additional federal weekly unemployment insurance benefits, as of Jan. 3, 2012. For more than 400,000 workers who will exhaust all of their regular state benefits in January, there will be no more federal help; their benefits will be cut off. More workers will exhaust benefits in February and each succeeding month, and all of them – millions of workers — will be denied any federal benefits.

Nearly 600,000 very long-term unemployed workers who are currently receiving Extended Benefits will lose those benefits in January 2012 because their states will end their EB program when full federal funding expires.

More than 3 million workers are currently receiving EUC. Most of them will lose those benefits prematurely if the legislation is not renewed. EUC provides benefits in “tiers” of weeks; people receiving EUC as of Jan. 3, 2012 will be allowed to complete their current tier but not move on to the next tier. The National Employment Law Project estimates that over 700,000 workers will reach the end of their current tier and thus receive no further federal benefits in January. Many more will lose EUC benefits prematurely in the months to follow.

Altogether, the Department of Labor estimates that about 2.5 million workers will lose benefits by March 3, 2012, and 5 million by year’s end, if federal benefits are not renewed.

Although the economy has improved since the depths of the recession, by any measure, the labor market is very poor, and jobless workers face terrible challenges. A recent report by the Council of Economic Advisers makes clear that the jobless are not to blame for their situation; the fault lies with the economy:

As of November 2011, the unemployment rate stood at 8.6 percent and 5.7 million workers had been out of work for more than 26 weeks; the average duration of unemployment was 40.9 weeks. In October, the latest month for which job vacancy data are available, there were more than four job seekers per job opening (versus 1.5 pre-recession). Estimates based on flow data from the Bureau of Labor Statistics monthly Current Population Survey (CPS) show that the probability that an unemployed worker finds a job in any given month is roughly 17 percent. For those who have been unemployed for more than 26 weeks, the monthly job-finding rate is closer to 10 percent.

Top 10 lies about Social Security (from those who just want to dismantle government)

Since the season of top 10 lists is upon us, here’s the Social Security Scrooge version:

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

Continuing extended UI benefits will make the labor market stronger

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

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

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

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

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

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

Cleaner, safer air (and some jobs) coming soon: Final “air-toxics rule” still likely to be life-saver, not job-killer

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

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

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

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

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

Reducing the black-white achievement gap by reducing black unemployment

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

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

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

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

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

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

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

The financial crisis didn’t, and won’t, fix inequality

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

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

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

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

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

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

Snapshot: Unemployment insurance benefits increase job-search activities

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

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

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

—with research assistance from Hilary Wething

Voodoo economics playbook: Gingrich goes all in

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

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

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

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

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

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

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

Congressional Progressive Caucus picks up where Obama’s speech left off

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

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

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

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

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

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

On fairy tales about inequality

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

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

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

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

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

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

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

Will the real unemployment rate please stand up

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

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

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

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

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Same old, same old: One quick test for what’s serious in job creation proposals

Jeff Madrick has a good review of Bill Clinton’s new book in the New York Times. The punchline of the review is that Clinton doesn’t offer much except for very cautious (Clintonesque?) proposals to combat the current jobs crisis and instead mostly highlights his own own efforts at bringing the federal budget deficit into balance in the 1990s while calling for this to again become a focus of economic policy.

This desire to return to the 1990s when the economy was generating much better (though bubble-fueled) outcomes is understandable, if misguided. But this desire helps illustrate a quick and dirty test that should be used to grade anybody’s policy prescriptions for combating the current jobs crisis: Are they just re-packaging policy ideas that they think would be a good idea anytime, or do they recognize that the economy’s exceptional troubles today require exceptional measures?

If it’s just re-packaging, you can generally discard them as serious solutions to the jobs crisis. So, when GOP members of Congress put out a “jobs plan” that relies on tax cuts and blocking regulation – it’s fair to ask when are they not in favor of tax cuts and deregulation? After all, if the exact same policies that they think are good ideas when the unemployment rate is 4 percent are also the only ones offered up to spur job creation when the unemployment rate is closer to 9 percent, doesn’t this imply that nothing special needs done about job creation today?

Take EPI, on the other hand. We don’t urge Congress every single year to pass hundreds of billions of dollars of debt-financed fiscal support. We do urge Congress to do this when the unemployment rate is historically high – because utterly boring textbook macroeconomics says that this is the proper medicine to treat an economy with very large amounts of productive slack, even after the Federal Reserve has exhausted traditional recession-fighting tools.

