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

Earlier this year, the Bureau of Labor Statistics (BLS) released a short report on wage inequality in the U.S. It gave detailed breakdowns of earnings by gender, age, education, state of residence, industry, and occupation.

The report also included data on access to leave benefits along the wage distribution. In general, high-wage workers have greater access to these benefits than low-wage workers.

We can break the various types of leave into three separate categories. First, there is unpaid family leave, which allows employees to take time off work to care for sick family members or newborns. Access to unpaid family leave is nearly universal: about 86 percent of all workers — and even 75 percent of low-wage workers — can take unpaid family leave. This can be seen in the figure below.

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The staff of CalPERS, the $288 billion California public employees’ pension fund, has had a bad couple of weeks. Just before Thanksgiving, they released long-awaited figures showing that over the 25 years since 1990, the pension fund paid more than $3.4 billion in performance fees to private equity firms — so-called carried interest that is taxed at the lower capital gains tax rate rather than as ordinary income. Private equity has persuaded public pension funds that these performance fees are warranted by the exceptional returns earned on PE investments, but the evidence is weak. Because PE investments are illiquid and risky, returns need to be high enough to be worth the risk. CalPERS’ benchmark is a stock market index of domestic and global stocks plus 3 percent, the typical private equity risk premium. Unfortunately, CalPERS’ PE investments failed to beat this benchmark in the past three-year, five-year and ten-year time frames. Indeed, over the 10-year period, CalPERS would have had the same returns by investing in the stock market index in its own benchmark without the added risk of investing in private equity.

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The Federal Reserve’s Federal Open Market Committee continues to debate whether it should raise short-term interest rates to prevent inflation. The effects of raising these interest rates cascade throughout the economy: rates for automobile loans and mortgages will rise and the economy will generally slow. But a slower economy means that fewer people have jobs and workers will have less bargaining power to demand higher wages. With inflation already low and the economy still recovering from the Great Recession, there are good arguments for the Fed keeping rates low.

Looking into the future, low rates will help the most marginalized and disadvantaged. For example, the gains from lower unemployment will disproportionately help black workers. History provides more reasons for keeping rates low: black workers were hit much harder than whites, Asians, or Hispanic/Latinos in both the 2001 and 2007 recessions. In addition, the incomplete recovery from the 2007 recession is on top of an incomplete recovery following the 2001 recession.

This is evident looking at the unemployment rate and employment rate (or EPOP ratio, employment-to-population ratio) of prime-age (25 to 54) blacks and whites for the 2001 and 2007 recessions. (Looking at prime-age workers, who are in an age group likely to be working, helps eliminate any demographic effects that might be also happening.)

The graph below shows the change in the unemployment rate on the y-axis and the change in the EPOP on the x-axis for the 2001 business cycle. As the recession progresses, the graph moves up and to the left (i.e. the employment rate declines and the unemployment rate increases); during the recovery, it moves down and to the right.

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Last week, CEPR released a report titled The Anomaly of U-3: Why the Unemployment Rate is Overstating the Strength of Today’s Labor Market. The report shows that the U-3 unemployment rate, also called the official unemployment rate, is out of line with eleven alternative measures of labor market slack.

Five of these measures — the U-1, U-2, U-4, U-5, and U-6 unemployment rates — are calculated at the state level. These five alternative measures allow us to examine the strength of each state’s job market. By all but one measure, the U-3 unemployment rate is overstating the strength of the economy in a clear majority of states. This can be seen in Table 1 below, which summarizes the results from Tables 2-7.

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In late 2007, the Federal Reserve (“Fed”) began pushing down interest rates in hopes of boosting the economy and providing job opportunities for American workers. The downside to lower interest rates is the risk of higher inflation; at the time, the Fed correctly believed that inflation wasn’t a problem, given that all measures of inflation were near their stated targets and falling.

The Fed made a hard push to boost employment by lowering the Federal Funds Rate — the rate at which banks can lend to each other overnight — from 5.25 percent in early 2007 all the way to 0.16 percent in December 2008. The Fed has kept the Federal Funds Rate near zero for the last seven years.

When the Fed meets on December 15–16, it will consider raising rates despite the fact that the labor market by at least one key measure is only about halfway recovered from the 2007–2009 recession. Moreover, inflation is hardly a problem in today’s economy. By all measures inflation is low, and projections of future inflation indicate that the Federal Reserve is likely to remain below its target rate of 2.0 percent.

So when the Fed votes on whether or not to raise interest rates next week, it will be choosing between reducing the risk of a potential future problem (inflation) and a very real present one (low employment). There is substantial disagreement amongst members of the Fed about which problem is more important.

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The Labor Department reported that the economy added 211,000 jobs in November. With modest upward revisions to the gains reported for the prior two months, the average growth over the last three months has been a strong 218,000.

