This piece originally appeared in the Wall Street Journal’s Think Tank blog.
Our friend and former colleague Jared Bernstein has mounted a small but strategic retreat in the campaign to have the Fed continue focusing on full employment. He has written that Friday’s jobs report, though not stellar, was good enough to make a December increase in interest rates a near-certainty. He then argues that this might not be the worst thing in the world:
Even while I do not see much rationale for an increase, especially given elevated underemployment and the stark lack of inflationary pressures, given their recent messaging, a non-liftoff in December would suggest the economy is a lot worse than they thought in some secret way they’ve been keeping from us. Such a negative surprise would be ill-advised.
Presuming that they won’t want to go there, it’s now all about the ‘path to normalization:’ how fast they raise. … [I]f I’m Chair Yellen, my message to the hawks is: ‘OK, you got your rate liftoff even though the data weren’t really there for it. Now back…off and let’s go back to being data-driven about future increases.’ ”
Jared is right that the larger economic question is not just about a 25-basis-point increase this month but about how rapidly interest rates climb over the next year or so. But we’re still really uncomfortable with starting lift-off before the data support it. Once you start indulging faith-based arguments about monetary policy, you’ve lowered the bar for data-driven analysis, making smart policy choices harder and harder to sustain.
On Friday, the Bureau of Labor Statistics will release the November numbers on the state of the labor market. On December 15, the Federal Open Market Committee will meet to determine whether they should raise interest rates, and most prognosticators think that this time they will actually go through with it. Last month’s stronger than expected jobs report led many to declare, prematurely, that it is time to start raising rates in order to ward off incipient inflation. The reality is that we need to see strong wage growth that is consistent and strong enough so that labor share of income returns to pre-recession levels and the labor market achieves a full recovery. Then, and only then, should we begin a conversation about raising rates.
Over the last six years, nominal wage growth has continued hover around 2.0 to 2.2 percent, far below target (see below on the target). Yes, October’s year-over-year growth was stronger—2.5 percent for nonfarm employees, although it was lower for production and nonsupervisory workers (2.2 percent). But again, one month of data is not sufficient evidence, and even 2.5 percent is still far below the wage target.
The Department of Homeland Security’s proposed STEM OPT extension fails to protect foreign students and American workers
For decades, the Optional Practical Training (OPT) program has permitted foreign graduates of U.S. universities, who visit the United States to study through the F-1 nonimmigrant visa program, to be employed in the United States for up to 12 months immediately after graduation. In 2008, the George W. Bush administration extended the OPT program period to 29 months for F-1 graduates of a science, technology, engineering, or math (STEM) program—known as the STEM OPT extension—through an Interim Final Rule (IFR) promulgated by the Department of Homeland Security (DHS). On August 12, 2015, the U.S. District Court for the District of Columbia struck down the 2008 IFR, ruling that the regulation was illegally created in violation of the Administrative Procedure Act. Judge Ellen Segal Huvelle vacated the IFR effective February 12, 2016.
On October 19, 2015, President Obama proposed new DHS regulations that would reinstate the STEM OPT extension and increase its duration from 29 months to 36 months per STEM degree for foreign STEM graduates, and allow the extension eligibility to apply to up to two STEM degrees. Effectively, this would allow foreign graduates with STEM degrees to be employed for up to six years while on an F-1 visa. The DHS regulatory notice solicited comments from the public. In our comment, we argue that the president’s STEM OPT extension proposal is problematic for several reasons:
Last Thanksgiving I wrote a blog post in the “how to argue with your relatives at Thanksgiving” genre, providing some hard numbers for people who didn’t want to let their conservative relatives spout nonsense about economics with impunity at the holiday dinner table. This year, lots of those same arguments are still in the news, so I updated some of the data and points for 2015. Also, another silly argument seems to be making the rounds: the claim that the Fed’s low interest rates have somehow hurt “poor savers,” and hence the Fed should raise rates at its next meeting.
So, here’s an updated list of some of the myths that come up every year, and how to address them.
MYTH: The government’s spending too much—they should tighten their belts the same way households had to following the Great Recession
This “tighten the belts” line is perhaps the worst analogy ever. And yes, it’s bipartisan silliness. Simply put, if everybody (households, businesses, and governments) tightens their belts together (i.e., stops spending money) then the result is just a steep recession. Even with increased federal government spending, tightened household and business spending in 2008-2009 led to a savage economic downturn. Actively cutting government spending would’ve made it worse. Much worse. There really is tons of evidence that the increases in government spending during and right after the Great Recession (the Recovery Act, mostly) made the recession much lighter and the recovery come faster.
But, say you continue to disbelieve the overwhelming evidence that spending cuts slow growth and worsen recessions. Let’s just look at the data on federal spending in the recovery since the Great Recession versus recovery from the previous three recessions (in the early 1980s, early 1990s, and early 2000s) to see if even the premise of “exploding spending” in recent years is right. The figure below shows (inflation adjusted) federal government spending over the full business cycle (centered on the recession’s trough in the middle of 2009.
