Dr. King knew that full employment raises the price of prejudice

January 20th, 2020 at 9:10 am

There are so many reasons to celebrate the life, work, and legacy of Martin Luther King, Jr., whose birthday we celebrate today. The dimension I like to elevate is Dr. King’s profound understanding of the importance of full employment to the opportunities of black Americans. Remember, the full name of the March on Washington was the March on Washington for Jobs and Freedom (my bold). A sign some of the marchers held that day told of a simple but powerful equation: “Civil Rights Plus Full Employment Equals Freedom.”

Dr. King’s insight was born of the recognition that racial discrimination by employers is costless in slack labor markets. With abundant excess labor, racist employers could handily indulge their prejudices. But when the job market tightens up and stays tight, that strategy becomes increasingly costly until avoiding non-white hires means an inability to meet consumer demand and leaving profits on the table.

In fact, last year, with overall unemployment near a fifty-year low at 3.7 percent (the average for 2019), the black jobless rate was 6.1 percent, its lowest on record, with data going back to the early 1970s. The average black rate since then was twice last year’s level, about 12 percent.

We mustn’t, of course, overlook the racial context that so motivated King: the 2019 white jobless rate was 3.3 percent, not quite half the black rate, but close to it. As followers of these data know, that ratio has been persistent.

It’s common, though incorrect, to suggest that the elevated black/white jobless-rate ratio is a function of educational differences. In fact, as economist Valerie Wilson often emphasizes, racial unemployment gaps persist at each education level. Using BLS data for those 25 and up for 2018, the ratio of black-to-white unemployment is around 1.5-2 across education groups (with lower ratios for those with more education).

Another way to show this persistence—and belie the claim that it’s all just about educational attainment—is to imagine that blacks had the same educational attainment as whites. That is, calculate the total black unemployment rate for the 25+ group using white labor force shares by education but black jobless rates. The resulting rate for 2018—5.1 percent—is just slightly below the actual black rate of 5.3 percent. In other words, at least by this simple simulation, even if blacks had white attainments, their unemployment would still be well about whites’ 2.9 percent unemployment rate.

Much research has found this gap to be associated with racial discrimination, against which, as Dr. King argued, full employment remains a potent weapon. We thus must ply macro policy get to and stay at full employment for long enough so that those victimized by racial prejudice can get a foothold in the job market. Moreover, in order to push back against last hired, first fired dynamics, we need micro policies to cement these racial gains.

At the macro level, this implies using fiscal and monetary policy to achieve and sustain truly full employment. There’s of course been a sharp debate as to what is the lowest unemployment rate consistent with stable prices. Clearly, based on especially inflation (both realized and expected) but also wage data, we’re not there yet, and I much endorse Fed Chair Jay Powell’s view of being data dependent on this, versus trying to estimate a “natural rate.”

If you must have a number, though, the little exercise above suggests that any target that includes black workers is biased up by racial prejudice. If some employers resist hiring workers of color for prejudicial reasons, that says nothing about the correlation between unemployment and inflation. Thus, a simple metric, purged of this racist impulse might be the white rate. Last year, that was 3.3 percent; 2.7 for the 25+ group. Such rates, for the record, are at least a full point below most estimates of the natural rate.

The tight labor market has helped propel an almost 10 percentage point gain in prime-age (25-54) black employment rates (the comparable white rate is up just 4 points). How do we sustain these gains when the inevitable downturn hits?

By liberal [sic] application of fiscal policy designed to keep recent entrants in the job market! Subsidized employment opportunities, including public jobs if, in a deeper recession, private sector employment is not available. Also helpful would be infrastructure projects with local hiring ordinances, as would apprenticeship programs targeting persons of color.

The key is to be driven by King’s insight that in slack labor markets, the price of prejudice falls. Yes, the larger project must be to prosecute such illegal practices—that’s why we have an EEOC. But while we celebrate Dr. King’s legacy, we must acknowledge that his work is far from complete, a fact that is glaringly obvious in the age of Trump. And one way to fight back, as Dr. King taught us, is through the relentless pursuit of racial justice and opportunity through full employment labor markets.

2019: A robust year for job growth; less so for wage growth

January 10th, 2020 at 9:59 am

Payrolls rose 145,000 last month, capping off a strong year for job gains with payrolls up 2.1 million over the year, an average of 176,000 per month. These are solid numbers, especially at this stage in a uniquely long expansion, but as we show below, their magnitude is well within historical context. In fact, in percentage terms, employment growth in 2019 posted the slowest growth rate (1.4%) since 2010. This, however, is to be expected, as such growth rates typically decelerate as recoveries grow older and the labor market closes in on full capacity (see data note at the end of this post).