Construction accounted for 46,000 of the new jobs, likely helped by unusually warm weather in the Northeast and Midwest. Restaurants added 31,500 jobs, retail added 30,700, and professional and technical services added 28,400. Job growth in the health care sector was relatively weak at 23,800. Other data in the establishment survey was less encouraging with a drop of 0.1 hour in the length of the average work week. This drop, combined with the weak reported growth in the hourly wage, led to a modest drop in the average weekly wage.

The unemployment rate remained at 5.0 percent. There was also no change in the labor force participation rate or the employment-to-population ratio, both of which remain far below pre-recession levels.

Other data in the household survey also are consistent with a weak labor market. The number of involuntary part-time workers jumped by 319,000 after large declines in the prior two months. There was no change in the average duration of unemployment spells, with the median duration edging downward slightly to 10.8 weeks. The percentage of unemployment due to voluntary job leavers edged up slightly to 10.0 percent. This is still a number consistent with a recession labor market, as are the duration measures and the share of involuntary part-timers workers.

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On Friday, the Bureau of Labor Statistics will release its latest jobs report. This month’s report is of special significance given that the Federal Reserve may raise interest rates in mid-December.

News reports typically cite three numbers from each jobs report: the unemployment rate, the number of jobs created, and the number of private-sector jobs created. By themselves, these figures provide an incomplete picture of the labor market. Here are five additional measures worth watching. Hyperlinks have been included so that anyone wishing to check these figures can do so easily on Friday.

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On November 24, CalPERS, the California public employee pension fund, released the long awaited figures on the amounts it has paid private equity firms in performance fees — so-called carried interest. For years, the pension fund failed to ask for or report these fees. This changed recently under pressure from unions, media and the tax-paying public which were highly critical of CalPERS claim that it could not track and did not know how much these fees cost it. As widely anticipated, the number is ginormous. Over the 25 years since 1990, CalPERS has paid $3.4 billion in carried interest to the PE firms in whose funds it has invested. In the last year, CalPERS paid $700 million in these performance fees. At this rate, it will pay private equity $17.5 billion in performance fees over the next 25 years, more than 5 times what it paid in the last 25.

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Earlier this week, Representative Keith Ellison (D-MN) and Representative Rosa DeLauro (D-CT) introduced a bill aimed at making diapers affordable. H.R. 4055, or the Hygiene Assistance for Families of Infants and Toddlers Act of 2015, will allow states to create pilot projects that provide diapers or subsidies for diapers to poor families.

Currently, families are unable to use money from nutrition programs (such as food stamps or WIC) to pay for diapers, and those receiving benefits from the Temporary Assistance for Needy Families program (TANF) often find that they also need to choose between diapers and other necessities. Community “diaper banks” work to distribute diapers to those who need them, but they can only satisfy a portion of the need.

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CEPR's Dean Baker is one of the 63 prominent economists who sent a letter to the heads of the Senate and House Appropriations Committees on Wednesday, urging full funding for the Bureau of Labor Statistics (BLS).

Signers of the letter include Angus Deaton, winner of the 2015 Nobel Prize in Economics, and come from across the political spectrum, such as the past chairs of the Council of Economic Advisers under President Obama (Austan Goolsbee) and President George W. Bush (Glenn Hubbard).

The BLS is the source of data that is relied upon by business leaders, the government, and experts in assessing the state of the economy. For example, the BLS generates the government's official measures of unemployment, which are the basis of CEPR's monthly Jobs Byte report.

Many of CEPR's analyses of the labor force rely upon BLS data. And as a service to fellow researchers and academics, CEPR also maintains user-friendly versions of BLS data at

In their letter to Congress, Dean and his fellow economists point out that, "[t]he very nature of work in the U.S. economy is changing. Now is not the time to cut funding for the main institution charged with tracking these changes,” and caution that, "Hampering the BLS’s ability to gather and report timely, accurate, and relevant data causes ripple effects throughout the federal government, the business community, and the U.S. economy.”

They also note that the BLS's budget " down more than 10 percent since 2010. The Senate Appropriations Committee proposes another round of cuts for FY2016. Although House appropriators have called for a modest increase in BLS spending, their figure still falls $23 million short of the President’s request and does not come close to off-setting the funding shortfalls of the last five years."

You can read full text of the letter here. The organizers of the letter, the Economic Innovation Group, have also started a social media conversation about this topic with the hashtag #SaveTheData.

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The following reports on labor market policy were recently released:

Center for American Progress
Administering Paid Family and Medical Leave: Learning from International and Domestic Examples
Sarah Jane Glynn

Economic Policy Institute
Hiring Lags as Economy Slows Over the Summer
Alyssa Davis

Closing the Pay Gap and Beyond: A comprehensive Strategy for Improving Economic Security for Women and Families
Alyssa Davis, Elise Gould

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CEPR senior economist Eileen Appelbaum spoke about private equity's leveraged buyout strategies and their effects on American companies and workers at a Capitol Hill briefing on Tuesday titled, "Hedge Funds and Private Equity: Transferring Wealth Up."