By closing loopholes in the Buy American Act, the 21st Century Buy American Act will increase demand for U.S. manufactured goods and create at least 60,000 to 100,000 U.S. jobs. The Buy American Act requires “substantially all” direct purchases by the federal government (of more than $3,000) “be attributable to American-made components.” However, there are a number of exclusions or loopholes in the Buy American Act. The single largest is an exception for “goods that are to be used outside of the country,” and the 21st Century Buy American Act includes provisions to close it. In addition, current regulations interpreting the Buy American Act state that “at least 50 percent of the cost must be attributable to American content,” which can reduce net demand for American made content.
Between 2010 and 2015, the “goods used outside of the country exception” was used to purchase $42.3 billion in goods that were manufactured outside of the United States, an average of $8.5 billion per year.1 The 21st Century Buy American Act would require most or all of those goods to be U.S. made, increasing demand for U.S. manufactured goods by up to $8.5 billion per year.2 Although labor markets have improved in the United States since the recession, there remains substantial slack and 2.6 million jobs were still needed to catch up with growth in the potential labor force in September 2015. I assume, based on recent research by my colleague Josh Bivens (Table 5) that wages earned by new manufacturing workers will support a macroeconomic multiplier of 1.6 in the domestic economy over the next year.3 I also assume, based on total GDP and employment levels in 2014 that a 1 percent increase in GDP adds 1.3 million jobs to the economy. Thus, the $8.5 billion increase in spending on domestic manufactured goods (with 100 percent domestic content) would increase GDP by $13.6 billion (0.08 percent), creating up to 100,000 new jobs in the domestic economy.
Congresswoman Rosa DeLauro (D-Conn.) spoke at the unveiling of EPI’s Women’s Economic Agenda on November 18, 2015. Her remarks, as prepared for delivery, are posted below.
Good morning. Maya, thank you for that kind introduction. I have to first recognize EPI and Larry who have been a godsend in providing members of Congress great economic information that focuses on the impacts of public policies on low and middle class Americans and their families. The topics they cover are wide-ranging—from the impact of various trade agreements to the current jobs crises, where people are in jobs that don’t pay them enough to live on.
Let me also acknowledge my colleagues and the advocates who join me at the podium. Senator Warren—a woman who needs no introduction. The Boston Globe describes her as “a fierce advocate for the lot of working families.” Senator Warren has a reputation for knowing how to get things done.
Elise Gould at EPI—thank you for your tireless work on this Women’s Economic Agenda. Let me acknowledge Liz Shuler. Thank you for your leadership and advocacy at AFL-CIO. And all the advocates here today. Each of them put working families at the heart of everything they do.
Today we come together to push the policies as part of the Economic Policy Institute’s Women’s Economic Agenda to improve the lives of working women and families.
The Elementary and Secondary Education Act (ESEA) appears, finally, to be nearing reauthorization. Barring unforeseen circumstances, Congress will, after years of effort, begin to right some of the wrongs wrought by the excessive focus on standards and accountability in No Child Left Behind (ESEA’s current iteration). The draft framework sent to the conference committee swings the pendulum from federal overreach and prescription back toward state and local control. It claws back—but does not eliminate—accountability requirements by striking “Adequate Yearly Progress,” annual measurable objectives, and the unattainable goal of 100% proficiency from the act.
Not only would this ESEA do less wrong, it would do more right; key passages hold promise to return ESEA to its civil rights and antipoverty roots. Informed by rising rates of student poverty, the proposed framework recognizes that poverty poses a major impediment to effective teaching and learning.
It is true that much of the debate around reauthorization has been about testing, funding for charter schools and vouchers, the Common Core State Standards, and a range of other issues worthy of consideration. But these are not central to the core purpose of ESEA, which was originally passed as part of President Lyndon Johnson’s War on Poverty. Over the years, that purpose has been diluted. But as 10 organizations, led by the Broader, Bolder Approach to Education, wrote to education leaders of both houses last year, Congress has a unique chance to reverse course and bring ESEA back to its roots. We called on Congress to follow five key principles in ESEA reauthorization:
These five principles represent the original spirit and intent of the law, and they give states, districts, and schools the flexibility they need to address their specific concerns and meet the unique needs of their students. We propose that they be at the center of a reauthorized Elementary and Secondary Education Act.
Closing the pay gap and beyond: A brief explanation of the motivation behind EPI’s Women’s Economic Agenda
This morning, EPI released our Women’s Economic Agenda (and an accompanying research paper)—a set of policies designed to close the gender wage gap and ensure that women achieve real, lasting economic security.
