More evidence–this time from CBO–that higher (even much higher) minimum wages largely do what they’re supposed to do.

July 8th, 2019 at 2:39 pm

Raising the federal minimum wage to $15 per hour by 2025 would lift the pay of 27.3 million workers—17 percent of the workforce—according to a new report from the Congressional Budget Office. It would raise the incomes of poor families by 5 percent and thus reduce the number of people in poverty by 1.3 million. Since these low-end gains would be partially financed out of profits, the increase in the wage floor would reduce inequality.

CBO also estimates that “1.3 million workers who would otherwise be employed would be jobless in an average week in 2025.” Because economists’ estimates of the job-loss effects from minimum wage increase are so wide-ranging—some studies find little-to-no job loss impacts; other find more—CBO estimates that there’s a two-thirds chance that the actual change in employment is between 0 and -3.7 million. Interestingly, -1.3 million is not the midpoint between 0 and -3.7, suggesting the budget office gave a bit more weight to studies finding less evidence of job-loss effects.

Thus spoke Zarathustra the CBO. Should this lead objective policy makers to embrace or eschew the policy to increase the federal minimum wage to $15 in 2025 (assume for this exercise that “objective policy makers” exist)?

I’d give a solid push towards embrace. It’s a progressive policy that’s long been shown to largely hit its goals of boosting the earnings of low-wage workers whose families seriously need the income. Yes, the report warns that some will be hurt by the increase, but the best research suggests their job-loss estimate may be too high. Moreover, even if they’re right, the ratio of helped-to-hurt is 21 (27.3m/1.3m). And given the extent of turnover in the low-wage labor market, many of those 1.3 million workers will eventually find new jobs, jobs which pay a lot better than their old ones.

Full disclosure: I’ve long advocated for minimum wage increases, so my “embrace” won’t surprise those who’ve followed that work. But the reason why I—and, more importantly, progressive institutions like the Economic Policy Institute, CBPP, CAP, and many others—have long advocated for minimum wage increases is that a deep body of uniquely high-quality research finds that prior increases have had their intended effects of raising low-wage workers’ incomes without leading to significant job loss.

But isn’t the $15 minimum wage a lot more ambitious than prior increases (the CBO report also simulates $10 and $12 increases)? It is, and as such, it will have a much larger “bite” than prior increases, meaning it will apply to a larger share of low-wage workers than past increases. Figure 4 in the report shows that the 1991 increase directly affected about 6 percent of workers; this one could affect almost 14 percent.

To evaluate this concern, go back to my comment about “uniquely high-quality research.” By that I mean that because so many states and cities have implemented higher wage floors on their own—there are over 130 such cases over the last few decades—researchers have been able to conduct many more experimental-type studies than in virtually any other area of economics, comparing outcomes in places that raised their wage floor to outcomes in places that did not. Moreover, some of these increases have had comparable bites to the $15 wage simulated by CBO, as shown by this new paper by Godoey and Reich.

The importance of this new report relative to today’s CBO release is that G&R focus especially on high-impact (large bite) increases. They find “positive wage effects but do not detect adverse effects on employment, weekly hours or annual weeks worked. We do not find negative employment effects among women, blacks and/or Hispanics. We do find substantial declines in household and child poverty.”

No single study will end this debate, but as someone who’s been in this debate for about 30 years, believe me: especially since the path-breaking work of the late (man, that’s still painful to write) Alan Krueger and David Card, the evidence from this sort of controlled study has changed many economists’ and policy makers’ views on minimum wages.

The simple, classical model—raise pay by mandate and everyone affected gets hurt—is clearly wrong, as the CBO report shows. Just how wrong is it is something we’ll continue to argue about. But in the meantime, policy makers who want to improve the living standards of low-wage workers, reduce poverty, and push back on inequality can rest assured that, as the budget office’s new report shows, the evidence is on their side. The benefits of the increase—even a significant increase like this one—far outweigh the costs.

July jobs: nice pop on payrolls but flat wage growth

July 5th, 2019 at 9:18 am

[This jobs report is an important one in terms of assessing the impact of headwinds on the job market, but because it’s sort of a holiday, I’ll just offer up a truncated, bullet-point report. As always, thanks to Kathleen Bryant, who got up early on vacation to help me out!]


–Payrolls rose 224,000 last month, well above expectations for ~165K. Though we never want to over-weight one month of noisy data, that’s an important number, suggesting that building economic headwinds haven’t dented job creation much yet at all.