Senator Tammy Baldwin (D-WI), Representative Nydia Velazquez (D-NY), and Senator Al Franken (D-MN) were the keynote speakers. The Senators spoke mainly about the current hot topic of the carried interest tax loophole, which is mostly used by private equity and hedge fund managers. Congresswoman Velazquez discussed the need for more hedge fund transparency, especially in light of the fiscal situation in Puerto Rico.

Click the images below to watch a video of the event, as well as to view the presentations of Eileen and one of her fellow panelists, Victor Fleischer (columnist for The New York Times).


Hedge Funds and Private Equity: Transferring Wealth Up


Eileen Appelbaum presentationVictor Fleischer presentation

Other panelists included David Wood, Director of Initiative for Responsible Investment at the Kennedy School at Harvard, who talked about the concerns of pension trustees about private equity investments, and Eric LeCompte, Executive Director of the Jubilee USA Network, who spoke about how hedge funds in particular are affecting efforts to relieve poverty around the world. The event co-sponsors were Americans for Financial Reform, the AFL-CIO, and the American Federation of Teachers.

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In recent weeks there has been significant discussion about the effects of raising taxes on the rich. Think tanks, government institutions, and media outlets such as the Brookings Institution, the U.S. Treasury Department, the New York Times, the Washington Post, and Vox have all devoted significant coverage to the prospect of raising taxes on wealthy Americans.

The coverage has focused for the most part on the federal income tax. The federal income tax is a progressive tax that requires rich Americans to pay higher rates than the poor.

But the federal income tax is just one part of the larger overall tax code. Other parts of the tax code which are regressive generate as much or even more revenue than the federal income tax.

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CEPR's Eileen Appelbaum provides comments (PDF version) on the Internal Revenue Service (IRS) Proposed Rule: Disguised Payments for Services, which will affect the private equity industry.

I am writing to provide comments in support of the proposed regulations issued by IRS and Treasury under section 707(a)(2)(A) of the Internal Revenue Code relating to disguised payment-for-services transactions.

I am senior economist at the Center for Economic and Policy Research in Washington, DC and Visiting Professor of Management at the University of Leicester, UK. I have coauthored a highly regarded book on private equity (PE), Private Equity at Work: When Wall Street Manages Main Street, which provides a balanced examination of the industry but raises concerns about excessive financial engineering by PE firms.

The proposed regulations clarify existing provisions in the tax code that govern the circumstances in which management fee waivers, commonly employed by private equity firms, can be used. In a management fee waiver, a fund manager waives the fixed management fee and receives in its place a priority claim on the fund's gross or net profits from any accounting period equal to the foregone fee. Fee waivers are entirely tax motivated. They are intended to convert ordinary income from management fees into equivalent profit income taxed at the lower long-term capital gains rate and to defer income realization from the regular due date of the waived fee until distributions of the funds profits are subsequently made. However, fee waivers generally do not meaningfully alter the economic deal between the fund managers and their investors. In other words, a fee waiver inserted in the fund partnership agreement is mere window-dressing designed solely to achieve a tax result.

In 1984 Congress passed section 707(a)(2)(A) to address this precise situation. As the statutory text and legislative history makes abundantly clear, this provision disallows the claimed tax benefits from fee waivers in cases where the fund manager does not bear significant entrepreneurial risk. The proposed regulations confirm the intent of Congress and make clear that entrepreneurial risk is the key consideration in management fee waivers. Management fee waivers by private equity firms rarely, if ever, will satisfy this condition: there is little risk that the fund will have no accounting period in which the priority claim on gross or net profits can be exercised. The proposed guidance appropriately concludes that window-dressing provisions do not change the tax character of fixed compensation from ordinary income to capital gains.

The proposed regulations are intended to put an end to this abuse of the tax code which enriches private equity firm partners at the expense of the tax-paying public. It is not possible to say precisely how much tax revenue has been lost due to abusive fee waivers because the total amount of fee waivers by the private equity industry is not publicly available. However, we do know that a single PE firm (Bain Capital) claimed approximately $250 million of tax savings from abusive fee waivers over a 10-year period. With management fee waivers for at least the past 15 years used by an estimated third to a half of all U.S.-based private equity firms, the revenue loss to the IRS from taxpayer neglect of section 707(a)(2)(A) is likely to be in the billions of dollars. The general 3-year statute of limitations on enforcement imparts a certain urgency to the finalization of the proposed regulations and to speedy enforcement so that back taxes, penalties and interest can be collected by the IRS in cases of abusive use of management fee waivers. I strongly support the proposed regulations and recommend that they be quickly finalized and enforced.