In the last several decades women have made great strides in educational attainment and labor force participation. Nevertheless, when compared with men, women are still paid less, are more likely to hold low-wage jobs, and are more likely to live in poverty. And the problem is worse for women of color. As demonstrated in numerous research studies, gender wage disparities are present across the wage distribution and within education, occupations, and sectors, sometimes to a grave degree.
Closing the gender wage gap is absolutely essential to helping women achieve economic security. But to bring genuine economic success to American women and their families, we must do more. The gender wage gap is only one way the economy shortchanges women.
At the same time the gender wage gap has persisted, hourly wages for the vast majority of workers have stagnated, as the fruits of increased productivity and a growing economy have accrued to those at the top. It hasn’t always been this way. As you can see in the figure below, pay rose with productivity in the three decades following World War II. But since the 1970s, pay and productivity have grown further apart, as the result of intentional policy decisions that eroded the leverage of the vast majority of workers to secure higher wages.
A progressive women’s economic agenda, one that seeks to truly maximize women’s economic potential, must focus on both closing the gender wage gap and raising wages more generally.
Friend and former colleague Jared Bernstein made a defense of the ACA excise tax on expensive employer-provided health insurance plans a couple of days ago. It’s about as good a defense as there is of the excise tax, but at EPI we’re still largely unconvinced. He provides some arguments on the substance of the tax (which I’ll briefly touch on below), but mostly leans on a political argument, that this is a tax that actually exists, and given the anti-tax zealotry of congressional Republicans, we should be very leery of giving away any revenue that is currently on the books.
First, some economics, and then on to some politics.
Jared and I are roughly on the same page regarding the wage/health care trade off issue. As the excise tax is imposed on plan costs above a certain threshold, this will encourage people to shift into plans with lower upfront premiums. But these lower upfront premiums mean that more health costs are shifted onto households in the form of higher co-pays, deductibles, and co-insurance. The good news of lower premiums, however, is that this frees up money for employers to give more compensation to workers in the form of cash wages rather than health premiums. Elise Gould and I have argued in the past that this wage boost stemming from less-generous health plans is likely to be a long time coming, particularly if labor markets remain slack. Jared agrees. He argues this trade off likely will happen in the longer run. I agree (though I’m not 100 percent sure, and am troubled by the lack of robust empirical support in the research literature on this). My beef has mostly been with people who simply state that the excise tax will lead to a “raise” for American workers. That’s bunk. It will change the composition, not the level, of employee compensation. And it will increase total taxes on this compensation, hence cutting their take-home pay.
Today’s release of the September Job Openings and Labor Turnover Survey (JOLTS) data corroborates the story we saw in August and September’s jobs reports, as hiring slowed and the economy added a paltry number of jobs (note that the JOLTS data comes with a one-month lag relative to monthly jobs numbers, so the much-improved October jobs report data is not reflected in today’s release). Although the number of job openings increased to 5.5 million in September, this was after a large decrease to from 5.7 to 5.4 million in August. But the main data point we should focus on is the hires rate, which actually fell in September from 3.6 percent to 3.5 percent, the lowest it has been in a year.
In September, there were 1.4 active job seekers for every job opening. Although this decline is a welcome improvement in the JOLTS ratio, it is important to remember that there are still almost 8 million unemployed workers and over 3.5 million estimated “missing workers” who have left the labor force altogether because job opportunities have been so weak.
In fact, there is still a significant gap between the number of people looking for jobs and the number of job openings. The figure below shows the levels of unemployed workers and job openings. You can see the labor market improve over the last five years, as the number of unemployed workers falls and job openings rise. In a stronger economy (like the one shown in the initial year of data), these levels would be much closer together.
The National Association of Homebuilders (NAHB), both in congressional testimony and in the official comments it submitted to the Department of Labor, makes a strong case for the Obama administration’s proposed rule on the overtime rights of salaried workers. Yes, you read that right: NAHB makes an ironclad case that businesses will have little difficulty adjusting to the proposed rule change.
Naturally, NAHB, which claims to represent 140,000 members involved in “home building, remodeling, multifamily construction, property management, subcontracting, design, housing finance, building product manufacturing and other aspects of residential and light commercial construction,” testified before Congress that the DOL proposal would be the end of Western Civilization. But the data they presented tell a different story.
NAHB’s own survey of its members found that two-thirds would make no changes in their policies or operations. Many, of course, already pay their supervisors more than $50,440 a year and would be unaffected. Of the one-third that would make adjustments, most would do exactly what the rule contemplates: they would reduce the amount of overtime their supervisors work. Twice as many firms would raise the salary of their supervisors above the $50,440 threshold as would reduce their salary. And only 13 percent of the firms that said they would make a change would switch their supervisors from salary to hourly wage. In other words, just 4 percent of home builders would convert their salaried supervisors to hourly pay.