–Our monthly smoother shows average monthly job gains over 3, 6, and 12-month windows. Even including May’s weak 72K (revised) gain, the average over both the past 3 and 6 months has been around 170K jobs/month. That’s a slight downshift from the 12-month average but still a very solid number, one that should handily support the ongoing expansion.

–The unemployment rate ticked up to 3.7% (a statistically insignificant change, btw), but that was mostly due to more people coming into the labor force–the participation rate nudged up 0.1 ppts to 62.9%.

–That’s all good news, but the evolving wage story is less so. As the figures below reveal, our 6-mos rolling average of yr/yr nominal wage growth shows the trend (versus the noisier monthly values) is stalled or even trailing off a bit. This too, is an important finding, suggesting that a) there’s still “room-to-run” in this expansion as labor supply doesn’t appear to be tapped out, b) even with unemployment near 50-yer lows, too many workers still lack the bargaining clout they need.

–That said, nominal wage gains are beating consumer inflation, which is running a bit below 2%, so the buying power of paychecks is rising. Again, this combination of solid job gains, low inflation, and nominal wage growth around 3% should handily support the expansion in at least the near term.

Other observations:

–Gov’t added 33K jobs, and some are saying that’s related to hiring for the decennial Census. Such hiring does and will cause a temporary spike in payrolls, but federal gov’t employment was up only 2K last month. Local gov’t added 29K jobs, so this doesn’t look like a Census issue.

–Manufacturing had a better month in June, adding 17K jobs after being flat for most of the year. One month doesn’t change the recent trend, and the factory sector remains high on the watch list, as the trade war, stronger dollar, and our expanding trade deficit may put downward pressure on the sector in coming months.

–This is a tricky jobs report the Federal Reserve, which is meeting later this month and is expected to cut its benchmark interest rate. But with unemployment below their estimate of the “natural rate” (the lowest jobless rate believed to be consistent with stable prices) and average payrolls gains well north of the “equilibrium” level (the level required to keep unemployment from rising), they will not see a rate cut as an obvious necessity.

–Pushing the other direction–toward a rate cut–are below-target inflation and the absence of wage acceleration.

–So, it’s quantities versus prices! May the best variable win. While I carry a fairly hefty rate-cut bias, I’m not sure what I’d vote for were I at the FOMC table. Given the need for sustained real wage growth for the majority of workers left behind during decades of rising inequality, I’m leaning toward “prices,” as in cut rates in the hopes of even lower unemployment and the possibility of bending the wage-growth curve back up. But I’ll think on it and get back to you later with a definitive call!

The economic outlook: The importance of getting ready for the next downturn sooner than later.

June 28th, 2019 at 3:55 pm

Yesterday, some colleagues and I gave a talk on the urgency of being ready for the next downturn before it hits. Here’s the PowerPt (as a PDF) and below is an annotated version. To be clear from the outset, you will not learn from this presentation when the next recession will be upon us because no one knows (as you’ll see, the presentation features some headwind and tailwind slides). What we do know is that there are some important and unique attributes re the current expansion that makes planning now for the next downturn especially urgent.

What do I mean, “limited monetary space?” The arrows in the next slide shows how much–how many percentage points–the Fed funds rate has fallen in downturns since the 1970s–more than 5 ppts, on average. Note that cute, little arrow at the end of the series. Especially given the Fed’s recent shift in bias toward “insurance” cuts, it’s a virtual certainty that we’ll enter the next downturn with less monetary space than in the past (this observation assumes the Fed means it when they say they’re not much interested in Euro-style negative rates).

OK, but what about fiscal policy, which was really the focus of this briefing? As the next slide shows, wherever the next downturn is, absent large, unforeseen (and frankly, unimaginable; neither large tax increases nor big spending cuts are happening anytime soon) changes to our fiscal policy, we’ll be going into the next downturn with a debt/GDP ratio that’s at least twice that of the post-1970 average.

Which is why it’s so important to distinguish between “actual” and “perceived” fiscal space.

The second bullet above is especially important. There’s this crazy idea you sometimes hear from policy makers: “in a recession, households have to tighten their belts, and thus the government should do so as well.” That’s totally upside-down. The whole point of countercyclical policy is that because HHs are belt-tightening, the federal government must engage in deficit-financed belt loosening (remember, states have to balance their budgets so the in a downturn, the federal gov’t is the only fiscal game in town).

