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

The Labor Department reported that the economy added 173,000 jobs in August, somewhat less than most predictions. However, the prior two months' numbers were revised upward by 44,000, bringing the average gain over the last three months to 221,000. The big job gainers in August were health care with 40,500 jobs, restaurants with a gain of 26,100 jobs and the government sector with an increase of 33,000. Almost all of the gains in government employment (31,700) were in state and local education. This reflects a timing issue with many schools starting earlier than normal. These jobs will likely disappear in next month's report.

The unemployment rate dropped to 5.1 percent, as employment increased by 196,000. However the employment-to-population ratio was little changed at 59.4 percent. Other news in the household survey was mixed. The percentage of unemployment due to people voluntarily quitting their jobs fell slightly from 10.2 percent to 9.8 percent. This is extraordinarily low given the relatively low rate of unemployment. All the duration measures of unemployment increased in August, with the share of long-term unemployed rising from 26.9 percent to 27.7 percent, the second consecutive increase.

The average hourly wage rose by 8 cents in August. It has risen at a 1.9 percent annual rate in the last three months compared with the prior three months, down slightly from its 2.2 percent rate over the last year. There clearly is no evidence of accelerating wage growth in this report.

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The Labor Department’s decision to raise the threshold under which salaried workers are automatically eligible for overtime is long overdue. The failure to have this threshold at least keep pace with inflation has both led to many workers being wrongly denied protection under the Fair Labor Standards Act (FLSA) and created an invitation for employers to game the law.

First, it should be understood that the proposed $50,440 threshold is just keeping in line with inflation since 1975. Arguably the threshold should have risen in step with productivity growth, since average wages have risen mostly in step with productivity over the last four decades. (Median wages have not kept pace with productivity, which is a problem this rule change may help to correct.) If the overtime threshold had been adjusted in step with productivity growth over this period it would be almost $100,000 in 2016. There is no reason to believe that the 1975 threshold was seriously impeding business decisions at the time. Given the doubling of productivity over the last four decades, there would be even less reason to believe the $50,440 threshold would impede businesses operating in 2016.

The second point is that the failure to adjust the threshold leaves workers open to employers that decide to effectively flout the law. The FLSA was put in place to ensure workers would receive minimally fair treatment in both the wages they are paid and the hours they have to work. The minimum wage sets a pay floor below which workers should not have to work. The hours standard imposes a penalty on employers for requiring workers to put in unusually long hours, and compensates workers for this imposition.

With the current threshold of less than $24,000, employers are able to classify even very low-paid salary workers as supervisory and then require them to work 60, 70, or even 80 hours per week. In such cases, salaried workers may not only be deprived of the overtime premium to which they should be entitled, but they also are not getting paid at all for their additional hours of work. In extreme cases this could result in workers earning less than the minimum wage. For example, a worker earning a salary of $24,000 a year would be earning just $6.85 an hour if their employer typically demanded they work 70 hours a week.

Allowing for this evasion of the minimum wage is clearly inconsistent with the intent of the FLSA. It makes no sense to impose a minimum wage standard, but then allow a substantial segment of the workforce to be effectively excluded from its protection because they are salaried employees. This is the situation that exists with the current outdated threshold.

The current low threshold also encourages the sort of gaming by employers that economists all recognize as wasteful. It effectively tells employers that they can avoid paying overtime premiums to workers, and possibly even paying the minimum wage, if they pay their workers weekly salaries and classify them as supervisory employees. Laws should never be written so that those who which to avoid them need only find a simple legal subterfuge. The distinction between hourly and salaried employees should be made based on the nature of the work involved, not the fact that the latter payment structure makes it possible for employers to avoid the requirements of the FLSA.

This raises a final point. Clearly enforcement is a major problem with the hours standard, since the assumption in raising the threshold is that workers earning less than $4,000 a month are not in a meaningful sense supervisory. The employers who do not currently pay overtime to salaried workers in the band between the old and the new threshold ($23,660 to $50,440) are all claiming that these workers have major supervisory responsibilities. In principle this can be evaluated on an individual basis with the Labor Department making a determination as to whether this claim is warranted. As a practical matter, this imposes an enormous enforcement problem which would require inspectors to visit millions of workplaces and make detailed assessments of the job responsibilities of individual workers. This would require several orders of magnitude more inspectors than the Wage and Hours Division currently has at its disposal.