The unemployment rate ended the year at 3.5%, a fifty-year low. Wage growth, however, disappointed last month, and has clearly decelerated in recent months, even at low unemployment. This important finding suggests a) job quantity in this labor market expansion is stronger than job quality, b) many workers still suffer weak bargaining clout, and c) based on both recent wage and price movements, we are not yet at full employment.

Our monthly smoother shows monthly gains using 3, 6, and 12-month averages. All three bars are of a similar height, meaning the underlying trend of monthly payroll gains is around 180,000, an impressively large number for a record-long job recovery that’s been ongoing for about a decade.

The figure below provides more context, showing average monthly payroll gains since 2000. Last year was around the middle of the pack in terms of its magnitude, but the figure provides a good look at the cumulative job gains that occur in a long, robust jobs expansion compared to the much shorter one in the 2000s.

While both nominal and, more importantly from the perspective of workers’ living standards, real paychecks have gotten a boost from the tight labor market over the past few years, they remain a soft spot. The figures below show hourly wage gains, year-over-year, for all private sector workers and for mid-level workers. The figure for all workers rose a lot more strongly last year than in 2019, when, despite a tight labor market, it began to decelerate (this series is more pessimistic than some, but others series show a similar flattening).

The next figure provides similar context showing nominal hourly wage gains for each year, 2000-19 (wage growth for the “all” group is only available since 2007). Last year’s deceleration is clear, but the height of the bars is still commensurate with earlier periods of tight labor markets.

The next figure shows real wages (with 2019 values based on my forecast of December’s inflation rate). Here again, we see real gains for workers in 2019, but less so than both last year and earlier years in this expansion (one reason for this finding is that inflation was exceptionally low in 2015). A relevant input to this real wage analysis is the fact that productivity growth has slowed over this period. Higher productivity growth allows firms to pay more while maintaining profit margins. Conversely, at lower productivity growth, workers’ diminished bargaining power becomes a bigger constraint on their pay, a factor that is increasingly disadvantageous in our era of growing employer power in key industries such as retail, health care, and technology.

Another clear labor-market soft spot is the manufacturing sector. The year ended with a loss of 12,000 jobs; the sector added just 4,000 jobs per month in 2019 compared to 22,000 in 2018. As a share of total employment, manufacturing was 8.4% last month, its second lowest share of record going back to 1939. Of course, this is the result of a long-term shift from goods to service production, one that is common to advanced economies, but research clearly links the recent decline in manufacturing to Trump’s trade war.

In sum, 2019 was a good year for low unemployment and job gains. Yes, the latter is down relative to earlier years in the expansion, but that’s expected at this stage (see data note below). The crucial macroeconomic lesson is that the U.S. can run a much hotter for much longer labor market than many economists and Federal Reserve policy makers heretofore believed. Even at a 50-year low for unemployment, wage and price pressure remain at bay.

That said, wage trends and manufacturing employment remain conspicuous and important problems, however, and both should be addressed by policies that strengthen worker bargaining power and boost the international competitiveness of exporters.

Data note: There are various ways to calculated annual changes over calendar years. In the above analysis, we take employment and percent changes from December over December, e.g., from December 2018 to December 2019. In our view, this is the best way to summarize the growth over the year versus, say, compared the average payroll level for year t with year t-1. We also note that these payroll values will shortly be revised, though the broad trends described above will remain intact.

Evidence for the claim that employment growth eventually slows as expansions age can be seen in the figure below, which plots year-over-year percent changes in payrolls, with recession shading. As expansions age, this variable eventually decelerates. We quantify this by regressing the change in payrolls (either raw numbers or percent changes) on a trend and trend-squared that grows with each expansion (so the first month in each expansion is ‘1’, the second is ‘2’, etc. and recessions are ‘0’s’) we find a significantly non-linearity in this variable. That is, the trend expansion variable is positive (as expected) and the squared value is negative, with both coefficients highly significant.

Source: BLS

None of this should be taken to imply that the expansion is soon to fade to recession. First, there is no evidence of labor market or broader economy overheating, either in the wage or especially in the inflation data. Moreover, there are no obvious credit bubbles of the type that have ended recent expansions. In fact, as Goldman Sach’s Jan Hatzius has pointed out, household and firm balance sheets look fairly healthy. In fact, our simple payroll model described above predicts considerably slower payroll growth right now relative to the actual growth rate—about 1% vs. the actual 1.4%–implying this expansion, even at its advanced age, is chugging along at a safe clip, at least for now.

