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

The following newsletter highlights CEPR’s latest research, publications, events, and much more.

— CEPR Senior Associate for International Policy Alexander Main penned this op-ed for the The New York Times on corruption in Honduras. In the piece, Alex writes that a growing number of Hondurans are insisting on an independent, United Nations-backed body to investigate corruption charges against the current president and others in his party. Alex also notes that 54 members of Congress have urged Secretary of State John Kerry to support this demand.

The piece was picked up — and commented on — by several media outlets in Honduras, and it even sparked an editorial cartoon there, here. Alex was interviewed about the op-ed by The Real News, and was cited in this Think Progress article.

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A little over a week ago, CEPR released a blog post looking at the Congressional Budget Office’s (CBO) projections for wage growth over the next decade. Based on the data presented in their 2016 Budget and Economic Outlook, CBO expects wage inequality to rise substantially over the next decade.

It is striking that this projection of a continuing rise in inequality has gotten so little attention. By contrast, the media constantly talk about the projected shortfalls in the Social Security Trust Fund, making the point that if the projections prove correct then in 2034 we will either have to cut benefits or raise taxes.

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Last month the Congressional Budget Office (CBO) released its Budget and Economic Outlook report for 2016 to 2026. While various aspects of the report have gotten major play in the media, one important yet overlooked detail is what CBO says about wage inequality. Specifically, CBO expects to see a “continued increase in the share of wages earned by higher-income taxpayers” (pg. 88). It indicates that another 4 percentage points of wage income will be redistributed from the bulk of the workforce to the roughly 7 percent of workers who earn more than the cap on wages subject to the Social Security tax (currently $118,500):

“The share of covered earnings above the taxable maximum amount is projected to rise to more than 20 percent in 2026, 4 percentage points more than the share in 2015...” (pg. 94)

This ceiling on the amount of wages subject to taxation rises in line with average wage growth every year. If inequality goes up and high-wage workers’ earnings rise faster than average, a greater share of overall wages are exempt from taxation. Due to rising inequality, the share of wages going untaxed has nearly doubled from one-tenth to nearly one-fifth over the past thirty years.

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Between 2007 and 2015, there was a substantial decrease in the civilian labor force participation rate from 66 percent to 62.7 percent. Journalists and economists have debated how much of this decline can be attributed to a weak economy as opposed to an aging population.

The civilian labor force participation rate (LFPR) measures the percentage of the civilian non-institutional population (those who are 16 and above and not part of an institution, e.g. a mental institution, prison, etc.) who are in the labor force. The labor force consists of everyone who is either employed or unemployed (meaning they have searched for work sometime over the past four weeks). The LFPR may fall as a result of bad economy, as people give up looking for work due to a weak labor market, but it also changes due to demographics. If the population is aging, a greater percentage of the population may hit retirement age and willingly retire. Conversely, if the population is becoming younger, a greater percentage of the population may enroll in high school or college.

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Social Security, the program that provides retirement, disability, and survivor benefits to millions of Americans just gave a valentine to those making $1,000,000 a year.

Many people do not realize that the taxes that fund Social Security only apply to the first $118,500 of wage income in 2016. Income above the cap is not subject to the tax and workers do not pay into Social Security on that income. That means that the vast majority of the population (those making under $118,500 a year) pay the 6.2 percent Social Security payroll tax for the entire year, but the wealthy don’t. It also means that the wealthy have a lower effective tax rate.

For example, someone making $1,000,000 paid into Social Security on every day in 2016, up until and including February 13th. On the 14th — Valentine’s Day — their income was no longer subject to the payroll tax, and their paychecks for the rest of the year became heftier.

