Category: Labor Markets

In conversation with David Weil

Posted on by Nick Bunker

“Equitable Growth in Conversation” is a recurring series where we talk with economists and other social scientists to help us better understand whether and how economic inequality affects economic growth and stability. In this installment, Equitable Growth’s Executive Director and Chief Economist Heather Boushey talks to David Weil, currently the Peter and Deborah Wexler professor of management at Boston University’s Questrom School of Business. Weil will become the dean of the Heller School for Social Policy and Management at Brandeis University in the fall. They talk about Weil’s research on the “fissured workplace,” the influence of monopsony power, the rise of interfirm inequality, and his experience in government.

Heather Boushey: Thank you so much for taking the time to do this interview. Your research and writing on the fissured workplace has been so important for understanding what’s happening to the U.S. labor market over the past several decades. I want to run through your ideas, but I also want to tap into your experience as a policymaker. You just spent three years working for the Obama administration, putting your ideas into action, and I’d like to hear a little bit about that.

We can come back to that in the end, though.

I had the pleasure of co-editing “After Piketty: The Agenda for Economics and Inequality,” which of course is a volume you contributed to. And your chapter was on the fissured workplace. I’d like to start off this conversation by asking you to explain what you mean by that. Not everyone who’s listening to this or reading this will have heard your argument. What does a fissured labor market look like?

David Weil: The whole idea of the fissured workplace grew out of thinking about a bunch of phenomena that had been happening to the labor market, with business organizations outsourcing, subcontracting, and third-party management. I had been studying in various projects the changes in business organizations and thinking about some of their impacts on compliance with workplace standards and other labor market outcomes. And at a certain point, it started to strike me that there were common elements about these different activities.

First of all, public and private capital markets were pushing businesses throughout the 1980s to talk about what’s their core competencies and to kind of focus increasingly on what were they delivering to their customers? And what were they delivering to investors in terms of the value they’re creating. Living in a business school has made this sort of something I hear a lot as well. And as you know in economics, there’s nothing inherently wrong with specialization. It has been a driver in so much of economic history and business development. But the pressure over the past decade seemed to be at an almost laser focus.

So you started to have companies really shedding anything that wasn’t core to their definition of value creation. And that led to the second element you see in fissuring, which is this desire to shed anything that doesn’t contribute to the perceived core competency. If you look at different businesses and industries, the process of shedding plays out somewhat differently, but the basic evolution is they start by shedding things like payroll, accounting, information technology, publications, things that they can find other players to provide, usually at a lower cost.

But then you start seeing that the activities they’re shedding continues. It’s like businesses started to say, “Hey, this is actually kind of cool. I can get this stuff done, and instead of paying, let’s say a wage, to a person to do something, I am paying a price to get the same activity.” And so that shedding starts moving inward to more and more activities that are pretty central to what that business does.

So, for example, in the hotel industry in the 1980s, the branded hotel industry got out of the business of actually owning properties. Instead, they came to define their core competency as managing portfolios of brands. And so you married a strategy of franchising the property to a strategy of simply owning the brand and making sure that the brand was being delivered by these properties. The property owners would pay you revenue for the use of the brand name or the brand affiliation through royalties, advertising, and licensing fees. The franchise owners get the benefits of the brand recognition but now face the problem of managing the property and hiring the workforce. We can talk about any number of industries where this process also started to happen. The pathways differ, but in each case, they’re shedding activities as almost a complement to pursuit of the chosen core competency.

But the third piece, which is really important in my mind to understand both the fissuring phenomenon and its public policy implications, is that companies needed some kind of glue to hold the first two elements together—like the hotel brand’s standards in the above example. Why? Because if I’m trying to maximize the value of my core competency but I’m shedding activities to other players, those businesses can undermine my core competency. So the third piece is creating some kind of organizational glue to make sure those other entities don’t stray, that they keep to task, that their incentives are aligned with the main company’s in a way that you still have the product delivered to quality or technical or time specifications, or all of the above.

This is why I think franchising started to spread to lots of sectors. It’s a form of business organization that allows you to shed and yet control. That’s the nature of a franchise agreement.