Back-up evidence for WaPo piece on most important econ lessons of the decade

December 23rd, 2019 at 7:36 am

Here are the companion figures to my WaPo piece today on econ lessons of the decade.

1) The unemployment rate can fall a lot lower than most economists thought without triggering inflationary pressures.

2) Budget deficits cannot be assumed to place upward pressure on interest rates.

3) Weak worker bargaining power has long been a factor driving inequality. In the last decade, the increasing clout of certain employers has joined the mix.

Source: NY Times

4) Progressive health care reform, wherein the government plays a larger role in coverage and cost control, works.

Source: Paul Van de Water, CBPP

5) [Lesson re-learned] Trickle-down tax cuts don’t work.

Source: Goldman Sachs

6) Antipoverty programs don’t just reduce poverty today; they improve the outcomes of their beneficiaries many years hence.

Source: CBPP

CBPPs best graphs of 2019!

December 19th, 2019 at 3:45 pm

For a certain breed of wonk and nerd, it’s not the holiday season until some of CBPP’s best graphs of the year are collected and briefly annotated. This year, Kathleen Bryant and I took a stab at picking some of the figures we thought were most important to document the economic and policy landscape facing economically vulnerable people.

One of the most important and positive trends of the last decade was the decline in share of Americans without health coverage due to the Affordable Care Act. Their numbers fell from about 45 million to 27 million, a gain in coverage for ~18 million people. But this year’s release of the Census Bureau’s health insurance data revealed a troubling reversal of this trend. In 2018 (the data lag one year), the uninsured rate increased for the first time since the ACA’s passage. These findings illustrate the grave consequences of the Trump Administration’s repeated attempts to undermine the ACA over the past several years.

One reason the reversal shown above is of such concern is that health coverage saves lives. Reviewing a recent academic study, Matt Broadus and Aviva Aron-Dine report that the ACA’s Medicaid expansion prevents thousands of premature deaths each year and saved the lives of at least 19,200 adults aged 55 to 64 between 2014 and 2017. Matt and Aviva find that if all states had expanded Medicaid in 2017, the number of lives saved by full expansion would almost equal the number saved by seatbelts. Given such magnitudes, and considering that the federal government pays 90 percent of the costs of the expansion, these findings underscore the cruelty of remaining state resistance to the expansion.

The positive aspects of the current U.S. economy, such as our low unemployment rate, mask the fact that there’s an affordability crisis for low- and middle-income housing, both purchased and rental. Alicia Mazarra’s analysis shows one reason why: a large, persistent gap in the growth of incomes and rents of the median rental household. Federal rental assistance programs make a dent in the income-rent gap by helping 10 million people keep roofs over their heads – but these programs are woefully underfunded: only one in four eligible families get the rental vouchers to which they’re entitled, a huge shortfall that could be ameliorated simply by adequately funding the voucher program.

The official poverty measure leaves out the impact of some of our most important anti-poverty programs, including the market value of SNAP and tax credits for working families. CBPP’s Danilo Trisi and Matt Saenz showed that when we account for the full spate of anti-poverty programs (some of which are counted in the official measure), the national poverty rate falls by almost half, from 24 to about 13 percent. That amounts to 37 million people, including 7 million kids, lifted out of poverty. We can and should argue that 13 percent is still far too high in the world’s richest economy, but claims that the safety net fails to cut poverty are demonstrably wrong.

As just noted, one of the programs that reduces poverty is the SNAP program. Most people reasonably think of SNAP as a consumption program; i.e., it raises recipient families’ ability to meet their basic needs. But as the figure shows, it’s also an investment program, with long term benefits for children in households that receive it. Because the national program was originally phased in state-by-state, researchers were able to compare adult outcomes of kids in SNAP households to those in households that did not receive nutritional assistance. SNAP receipt had long-term benefits, improving both health and educational outcomes.

The U.S. labor market creates a lot of jobs, which is, of course, a good thing. But too many of those jobs are of dubious quality. About half of working-age Black and Latino workers are in low-wage jobs (it’s about a third for whites). That’s one reason why CBPP’s tax team touted the Working Families Tax Relief Act, an earnings subsidy for low- and moderate wage workers which builds on the EITC. The WFTRA “would improve the economic well-being of 46 million low- and moderate-income households with 114 million people.” Along with higher minimum wages, it’s a surefire way to improve the quality of lower-paid jobs.