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Job Leavers as Share of the Unemployed

The figure above shows the percentage of unemployed Americans who quit their last job, by race. For all groups, the share of job quitters took a nosedive during the recession; this is to be expected, because a low rate of job quitting is actually a sign of a weak labor market. When workers feel that there are few job opportunities available to them, they are less likely to quit their jobs, because they know that they are unlikely to find a new one. By contrast, when the economy is strong and the job openings rate is high, we see more workers leaving their jobs:

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The following reports on labor market policy were recently released:


Economic Policy Institute
When Quitting is a Good Thing
Elise Gould

The Fed Shouldn’t Accept the “New Normal” Without a Fight
Josh Bivens

State Unemployment Rates by Race and Ethnicity at the End of 2015 Show a Plodding Recovery
Valerie Wilson

Center for American Progress
How States Are Expanding Apprenticeship
Angela Hanks, Ethan Gurwitz

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This week D.C. will hold another hearing on a proposal for Paid Family Leave, in line with states like New Jersey, California and Rhode Island that have implemented paid family leave programs over the last decade. In this election cycle, a major point of political discourse among Democrats has been that America is still one of the only developed countries that has not established a paid leave program to provide income for workers during family or medical leaves. However, the case for federal paid leave has been gaining momentum for the several years; that would fix many problems with the current system of unpaid leave that keep workers from taking care of family members, bonding with a new child, or taking care of serious medical illnesses.

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Today President Obama released his 2017 Budget, the final one of his presidency. Among many initiatives to strengthen the economic security of workers and retirees is one that CEPR’s been leading on for years: work-sharing (a.k.a. short-time compensation). The President’s proposal provides 1.8 billion dollars over ten years to expand work-sharing programs. 

Since the depths of the Great Recession, CEPR’s Dean Baker has been promoting the concept of work-sharing, which prevents job losses by incentivizing employers to reduce workers’ hours, rather laying them off entirely. The workers, in turn, are partially compensated for those hours with pro-rated unemployment benefits.

Work-sharing has proven to be one of the few areas of bipartisan consensus that we’ve seen over the past few years. For example, Dean has regularly partnered with conservative economist Kevin Hassett of AEI in advocating this idea. A dozen states have passed work-sharing since 2009, mostly with bipartisan majorities, to bring the total number with work-sharing programs up to 28 states plus the District of Columbia. In 2012, a bipartisan vote in Congress passed the Middle Class Tax Relief and Job Creation Act, and it included temporary funding to support states’ work-sharing programs, which has since expired. 

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In 1996, the Congressional Budget Office (CBO) projected that unemployment would rise from 5.8 to 6.0 percent the next year and stay at that rate into the 2000s. The consensus among most economists and policy experts was that 6.0 percent unemployment was the lowest the unemployment rate could fall to before it caused inflation (this rate is known as the non-accelerating inflation rate of unemployment, or NAIRU), even though inflation was already very low.

In their minds, this meant the Federal Reserve (Fed), which has an obligation to pursue low unemployment, should keep interest rates as high as necessary to prevent the unemployment rate from falling much below 6.0 percent. While it might be possible to lower interest rates to reduce unemployment, as some economists and activists advocated for, the mainstream view was that this would not be worth the cost of higher inflation.

Alan Greenspan, then chair of the Fed, and Janet Yellen, the chair today, seemed to go along with that consensus. Yellen even called low interest rates to promote growth and employment “a very confused set of arguments.”

But over the next four years, Greenspan broke with orthodoxy and used his influence to keep rates relatively low, unlike during the expansion in the 1980s. In 1997, when unemployment had dipped below 6.0 percent without an uptick in inflation, Paul Krugman doubled down on his belief that this would lead to accelerating inflation. He, like many other commentators, was wrong.

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The following reports on labor market policy were recently released:


Economic Policy Institute
States Heavily Reliant on the Energy Sector Had a Tough Year, but Most Other States Finished 2015 Heading in the Right Direction
David Cooper

The Obama Administration Pushes for a Better Response to Unemployment
Ross Eisenbrey

The H-2B Temporary Foreign Worker Program
Daniel Costa

14 States Raised Their Minimum Wage at the Beginning of 2016, Lifting the Wages of More than 4.6 Million Working People
Will Kimball

Balancing Paychecks and Public Assistance
David Cooper

Political Economy Research Institute
Is a $15 Minimum Wage Economically Feasible?
Jeannette Wicks-Lim

National Employment Law Project
How Much Do New York’s Workers Need? At Least $15 per hour – Both Upstate and Down
NELP

The Institute for Research on Labor and Employment
#39: “Current Challenges to Workers and Unions in Brazil”
Roberto Véras de Oliveira

Urban Institute
Women In Pakistan’s Urban Informal Economy
Ammar A. Malik, Hadida Majis, Husnain Fateh, Iromi Perera

Institute for Women’s Policy Research
Access to Paid Sick Time in St. Paul, Minnesota
Jenny Xia

Women Gain 55 Percent of Jobs in Last Year, 77 Percent in Last Month
Institute for Women’s Policy Research

Center for American Progress
Women and Families’ Economic Security in New Hampshire
Sarah Jane Glynn, Brendan Duke, Danielle Corley

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One of the most depressing aspects of the 2007-2009 recession was the unprecedented rise in long-term unemployment. This is depicted in the chart below.