There are, obviously, more long-running policy debates that we have strong opinions on – we think the minimum wage should be raised and indexed to keep its value from eroding over time, and we think labor law should be reformed to allow willing workers to form unions. We don’t, however, claim that enacting these “perpetuals” are things that will yank down the overall unemployment rate in the next two to three years. They’re good policies for boosting the long-run economic performance of low- and moderate-income households, but they’re not serious job creators, per se. So, when simple job creation becomes a top priority, we put other things on top of that particular to-do list.

Also, we’re generally in favor of more public investment, in good times or bad. There’s a good reason for this – public investment has been lagging in recent decades and aids long-run economic performance. But even here we recognize different economic environments – when the unemployment rate is historically high and the economy needs spending power, we argue that public investments should be debt-financed. If the unemployment rate fell to very low levels even while the public capital stock needed upgrading, we’d argue that the case for financing these investments with taxes makes more sense (actually, for very high-return investments, one can imagine a case for debt-finance either way, but we wouldn’t argue for debt-finance on job creation grounds if the economy was performing well).

The figure below will help us recap: a good quick-and-dirty test for how sensible somebody’s top policy prescriptions for job creation are is  simply asking if they were arguing for the exact same policies at point A (i.e., before the Great Recession) and point B (i.e., at very high rates of unemployment). If so, these policies probably are not going to do much for jobs.

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Projected: Nearly 15% of the workforce will be unemployed at some point in 2012

The monthly unemployment rate published by the Bureau of Labor Statistics measures the number of workers who are not working and looking for work – that is, the unemployed – out of the total number of people who are either working or looking for work in a given month. But this understates the number of people who experience unemployment during any longer period, since someone who is employed in one month may become unemployed the next, and vice versa.

Yesterday, BLS released its report on “over-the-year” employment and unemployment in 2010, which measures (among other things) the share of the workforce who experienced unemployment at some point during 2010. The report finds that 15.9 percent of the workforce was unemployed at some point last year, much higher than the average monthly unemployment rate in 2010, which was 9.6 percent.

The figure shows the average monthly unemployment rate and the over-the-year unemployment rate. Using the ratio of the over-the-year unemployment rate to the average monthly unemployment rate in 2010 (the latest data available), the over-the-year unemployment rate for 2011 and 2012 are projected. According to the data, we can expect that 14.9 percent of the workforce – more than one in seven workers – will be unemployed at some point next year.

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It doesn’t have to be this way.  The number of people experiencing unemployment – and the scars this unemployment causes to careers, families, and communities – could be considerably reduced with substantial additional stimulus spending to generate jobs.

Seniors are STILL worse off than working-age adults

After adjusting  for household size, the income of households headed by adults 65 and older was 13 percent lower than that of households 35 and under, according to a new Pew report. (The gap is much larger when seniors are compared to households headed by adults in their peak earning years, which begs the question of why the authors chose to compare seniors with a group that includes not just young people starting their careers but also many students.)

What’s the title of this report? “The Old Prosper Relative to the Young: The Rising Age Gap in Economic Well-being.” That’s right, those oldsters are raking it in, once again.

How do the authors come up with a title like that, given the facts? In what’s become a familiar refrain, they focus on the fact that seniors, while they still have lower incomes, are not as far behind as they used to be, especially since the economic downturn walloped young people. O-kay! They also cite a lower official poverty rate for seniors, completely ignoring the fact that a new poverty measure that takes into account  higher out-of-pocket medical costs for seniors shows they have a poverty rate slightly higher than that of working-age adults, even with the help of Social Security and Medicare.

They also cite seniors’ higher net worth, implying that seniors who’ve paid off their homes and socked away some money in a 401(k) are better off than younger people, though the real story is that these savings aren’t nearly enough, even if they sucked every last penny out of their homes to pay for retirement. (In 2009, the median net worth of households aged 57-66 was roughly four times this group’s median annual income, according to the Federal Reserve’s Survey of Consumer Finances. Even with Social Security, pensions, and other income, that’s not enough to maintain the same standard of living through retirement.)

This is a familiar story, but in a new twist to the old ageist refrain, the Pew report also bops seniors for working longer. Well, that’s refreshing. We usually hear that older workers are lazy and retire too soon.