It is noteworthy that of the four top responses among the home builders who say they will make changes, two are undeniably positive—raising salaries and reducing overtime hours worked. Apparently, Ed Brady, the NAHB official who testified in the Small Business committee, is one of the few home builders in America who would contemplate outsourcing the role of construction supervisor in order to avoid paying overtime. Any contractor who employed that supervisor would have to deal with the same issues as Mr. Brady, and would charge for the costs they entail, plus a profit— so perhaps it’s not surprising that Mr. Brady is alone in planning to outsource his supervisors.
Clearly, the NAHB’s own evidence shows that DOL’s proposed changes in the overtime rules will have small, mostly positive effects on the homebuilding industry and its employees.
An increase of 271,000 in payroll employment is a promising sign. One month is surely not predictive of the future, but if this continues, it is good news for the economy and the people in it. While the topline employment number for October is quite encouraging, other indicators continue to paint a picture of a plateaued economy, particularly the fact that there has been no growth in prime-age employment-to-population ratio (EPOP) this year.
The share of the 25–54 year old population actually employed is arguably one of the best measures of economic health. At 77.2 percent, it remains depressed— lower than the worst of the prior two recessions before the Great Recession. The effects of such low prime-age EPOPs may be far-reaching, affecting not only the incomes but also the health of the population.
Public-sector employment also remains weak, and depressed government spending continues to be the leading cause of the sluggish pace of recovery in recent years. One thing that has been historically unique about this recovery is the unprecedented loss of and lack of recovery of public-sector jobs. The figure below compares public-sector employment in this recovery to the three prior recoveries. Recessions are marked by the lines to the left of the zero point on the x-axis, while recoveries are to the right. This graph clearly shows that the public sector has seen massive job loss in the current recovery. This is a direct result of austerity policy and a huge drag that has not weighed on earlier recoveries.
Bringing It Back Home, a report issued by the Economic Policy Institute at the end of October, provides a distinct service in reminding Americans that they can learn more about how to improve their schools by looking at successful American states than they can by heading overseas to pry lessons out of foreigners.
The authors, Stanford’s Martin Carnoy, EPI’s Emma Garcia, and Tatiana Khavenson at the National Research University Higher School of Economics in Moscow, have produced an impressive piece of scholarship. Their work makes a genuine new contribution to the discussion about how to improve American schools.
In considering this study, several points need to be born in mind.
First, the United States has very real problems in its schools. We cannot be Pollyannas about where we are. Average student performance is not where we would like it to be, and the average conceals terrible gaps between students doing well and those bringing up in the rear.
Historically, we have done a reasonably good job with the traditional students our schools were designed to serve. But now we face a new challenge: a student population in which the majority of students are, for the first time in our history, both low-income and children of color.
On Friday, the Bureau of Labor Statistics will release the October numbers on the state of the labor market. As usual, I will be looking closely at nominal wage growth. Wage growth—a key indicator of labor market slack—remains far below target levels. It’s important to continue to encourage the Federal Reserve to keep their foot off the brakes until wage growth picks up. But, right now, I want to talk about the pace of job growth.
Previously, I’ve written about how payroll employment has been slower in 2015 compared with 2014. Average monthly job gains were 260,000 in 2014. This year so far job growth has averaged only 198,000— and moreover, job growth the last three months was noticeably slower than the previous three months. In the third quarter, average job gains were 167,000, compared with an average of 231,000 in the second quarter.
So, job growth has slowed, but what do these numbers really mean? Recent months are clearly weaker, slower, more sluggish than previous months, but are we still on the right track? At this recent slower rate of growth, a full jobs recovery is still almost two and a half years away.
Elaine Kamarck’s essay, “Delaying the Inevitable: Political Stalemate and the U.S. Postal Service,” grossly misstates the facts about the central cause of the Postal Service’s financial crisis, which is the statutory requirement to pre‐fund retiree health benefits. Current law, enacted in 2006, requires the Postal Service to pre‐fund these benefits over a 10‐year period at a cost of $5.5 billion per year. Kamarck writes (citing a Report by the Postal Regulatory Commission1) that retiree health benefits caused “$22,417 million in expenses out of a total net loss of $5.5 billion in fiscal year 2014.” Wrong. The $22.4 billion figure Kamarck cites represents the liability the Postal Service accrued over a 10‐year period due to its inability to make all the pre‐funding payments mandated by the 2006 law.
Kamarck misses what the Postal Regulatory Commission Report clearly shows: The $5.7 billion pre‐funding expense for 2014 exceeded the Postal Service’s $5.5 billion net loss for the year. For 2014 operations, the Postal Service had a positive net income of nearly $1.4 billion. (The Postal Service also had a positive net income based on operations in 2013 and in the first half of fiscal year 2015.)