As I argued in recent testimony before the House Budget Committee, the 2017 Trump tax cuts have broken a key linkage in advanced economies: that between a strengthening economy and more tax revenues flowing into the Treasury. The figure above shows that the average revenue flow as a share of GDP is about 17 percent, but in periods like the present, with low unemployment, that share rises to 18 percent. However, in 2019, it fell to 16.3 percent, about two percentage points of GDP, or over $400 billion, below where it should be.

Source: Goldman Sachs Research

Sticking with the Republican tax cuts, the package was sold as not only “paying for itself,” an obviously false claim, but as a stimulus for business investment. The cuts were particularly generous to corporate shareholders and wealthy households, and trickle-down tax lore maintains, against decades of evidence, that such tax cuts will boost business investment. As the above chart shows, the opposite occurred: since the tax cuts were passed, investment in plants, equipment, and research have grown more slowly.

One of our more important papers from the past year was Chye-Ching Huang and Roderick Taylor’s analysis of ways the federal tax code maintains racial inequality in income and wealth. Of course, the code does not explicitly target race or ethnicity but centuries of racist policies – such as the laws upholding slavery, the confiscation of Native American tribal lands, and the policies that racially segregated schools and neighborhoods – have so dramatically shaped today’s income and wealth distributions that almost any federal tax policy change will inevitably raise or lower racial barriers and disparities. The gif illustrates the racial disparities that are the culmination of centuries of barriers that people of color have faced to accruing wealth.

And, with that, thanks for following these econo-musings, and seasonally-adjusted greetings to all!

November job gains beat expectations, as Wal S’yas (reversed Say’s Law) takes hold

December 6th, 2019 at 9:29 am

Payrolls rose by 266,000 last month and the unemployment rate ticked down slightly to 3.5%. Hourly wage growth for all private sector workers remained where it has been, up 3.1%, year-over-year, while the pay of lower-wage workers–the 82% of payroll employment that’s blue collar in factories and non-managers in services–has been trending up a bit, and was up 3.7% last month (a slight tick down from 3.8% in October). With inflation running around 2%, this translates into solid real wage gains for these workers. The stronger trend for lower-paid workers is also a reminder of who disproportionately benefits from persistently high-pressure labor markets.

The November jobs number of 266K was boosted by the return of almost 50,000 strikers due to the end of the GM strike. Thus, much like we discounted the loss of those workers in the previous month’s jobs report, we should discount their return (I discuss the trend in manufacturing employment below). Even so, our monthly smoother implies, if anything, there’s been a slight acceleration in job gains in recent months (the smoother averages monthly payroll gains over 3, 6, and 12-month windows, and thus smooths out the strike effect).

In tandem with the wage results, payroll gains of this magnitude suggest that the persistently high-pressure labor market is boosting labor supply at both the extensive and intensive margins, i.e., pulling people in and adding hours for incumbent workers. I often stress the positive wage effects of high pressure labor markets, but the supply effects are structurally important, as they imply the potential for increased economic capacity. Fans of economic theory will recognize this as reversed “Say’s Law.” That is, Say’s Law, which is now widely viewed as erroneous, argued “supply creates demand.” It appears more accurate to argue that demand–in this case, persistently strong demand for labor–creates (labor) supply.

A hugely important policy question is whether that supply lasts past the next recession. This will surely require employment-oriented policies to avoid last-hired, first-fired outcomes when demand eventually lags. Such policies include subsidized employment, training, and apprenticeship programs.

Turning to one key, and less favorable, recent sectoral development, many different data sources have shown weakness in manufacturing employment, driven by the trade war and slower global growth. What is sometimes not emphasized enough in this context is that both of these factors tend to put upward pressure of the US dollar. As trade economist Rob Scott pointed out in a recent op-ed: “The dollar has climbed 10 percent since the tariffs first took effect in March 2018, and has also risen 11 percent against the [Chinese] yuan in the same period. This lowers the cost of imports and raises the cost of U.S. exports…”

As the next figure shows (and note the figure smooths out the strike effects), there’s but a large deceleration in manufacturing job gains as the above-named factors have seriously dinged manufacturing activity.

The U.S. job market continues to post impressive job gains. While overall wage trends remain stalled, those of lower-paid workers serve as a reminder of one of the benefits of high-pressure job markets. At the micro-level, especially given low inflation, this means real paycheck gains for working Americans. At the macro-level, it means we can expect the American consumer to continue to fuel the already record-long expansion. Against this broadly favorable backdrop, Trump’s trade war is a clear negative, demonstrably hurting factory workers.