Vast majority of public supports a legalization program for unauthorized immigrants

I was shocked to discover today just how far the pendulum has swung in terms of American public opinion on immigration. The new United Technologies/National Journal Congressional Connection Poll revealed that 62 percent of Republicans – the group most likely to oppose “illegal” immigration and the presence of unauthorized migrants in the U.S. – now support allowing “those who have been here for many years and have broken no other laws to stay here legally.” Among Democrats, support is at 72 percent, which means a great majority of Americans from both major political parties are now strongly in favor of a legalization program to solve the problem of irregular migration. Among all respondents, support was 67 percent.

Of the 62 percent of Republican supporters, 43 percent want to deport those who have only been in the United States for a short period of time, and 19 percent favor allowing all unauthorized migrants to stay as long as they have broken no other laws and commit to learning English and U.S. history. With such vast bipartisan support, is now the time is to finally implement a legalization program for the unauthorized population?

Perhaps the American public has finally realized that deporting 11 million people – 8 million of whom are exploitable workers with no labor rights – is simply not rational or feasible. Such action would shrink the economy and tear families apart. And it would unfairly blame and punish the migrants themselves, when others share the blame. Just before 9/11, deportations were less than half as common as they are today (and six years before that, there were almost 90 percent fewer deportations), and employer sanctions were a rarity. For decades, employers lured unauthorized migrants to the U.S. with job offers, while Congress and the president looked the other way when it came to enforcement. Government policies also played a role. Enactment of the North American Free Trade Agreement (NAFTA) in 1994 was perhaps the single biggest factor causing the increase in irregular migration.

Thus, the government, employers and migrants should equally share the blame, and any solution must be rational and humane – but also deter future flows of unauthorized migrants. The necessary solution is clear, and really quite simple, and the language used in the UT/National Journal poll suggests some of what’s required.

First, the government can motivate unauthorized residents to come forward by offering legal status to those who can prove they have not committed crimes other than residing in the U.S. without proper authorization, and then require them to pay any unpaid taxes, learn English and take courses in U.S. history. The other key step in the process will be determining how long the unauthorized migrant has resided in the country, and their level of attachment to the labor market. I would argue if you’ve been working continuously in the country for three years, you’ve cemented your place in the U.S. labor market and should be allowed to stay. If a majority disagrees that three years is long enough, a compromise should be negotiated.

The UT/National Journal poll does not specify exactly how many years they meant when asking if respondents would support legalization for those who have been here for “many years.” A new report estimates the length of time the unauthorized population has resided in the country, which gives us an idea of how many people could qualify for this legalization program based on the number of years ultimately required. Only 15 percent of unauthorized migrants have been here less than five years, while 63 percent have been in the country for 10 years or more, and 35 percent have been here for at least 15 years. This tells us that the vast majority of unauthorized migrants are not recent arrivals, and are therefore likely to be well integrated into the labor market because they are unable to access almost any part of the social safety net (i.e., they have no other choice but to work).

Finally, once this program is in place, deport and strictly enforce immigration laws against those that do not qualify for legalization, and begin implementing a functional employment verification system to deter future flows of unauthorized migrants (this would need to include a PIN-based system to overcome some of the privacy concerns inherent in E-Verify, as discussed here).

Unfortunately, political decisions and public policy often fail to respond quickly to public opinion and the public’s desires. But this new polling data revealing broad support for a legalization program – when considered in conjunction with data showing the stock of unauthorized residents in the country has reduced by about one million since the recession, and a sharp decline in the annual flow of unauthorized migrants – suggests there hasn’t been a better time to fix this crucial part of our broken immigration system since 1986.

Eliminating Medicare epitomizes penny wise, pound foolish budgeting (it’s bad health policy, too)

Via Paul Krugman, I see that Politico honored House Budget Committee Chairman Paul Ryan (R—Wisc.) as health care policymaker of the year. Steven Benen nicely expounds the absurdity of this choice, namely that Ryan’s budget would repeal the Affordable Care Act, shift costs to families (rather than curb costs), end guaranteed Medicare coverage, and slash Medicaid funding. In fact, the Congressional Budget Office’s long-term analysis of Ryan’s fiscal year 2012 budget estimated that federal spending on Medicaid—healthcare for the disabled and poor children and seniors—would be roughly halved in the next two decades.

It’s worth adding that health policy experts widely agree the key objective for national health policy is slowing economy-wide health care cost growth. To this point, Ryan’s budget resolution would do more than shift costs—it would actually exacerbate the problem by increasing economy-wide costs. CBO’s analysis showed that Medicare is currently 11 percent cheaper than an equivalent private insurance plan. This efficiency premium compounds with time, as depicted in the figure below. By 2030, Medicare as we know it is projected to be at least 29 percent cheaper than an equivalent private sector plan (relative to CBO’s alternative fiscal scenario for the long-term budget outlook). Replacing Medicare with a voucher negates the economies of scale (and lack of a profit motive) afforded by Medicare.