Unfortunately, that’s not all she got wrong. For example, Kamarck pegs her analysis to the “dramatic decline in the volume of single piece first class mail,” citing a study by the USPS Office of Inspector General (OIG).2 But in doing so, she omits reference to the several important qualifiers in that OIG study. First, as the OIG study states, “The total volume decline figure hides significant differences in mail volume by geographical area. Differences in mail use such as these have important policy implications for the nation and for the Postal Service.”3 In some parts of the country, there has been little or no decline in the use of First Class Mail;4 and even in areas of high volume loss, significant volumes of First Class Mail remain.5
After dipping slightly in 2013, annual earnings of the top 1.0 percent of wages earners grew 4.9 percent in 2014, and the top 0.1 percent’s earnings grew 8.9 percent, according to our analysis of the latest Social Security Administration wage data. This analysis provides the first look at the likely trend of the household incomes of the top 1.0 percent. The top 1.0 percent’s earnings have nearly returned to their previous high point, attained in 2007. In fact, the earnings of workers between the 99th and 99.9th percentiles have reached their highest level of all time—it’s only the earnings of the top 0.1 percent that are still below 2007 levels. The top 5.0 percent has also reached its highest level of earnings ever.
Surprisingly, wages of the top 1.0 percent declined in 2013, while those of the bottom 99.0 percent grew. We hypothesized that this decline in top earnings might reflect income shifting, as a new, higher top bracket—39.6 percent—and an additional 0.9 percent Medicare tax on high earners provided incentives to shift compensation into 2012 (when top 1.0 percent wages grew 6.1 percent). It looks like we were right. The strong growth of earnings at the top in 2014 suggests that the highest earners have found their mojo once again. In the analysis below we review these recent trends, as well as trends during the Great Recession and over the longer-term.
Wage growth from 2013 to 2014
The table below shows that annual earnings for the bottom 90 percent of earners rose 1.4 percent in 2014, to $33,297—just $20 above their 2007 level. Given that hourly wages were stagnant or falling throughout the wage scale in 2014, this growth in annual wages must have been due to an increase in hours worked per worker. Workers between the 90th and 95th percentiles of wages (averaging about $110,000 in 2014) saw wage growth comparable to that of the bottom 90 percent (1.3 percent) and the earnings of workers between the 95th and 99th percentile grew 1.9 percent. Among the 1.0 percent, earnings for the top 0.1 percent grew the strongest (8.9 percent), while those just beneath them—the next 0.9 percent—had a slower 2.6 percent earnings growth.
The New York Times has published two parts of a three-part series about the epidemic of arbitration clauses that have cropped up in millions of transactions between corporations and their customers and employees. The clauses are routinely included in employment contracts, cell-phone contracts, consumer product purchase agreements, cable subscriptions, rental agreements, and a multitude of financial transactions, as a way to prevent injured parties from having their day in court. Giving up the constitutionally protected right to sue in state or federal court is a big deal and is often the result of ignorance and deceit: millions of people have no idea the clauses are there in the fine print of contract provisions written in legalese that few individuals ever read or comprehend. They don’t find out they’ve lost their rights until they need them.
Individuals give up not just their right to go to court but all protections regarding the venue of any hearing their claim will receive (for example, the agreement might require arbitration in a city a thousand miles away). They might give up certain remedies and the right to appeal even if the arbitrator gets the law completely wrong, and give up the essential right to join with other victims to file a class action, especially important when each claim is small and no single individual could rationally pay to hire a lawyer and bring a lawsuit for such a small sum.
This week we learned that, for the first time in its 20 year history, scores on the National Assessment of Educational Progress (NAEP) declined or were stagnant in both fourth and eighth grades in both math and reading. Naturally, this is prompting concern and questions. Are current education policies on the right course? Is the Common Core not working? Do these scores indicate “test fatigue” because kids are taking too many tests?
These questions cannot be answered by two years of data, even relatively reliable data like NAEP scores. We should be looking at longer-term trends—this decline may be a blip, even if it was across-the-board. We also need to disaggregate the data and look at not just how the average student performed, http://www.canadianpharmacy365.net/. Perhaps most important, we should always consider these data in a broader context.
Looking at this year’s scores as part of a longer term trend, we see that the past decade (post-No Child Left Behind) delivered much smaller gains than the years prior. Fourth graders gained substantially more in math between 1992 and 2003 (15 points) than in the twelve years since (nine points between 2003 and this year’s 2015 results). In eighth grade, the difference is even more striking—a gain of 15 points from 1992–2003, versus just four since. And while overall gains in reading have been much smaller, the ratio is similar—fourth graders gained five points from 1992–2003, but just one point in the past twelve years.
Disney H-1B Scandal in Spotlight Again: Meet The American Workers Whose Jobs and Careers Were Destroyed by the H-1B Program
Two courageous Disney workers were interviewed yesterday on a local television news program in Sarasota, Florida. In the interview, they describe what it was like to train their foreign replacements: “Like when a guillotine falls down on you.” It’s hard to overestimate how many Americans’ livelihoods have been damaged by the H-1B visa guestworker program, which allows employers to hire about 130,000 new college-educated foreign workers every year for up to six years at a time.