Changing this rule makes the enforcement issue much easier. The question is simply whether a worker earning less than the new threshold was paid an overtime premium whenever they worked more than 40 hours a week. At this level of simplicity the FSLA overtime rules becomes far more enforceable.

For these reasons the Labor Department should undertake this long overdue modernization. It would clearly keep with the intent of the law and make a big difference in the lives of tens of millions of working people and their families.

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The following reports on labor market policy were recently released:


Center for American Progress

How Overtime Rules Would Benefit Millennials     
Sunny Frothingham


Economic Policy Institute

More of the Same in the July State Jobs Report
David Cooper

How the Economy Has Performed for Workers this Year
EPI


Center for Economic and Policy Research

Young Black America Part Four: The Wrong Way to Close the Gender Wage Gap
Cherrie Bucknor


Institute for Women’s Policy Research

The Union Advantage for Women
Julie Anderson, Ariane Hegewisch, Jeff Hayes

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The stock market hovered at or near record highs throughout 2014, leading to high valuations for private equity-owned portfolio companies since prices for these companies are typically benchmarked to comparable publicly traded firms. With companies fetching high prices in this sellers’ market, PE funds were busy—in the words of Apollo chief Leon Black—selling everything that wasn’t nailed down. The result, according to PitchBook’s Benchmarking + Fund Performance report released yesterday, is that private equity funds returned a whopping $232.5 billion to pension funds and other limited partner investors last year.

According to PitchBook, private equity fundraising was highly successful in the first half of 2015 as investors counted up their winnings and recycled these gains into new PE funds. Unlike Donald Duck’s Uncle Scrooge sitting in his house counting up his money, however, pension funds and other private equity LPs are supposed to be sophisticated investors able to compare the returns from investing in private equity to other, less risky investment strategies. So, how do returns from investments in private equity compare with similar investments in the Russell 3000 stock market index? PitchBook conveniently provides that information as well.

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Women—and black women in particular—have seen significant improvements in high school completion rates since the turn of the century, almost cutting in half the black-white gap for women during that time, as I shared last month. But has that meant an increase in college entry and completion—especially since a college degree should demand higher wages in the labor market?

The second report in my Young Black America series of reports examined just that. I found that young black women and men are entering and completing college at higher levels than in the past. Yet, these gains haven’t been enough to noticeably close the gap between them and their white counterparts. From 1980 to 2013, women had higher college entry rates than men, with white women having the highest entry rates of all (see Figure 1). In 1980, 46.9 percent of 19-year-old white women had entered college (including community college). The college entry rate for white men was 41.0 percent and the rate for black women was 40.0 percent. Black men had the lowest entry rate of 25.9 percent, 14.1 percentage points lower than that of black women.

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The Federal Reserve Bank of Kansas City is now hosting its annual meeting of central bankers in Jackson Hole, Wyoming. The topic of the meeting’s symposium this year is “Inflation Dynamics and Monetary Policy,” addressing the inflation side of the Fed’s dual mandate to maintain high levels of employment and keep inflation low.

The Fed has recently been signaling that it may raise the federal funds interest rate, or the rate financial institutions use to lend to each other. This rate has been close to zero since the beginning of the Great Recession (the 20072009 recession) in order to encourage the expansion of the economy. Raising this rate slows down the economy because rates for mortgages and car loans, for example, tend to follow this short-term interest rate. This will reduce inflationary pressure but will also cost jobs and weaken the labor market.

While the official unemployment rate of 5.3 percent seems reasonably low, there is reason to believe this measure understates the weakness of the labor market. This is because workers left the labor force during and after the end of the Great Recession. The exit of these workers counterintuitively causes the unemployment rate to decline. But other measures of the labor market, like the employment-to-population (EPOP) ratio, is evidence that the labor market is persistently weak. In fact, the EPOP ratio for prime-age workers (workers aged 25 to 54) was still down by 2.6 percentage points since the beginning of the recession in 2007.