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Ryan’s plan would accrue budgetary savings by ending guaranteed Medicare coverage, but at the expense of increasing total health costs and only by vastly increasing beneficiaries’ costs. By 2030, the Ryan budget would reduce government expenditure for the average beneficiary by 22 percent but push the beneficiary’s out-of-pocket costs up 127 percent. Extrapolating from CBO’s analysis, Dean Baker and David Rosnick calculate that the Ryan proposal would increase national health care expenditure by $30 trillion over the next 75 years, assuming households purchase Medicare-equivalent plans. A more likely scenario would involve an increase in national health care expenditure and a decrease in the number of Americans receiving adequate health care coverage.

Politico’s award choice cited Ryan’s influence over the Republican presidential candidates and credited him with producing a “starting point” for future health care reforms. Ryan’s budget (specifically its treatment of Medicare) has indeed served as a litmus test for conservative bona fides in the GOP field, but that should be cause for concern rather than celebration among health policy experts. Eliminating Medicare and its associated cost efficiency savings would be a lousy starting point for the next round of health care reform, as it epitomizes penny wise, pound foolish budgeting.

I still haven’t run a small business … but the case against regulation is still awfully weak

Yesterday on a panel at the Atlantic magazine’s “High-Growth Business Forum” an audience questioner brought out the “you’ve never run a small business” j’accuse again when I made the argument that today’s still-sluggish recovery was not being held-back by regulatory changes. I won’t rehash the argument here – check out this, this, and this to see why regulation has nothing to do with the poor economic performance since the Great Recession began (well, except for the role of financial deregulation in contributing to the policy non-response to the build-up of the housing bubble).

What was odd, though, were the specific examples of burdensome regulations that were brought up in response to some prodding. Nobody (in a very business-friendly audience and panel) seemed particularly eager to go after any specific financial regulations, health care regulations, or environmental regulations. These are clearly the ones that GOP congressional members have in mind when they scream about “job-killers,” but even this audience didn’t seem interested in arguing specifics on them. I guess it turns out that a stable financial system, fairer health system and clean air and water are all actually pretty popular.

Instead, Brink Lindsey of the Kauffman Foundation fingered zoning regulations and occupational licensing. Fair enough – smart people have said that some regulations in these realms seem to be more about rent-seeking than solving market failures. Further, I’m a sucker for arguments that zoning regulations often lead to some very undesirable outcomes. Maybe I just read too much Atrios.

On occupational licensing, though, it’s worth noting first that a group of incumbent business-owners, like many of those in audience, would very likely be against an abandonment of occupational licensing standards – which after all tend to shield incumbents from competitive pressure. And color me cynical, but I’d wager that a policy campaign aimed at reducing occupational licensing will find plenty of rationale for well-paid occupations (doctors, lawyers, accountants) to keep their licensing requirements while dismantling it for lower-paid ones.

Regardless of the specifics, it seems pretty clear that the effect of regulations like these on overall economic growth (as opposed to distribution) is tiny in a macroeconomic perspective. In short, it seems awfully hard to explain the high priority Washington policymakers have put on rolling back proposed regulations based on examples like these (which, by the way, are generally not federal regulations).

And then the anti-regulatory arguments got really silly – with a panel member singling out health inspections at restaurants as overly burdensome and arguing that they were unneeded because restaurants whose food-handling practices make people sick would go out of business as their reputation spread. This seems too obvious to have to say, but apparently it’s not so here goes: it is far from obvious that this “free market” solution is less costly than a regulatory one.

Many regulations are actually about increasing consumer choice by reducing their search costs – seeing a health inspection certificate on a restaurant’s wall is a signal that you don’t have to spend your own precious time researching their record on safety by yourself. And guess what – often just this sort of reasoning turns out to be supported by evidence – a study of a Los Angeles regulation that forced restaurants to display hygiene information to customers led to not just an improvement in restaurant hygiene but also to an increased sensitivity of consumers to differences in restaurant hygiene. In short, it offered information not previously available to consumers and this information led them to make different (and presumably better for them) choices. Oh, and it also led to a sharp drop in hospitalizations related to food-borne illnesses.

So, I still haven’t run a business – but broad-brush jeremiads against the regulatory burden stifling the U.S. economy still don’t really have much of a case.

