Blog postings by CEPR staff and updates on the latest briefings and activities at the Center for Economic and Policy Research.

Every year, the Social Security and Medicare trustees’ report, released earlier this month, provokes a range of responses. This year’s report was no exception, even though it was very similar to last year’s report. For Social Security, an essential program that provides retirement and other benefits to millions each year,  the report predicted that it would only be able to pay 79 percent of benefits starting in 2034. This is because of a predicted shortfall in funding, which can be explained by a combination of factors, none of which imply the program is poorly run, no longer important, or fundamentally unsustainable.

While some are clear-headed about the issues facing the programs and understand its relative affordability, others provide misleading and often exaggerated narratives that rely on poorly thought-out indicators (for example, changes in worker-to-retiree ratios).

As with last year, buried deep within this year’s 270-page report are the trustees’ own facts about the program’s future. Relying on this data and based on the trustees’ logic, it is clear that Social Security is not in dire straits. Let’s walk through it.

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Earlier this year we did an analysis of CEO compensation in the health insurance industry to see if it was affected by the cap on deductibility imposed by the Affordable Care Act (ACA). One of the provisions of the ACA limited the amount of CEO pay that health insurers could deduct on their taxes to $500,000, beginning in 2013.

This provision effectively raised the cost of CEO pay to insurers by more than 50 percent. Prior to 2013, the deduction in effect meant that the government was picking up 35 cents of every dollar of CEO pay, while the companies were paying just 65 cents.[1] With the new provision in place, insurers are now paying 100 cents of every dollar of CEO pay in excess of $500,000.

If the pay reflects the value of the CEO to the company, we should expect this change to reduce the pay of CEOs in the insurance industry. For example, if a CEO gets paid $20 million a year, this should mean that she delivers roughly $20 million in additional value to shareholders.

When the CEO’s pay was fully deductible, the $20 million paid to the CEO actually only cost the company $13 million. This would presumably be the number that matters to shareholders since they care about how much money comes out of their pockets, not the number on the CEO’s paycheck.

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The May Consumer Price Index (CPI) was very much in line with expectations, as both the core and overall index rose 0.2 percent in the month. Over the last year, the core index has risen 2.2 percent, while the overall CPI has risen 2.8 percent. Inflation in the core continues to be driven largely by higher shelter costs. A core index that excludes shelter rose just 0.1 percent in May. It is up 1.3 percent over the last year.

The shelter component of the index rose 0.3 percent in May driven in part by a huge 2.9 percent jump in the “lodging away from home” (primarily hotels and motels) category. This figure is highly erratic. It has risen 4.4 percent over the last year. The shelter component has risen 3.5 percent over the last year, driven by a 3.6 percent increase in the rent proper index, and a 3.4 percent increase in the owners' equivalent rent (OER) index. The rent proper index includes utilities in many units. As a result, when energy prices rise rapidly it would be expected to increase at a faster rate than the OER index. For the month of May, the OER increased by 0.2 percent and the rent proper index increased by 0.3 percent.

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Why did the Revolving Door Project work with more than 30 other organizations in May to urge Senate Democrats to choose strong public interest-minded candidates for open leadership positions allocated to Democrats at key financial agencies, including the Securities and Exchange Commission (SEC) and the Federal Deposit Insurance Corporation (FDIC)?

Because we have learned that when reformers and progressives do not recognize that "personnel is policy" and work to identify appropriate senior leaders for Independent Agencies, the consequences can be catastrophic.

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There's a pretty good chance that you, or someone you know, has at some point worked a job that the US Bureau of Labor Statistics (BLS) would classify as "contingent" or “alternative.” These are jobs that, respectively, are not expected to last and that do not come with a traditional employment relationship. In its most modern form, this can include gig work, such as driving for Uber or providing freelance labor through TaskRabbit. However, the majority of contingent and alternative work is comprised of independent contracting, work for contract companies, on-call work, and work for temporary help agencies. On Thursday, June 7, BLS will release the results of its first survey of contingent and alternative work since 2005, giving insight into how the incidence of these types of work has changed over the past 12 years. To add context to the highly anticipated data release, let’s look at the results of the 2005 survey and outline what the release on Thursday will (and won’t) tell us.