I think information technology facilitated this because you have lower-cost mechanisms to monitor subsidiary organizations or the networks of organizations that make up a fissured workplace. I think Uber is an example of exactly this, in probably the most technologically advanced form out there. But years ago I had studied the evolution of the supply chain in the retail industry, and the standards that came with those business arrangements are also about the glue. So you can find this glue manifesting itself in different places. That’s the key third element.

The idea of fissuring is really the combination of those three things applied in different settings that has the net effect of breaking apart the employee-employer relationship. Take the hotel example. Once the property was franchised, the owners of the property had limited knowledge about running a hotel. So you’ve got third-party managers running the hotel owned by a different entity under the specifications of the brand. And those third-party managers typically started hiring staffing agencies. They didn’t want to be the employers either. And so you have this deepening of the fissures. Subcontracting begets subcontracting.

Fissures like this also spread. They spread to other industries. They spread to other parts of the occupational distribution of a given industry. And the end result is you have broken apart the employment relationships. Sometimes this reflects employers trying to avoid their own liability under workplace laws and regulations. And that’s an important part of it.

But I think another part of the phenomenon that I’ve always been trying to emphasize is that it goes beyond avoidance of liability. Because if you think this is just about employers trying to weasel out of their responsibilities, you miss this more fundamental change, in my mind, that’s happening in business organization. And if you’re trying to ultimately deal with the consequences of that, then you’re underestimating the difficulty of unwinding that behavior or changing that behavior in some way to deal with the consequences in the labor market.

Boushey: So part of what firms got rid of are the management problems with all the subcontracting because managing humans is difficult, and nobody wants that piece, and so they want to separate that from all of the actually profitable parts of the enterprise. But they’re paying a price rather than a wage, right, which of course is what Uber does. Yet there are all these rules, which means the company is still in control. Traditionally, we’d have this distinction between a contract and being an employee. But it seems like you’re suggesting that there’s something more to the management problem than just the responsibility.

Weil: No, I think you’re exactly right about both elements. Managing people is messy. And businesses, if they can push that to someone else who can do that problem for them more effectively, they’re going to do it.

There’s a really interesting guy in capital markets. You’ve probably met this guy, in the financial services industry, Steven Berkenfeld, who’s at Barclays Bank. Steve has been thinking a lot about the future of work, and I’ve appeared in some of these future-work seminars with him. He likes to quote Henry Ford, who asked why he had to get the rest of the worker when all he wanted was his hands. Steve has talked about this insight in the financial services industry after the financial collapse, when there was a scrambling to cut costs as much as possible. Some of that was accomplished by companies shifting work out of financial services industries to contractors.

This vignette from that industry, which I think is suggestive of what you’re talking about, is once they did it, they suddenly said, “Oh my gosh, so much better. We don’t have to deal with messy humans. We can just pay for this other company to deal with it. And we don’t have to look into that box anymore.”

But I think this is a public policy fallacy because they are still setting so many of the terms about what that box does. In terms of how we think about this in terms of public policies, what I sometimes call the lead company is still dictating outcomes, performance goals, and very specific things that they want those entities to do. In so many ways, their hands are still all over matters that are still about the employment relationship. But they have created this market distinction between their activities and those of the subsidiary.

I think the management piece is a big part of it, but again, with the caveat that they have created a glue to make sure they follow what is required to achieve core outcomes for the lead business.

But another critical impact of fissuring that you noted is its impact on the setting of wages. This is what I wrote about in my chapter for “After Piketty” that you edited. The wage-setting process is transformed by shifting out work. Why is it that companies set single wages for a job? Why do they set standard wages rather than be a price discriminator and set a wage so that each worker gets only their marginal product of labor? It’s because people are working within the four walls of the same entity. We are social animals, and equity norms come up. And people compare their wages, whether they are allowed to or not.

Boushey: Yes, they do.

Weil: People know. People know. They are very aware. And because people are aware, employers are aware. And so you have more uniform wage policies. You have standard wages.

There was a big literature in the 1990s about why did large firms pay more to certain workers than otherwise equal workers in smaller firms? And the answer, to me the most compelling answer, is things like fairness and equity. That if you’re in the structure, if you are a janitor working at a GM facility, you know what the people on the assembly line are earning. And that tends to pull up your pay.