Snapshot: Why the drop in the unemployment rate isn’t what you think

Unemployment in November dipped to 8.6 percent, its lowest point since March 2009, down from its 10.1 percent recession high in Oct. 2009. The unemployment rate fell because the share of the population seeking work or working—the labor force participation rate—has fallen considerably. We know this because the share of the population employed last month—58.5 percent—is the same as when the unemployment rate peaked. The lack of change in the share of the population employed—known as the employment-to-population ratio—indicates that the growth in employment has only kept pace with the growth of the working-age population. The figure shows the erosion in the labor force participation rate of people age 25 and older by education level over the last two years.

For the 8 percent of the labor force who have not completed high school, there was no real fall in labor force participation as the small decline from 2009–10 roughly offset the small increase from 2010–11. In contrast, labor force participation of those with a high school degree or some college declined by 1.6 percentage points, with the greatest decline occurring in the last year. There was a somewhat smaller but still sizeable 1.3 percentage-point decline in labor force participation of those with a college degree or further education (such as a master’s or professional degree). Thus, this deep recession led to a widespread shrinkage of the labor force that encompasses all but the least-educated workers.

President Obama got it right; Fox news gets it wrong

It was exciting to hear the president tell it like it is yesterday. After two years of trying to make nice with the interests that were most responsible for the financial collapse and which are responsible even now for the gridlock in Washington that keeps the economy from moving forward, President Obama told America’s middle class that its future is being threatened by the greed and self-interest of some of the wealthiest people in our nation.

The most important part of his speech in Kansas was probably his attack on the “collective amnesia” that allows some people to continue advocating the Bush administration’s tax cuts for the rich, despite their clear history of failure as a spur to job creation. Obama said:

“Remember in those years, in 2001 and 2003, Congress passed two of the most expensive tax cuts for the wealthy in history. And what did it get us? The slowest job growth in half a century. Massive deficits that have made it much harder to pay for the investments that built this country and provided the basic security that helped millions of Americans reach and stay in the middle class — things like education and infrastructure, science and technology, Medicare and Social Security.”

The president pointed out the folly of pursuing the same kinds of failed “you’re on your own” economic policies that got us into the worst recession in 75 years. Weak regulation helped cause the Great Recession. Why would anyone expect the same policies to get us out?

“Remember that in those same years, thanks to some of the same folks who are now running Congress, we had weak regulation, we had little oversight, and what did it get us? Insurance companies that jacked up people’s premiums with impunity and denied care to patients who were sick, mortgage lenders that tricked families into buying homes they couldn’t afford, a financial sector where irresponsibility and lack of basic oversight nearly destroyed our entire economy.

We simply cannot return to this brand of ‘you’re on your own’ economics if we’re serious about rebuilding the middle class in this country.”

Unsurprisingly, the right wing media, led by Fox News, wants to take us right back to the kind of Bushonomics that crashed the economy in 2007. Progressive taxation doesn’t sit well with Fox’s high-income anchors, let alone its billionaire owner, Rupert Murdoch. As our friends at Media Matters document nicely, Fox immediately launched a broadside against the president and the notion of tax fairness, misquoting him when it was convenient, and accusing him of class warfare and socialism.

I support raising the top marginal income tax rate to 45 percent — about half the 91 percent top rate under President Eisenhower. President Obama just wants to restore the top rate to its level under President Clinton – 39 percent. If that makes him a socialist, what was Dwight Eisenhower? Could it be that the Commander in Chief of Allied Forces during World War II and two-term Republican president from Kansas was a socialist and a class warrior? Uh… no.

Supply-side’s abject failure

In a speech Tuesday, President Obama issued a damning critique of trickle down economics and a stark defense of social insurance and public investments funded by progressive taxation. The president’s speech in Osawatomie, Kan., addressed the challenges of rebuilding the middle class and tempering income inequality, making the case that doubling down on the supply-side experiment of the last decade will fail the needs of the vast majority.

The president aptly characterized conservative economic policy as a two-pronged approach of cutting regulations and cutting taxes for the wealthy. (Note conservatives’ glaring lack of enthusiasm for refundable tax cuts or even an across-the-board payroll tax cut – tax cuts that would be pretty broad-based.) This is, of course, exactly the economic nostrum being preached by the GOP presidential field and Republican leadership on Capitol Hill. See, for instance, how the tax plans of presidential candidate Rick Perry or House Budget Committee Chairman Paul Ryan (R-Wisc.) belie any concern about income inequality, or how regulatory uncertainty is used as a phony explanation for the jobs crisis.