In February 2005, questions about contingent and alternative employment were added to the regular monthly Current Population Survey (CPS). Specifically, in the case of contingent work, CPS respondents were asked whether they expect their job to continue, and for how long, or whether it is temporary in nature. BLS reports that, in February 2005, contingent workers comprise between 1.8 and 4.1 percent of the workforce. These estimates vary based on the definition of contingent — the low estimate of 1.8 percent excludes the self-employed and independent contractors, and persons who expect to continue their job for more than a year. Long-term independent contractors and self-employed workers (those who have held the job for more than a year or expect to continue in the job for more than a year) are also excluded from the larger estimate of 4.1 percent of the workforce.

As reported by BLS, contingent workers in 2005 were more likely than the overall workforce to be under age 25 and, relative to noncontingent workers of the same age, were more likely to be in school. Contingent workers were also less likely to be white, compared to their noncontingent counterparts. Contingent workers were less likely than noncontingent workers to have employer-provided health insurance or to be eligible for employer-provided pension plans. More than half of workers in this category said that they would prefer noncontingent work, and about a third said that they preferred their current arrangement.

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It has become common for economists to cite the rise in the ratio of job openings to hires as evidence that employers can't find people with the necessary skills. This then leads to an argument that our problem is not a lack of jobs in the economy, but rather that workers don't have the skills that are in demand in today's economy. We then tell workers that they need more skills, rather than blame our policymakers for not generating enough demand.

As I have been fond of pointing out, one of the sectors with the sharpest rise in openings to hires is the restaurant sector. I would not demean restaurant workers, it can be very demanding work (I did it for several years in my college days), but this is not an industry that is generally thought to demand highly skilled workers. 

Anyhow, the April data on from the Job Openings and Labor Turnover Survey (JOLTS) indicate that restaurants are finding it even harder now to find workers with the necessary skills. The job openings rate rose from 5.5 percent to 5.7 percent, while the hire rate inched up from 6.1 to 6.2 percent. The figure below shows the longer term picture for the somewhat larger leisure and hospitality sector.

fredgraph5

My takeaway is that we can either believe that restaurant work requires many more skills than is generally realized or that the job openings to hires ratio means something different than it did two decades ago.

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The Bureau of Labor Statistics reported the economy added 223,000 jobs in May. With upward revisions to the prior two months' data, this brought the three-month average gain to 179,000. The job growth also pushed down the unemployment rate to 3.8 percent, tying a low hit in 2000 (the next previous low is December 1969). The unemployment rate for blacks fell to 5.9 percent, an all-time low.

In spite of the positive news on job growth and the unemployment rate, there is no evidence of an acceleration of wage growth, with year-over-year wage growth coming to 2.7 percent — roughly the same pace as we have seen over the last year. For all the talk of a labor shortage, we also are not seeing any notable uptick in average weekly hours. The length of the workweek overall was unchanged in May, and it actually fell by 0.2 hours in manufacturing. If employers are really having trouble finding workers we would expect them to be getting more hours out of the workers they have, but this isn't happening.

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The price of auto insurance fell by 0.2 percent in April. While this is a welcome turnaround, auto insurance costs still exceed both education and health care as a contributor to inflation. Over the last year, auto insurance prices have risen by 9.0 percent, adding 0.21 percentage points to the inflation rate. 

By contrast, the 2.2 percent rise in the health care index added about 0.19 percentage points to the inflation rate. The 1.8 percent rise in the education index added just 0.05 percentage points to the inflation rate over the last year.