And we know from the work of [University of Massachusetts-Amherst economist] Arindrajit Dube and [Boston University economist] Johannes Schmieder that there is a premium for being in-house versus broken away from the mothership. Once work is being paid for by a price as opposed to a wage, then it’s no longer a wage-setting problem, and so a lot of those equity norms change.

From an employer’s point of view, they can breathe a sigh of relief. They don’t have to deal with that anymore. They don’t have to deal with the fact that it’s complicated to think about “What should I be paying the folks who are doing the landscaping because they’re no longer my employees? They’re just this thing I outsource.”

I think that has consequences. What’s driving inequality, to me, comes back to the fissured workplace. It comes from the consequence of shifting the wage-setting problem to all these other entities and kind of getting out of that fairness bind that employers otherwise have to deal with differently.

Boushey: Exactly. Saying that a janitor is going to be paid a higher wage in a larger firm means that labor markets aren’t perfectly competitive, right? So one of the questions we’ve become a little obsessed with at Equitable Growth is market structure and competition and monopoly and monopsonies. Talk to us for a little bit about the role of monopsony in the fissuring of the workplace.

Weil: Part of the way I view fissuring is as a way to deal with the problem of setting monopsony wages. It’s hard to do that if they’re your employees. It’s much easier to do if I am setting prices for a bunch of janitorial firms in different facilities. Then I have a bunch of prices and I put it out to competition. And if the janitor in Facility A is being paid differently than the janitor in Facility B, that’s not my problem. I’ve just hired two different firms. And once you break out of the problem of having a single price, what do you do? You do price discrimination.

In my mind, by fissuring, you are able to do essentially wage discrimination without having to set wages. You’re doing it through the pricing mechanism. I think this has had a big effect, in particular, on lower-wage work. You are pushing that kind of work to a set of firms who are in higher levels of competition with each other. Studying the labor market from my perspective would certainly lead me to believe that labor markets are far from perfect, but I think companies are pushing wages closer and closer to what we would think of as marginal productivity. And some of the rents that used to be collected by workers because they were inside a firm, even a nonunion firm and certainly in a unionized setting, are now going back to the companies because the companies are playing close to what they actually need to pay to entice people to do that work.

At the same time, you have these firms that are shedding activities but also are rapidly moving up. So if you are lucky enough to be in the Google mothership, you soar up with that wage structure. You’re moving up because your company is moving up. And wherever you are, whether you’re an engineer or an executive, the whole pay structure’s moving up. And then you have these businesses in the shedded parts of the economy where those pay structures are being pushed downward, closer to the marginal productivity of labor. And even the executives in those businesses who are providing these services for the lead companies in the economy are not doing nearly as well because they’ve been separated from the same kind of mothership relationship. I think we really need to better understand how a wage is determined in those enterprises.

Boushey: So this leads to the issue around who captures the rents. There’s a body of research showing that the distribution between the amount of national income going to labor versus going to capital has been changing over time. Increasingly, it seems like one of the big research questions out there is “What is the connection between the two?” Where do you think some of the research questions are that you think are most pressing for us to start investigating?

Weil: There’s this paper right now that [Massachusetts Institute of Technology economist David] Autor and [Harvard University economist Lawrence] Katz and [MIT economist John] Van Reenan have about the diminishing labor share tied to essentially increased concentration of firms, or those industries with higher concentration ratios on the product market side are also ones where you see diminished share of income going to labor. I think that is a phenomenon very consistent with what I’m talking about, about the separation and the rushing apart of businesses from those that are still able to capture the value and capture the rents. And at the end of the day, they might have a lower labor share because of the part of the work they’re doing.

If you are a major hotel chain right now, a hotel brand, a big part of what you do has to do with creating and sustaining brands. It’s not employing people who are cleaning rooms anymore. That’s going to other entities. This is the mechanism that actually allows or enables that separation to exist. And what I think we don’t know enough about is whether the wage-setting policies in both the entities are moving down in the distribution of businesses and the entities that are quickly moving up the distribution.