This supply-side snake oil is peddled on the premise that when the wealthy do well, income gains trickle down to the middle class and everyone benefits from a growing economy. But that hasn’t happened—real median income has sharply decoupled from productivity gains in recent decades (particularly since 2000) and income gains have been incredibly concentrated at the top of the earnings distribution. The president made the following salient point on the supply-side experiment:

“Now, it’s a simple theory… And that theory fits well on a bumper sticker. But here’s the problem: It doesn’t work. It has never worked. It didn’t work when it was tried in the decade before the Great Depression. It’s not what led to the incredible post-war booms of the ‘50s and ‘60s. And it didn’t work when we tried it during the last decade. I mean, understand, it’s not as if we haven’t tried this theory.” (Emphasis added.)

The record of the Bush-era tax cuts, also invoked by the president, indeed speaks volumes: “Remember in those years, in 2001 and 2003, Congress passed two of the most expensive tax cuts for the wealthy in history. And what did it get us? The slowest job growth in half a century.” That and the slowest economic growth, non-residential fixed investment growth, compensation growth, and wage and salary growth. Imagine if we had instead used the $2.6 trillion these tax cuts added to the public debt over 2001-2010 to undertake investments in areas like education, infrastructure, and scientific research—investments that would have produced much better job-growth and that have actually demonstrated high economic returns.

President Obama's speech in Kansas likely resonated with middle-class Americans.

Since the 2001 and 2003 tax cuts didn’t generate much in the way of jobs or incomes, they failed (by miles – or should we say trillions of dollars) to fulfill the mendacious claim often made by conservatives that tax cuts pay for themselves. (Note that this assertion continues to surface despite being flatly rejected by the Bush administration’s own economists.)

Based on this abject policy failure and the clear dysfunction of a tax code that allows a quarter of millionaires to pay lower effective tax rates than middle class families, President Obama made the case for tax reform – including allowing the top individual income tax rate to revert from 35 percent to the 39.6 percent rate implemented by President Clinton (which would still be well below tax rates for most of the post-World War II era).

Since most Republicans will clearly scream about the onerousness of this proposal, it’s worth noting that the optimal taxation literature calls for a steeper schedule of marginal tax rates and a considerably higher top rate than 39.6 percent. In their recent paper on the case for progressive taxation, economists Peter Diamond and Emmanuel Saez peg the optimal top income tax rate at 73 percent, up from 42.5 percent today (taking into account Medicare payroll taxes and average state income and sales taxes). This would imply a top federal marginal income tax rate of 65.5 percent—more than 25 percentage points higher than that proposed by the president. The current top tax rate is “is optimal only if the marginal consumption of very high income earners is highly valued,” note Diamond and Saez.

Of course, the value that policymakers put on the happiness of the very rich is exactly what stands behind the failure to enact job creation measures that would be financed by a surtax on millionaires and the repeated collapse of long-term deficit reduction negotiations because of conservative intransigence over raising more revenue from upper-income households.

I applaud the president for making the case for the progressive alternative against regressive tax cuts as the lodestar of economic policy. America’s low- and moderate income families should, too. As a nation, we cannot afford to double down on the failed, plutocratic pipe dream that is trickle down economics. Another round of tax cuts for the highest-income households will not restore full employment but will exacerbate widening income inequality, blow a bigger hole in the budget deficit, and defund needed public investments and economic security programs. Any policymaker genuinely concerned with the fate of the middle class, inequality and immobility, or the budget deficit, should be focused on rolling back the last round of inequitable and ineffective tax cuts rather than digging us deeper and deeper into a new Gilded Age.

What David Brooks gets right – regulations aren’t tanking the economy – and what he misses

The House of Representatives is poised to vote for the REINS (Regulations From the Executive in Need of Scrutiny) bill today; this would come on top of votes on two bills last week that would also upend the regulatory process.  These efforts are premised on assertions that regulations are greatly damaging the economy, and David Brooks’ op-ed today is another timely reminder that these assertions are inaccurate.  He opens with:

“Republicans have many strong arguments to make against the Obama administration, but one major criticism doesn’t square with the evidence. This is the charge that President Obama is running a virulently antibusiness administration that spews out a steady flow of job- and economy-crushing regulations.”

And closes with:

“They [regulations] are not tanking the economy.”