A bit over four years ago, the U.S. economy threatened to breach the legislated (and totally arbitrary) national debt ceiling. There was no economic sign (high interest rates, for example) that argued that public debt was too high, and there were many economic signs that such debt was actually too low. Yet because of a quirk in American economic policy, Congress must periodically act to raise the nominal value of the debt allowed to be issue by the federal government. This is normally a pro forma vote, at least after members of Congress are allowed to rail against what they see as the fiscal policy failings of the current president.
But in August 2011, in an unprecedented breach of Congressional norms, Republicans in Congress instead used the looming breach of the debt ceiling to demand spending cuts. Besides breaching legislative norms, the resulting cuts were also economically disastrous. The Budget Control Act (BCA) of 2011 and the resulting spending austerity (often short-handed not quite accurately as “the sequester”) fully explains why the U.S. economy has yet to reach a full recovery from the Great Recession, even more than six years after the recession officially ended. If we had instead simply followed the average path of federal spending that characterized all previous post-World War II recessions, the U.S. economy would be at full employment by now, and the Fed would have certainly begun raising interest rates a long time ago.
The fiscal drag resulting from the sequester relented a little in the past two years, as the result of a compromise reached between the House and Senate budget committees. But this compromise only rolled back sequester cuts for two years. For fiscal year 2016, the Congressional Budget Office estimates that not extending this compromise and instead returning to 2011 BCA spending targets could cost as many as 800,000 jobs as these cuts drag on aggregate demand.
Over the past few years, many states have faced critical choices about whether to raise state revenues, hold firm to existing—potentially inadequate—tax structures, or cut taxes, sometimes on top of cuts made in earlier years. Today, lawmakers in Pennsylvania are again considering these same choices, but with a somewhat unique opportunity to change course from the path they took earlier in the recovery. Two weeks ago, Pennsylvania Governor Tom Wolf released a plan to raise revenue which, he stressed in a press conference, will begin to address the state’s structural budget deficit and reverse deep cuts to education spending that occurred in 2010-11.
As lawmakers throughout the country consider plans for the coming fiscal year, it is instructive to compare the fiscal and economic performance of Pennsylvania in recent years with other states that made either similar or starkly different fiscal choices. For example, California and Minnesota raised taxes to improve their fiscal health and to reinvest in education, while Kansas and Wisconsin followed the same path as Pennsylvania—reducing taxes by varying degrees and dramatically cutting education spending.
The results of this policy experiment can be summarized as follows:
- The two states that raised revenues have enjoyed percent job growth since 2010-11 that is one-and-a-half to three times larger than the three states that cut taxes.
- The states that increased taxes have seen revenue growth—both as a result of the tax changes and as a result of stronger recoveries—of 8 percent and 15 percent. Kansas has seen its revenues fall 5 percent and Pennsylvania and Wisconsin have seen revenue growth of 5 percent and 7 percent, meager enough to make fiscal stability and reinvestment in vital programs difficult.
- State school funding per pupil has increased 15-21 percent in Minnesota and California while plunging 9-14 percent in the three tax-cut states. That means the ratio of funding per pupil in Minnesota and California compared to any of the other three states has shifted 26-41 percent in just four years.
Today’s Job Openings and Labor Turnover Survey (JOLTS) report shows there has been little change in the labor market for America’s workers. The rate of job openings actually decreased in August to 5.4 million. At the same time, the hires rate held steady while the quits rate remains depressed. Coupled with jobs reports so far this year, today’s report provides more evidence of a slow moving economy, with meager wage growth and employment growth that’s just keeping up with the growth in the working age population.
There is still a significant gap between the number of people looking for jobs and the number of job openings. The figure below shows the levels of unemployed workers and job openings. You can see the labor market improve over the last five years, as the number of unemployed workers falls and job openings rise. In a stronger economy (like the one shown in the initial year of data), these levels would be much closer together. Today, there are still 1.5 active job seekers for every job opening. Furthermore, on top of the 8+ million unemployed workers warming the bench, there are still four million workers sitting in the stands with little hope to even get in the game.
Job openings levels and unemployment levels, 2000-2015
|Month||Job Openings level||Unemployment level|
Note: Shaded areas denote recessions.
Source: EPI analysis of Bureau of Labor Statistics Job Openings and Labor Turnover Survey and Current Population Survey
An internal memo to the staff of hipster retailer Urban Outfitters, which was leaked to Gawker, gives us a window into how the retailer’s Philadelphia-based parent company, URBN, plans to deal with the upcoming holiday rush. Their not-so-innovative idea: ask employees to work for free.