The Rise of Long-Term Unemployment

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The economy added 151,000 jobs in January, in line with some economists' expectations. There were largely offsetting revisions to the prior two months data leaving the average change over the last three months at 231,000. The slowing was sharpest in construction, which added 18,000 jobs after adding an average of 56,500 jobs in the prior two months. The temp sector lost 25,000 jobs in January after a reported gain of the same size in December. The big job gainers were restaurants, which added 46,700 jobs, health care with a gain of 36,800, and retail with a gain of 57,700. Both restaurants and retail were likely helped by unusually good weather. (The storms hit after the survey period.)

On the household side, there was another large increase in labor force participation, with 284,000 entering the labor force, after adjusting for changes in population controls. Employment rose by 409,000 after the adjustment. Other news in the household survey was mixed. The number of involuntary part-time workers fell again and is now down by almost 800,000 over the last year. The number of people who choose to work part-time rose slightly. It is now up by almost 500,000 from its year ago level. This is a predictable effect of the ACA as people no longer need to work full-time to get health care insurance through their jobs.

On the negative side, the unemployment rate for African Americans by rose by 0.5 percentage points and for African American teens by 1.5 percentage points. This indicates the drop in December was a blip. The percentage of unemployment due to voluntary job leavers also dropped in January, indicating a lack of confidence in the labor market.

There was a large 12 cent jump in the average hourly wage in January, but this followed a month in which there was no reported rise at all. Over the last three months the wage has risen at a 2.5 percent annual rate compared to the prior three months, the same as its pace over the last year. There is little basis for believing there is any notable increase in wage growth.

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Back in 2008, Barack Obama pledged not to raise taxes on households making less than $250,000 per year (and individuals earning less than $200,000). During his administration, almost none of the tax proposals that have come from the White House have crossed that line, in effect forgoing potentially tremendous amounts of revenue. Presidential candidate Hillary Clinton has made a similar promise if she is elected president.

All this, in the name of avoiding tax increases on the “middle class.”

While $250,000 per year may seem like a “normal” income for inside-the-Beltway types, it is actually the 97th percentile of households in America.[1] That means that 97 percent of households make less than that. For individuals, $200,000 per year falls above the 98th percentile. On most scales, being in the top two or three percent would not be thought of as being in the “middle.”

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Many Americans are not aware that, because there's a cap on the amount of earnings that are subject to Social Security payroll tax, the highest-income earners among us pay a lower rate than the rest of us. For 2016, that cap is set at $118,500 per year, the same level as in 2015. (In almost all prior years, the cap increased annually with inflation, but lower gas prices were a major factor in holding the relevant inflation measure flat last year.)

That means that people who make a quarter of a million dollars per year pay this tax on less than half of their wages. Those who make a million dollars annually pay the tax on less than one-eighth of their earnings. In other words, the vast majority of us who make less than the cap pay a Social Security tax rate that's more than eight times that of millionaires.

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Percent of Newly Employed Who Were Not In Labor Force In Previous Month

The graph above is interesting. It looks at newly employed persons, a group that includes all new hires except for people who were previously employed. There has been an increasing trend during the recovery for employers to hire people who are not in the labor force rather than people who are unemployed.

Before we proceed any further, it’s worth clarifying the Bureau of Labor Statistics’ definitions of the terms employed, unemployed, and not in the labor force (all persons who are employed or unemployed are part of the labor force):

  • Employed: Someone who has a job and is currently working;
  • Unemployed: Someone who does not have a job, wants one, and has applied for a job within the past four weeks;
  • Not in the Labor Force: Someone who does not have a job and has not applied for a job within the past four weeks.