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The following reports on labor market policy were recently released:


Economic Policy Institute

Congress Must Act to Save the 190,000 to 640,000 U.S. Jobs at Risk Due to Chinese Currency Devaluation
Robert E. Scott


National Employment Law Project

Advancing a Federal Fair Chance Hiring Agenda: Local & State Reforms Pave the Way for Presidential Action
Maurice Emsellem, Michelle Natividad Rodriguez

The Case for Reforming Federal Overtime Rules: Stories from America’s Middle Class
Judith M. Conti

The Growing Movement for $15
Irene Tung, Paul K. Sonn, Yannet Lathrop


UCLA Institute for Research on Labor and Employment

The ‘Raise the Wage’ Coalition in Los Angeles: Framing Opportunity Against Corporate Power
Fernando Cortes Chirino


Center on Wage and Employment Dynamics

Estimated Impact of a Proposed Minimum Wage Law for Sacramento
Michael Reich, Annette Bernhardt, Ian Perry, Ken Jacobs


Center on Wisconsin Strategy

Meager Recovery in the Number of Jobs in Wisconsin
Center on Wisconsin Strategy

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Kevin Drum at Mother Jones took the Washington Post to task for their recent article on the supposed labor shortage for restaurant cooks. The article explains the shortage by citing rising housing costs and long commutes, poor working conditions, large student loan burdens, and a lack of career prospects. It says that these factors make restaurant jobs undesirable, especially for cooks.

Drum points out that the obvious solution to this problem is raising wages, and that the article never mentions it as a possibility. He says that “[m]aybe there are plenty of good entry-level cooks available” at a wage of $15 an hour instead of a wage of $10 to $12 an hour that the article cites. Drum is right that a higher wage would attract more applicants for these positions. They would also attract cooks and workers in other food service occupations back to the restaurant industry. This would mean that the “shortage” of cooks is probably not a real shortage after all.

Luckily, industry data can be used to look for evidence of wage growth. If there were a shortage, the data would show healthy wage growth. This is because employers would be competing over a smaller pool of workers, and they would use higher wages to attract those workers. If there is low or moderate wage growth, it’s likely that there is no real shortage.

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The following reports on labor market policy were recently released:


Economic Policy Institute

Manufacturing Job Loss: Trade, Not Productivity, Is the Culprit
Robert E. Scott

(In)dependent Contractor Misclassification
Francoise Carre


Institute for Women’s Policy and Research

How the New Overtime Rule Will Help Women & Families
Heidi Hartman, Kristin Rowe-Finkbeiner, Hero Ashman, Jeffrey Hayes, Hailey Nguyen

Women Gain 115,000 Jobs in July and Men Gain 100,000 Jobs
Institute for Women’s Policy Research (August 2015)


CLASP

Out of Sync: How Unemployment Insurance Rules Fail Workers with Volatile Job Schedules
Liz Ben-Ishai, Rick McHugh & Claire McKenna


Urban Institute

Recent Evidence on the ACA and Employment: Has the ACA Been a Job Killer
Bowen Garrett, Robert Kaestner


Center on Wisconsin Strategy

A District That Works: Policies to Promote Equity and Job Quality in our Nation’s Capital
Satya Rhodes-Conway, Peter Bailon, Sam Munger, Chris Reynolds

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Those pushing to cut and/or privatize Social Security have long tried to rest their case on an appeal to generational equity. They argued that the taxes needed to support baby boomers would impose a crushing burden on our children and grandchildren.

This argument flies in the face of reality. If we see the sort of wage growth projected by the Social Security trustees, and if it is evenly shared, then real wages would be 55 percent higher in 2045 than they are today—a $61,388 median annual wage compared to $39,560.

Suppose that we close the projected shortfall in Social Security entirely by raising the Social Security payroll tax, with no other revenue increases and no cuts in benefits. In this case, our children would see after-tax wages that are 51 percent higher than what we earn today, with a median wage of $59,547.[1] It’s hard to see the generational injustice here. (It is worth reminding those who consider this tax to be a generational injustice itself that we now pay a far higher tax rate than our parents or grandparents did.)