In a “call for volunteers,” URBN informs the staff that “October will be the busiest month yet for the [fulfillment] center, and we need additional helping hands to ensure the timely shipment of orders.” It goes on to explain to its employees that “as a volunteer, you will work side by side with your [fulfillment center] colleagues to help pick, pack and ship orders for our wholesale and direct customers.”
In short, URBN, whose executive staff took home a combined $12.2 million in compensation last year, is asking its employees to take time out of their weekends to commute to rural Pennsylvania and work in a warehouse—for free.
Unsurprisingly, this request is most likely illegal. According to the Fair Labor Standards Act (FLSA), it is unlawful for a for-profit employer “to suffer or permit” someone to work without compensation—consequently, asking an employee who is not “exempt” to “volunteer” for a for-profit enterprise, whether they are salaried or hourly, is explicitly prohibited by the FLSA.
This week, President Obama announced the completion of negotiations on the proposed Trans-Pacific Partnership (TPP). The TPP, which is likely to drive down middle-class wages and increase offshoring and job loss, has been widely criticized by leading members of Congress from both parties. Hillary Clinton, Bernie Saunders, and other presidential candidates have announced their opposition to the deal.
Meanwhile, U.S. jobs and the recovery are threatened by a growing trade deficit in manufactured products, which is on pace to reach $633.9 billion in 2015, as shown in Figure A, below. This deficit exceeds the previous peak of $558.5 billion in 2006 (not shown) by more than $75 billion. The increase in the manufacturing trade deficit in 2015 alone will amount to 0.5 percent of projected GDP, and will likely reduced projected growth by even more as manufacturing wages and profits are reduced.
U.S. manufacturing trade deficit, 2007–2015* (billions of dollars)
|Year||U.S. manufacturing trade deficit (billions of dollars)|
* Estimated, based on year-to-date trade data through August 2015
Source: Author's analysis of U.S. International Trade Commission Trade DataWeb
The growth of the manufacturing trade deficit is starting to have an impact on manufacturing employment, which has lost 27,300 jobs since July 2015, as shown in Figure B, below. Growing exports support U.S. jobs, but increases in imports cost jobs, so even if overall exports are growing, trade deficits hurt U.S. employment—especially in manufacturing, because most traded goods are manufactured products. Although the United States had regained more than 800,000 manufacturing jobs since 2010, the low point of the manufacturing collapse after the great recession, overall manufacturing employment is still 1.4 million jobs lower than it was in December 2007.
The Affordable Care Act is making the U.S. health system much more efficient and fair. One provision of it, however, remains controversial, even among those strongly supportive of the overall law. This is the 40 percent excise tax on the marginal cost of expensive health plans, sometimes very misleadingly referred to as the “Cadillac Tax.” Defenders of this tax, and even many reporters, have claimed recently that the tax will “give Americans a raise” or will “raise incomes.” These claims are wrong. Instead, the excise tax— even in the best case—is an unambiguous cut in after-tax pay for workers.
Beginning in 2018, the tax will be levied on the cost of single plans in excess of $10,200 a year, and non-single plans in excess of $27,500. The point of the tax is to nudge workers into taking thinner health plans—those with lower premiums that stay under the threshold for the tax. But choosing plans with lower premiums will generally lead to higher out-of-pocket costs – higher deductibles, co-pays and/or other forms of cost sharing. This increased cost-sharing is the point of the tax, not a byproduct. By boosting the marginal cost of each new episode of obtaining health care, the theory is that health consumers will shop more wisely and cut back on unnecessary care. We have strong reservations about leaning on this dynamic as effective cost containment, but for now I’ll focus on a side claim made by defenders: that a happy consequence of accepting plans with lower premium costs is that workers will see higher wages.
The theory for this is that if employers cut back on contributions to health insurance premiums as workers choose thinner plans, more money will become available to boost non-health care compensation—wages or other fringe benefits. This presumed increase in wages actually accounts for a significant share of estimated revenue that will be raised by the tax. (I should note that if the compensating wage boost stemming from lower employer premium payments does not happen, this does not necessarily mean that the tax won’t raise money. Lower premium costs and unchanged wages paid by employers imply a rise in business income or profitability, and this higher profitability should mean higher tax payments by employers.)
This will be the first in a series of blog posts examining some of the comments submitted to the U.S. Department of Labor (DOL) in response to its notice of proposed rulemaking (NPRM) on overtime pay for salaried employees. Approximately 300,000 comments have been acknowledged by DOL; I want to call attention to a few of the most salient comments, both pro and con.
I’ll start with the Human Resources Policy Association (HRPA), which claims to represent “the most senior human resource executives in more than 360 of the largest companies in the United States.” HRPA’s comment addresses both what DOL actually proposed as well as ideas it was merely considering. Three of HRPA’s criticisms are worth considering, though each is deeply flawed:
- The proposed salary level is too high because it “would effectively nullify the statutory exemption for a significant number of employees Congress meant to exempt.”
- The proposed rule would limit “workplace flexibility.”