The graph above does not include people who move from one job to another. (However, it’s worth noting that job mobility has been declining – employers are generally not poaching workers from other firms. This means that employers are not competing to hire workers and therefore not raising wages.) Rather, the graph looks at newly employed persons and asks whether they were unemployed or not in the labor force in the previous month.

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The economy grew 0.7 percent in the 4th quarter, bringing its rate for the full year (4th quarter to 4th quarter) to 1.8 percent. That is a substantial slowing from the 2.5 percent rates of the prior two years. By far the major component boosting growth was consumption, which grew at a 2.2 percent annual rate, driven largely by continued strong growth in durable goods consumption, which grew at a 4.3 percent annual rate. Housing was also a big contributor to growth, expanding at an 8.1 percent annual rate and adding 0.27 percentage points to growth.

Investment and trade were both big negatives in the quarter.  The real trade investment increased by $20.7 billion in the quarter subtracting 0.47 percentage points from growth. Spending on equipment and non-residential structures both fell in the quarter, subtracting 0.3 percentage points from growth. Equipment spending has been hard hit both due to the impact of the trade deficit on manufacturing and also due to the collapse of investment in energy related sectors.

Another factor depressing growth in the quarter was the slowing of inventory investment, which subtracted 0.45 percentage points from growth. The growth in final demand in the fourth quarter was 1.2 percent.

Inflation continues to be nowhere in sight. The core PCE grew at just a 1.2 percent annual rate in the quarter, bringing the increase for the year to 1.4 percent, well below the Fed's 2.0 percent target.

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The Labor Department reported that the economy added 292,000 jobs in December. There were also upward revisions to job growth for the prior two months, bringing the three month average to 284,000. The growth was widely spread across industries, with construction adding 45,000, employment services adding 42,300, and health care 39,400. However there is still little evidence that the tighter labor market is translating into stronger wage growth. The average hourly wage reportedly fell by 1 cent in the month.

The household survey showed the unemployment rate remained at 5.0 percent, but the EPOP rose to 59.5 percent, the highest rate of the recovery. Over the last two months, employment reportedly grew by 732,000. While the monthly employment numbers are erratic, this could be evidence that people are finally re-entering the labor force as the labor market strengthens.

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The following newsletter highlights CEPR’s latest research, publications, events, and much more

—CEPR Co-director Dean Baker wrote extensively on the Federal Reserve this past month, both before and after the Fed announced that it was raising interest rates.  Dean wrote several op-eds prior to the Fed’s December meeting, including this one for Fortune, and he and he spoke about the impact of the expected rate hike on the Diane Rehm show. CEPR issued this statement on the Fed’s decision. Dean penned several op-eds after the announcement including this one for Al Jazeera. In this op-ed Dean reminded the presidential candidates that the Fed exists and In this piece for US News and World Report’s Debate Club he called the decision to raise rates a step in the wrong direction. Dean also teamed up with Josh Bivens of EPI and the folks at Fed Up to answer some frequently asked questions about the Fed. We were happy to see Senator Bernie Sanders pick up on this theme in a NYT column later in the month.

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The following is a presentations, "Domestic Outsourcing in the U.S.: A Research Agenda to Assess Trends and Effects on Job Quality," by Eileen Appelbaum (Center for Economic and Policy Research), Rosemary Batt (ILR School, Cornell University), Annette Bernhardt (IRLE/Labor Center, UC Berkeley), Susan Houseman (Upjohn Institute for Employment Research).

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The following reports on labor market policy were recently released:


Center for American Progress

Helping Firms by Helping Employees?
Nicholas Bloom, Raffaella Sadun, Daniela Scur, John Van Reenen

Economic Policy Institute
No Evidence of Labor Shortages but Congress Considering Giving H-2B Employers Access to More Exploitable and Underpaid Guest workers
Daniel Costa

Black Unemployment is Significantly Higher than White Unemployment Regardless of Educational Attainment
Valerie Wilson

Urban Institute
The Goals and Dimensions of Employer Engagement in Workforce Development Programs
Shayne Spaulding, Ananda Martin-Caughey

National Employment Law Project
Upholding Labor Standards in Home Care: How to Build Employer Accountability into America’s Fastest Growing Jobs
Sarah Leberstein, Caitlin Connolly, Irene Tung

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