You know, I think in one sense the entities that—and here I’m thinking about this interesting experimental literature that I associate with people like Ernst Fehr, who has studied equity norms and fairness norms inside businesses, inside firms. I think a lot of that probably still holds. That you still are very cognizant of pay differentials.

You were joking before about everyone in firms knowing what other people are being paid, and therefore employers want to keep everyone happy because they don’t want to lose people. But I think we need to know more about the moment when employers say, “You know what, wouldn’t it be nicer if we shifted them out?”

I don’t think the shifting out has stopped. I am fascinated and concerned by the increasing number of higher-education jobs that are being shifted out. And I think that again becomes the operative question. It isn’t so much “How do I set salaries of all of those in the mothership?” It’s “Who am I deciding to jettison next?” And if you look at the structure of law firms, they’ve been transformed too. More and more of the mundane, day-to-day legal work has been shifted out to contract kinds of operations in the legal field. And you’ve had this separation of earnings. If you are a lawyer but no longer in one of these decreasingly common big law firms, then your returns as a lawyer have gone down substantially.

I’ve always found it very interesting when I talk about some of these things with journalists. They quickly say, “Oh yes, you’ve just described my life.” You know, “I would have been a full-time reporter.”

Boushey: Now they’re doing freelance.

Weil: Yes. Everyone’s freelance. A lot of the underlying logic of the fissured workplace I think has now spread to lead companies and caused them to think more and more about “Who else can I shed?” That, to me, is part of what the research agenda needs to continue to look at. What are noncompete agreements about? Why are noncompete agreements becoming so common? There’s the absurd noncompete agreement that Jimmy John’s hourly employees had to sign. It would not surprise me a bit that we’re going to see more and more of that work of people with higher educations also being affected by these trends.

Boushey: Are there any other research questions that you think are really pressing? And I ask in part because Equitable Growth is a grantmaking entity. We are looking for scholarship to support, and we’re trying to entice people to ask research questions that are really important to policymakers. Your advice would be super helpful.

Weil: I think we don’t understand enough about wage norms. I’m primarily now thinking about those labor markets where people are more subjected to the brutal pressure of the market. We still don’t know enough about where referent wages are and how you can affect those, and what people look to, and how that might vary. How important are social networks to the propagation of wage norms? How do they work out? How geographically focused are they? How do they play out in labor markets where ethnicity is important?

I think all this is important for its own sake in understanding the dynamics of this increasingly fissured workplace. But I also think from a public policy point of view, our policies don’t pay enough attention to how wage norms are set and then as a matter of policy to how to move those upward. I would offer as an anecdote the “Fight for $15,” which I would cast as a really successful social movement. By trying to affect the wage norm, that $15 becomes salient. I think it’d be fascinating to know where you have labor markets that feed, let’s say the fast food industry, where you’ve seen that change in the reservation wage because of the impact of that social movement.

Boushey: In an era where so few workers are unionized, to what extent does that become the marker of a good firm? A personal anecdote before you answer the question. I’m working with someone, and we’re looking for a venue for an event. But it’s in a place where there are no unionized hotels. And so one question we have is “Could we use $15 as the demarcation that takes into account some sort of labor standards?”

Weil: Right. Right. Right. Yes, and I think that’s a great example. I think I’ve always been somewhat of a skeptic of corporate codes of conduct and things like that. I think I’ve been more skeptical because I find often that people who are promoting those codes don’t seem to have an understanding of some of the issues of wage norms and how what they’re trying to do might fit into that. That being said, I think if we did have a better understanding, you could see how the decisions of private players and other innovative forms might be able to ultimately affect things that we care about in a public policy consequence.

Right now, in a world where we don’t know what the federal government’s going to be doing in terms of protecting basic labor standards, it seems to me that’s even more important because you need to then act on those wage norms, to try to do what we would normally do through minimum wage or basic labor standards policies.

Boushey: Well, so let’s use that as a segue to you just coming out of surveying for three years in [the U.S. Labor Department’s] Wage and Hour [Division], making decisions around policy. Is there an example of something where your research influenced what you and other policymakers did?

Is there a good example of something where you were studying something and then made something happen or tried to make it happen?