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The unemployment rate fell to 3.9 percent in April, the lowest rate since 2000. It has only been below this level for one month in the last 45 years. However, in spite of the drop in unemployment, other aspects of the report were less encouraging. Most importantly, wage growth remains weak. The average hourly wage increased by just 4 cents in April, bringing the year-over-year increase to 2.6 percent. There is no evidence of acceleration.

The drop in the unemployment rate was also due to the reported drop in labor force participation, the second consecutive drop, not an increase in employment in the household survey. There was also a drop in the percentage of unemployment attributable to voluntary quits. The 12.7 percent share is still near the high for this recovery, but well below the rates of 14 percent or more seen in 2000. This suggests that, in spite of the low unemployment rate, workers are still not confident about their labor market prospects.

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The latest analysis of family income by the Congressional Budget Office (CBO) understates the rate at which inequality has risen over the past 35 years. CBO’s analysis fails to capture the full extent of the increase in income inequality due to the way it treats Medicare and Medicaid spending.

The newly released analysis of family income from the CBO shows the same picture as previous versions: since 1979 the upper fifth of households have pulled ahead from everyone else. Specifically, the CBO shows that the average income of the upper fifth of households grew 95 percent between 1979 and 2014, some 1.9 percent per year, while the lower four-fifths grew 26–28 percent, a mere 0.7 percent annually.

But the CBO’s family income picture understates the rate at which inequality has increased over the past 35-year period in two ways.

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What do you call a policy fix that makes it easier to fund social programs and public services for all New Yorkers, saves the state of New York $7 billion annually, and is as easy to implement as unemployment insurance or workers’ compensation? It’s called the employer-side payroll tax, championed by CEPR’s senior economist, Dean Baker. We refer to it as the #TaxLawHack.

New York just adopted a voluntary version of the employer-side payroll tax. It’s New York’s smart tool to sidestep the recent federal tax law, which penalizes liberal-leaning states in an attempt to force cuts to quality state-level social services. But, like all change, this new law is being met with some hesitancy, skepticism and criticism.

It’s up to New York’s fearless early adopters to help keep the state’s public services funded. If you want to show the world how to fight back against GOP tax penalties, then tell your employer: “I want my #TaxLawHack!”

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This might not be the best time to be alive if you worry about things like racism or climate change, but 2018 is undeniably a great time to run a multinational corporation. Ironically, Facebook’s Mark Zuckerberg helps illustrate why life is great for CEO’s of multinationals, even as the corporate behemoth he founded is experiencing a public relations crisis and a falling stock price.

Why? Because in 2018, basically the only international rules that apply to corporations are those that benefit them.

For years, pragmatic observers of international trade have worked to illuminate the intentionally boringly titled process known as “Investor-State Dispute Settlement,” or ISDS, that is embedded in modern trade deals. ISDS creates extrajudicial panels whereby multinational corporations can seek to invalidate a country’s laws by a shadowy and opaque process.

In other words, under contemporary trade deals, corporations like Facebook have the right to challenge laws or regulations that Facebook doesn’t like in countries where Facebook is not headquartered.

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The percentage of unemployment due to people who voluntarily quit their jobs jumped to 13.1 percent in March, the highest level since May of 2001. This statistic is a good measure of workers' confidence in the labor market, since it means that they are prepared to leave a job even before they have new one lined up. Until this month, the quit rate had been unusually low (mostly under 11.0 percent) given the levels of unemployment we were seeing. The March level is more consistent with an unemployment rate near 4.0 percent.

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Last month, we did an analysis that examined the impact of a provision of the Affordable Care Act limiting the amount of CEO pay that could be deducted from profits to $500,000.

In the years after it took effect, this provision raised the cost of CEO pay to employers (i.e., shareholders) by more than 50 percent. Prior to 2013, shareholders of health insurance companies effectively paid just 65 cents on every dollar of CEO compensation, since their taxes would fall by 35 cents for every dollar they paid out. After 2013, they would be paying 100 cents of every dollar.