Some observers have raised the possibility that, in response to the proposed regulations, fund managers may introduce clawback provisions into management fee waiver agreements to provide a facade of entrepreneurial risk. Toothless clawbacks would be just additional window dressing. To guard against this gamesmanship, the final regulations should make clear that fee waiver clawbacks must have real economic substance. I recommend that the final regulations explicitly require that, in order for a clawback obligation to be considered, the terms of the fee waiver clawback must oblige individual fund managers to personally guarantee the general partner's fee waiver clawback obligation, just as personal guarantees secure the general partner's carried interest clawback obligations.

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The California Fair Pay Act, authored by California State Senator Hannah-Beth Jackson, passed the state senate unanimously and was signed by Governor Jerry Brown in early October. The Act addresses wage discrimination between men and women and requires employers to justify differences in wages for employees who do similar work, using non-discriminatory qualities. The law strengthens the California Equal Pay Act of 1949 by allowing comparison of “substantially similar” work regardless of titles, and requires that employers have a valid reason (e.g. professional experience, education, seniority) for differences in pay. It also allows for open discussion of salaries in the workplace and protection from an employer’s retaliation. For some, this is the only way wage discrimination can be discovered.

As one might expect, the law has faced resistance from business interests. Sarah Ketterer published a piece in the Wall Street Journal titled “The Wage Gap Myth That Won’t Die.” Apart from boilerplate anti-regulation arguments, Ketterer casts doubt on the very existence of wage discrimination against women. She contends that if one takes into account that women on average work fewer hours per week and tend to work in different, lower paid occupations than men, the “gap” in pay disappears.

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This post was written by Eileen Appelbaum and Rosemary Batt, co-authors of "Private Equity at Work: When Wall Street Manages Main Street." The presentation accompanying this post is available here as a PowerPoint.

Performance of Private Equity Investments of the California Public Employees Retirement System: What are the Issues?

On November 16, the staff and board of CalPERS, the California Public Employees Retirement System, held a review of its investments in public policy. This presentation reviews the major issues the pension fund should consider.

We begin by noting three main points.

First, investments in private equity are riskier and more illiquid than investments in public equities (the stock market). Higher risk can only be justified if the investments result in higher returns than are possible with less risky investments. That is, investments in private equity should have higher returns than stocks — they should beat the market and yield a premium over passive investments in a stock market index by a large enough amount to be worth taking on the extra risk.

Second, private equity (PE) funds performed pretty well in the decade from 1995 to 2005, with the median fund launched in each of those years beating the Russell 3000, a stock market fund made up of companies similar in size to those in private equity portfolios. However, the median fund in every vintage launched in the years after 2005 has failed to beat the market. Investors in half the funds launched after 2005 would have done better investing in an index fund that mimicked the Russell 3000.

Third, CalPERS PE investments haven’t beaten its stock market benchmark in year-to-date, 3-year, 5-year, and 10-year windows. It does beat the stock market index in the 20-year time frame, but this is largely due to the stronger performance of PE funds a decade ago.

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During the 2007–2009 recession, inflation fell significantly. After a brief uptick in prices in late 2011 and early 2012, inflation again subsided. According to all three of the major price indices, inflation remains below the Federal Reserve’s target inflation rate of 2.0 percent, as shown in the figure below[i]:

Annual Inflation Rates, Three Most Common Price Indices

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The following reports on labor market policy were recently released:

Center for American Progress
Wisconsin, Unions, and the Middle Class
Brendan Duke, Alex Rowell

Economic Policy Institute
Looking Beyond the Topline Employment Number: Public-Sector Jobs Remain Depressed
Elise Gould

Center on Budget and Policy Priorities
Policy Basics: How Many Weeks of Unemployment Compensation Are Available?

Institute for Women’s Policy Research

Strong Job Growth in October Lowers Unemployment rate to 5 Percent: Women Gain 158,000 Jobs and Men Gain 113,000 Jobs

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The latest jobs report from the Bureau of Labor Statistics shows that the unemployment rate fell to 5.0 percent last month. This is the same rate as from the beginning of the recession in December 2007, and is also the CBO’s estimate of the long-term natural rate of unemployment.

There’s good reason to think that the unemployment rate is overstating the strength of today’s economy. This is because people only count as unemployed if they have actively searched for work within the past four weeks. If workers become discouraged over their job prospects and stop looking for work, the unemployment rate falls. A better measure of the labor market wouldn’t show the economy gaining strength due to the fact that workers were becoming depressed with their job prospects.

One way of correcting for this problem is to ask what the unemployment rate would be if people hadn’t given up the search for work. Normally, we’d expect people to not be working if they are older and retired or young and in school. However, there’s little reason to think that people aged 25 to 54 should have suddenly stopped searching for work for any reason other than discouragement over job prospects.

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