Weil: I came into Wage and Hour having had the wonderful opportunity of advising it for a number of years. I was lucky enough to think about some of these issues before coming into it. I think one of the hardest things walking into an agency like that is if you don’t have an agenda, the day-to-day problems that come across the desk can completely swamp you. And if you don’t have a vision about what you’re trying to do as an agency, or as a leader in an agency, it’s very difficult to chart a course.

I came in very much with having had an opportunity already to think about and, in some sense, engage with the department on what kind of changes you needed to make to deal with the fissured workplace. I really thought about my job in terms of two huge external pressures.

One was the fissured workplace and the complexities it creates for a labor standards agency. Who’s the employer and who should we be worried about compliance is a very complicated thing to deal with. That problem overlays on a long-standing problem, which is a resources allocation problem. The Wage and Hour Division oversees laws that cover 135 million workers in 7.3 million workplaces. President Barack Obama had increased the size of our investigation force from its all-time low to 1,000 investigators. So we had 1,000 investigators to oversee 7.3 million workplaces. And those workplaces were increasingly fissured.

My obsession was how do we move more and more of our resources to a proactive approach on enforcement where you’re explicitly trying really to change behavior. Not just to recover back wages for workers. That’s obviously really important. But in my view, given those two forces, what you really have to be thinking about is changing the behavior of organizations so they comply in the future. And using every tool you have available to you, which starts with enforcement.

We had not historically used all of our enforcement tools. We had tools in the tool chest we had neglected to use. So we started to aggressively recover liquidated damages along with back wages. We started to use civil monetary penalties much more aggressively. We started to dust off what the law gave us and use those tools more effectively. We changed the relationship with our solicitor’s office so that our investigators were often thinking about “What or how can this translate into something that will really have greater effect through a litigation-based strategy?” Those are all tools of trying to use your enforcement tools to greater effect.

Secondly, we shifted away from being an agency where 75 percent of our investigations came out of complaints, which is typical for most enforcement agencies. Our view was that if you do that, you’re inherently reactive. And even more so, we wanted to focus on low-wage, vulnerable workers, who are obviously the ones most affected by violations. If you just follow complaints, you’re kind of thinking that the people who complain are those people, and they’re not. And so we had a lot of statistical analysis done.

And this was one of the projects I’d worked on years before, to show that industries with the highest levels of problems, objectively measured, were some of the ones with the lowest complaint rates. So you have to move an agency away from a complaint-driven culture toward one that’s using more of its resources for proactive, essentially agency-initiated investigations.

And by the time I left, almost 50 percent of our investigations were directed proactive ones. And the 50 percent that remained, complaints, we had changed the mechanism used for triaging. We were triaging incoming complaints so that it was no longer first in, first out but rather evaluating the incoming complaint and asking questions like “Does this complaint suggest a bigger problem? Is this a complaint that maps onto our larger proactive initiatives?”

And then another major element we focused on, and this goes to the fissured workplace, is where the back wages are owed because those workers are usually living on the bottom of some fissured structure, such as at the subcontractor level. And if you think about it, that subcontractor’s CEO, so-called CEO, is probably a small-time operator who’s got a very thin margin because the price they’re being paid is being set by someone up the chain, and so on. We really took a lot of heat from saying, “Well, the statute says there’s joint employer responsibility.” But we had a major initiative on joint employment so that we could make sure that pressure was applied to all relevant parties that contributed to the violation.

We put a lot of energy into misclassification of workers because, again, I think that misclassifying someone as an independent contractor rather than an employee is often something that happens at the bottom of a fissured structure. We wanted to say, “Look, you can’t just call people independent contractors because you don’t want to have to bother with all of the things associated with an employment relationship.”

Whether through the mechanism of joint employment, or simply the mechanism of saying “Look, you might not be the employer of record but if you are sitting as a key player in this whole structure, then you are setting standards. You are hiring staffing agencies. And therefore, we want you at the table.” And we did a lot of different initiatives to pursue this broader approach to enforcement and outreach.