If CEO pay bears a close relationship to their value to the company, this change in the tax code should have led to some reduction in their pay. Using a wide variety of specifications, controlling for growth in profits, revenue, stock price, and other relevant factors, we found no evidence that the pay of health insurance CEOs fell at all in response to the limit on deductibility.

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Foxconn Project

In late 2017, Foxconn, the Wisconsin Economic Development Corporation (WEDC), and Wisconsin Governor Scott Walker came to an agreement where Wisconsin will provide almost $4.5 billion in incentives and Foxconn will build a large manufacturing facility in Point Pleasant Wisconsin. Governor Walker has presented this agreement as a win for the people of Wisconsin that will generate billions of dollars of investment and thousands of high paying jobs. The incentives package is among the largest subsidies provided for a foreign based firm.

Foxconn is an electronics manufacturing company based in Taiwan and is associated with serious anti-worker management practices. The incentives package includes $2.85 billion in statewide tax incentives, $764 million in local government incentives, $139 million in state sales tax exemptions, and another $717 million in construction costs and grants. The deal also includes an expedited environmental permitting process and a dedicated liaison at the WEDC. In return, Foxconn must invest at least $9 billion in capital, and employ 10,200 people at an average compensation of $59,600, including benefits. Both Foxconn and Walker claim that overall 13,000 people will be employed and $10 billion will be invested. Foxconn has made similar promises in the past. In 2013 they claimed that they were going to build a $30 million plant and hire 500 people in Harrisburg Pennsylvania. Despite seeking incentives from Pennsylvania and already having a local office, the plant was never built. All said, Foxconn continues to make demands of the Wisconsin government as time progresses.

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The big jump in the price of energy commodities in January was partially reversed in February with a 0.9 percent drop. This brought the overall inflation rate for the month to 0.2 percent, the same as the core rate. Over the last year, the overall CPI has risen by 2.2 percent, while the core rate has risen by 1.8 percent.

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The prime-age (ages 25-54) employment rate rose 0.3 percentage points in February to 79.3 percent, a new high for the recovery. It rose 0.5 percentage points for men and 0.2 percentage points for women.

The employment-to-population ratio (EPOP) for prime-age men now stands 1.2 percentage points above its year-ago level, while the rate for women is 0.7 percentage points above its year-ago level.

This is consistent with the view that there are still many workers who are outside the workforce, but will return in response to a strong labor market. The implication is that there is still considerable slack in the labor market and there is little reason for the Federal Reserve to rush forward with interest rate hikes.

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In his January State of the Union address, President Trump called for $1.5 trillion in infrastructure spending over the next decade. If that amount materialized, it could go a long way toward meeting the nation’s infrastructure needs. But the release on February 12 of his detailed plan for raising and allocating those funds dashed any hope that this administration would address the nation’s acute need for infrastructure investment.

The meagerness of the federal contribution — just $200 billion over ten years, or less than 0.1 percent of GDP over that period — was already clear from the State of the Union. Half of those funds are allocated to an Incentive Program intended to support surface transportation and airports, passenger rail, ports and waterways, flood control, water supply, hydropower, water resources, drinking water facilities, wastewater facilities, storm water facilities, and brownfield and Superfund sites. Just listing everything the President’s plan claims to address for a federal expenditure of just $100 billion makes the inadequacy of the plan obvious. But there’s more.

The Incentive Program requires states and localities to put up 80 percent of the cost of any project in order to get a federal match of 20 percent. This turns the traditional approach to infrastructure investment on its head. The federal government typically provides 80 percent of the funding for such projects. It is wishful thinking to imagine how cash-strapped states and cities — already on the hook for extensive local infrastructure spending — will be able to find new public sources of financing, especially now that the recent Republican-passed tax law has severely limited their ability to raise taxes to pay for such undertakings.