In between, he cites a few relevant facts to support his view that “regulations are not a big factor in our short-term [economic] problems.” These include the Bureau of Labor Statistics data which show that during the first half of 2011, just 0.18 percent of mass layoffs were due to regulations. EPI President Lawrence Mishel comprehensively addresses the role of regulation and regulatory uncertainty in the economy in Regulatory uncertainty:  A phony explanation for our jobs problems; he arrays a range of economic and survey indicators that demonstrate that it is a lack of demand, and not regulations or regulatory uncertainty, that is behind the painful state of the labor market.

I don’t agree with some of the information and characterizations in Brooks’ article; let me focus on the most glaring omission: he includes no discussion of the benefits of regulation. These can be large, not only in terms of health or safety benefits, but often in terms of economic benefits. Appropriate financial regulations are essential to an economy’s foundation.

Also, I’ve previously shown that two joint EPA/Department of Transportation rules which regulate greenhouse gas emissions from, and establish fuel standards for, various-size vehicles have particularly sizable economic benefits. They produce large savings to drivers in the form of reduced expenditures on gasoline. In 2010 dollars, a conservative estimate of the economic benefits from these two rules amounts from $6 billion to $20.6 billion a year. This range is above the range of estimated compliance costs for all 11 major rules finalized so far by the Obama EPA; that range is $5.9 billion to $12 billion a year.

When health benefits are also considered, the combined benefits of all EPA rules finalized so far under the Obama administration exceed their costs by tens of billions of dollars each year. In 2014, the Cross-State Air Pollution rule alone will save an estimated 13,000-34,000 lives and lead to 820,000 fewer cases of respiratory symptoms.

Brooks is right in concluding that concerns that regulations are behind the economy’s troubles are misplaced, and that’s a step towards a more reasoned and balanced discussion. Let’s hope that next time he goes a step further and discusses the benefits from regulations as well.

(Here is a summary of EPI’s research on the costs and benefits of regulation and a summary of our research on the relationship between employment and regulation.)

The J-1 and H-2B guest worker programs hurt young people’s employment prospects

Youth unemployment exploded during the Great Recession and now stands at 16.8 percent for 16-24 year olds. For those not enrolled in school and possessing only a high school diploma, the unemployment rate is 21.5 percent. For teenagers 16-19, it’s nearly 24 percent. In fact, the share of young people employed in the United States in July 2011 was 48.8 percent, the lowest level of summer employment in more than 60 years. This will have long-lasting, negative impacts on young workers. Some countries, like the United Kingdom, are proactively implementing programs to put young people to work (and investing £1 billion in public funds to do so). Others, like Spain – with its 46 percent youth unemployment rate – have done little.

It is concerning that the U.S. not only is doing little to create jobs for young people, but is actually keeping young people jobless through the J-1 and H-2B guest worker programs.

The J-1 Exchange Visitor Program was created more than a half-century ago to facilitate cultural and educational exchanges in the United States between young Americans and foreign visitors. But the program has evolved into a massive guest worker program, and most of the 320,000 J-1 participants come here primarily to work. Of the 16 J-1 sub-programs, the largest, the Summer Work Travel program, last year admitted 132,000 workers, down from 150,000 at its peak.

J-1 guest workers now fill many jobs that traditionally went to high school and college students or to recent grads during the summer, including at amusement parks on the Jersey Shore and in Ocean City, Md., and national parks like Yellowstone. J-1 workers have also taken what used to be unionized jobs with decent pay and fringe benefits, working, for example, in a Hershey plant packing candy bars. Most of these jobs cannot be offshored, and were the traditional avenues for young people to enter the labor market for the first time. But instead of providing our young people with their first taste of real work, these jobs are going to J-1 guest workers. Why? Because employers have tight control over guest workers, can pay them less than the prevailing wage, and aren’t required to pay Social Security, Medicare and unemployment taxes on their behalf.

The employer preference for guest workers is contributing to high unemployment for Americans. Consider this: In Worcester County, Md., where many J-1 amusement park jobs are located, the unemployment rate normally drops sharply when the summer tourists arrive, but this past July (when most J-1 workers there are employed) the unemployment rate was double its pre-recession level. And the county unemployment rate is in double digits during the rest of the year. In addition, as the New York Times reported, even older, recently unemployed Americans have been vying for summer jobs like these at amusement parks due to a lack of other opportunities.

So how can we find jobs for 132,000 young people? End the Summer Work Travel program.