The next bullet argues that government spending to offset downturns is temporary. Thus, while it can raise the debt level, it doesn’t raise deficits once the economy recovers.

Still, as the next bullet says, at least one prominent paper found that when countries enter downturns with debt/GDP as high as ours will be, the fiscal response has been too tepid. In other words, history suggests that the distinction between actual and perceived fiscal space has not been adequately made or reflected in countercyclical policies.

The next slide gets a little into policies re lessons I learned from being in the Obama admin during the Great Recession. I recently wrote about these ideas here, but my colleagues on the panel for this briefing–Heather Boushey and Indivar Dutta-Gupta–have a lot more to say about them and others in a recent book for the Hamilton Project.

The key point, however, as I argue here, is to make these programs automatic stabilizers, not discretionary ones for Congress to fight over while the recession is whacking people’s living standards.

Finally, I’ve got these figures on headwinds:

Slower real GDP growth, though nothing recessionary, is uniformly in the forecasts. (“Mark’s nervous” refers to Mark Zandi of Moody’s having the most pessimistic forecast. He and I are writing a joint piece on that, so stay tuned.)


The Treasury yield curve is in inversion territory, and the bond market in general is strongly signalling its expectation of lower growth and significant Fed rate cuts. The stock market, while mostly going sideways for the past year, has popped a bit of late. This too reflects a more dovish Fed, but equity investors are expecting a softer landing than bond investors.

Employment growth has slowed, though it’s still strong enough to fuel solid, non-recessionary consumer spending

However, the Conference Board Consumer Confidence index is trending down…but it’s awfully noisy.

The trade war is whacking global trade volumes which is far from recessionary but is a drag on growth, both here and abroad.

Finally, my personal favorite tailwind indicator (on the right, above): the close tracking between aggregate real earnings and consumer spending. The good news is they’re both clearly in expansion territory. The bad news is that they can both downshift within a few quarters.

So, there you have it. I fear that the likely lack of both monetary space and perceived fiscal space may severely dampen the reaction to the next downturn. Moreover, headwinds exist. Thus, we should fix the roof while the sun is behind a few clouds.

I’m really worried about this, and you should be too. Still, I sleep like a baby. That is, I wake up screaming every two hours.

Three observations about current monetary policy (the last one is the most important)

June 21st, 2019 at 11:37 am

If you follow such things, you know that earlier this week, the U.S. central bank shifted its bias from patient waiting to a bias toward rate cuts. Here are three observations about this moment in monetary policy.

1. The market reaction has been interesting as bond yields have tanked while equity prices have climbed. Such a dynamic is not a mystery, as both movements reflect a dovish turn by both the U.S. Fed and the European Central Bank. Also, as has been the case throughout the expansion, low yields for fixed income investments can juice risk appetites for stocks.

But there’s also an ongoing argument between the two sides of the market, with the bond market more worried about global growth (and thus expecting bigger Fed rate cuts i.e., not just insurance cuts, but recessions cuts*) than equities.

If the bond market is right, there are two big risks afoot. One is that the stock market takes a big hit. That’s not infrequent in these volatile days, and trust me, my heart bleeds not for big selloffs. But if tighter financial conditions persist, that becomes another risk factor for growth. Which prompts the second risk: if the bond market’s expectations of significant rate cuts, say >150 basis points, is correct, we’d end up uncomfortably close to the dreaded zero lower bound.

ZLB risk was a big theme of the Fed conference I attended a few weeks ago in Chicago, and numerous papers stressed the benefits of alternative Fed policies, mostly QE. I found them moderately convincing but a) the funds rate is still the big gun, and b) I’m therefore more convinced than ever that if the next downturn is of any significant magnitude, the fiscal response will be the key determinant of how damaging it is to economically vulnerable people.

2. Just in case you were wondering, there’s still lots of room for real wages to rise, a fact that holds even if believe that we’re solidly at full employment. In fact, even more so if that’s your take. The reason is that labor’s share of national income is at an historically low level, as shown in the first figure below. And if we’re truly at full employment, the added bargaining clout of middle- and lower-wage workers should enforce this result. (This is the BLS version of this variable, which is more pessimistic than some other series, but they all show the same thing.)