- The rule should not index the salary level test.
The salary level proposed by DOL is modest and meets the congressional intent
HRPA’s argument that the salary level is too high begins with a misstatement of the role of the salary level test. It very clearly is not intended to set a “level at which the employees below it clearly would not meet any [executive, administrative, or professional (EAP)] duties test.” The salary level test would be redundant if the employees covered by it clearly would not meet any EAP duties test. In fact, DOL has long expressed the exact opposite intent. In the words of DOL’s 1949 report and recommendations, “the salary level must be high enough to include only those persons about whose exemption there is normally no question” (Weiss, 23).
This piece originally appeared in the Wall Street Journal’s Think Tank.
The Affordable Care Act took enormous strides toward providing access to health-care coverage to the tens of millions of uninsured Americans and reining in the skyrocketing costs of health care that heavily pressured households and public budgets, addressing what we consider the most glaring shortcomings of the U.S. health system. When it comes to cost control, however, the policy virtue of one provision of the ACA–the excise tax on high-cost employer-sponsored health insurance plans, frequently called the Cadillac tax–is often overstated.
This provision levies a 40% tax on the cost of insurance plans that exceed $10,200 for individuals in 2018 ($27,500 for non-single plans). The policy goal of this tax is to nudge workers into opting for plans that charge lower premiums. Lower premiums in turn imply higher co-pays, deductibles, and cost-sharing. To be clear, these higher out-of-pocket costs are the point of the tax, not a byproduct. The theory is that as each new episode of obtaining care becomes more expensive households will cut back on health spending and this will help contain costs.
We think this is roughly true. Evidence shows that making health care more expensive does induce people to consume less of it. But the same evidence shows that people do not cut back only on care that is ineffective or somehow luxurious; instead, they cut back across the board. Expecting sick Americans to decide on the fly in an opaque and uncompetitive marketplace what health care is cost-effective–and what is not–is an unrealistic and unfair approach to containing costs.
While overall costs may be pushed down by the excise tax, this is a good outcome only if one believes that the health care squeezed out is merely the ineffective kind. But a lot of welfare-improving care may also be a casualty, and for some patients, cutting back on medically indicated care because of the increased cost-sharing could increase their overall spending. For example: some patients who cut back on low-cost pills to contain cholesterol end up in emergency rooms.
Today’s Bureau of Labor Statistics employment situation report showed the economy added a disappointing 142,000 jobs in September, bringing average monthly job creation to 198,000 in 2015—a rate slower than 2014. Hope for upward revisions to the low August numbers were dashed as well. In fact, July and August’s numbers were revised downward by a combined 59,000 fewer jobs. Digging into the report, we see that the civilian labor force participation rate declined, the employment-to-population ratio for prime age workers has continued to stagnate, (sitting at 77.2 percent—where it was when the year started), and wage growth is stuck at 2.2 percent. Taken together, these are signs of a labor market that retains a fair amount of slack and evidence that the Federal Reserve was right not to raise interest rates in September and indeed should not raise them in 2015.
With the September data in hand, we can look at the number of teachers who are starting work or going back to school this year. The number of teachers and education staff fell dramatically during the recession, and has failed to get anywhere near its prerecession level, let alone the level that would be required to keep up with an expanding student population. Along with the dismal shortfall in public sector employment, due to the Great Recession and the ensuing austerity at all levels of government, public education jobs are still 236,000 less than they were seven years ago. The number of teachers rose by 41,700 over the last year. While this is clearly a positive sign, adding in the number of public education jobs that should have been created just to keep up with enrollment, we are currently experiencing a 410,000 job shortfall in public education. Short sighted austerity measures have a measurable impact, hitting children in today’s classrooms.
Teacher employment and the number of jobs needed to keep up with enrollment, 2003–2015
|Number of jobs||Jobs needed to keep up with student enrollment|
Source: EPI analysis of Current Employment Statistics public data series and U.S. Department of Education (2014)
On Friday, the Bureau of Labor Statistics will release the September numbers on the state of the labor market. I will be watching for upward revisions to August’s employment numbers, which came in lower than expected. As usual, I’ll be paying close attention to the prime-age employment-to-population ratio (EPOP) and nominal wages, which are two of the best indicators of labor market health. Friday’s report will also give us a chance to examine the “teacher gap”— the gap between actual local public education employment and what is needed to keep up with growth in the student population
Prime-age EPOP—the share of the working age population who is actually working—fell dramatically during the Great Recession. It saw some solid increases once the recovery began to take hold, but unfortunately remains below the lowest point of the past two business cycles and has stagnated for much of this year, as job growth has only been fast enough to keep up with the growth of the working age population. Before we can say that the labor market is truly back to normal, we need to see faster job growth—to employ new labor market entrants, unemployed workers, and the 3+ million missing workers who have left or never entered the labor market because of weak job opportunities.