One of the best examples, I think, is in the summer of 2016, when I signed an agreement with president and CEO Suzanne Greco of Subway sandwiches to create a voluntary compliance arrangement across that company’s franchise system. Subway understood and acknowledged their interest in improving compliance among their 13,000 franchised outlets and the tens of thousands of employees who worked for them. The company had a history of years and years of problems and violations. The agreement was built on my agency’s and the company’s mutual interest in addressing those problems in a more systemic fashion. That was the kind of agreement I was happy to sign partly because I wanted to see if that kind of thing could also work and partly because it was another way of bringing in a higher level of a fissured structure to the table and figuring out “How can you move compliance in that way?”

All of those ways and many other efforts were the long game we were trying to play. And I think we really did move the needle in a lot of those areas.

Boushey: Well, it also just shows the importance of government spending if you’re asking resource questions that are important in the real world, and thinking about how we’re going to apply them so that when you have that opportunity, you’re really able to take that depth of knowledge and make it into something real. It’s very impressive.

Thank you so much for the interview. But mostly, thank you for your service and all the work you’ve done to make workplaces better for millions of Americans.

Weil: Thank you.

Equitable Growth in Conversation: an interview with William A. Darity Jr. (“Sandy”) of Duke University

Posted on by Emilie Openchowski

“Equitable Growth in Conversation” is a recurring series where we talk with economists and other social scientists to help us better understand whether and how economic inequality affects economic growth and stability.

In this installment, Equitable Growth’s Research Director John Schmitt talks with economist William A. Darity Jr. (“Sandy”), the Samuel DuBois Cook Professor of Public Policy at Duke University’s Sanford School of Public Policy, about the importance of stratification economics in understanding U.S. economic growth and inequality. Read their conversation below.

John Schmitt: I have not too many questions, but hopefully we’ll have a good conversation. You are the founder of stratification economics, which you pioneered with a group that includes Darrick Hamilton, James Stewart, Gregory Price, and others. How would you describe the main features of stratification economics? And how would you differentiate them from the kind of standard, neoclassical economics that most of us were taught in graduate school or in undergraduate economics classes?

Sandy Darity: So, I think the core of stratification economics offers a structural rather than a behavioral explanation for economic inequality between socially identified groups—whether they’re racial groups, ethnic groups, gender groups, or groups that are differentiated on some other basis such as religious affiliation, for that matter. Stratification economics goes against the grain of trying to argue that the kinds of differences that we observe and economic outcomes are attributable to cultural practices or some forms of dysfunctional behavior on the part of the group that’s in the relatively inferior position.

We argue instead that economists and other social scientists have to look at social structures and policies to really explain why those differences exist. What might be unique about stratification economics is the particular way in which it offers the structural analysis of these kinds of inequalities, and that particular way is by focusing on the importance of relative group position from the standpoint of participants in our social world.

That persons compare themselves against others is based on research on happiness, which suggests that the major factor in determining whether a person reports feeling happy is actually their perception of their position in comparison with others—not their absolute position, but their relative position. What stratification economics brings on the scene is a specific view of exactly with whom individuals are comparing themselves.

Not only are folks making comparisons with individuals who they perceive as being part of their own social group, but they also are making comparisons about their group’s position.

The cross-group comparisons are made against the social groups that are “the other” for them. It’s those two sets of comparisons that drive behavior and drive people to actually act in ways that are supportive of the status of their relevant social group. I think traditional economics doesn’t pay much attention to the comparative dimension, and it certainly doesn’t pay much attention to the comparative dimension in terms of an individual’s sense of group identity or group affiliation.

I do want to add that a lot of this work is deeply collaborative. And I think it’s important that my collaborators be recognized, particularly [associate professor of economics and urban policy] Darrick Hamilton at the New School, Mark Paul, who is a postdoctoral fellow here at the Cook Center at Duke, and Khai Zaw, who is a statistical researcher at the Cook Center, who all have worked very closely with me.

And there’s a string of folks who have been involved in various dimensions of the development of stratification economics as a field, among them economists Greg Price [Morehouse College], James Stewart [Pennsylvania State University], Patrick Mason [Florida State University], Marie Mora [University of Texas at Rio Grande Valley], Alberto Dávila [University of Texas at Rio Grande Valley], Sue Stockly [Eastern New Mexico University], and Stephanie Seguino [University of Vermont].