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Two months ago, CEPR released a report on changes in the prime-age employment rate since the beginning of the recession in December 2007. CEPR used the prime-age employment rate rather than the unemployment rate for a specific reason: in order to be counted as unemployed, a prospective worker must “have actively looked for work in the prior 4 weeks.” This means that if someone has been searching for work for a long period of time, but has become dissatisfied with their prospects and hasn’t applied for any jobs over the previous month, he or she is no longer counted as “unemployed.” Paradoxically, if enough workers become discouraged with their job prospects and give up their searches for work, the unemployment rate can fall even as the job market is weakening.

In order to correct for this and other problems, it’s best to analyze rates of employment rather than unemployment. However, if we look at the employment rate for the U.S. as a whole, we miss out on the changing age distribution of the population: if the population is aging, a greater percentage of the population may hit retirement age and willingly retire, which doesn’t imply a weaker job market. Conversely, if the population is becoming younger, a greater percentage of the population may enroll in high school or college; yet this tells us nothing about employment opportunities for those who want to work. A simple way to correct for a changing age distribution is to limit one’s analysis to the “prime-age” population (Americans aged 25 to 54). The most recent job figures show that 77.1 percent of all 25-to-54 year-olds were employed in July. This means that the labor market has made up just 2.2 out of the 4.8 percentage points of prime-age employment that were lost between December 2007 and September and October of 2011.*

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Last week, the Bureau of Economic Analysis (BEA) released its GDP report for the second quarter of 2015. The BEA’s findings were generally positive: it reported that the economy grew at an annualized 2.30 percent rate between the first and second quarters of 2015, and it revised its first-quarter growth estimate upwards by 0.8 percentage points. Over the past year, real GDP grew 2.32 percent, in line with the second-quarter growth rate. This is 0.21 percentage points better than the average growth rate of 2.11 percent since the second quarter of 2009, when GDP hit its end-of-recession trough.

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The Labor Department reported the economy added 215,000 jobs in July, while the overall unemployment rate was unchanged at 5.3 percent. The unemployment rate for African Americans fell from 9.5 percent to 9.1 percent, the lowest level since February of 2008. The employment-to-population ratio remained unchanged at 59.3 percent for the population as a whole and 55.8 percent for African Americans. There were few other notable changes in the data in the household survey.

In addition to the July jobs numbers, data for May and June were also revised up slightly to bring the 3-month average to 235,000. However, there is still no evidence of this job growth leading to wage pressures. The average hourly wage rose 5 cents in July, but this followed a drop of 1 cent in June. This brings the annual growth rate for the last three months compared to the prior three months to just 1.9 percent, compared with a 2.1 percent increase over the last year.

The mix of jobs was a bit peculiar with the non-durable manufacturing sector adding 23,000 jobs. This is the biggest gain in the sector since a gain of 26,000 in August of 1991. This was driven by gains of 9,100 in food processing and 5,800 in plastics and rubber products.

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There is a growing consensus among economists that U.S. economic growth is impaired by the steep rise in inequality that is squeezing a middle class built in Pittsburgh and elsewhere across the nation by a once vibrant union movement committed to norms of equity. The latest evidence shows it is variation between companies in how employers treat similar workers, and not a widening gap within companies between workers with greater and lesser levels of education, that is behind this growing inequality. As labor standards have eroded, workers in jobs where they are treated fairly worry that their next job may be in one of the growing number of companies that misclassifies employees as “executives” in order to be able to require them to work more than 40 hours in a week without having to pay them for the extra hours, or that they will be denied paid sick days because the company doesn’t feel compelled, as the Pittsburgh Post-Gazette  put it in its July 15 editorial, to “pay employees for not working.” The recent decline in retail sales despite low oil prices is just the latest symptom of the impact on the economy of growing economic insecurity.

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Yesterday, CEPR released a short study asking how high the minimum wage would be if it had risen in line with productivity since 1968. Between January and February of that year, the minimum wage increased 14 percent from $1.40 to $1.60; instead of shedding jobs, the labor market seemed to improve. Between 1967 and 1968, the prime-age employment rate increased half a percentage point, and the unemployment rate fell to 3.6 percent.

Such an experience would ordinarily give policymakers little reason to fear minimum wage hikes. However, since 1968, the minimum wage has failed to rise in line with either productivity or inflation. Had it risen in line with productivity, it would have been $18.42 in 2014; had it risen in line with inflation, it would have been $9.54.