Or if Congress rejects that option, then restrict the program only to jobs that have an obvious educational or cultural value, and link the program’s size to the national unemployment rate. For example, if the unemployment rate averaged more than 5 percent in the preceding year, the SWT program could only admit 30,000 foreign workers, but if it fell below 5 percent, then the SWT limit could be raised to 50,000.Read more

Why falling unemployment may not be making voters happy

The unemployment rate dropped in November to 8.6 percent from 9.0 percent in October and from 9.8 percent a year ago. This is clearly welcome news. However, the underlying dynamics of the drop-off in unemployment this last month and over the last year are disappointing and have clear implications for policy and for politicians.

The issue is a decline in labor force participation, a topic that both Jared Bernstein and Ezra Klein have picked up on. To be blunt, among groups with high voter turnout rates, the fall in unemployment has been driven by people leaving the labor force and not because of job gains: this applies to those 25 and older who have a high school credential, some college, or a college degree or further education. In contrast, job gains were responsible for falling unemployment among lighter voting groups: young people (ages 16-24) and the 8.0 percent of the labor force that lacks a high school credential. The only exception to this breakdown is that job gains lowered the unemployment rate of those 55 and older (but only 40 percent of this group is in the labor force). Among women, unemployment has fallen very little (0.3 percent) while employment has fallen as well, indicating that job growth has not driven their modest unemployment gains. Men, in contrast, have seen a large drop in unemployment (1.2 percent) but modest growth in employment, indicating a shrinking labor force as the major explanation.

Overall, the dynamics in the labor market do not point to people generally feeling happier or more prosperous because a great deal of the falloff in unemployment is not because people are earning money in newly found employment, but because people are no longer in the labor market. There are some analysts who point to demographic changes (e.g., the population aging) as a reason to expect labor force participation to not return to prior levels: however, such longer-term trends are not salient in explaining the trend over the last year because such demographic shifts occur gradually.

This morning’s news prompted me to do a bit of analysis on how much of the drop in unemployment over the last year is due to greater employment and how much is due to the shrinkage of the labor force. It is not easy to produce a clean decomposition, but simply displaying the trends in the unemployment rate, the employment rate (the share of the population employed), and the labor force participation rate (the share of the population in the labor force, meaning they are either employed or unemployed) certainly helps. The table below presents the data for key demographic groups along with the shares of the labor force of each group. The data are for the most recent three months compared to the comparable months a year ago (avoiding the volatility of one month’s data).

Labor Force Share* Unemployment rate Labor force/population Employment/population
Sept.-Nov. Sept.-Nov. Sept.-Nov.
2010 2011 Change 2010 2011 Change 2010 2011 Change
All 100.0% 9.7 8.9 -0.8 64.6 64.1 -0.4 58.3 58.4 0.1
Education, 25 years and older
Less Than High School 8% 15.5 13.7 -1.8 46.8 47.0 0.2 39.5 40.5 1.0
High School 24% 10.0 9.4 -0.7 61.5 60.5 -1.1 55.4 54.8 -0.5
Some College 24% 8.8 8.1 -0.7 70.1 69.0 -1.1 64.0 63.4 -0.6
College Degree or More 31% 4.8 4.3 -0.4 76.4 76.0 -0.4 72.8 72.7 -0.1
By Age
16-24 14% 18.3 17.0 -1.3 55.2 55.5 0.3 45.1 46.1 1.0
25-54 66% 8.6 7.9 -0.7 82.0 81.4 -0.6 74.9 74.9 0.0
55+ 20% 7.2 6.7 -0.5 40.2 40.4 0.2 37.3 37.7 0.4
By Race/Ethnicity
White 81.0% 8.8 7.9 -0.9 64.9 64.5 -0.5 59.2 59.4 0.2
Black 11.6% 15.9 15.5 -0.4 62.1 61.7 -0.4 52.3 52.1 -0.2
Hispanic 15.1% 12.8 11.4 -1.4 67.3 66.7 -0.6 58.7 59.1 0.4
By Gender
Male 53.5% 10.4 9.3 -1.2 71.0 70.5 -0.5 63.6 63.9 0.3
Female 46.5% 8.8 8.5 -0.3 58.5 58.1 -0.4 53.4 53.2 -0.2
* Labor Force in November 2011. Shares by race/ethnicity sum to greater than 100% because Hispanics can be of any race.


The top line tells a clear story that unemployment fell by 0.8 percentage points but the share of the population employed rose by just 0.1 percentage point. The share of the population in the labor force fell by 0.4 percentage points. This tells you that in the aggregate it was not greater employment driving the drop in unemployment.Read more