Source: BLS

Put aside for a moment another important fact: wage growth hasn’t much bled into price growth for a while now. If you worry that full capacity labor markets will generate inflationary wage gains, consider that non-inflationary gains can be “paid for” by a shift from profits to wages, which also has the advantage of being somewhat equalizing (only “somewhat” because such aggregate shifts say nothing about how labor income itself gets distributed).

The figure below updates an estimate by Josh Bivens on how many years it would take for faster compensation growth to regain labor share. The “low” scenario is for slow real wage growth, 0-1 percent, which leads to little claw back of labor share. Steady real wage growth of 1.5 percent (“middle”) gets labor share back to around 2009 levels by 2025 and real wage growth of 2 percent gets back to 2007 levels by then.

Source: My analysis of BLS data.

3. Finally, and I’ll shortly have more to say about this, something very important–and under-reported–occurred in Fed Chair Jerome Powell’s press conference earlier this week. Numerous times, he referenced discussions at the Chicago “FedListens” conference on how important high-pressure labor markets are to people and places left behind in periods of slack. In my presentation at the conference, I stressed these points as well, adding that the flat Phillips Curve creates an opportunity for the central bank to maintain and prolong the benefits of full employment until the price data–realized and expected–solidly signal otherwise. From the perspective of accelerating inflation, high pressure labor markets must now be considered innocent until proven guilty!

I give Powell and the board a great deal of credit for engaging in these discussions and even more so, for elevating what they’ve learned in the echo chamber of the Fed’s public comments. The FedListens!


*I take this language from a recent GS Research note which is behind a paywall.

Should they cut or should they hold?

June 18th, 2019 at 12:22 pm

Should they cut or should they hold?
If they cut there will be trouble.
If they pause it will be double.
Tell me quick, I want to know.
Should they cut or should they hold!?

Pretty much everything has been said about whether the Fed should take out an insurance cut in the fed funds rate when their FOMC meeting concludes tomorrow afternoon. But not everyone’s had a chance to say it. So, I’ll briefly weigh in. My punchline: There are good arguments on both sides, but I’d hold for this meeting and signal forthcoming cuts as necessary. I’m not convinced that an insurance cut would have much upside relative to dovish forward guidance, and my bar for surprising the markets is high.

The case for a cut:

–Inflation is not only soft, but more importantly from the Fed’s perspective, inflationary expectations have slid down a notch. This is, by far, the most compelling reason to cut at this meeting.

–The May jobs report was soft and despite low unemployment, wage growth was flat.

–Real GDP is tracking at 2 percent, a downshift from recent prints of ~3.

–Here’s a sleeper issue that’s not getting enough attention even amidst all the chatter: fiscal stimulus is fading. where deficit-financed tax cuts and spending increases added 0.5-1 points to real GDP growth in 2018-19, as far as I can tell from following Congress’ appropriation debates (there will be spending; there will not be tax cuts), fiscal impulse will soon shift from positive to neutral.

–Trumpian trade tensions. They’re diminished given Trump’s reversal on full-bore Mexican tariffs, but trade policy, such as it is, is still a headwind.

The case for a pause:

–The strongest argument for holding is that the notion of “insurance cuts” is ill-defined and I’ve not seen compelling empirical evidence on their behalf.

–The May jobs report disappointed, but those monthly data are noisy and, even with some of the economic slowing noted above, the underlying labor market trends are still solid and, at least in the aggregate, U.S. consumers remain in decent shape. As I and co-authors recently wrote, there’s real turbulence beneath the aggregates, but the cyclical variables I track still look solid.

–For example, I find it useful to compare the product of jobs, weekly hours, and real wages (aggregate real earnings of production, non-supervisory workers) to real consumer spending (70 percent of GDP). In the figure below, you see the still-solid job market supporting pretty steady consumer spending.

Sources: BLS, BEA

–Financial markets place the probability for a cut coming out of this meeting at 20 percent. Now, I think surprising the markets can be a useful tool for the Fed, but there’s already enough uncertainty given Trump’s erratic trade mishegos.

–Given Trump’s badgering of the Fed to cut, in tandem with the pretty even case for pausing or cutting, there’s an independence case for the tie to go to the pauser.

So, while I certainly wouldn’t complain if a 25 bp cut in the funds rate comes out of this meeting, I expect the Fed to hold and can see their rationale. But it’s very important that they explicitly signal that their bias has shifted from patient holding to supportive cutting.