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A 3.0 percent jump in energy prices in January caused the overall Consumer Price Index (CPI) to rise by 0.5 percent in the month. This brought its year–over–year increase to 2.1 percent. However, core inflation remained modest, rising 0.3 percent in the month, with the year–over–year rate at just 1.8 percent.

Even this 1.8 percent rise is overwhelmingly due to the role of shelter. The core index, excluding shelter, has risen by 0.8 percent over the last year. There is no evidence whatsoever of accelerating inflation in the core index outside of shelter. Since the rise in the price of shelter is primarily the result of the limited supply of land in desirable areas, the inflation in this sector is not the result of conventional inflationary dynamics.

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By February 2018, many rich people have stopped paying into Social Security for the year. The essential program, which provides retirement, disability, and survivor benefits to millions every year, only taxes the first $128,400 of a salary (up from $127,200 in 2017). Any wage income above this payroll tax cap is not subject to the tax.

Since the vast majority of people in the United States make less than $128,400 per year, they pay the 6.2 percent payroll tax for the entire year. But those with incomes over the cap pay a lower effective tax rate.

For example, someone with a salary of $50,000 pays into the program for the entire year — up until December 31st — and has a 6.2 percent effective Social Security tax rate. But someone who makes $1,000,000 in 2018 stops paying Social Security taxes on February 16th — and has an effective tax rate of just 0.8 percent. In other words, the burden of Social Security taxes falls more heavily on those who make less money.

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In 2017, the Bureau of Labor Statistics (BLS) reports the black union membership rate to be 12.6 percent, equivalent to 2,210,000 black union members. While the overall union membership rate was unchanged in 2017 in the United States, it actually fell by 0.4 percentage points for black workers, who had a union membership rate of 13 percent in 2016. All else equal, if black union density had not fallen (it increased for white and Hispanic workers), an additional 70,000 black workers would be union members in 2017. This is particularly important for wages because black union members are reported by the BLS to earn $164 more per week than nonunion black workers.

Multiplying this union wage premium by the number of union members lost to the single-year drop in black union density shows a union-density-related wage loss for black workers of more than $597,000,000 in 2017. In contrast, union density for white workers increased by 0.1 percentage points, generating a one-year wage boost of nearly $1,274,000,000 (Figure 1).


Figure 1. Estimated One-Year Wage Effect from Change in Union Density in 2017
Millions of US Dollars

union_density_wage_effect

Source: Author’s calculations from Bureau of Labor Statistics' recent union report.

While black union membership fell by 0.4 percentage points in 2017 and 70,000 black workers missed out on the union wage premium, black union membership has fallen by an astounding 19.1 percentage points since 1983. As a result of this long-term trend, millions of black workers have missed out, not only on the wage premium that comes with union membership, but on better access to health and retirement benefits, as described in detail by Cherrie Bucknor in her report ”Black Workers, Unions, and Inequality.”

Policy differences between states offer insight into the divergence in outcomes in 2017 and long-term trends more generally. State policies have a big impact on union density: 6.3 percent of workers are union members in “right-to-work” states (states that prohibit contracts requiring that all workers who benefit from a union contract share in the cost), compared to 15.4 percent in states without the union-weakening rules. And states with lots of black workers have been particularly intense in their assault on unions. Right-to-work laws cover about half of all workers (50.4 percent in 2017), but cover 61 percent of black workers. So, while President Trump has asked someone to inform Jay-Z that his administration has the best policies for black workers, Republicans are putting in place policies that reduce black wages and benefits (both Kentucky and Missouri became right-to-work during 2017).

Beyond lower wages, in a fascinating new National Bureau of Economic Research working paper, James Feigenbaum, Alexander Hertel-Fernandez, and Vanessa Williamson point out one possible explanation for Republicans putting in so much effort to weaken unions in states where a large share of workers are black. The authors find that passing a right-to-work law reduces voter turnout by 2 to 3 percentage points. Cumulatively, right-to-work laws have reduced the Democratic vote share in local, state, and national elections.

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