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Last year, President Obama called for increasing the federal minimum wage to $10.10 an hour by the end of 2015. He argued that after 2015, increases in the minimum wage should be tied to inflation, with the minimum wage rising in line with the consumer price index.

The purchasing power of the minimum wage peaked in the late 1960s at $9.54 an hour in 2014 dollars. That is over two dollars above the current level of $7.25 an hour. While raising the minimum wage to $9.54 would provide a large improvement in living standards for millions of workers who are currently paid at or near the minimum wage, it is worth asking a slightly different question: what if the minimum wage had kept in step with productivity growth over the last 44 years? In other words, rather than just keeping purchasing power constant at the 1968 level, suppose that our lowest paid workers shared evenly in the economic growth over the intervening years.

This should not seem like a far-fetched idea. In the years from 1947 to 1969, the minimum wage actually did keep pace with productivity growth. (This is probably also true for the decade from when the federal minimum wage was first established in 1938 to 1947, but we don’t have good data on productivity for this period.)

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Last Monday, President Obama commuted the sentences of 46 non-violent drug offenders. While doing so, he highlighted what he believed to be the harsh sentencing guidelines that kept these men and women in prison. These commutations, President Obama's recent speech at the NAACP Convention in Philadelphia, and his Thursday visit to the El Reno Correctional Institution in Oklahoma represent the latest moves in his push for criminal justice reform. It has also sparked some spirited debate on incarceration here, here, and here.

As President Obama and others have mentioned, the incarceration rate has fallen over the past few years. After almost 30 years of steady increases, the incarceration rate peaked at 757.7 in 2007, and fell to 698.7 by the end of 2013.[i] This is certainly promising news, especially if this trend continues.

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Last quarter the civilian unemployment rate fell to 5.41 percent, the lowest rate since the second quarter of 2008. This represented a drop of 0.16 percentage points from the first quarter, when unemployment was 5.57 percent.

According to the Congressional Budget Office (CBO), this also meant that the economy nearly achieved full employment. The CBO estimates that the natural rate of unemployment, an estimate of the unemployment rate that excludes cyclical effects, was 5.38 percent in the second quarter. (The CBO publishes a short-term as well as a long-term rate; both were 5.38 percent in the second quarter. The two rates are expected to be the same going forward.)

The CBO’s estimates of the natural rate of unemployment are inconsistent with its estimates of the output gap. The output gap measures the difference between GDP and what GDP could be if there were no cyclical weakness in the economy. There should therefore be no output gap when the economy has hit its natural rate of unemployment.

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Construction employers often talk about the labor shortages they face. The Associated General Contractors of America recently released a press release lamenting that “contractors are having a hard time finding enough qualified workers to meet growing demand in many parts of the country” as unemployment rates in the construction industry declined. The Atlantic wonders, “Where Have All the Construction Workers Gone?” To bolster claims of a shortage, the industry puts out reports based on non-scientific surveys of employers.

If there were a labor shortage in the construction industry, we would also expect there to be healthy wage growth. Employers would be competing over a smaller pool of workers, and higher wages would attract construction workers to the firms offering them (or entice workers in different industries or occupations to switch to construction). But if we look at year-over-year wage growth for production and non-supervisory workers in the construction industry, we see that wage growth is not especially high, similar to findings for other major industries.

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The following reports on labor market policy were recently released:

Economic Policy Institute

The Federal Reserve Can Help Close Gender and Racial Wage Gaps by Pursuing Full Employment
Josh Bivens

Center on Budget and Policy Priorities

A Guide to Statistics on Historical Trends in Income Inequality
Chad Stone, Danilo Trisi, Arloc Sherman, and Brandon DeBot

Center for Law and Social Policy

Job Schedules that Work for Businesses in the District
Liz Ben-Ishahi

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In April 1991, the federal minimum wage was raised from $3.80 to $4.25 per hour. The federal tipped minimum wage, which had traditionally been set to half the normal minimum wage, was raised to $2.13. The tipped minimum wage sets a wage floor for all workers who receive tips as part of their compensation; most of these workers are in the food service industry, which employs 60 percent of the nation’s tipped workers.

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