So even though I don’t think stratification economics is sweeping the economics profession, there’s actually a significant core of folks who are embracing the approach, and, hopefully, the numbers will grow.

Schmitt: So, you make the comment about where conventional economics falls short. Can you give an example or two of a social or economic problem where you think that the tools developed in stratification economics give a better explanation for an economic or social phenomenon than the standard economics view?

Darity: One example would be the persistence of discrimination under competitive conditions. In standard economics, there’s very little room or terrain for trying to explain why we might observe sustained discriminatory practices by one group toward the other, particularly discriminatory practices that have economic content.

In stratification economics, it’s fairly straightforward to try to come up with an explanation that makes some sense. Because of the emphasis in stratification economics on what we might call tribal affiliation—or team affiliation or group affiliation—to the extent that people value those kinds of affiliations and the position of their team, group, or tribe, then they will engage in collaborative ways, whether those collaborative ways are fully conscious or whether they are implicit.

They’ll engage in collaborative ways to preserve the position of their group. And so discrimination can be something that’s sustained. And even more strongly than that, stratification economics would suggest that if the difference between the two groups narrows, the group on top will intensify its discriminatory practices. If it becomes harder to exclude the out-group because the out-group is becoming better educated or has other kinds of indicators that suggest that it is comparably productive to members of the in-group, then the in-group will intensify the degree of discrimination that it practices toward the out-group. I think that conventional economics would never actually see that phenomenon.

Schmitt: You’ve described stratification economics as combining influences from economics, sociology, and social psychology, and it’s obvious in a lot of what you just described about the persistence of discrimination. What led you to blend those things together? What are the influences or the ways that brought you to piece the various parts of this together?

Darity: You said at the outset that I was the founder of stratification economics—I think it’s maybe more accurate to say that I’m the person who gave this set of ideas a label. But I don’t think that these ideas originated with me, and I think that to a large extent, I’ve synthesized ideas from others. But I do think that these ideas from others are extremely powerful and influenced the way in which I began to think about this. I’ve long been wanting to bypass arguments for intergroup inequality that are predicated on the notion that there’s something fundamentally inferior about one of the two groups.

So from economics, for example, you could draw upon the work of the idiosyncratic early 20th century economist Thorstein Veblen, who, for example, in The Theory of the Leisure Class, talks about the significance of comparisons within your group versus comparisons vis-a-vis the group that is supposed to be outside of yours. And that translated into the forgotten theory of consumption—aggregate consumption in economics—that the late economist James Duesenberry developed, called the relative income hypothesis. People frequently discard that one when they think about theories of aggregate consumption, but that’s a body of work that influenced my way of thinking about some of these issues.

From sociology, I think that the most important contribution probably is Herbert Blumer’s 1958 essay on prejudice as a function of relative group position. He challenged the view that prejudice is something that we can identify as some sort of individual defect, arguing instead that prejudice is really something that’s functional for preserving or extending the relative position of an advantaged social group. That, to me, is very much stratification economics, without the label.

Then there’s a whole body of work about notions of individual productivity being influenced by the context in which people are performing tasks. This might include employment in a hostile workplace environment for an individual from a group that is subjected to stigma, which will affect the individual’s capacity to perform. And it’s not just the question of what educational credentials they have, or what kind of training they have, or what kind of motivation they have. It’s also a question of the atmosphere in which they are functioning. And so from social psychology, I took the phenomenon that has been developed by researchers such as Claude Steele [emeritus professor at Stanford and former vice chancellor and provost at the University of California, Berkeley] of stereotype threat as another dimension, or angle, for thinking about how individual productivity can be distorted or reduced as a consequence of the social climate that they face. In short, in the jargon we frequently use in economics, individual productivity is endogenous.

Schmitt: In a lot of your recent work, you’ve turned your attention to the issue of wealth inequality. What led you to make that a focus? And what do you think are the most important findings from that research?

Darity: My turn to the focus on wealth inequality came about for two reasons. One is because of an increasing recognition that these types of disparities are the most important indicator of differences in economic well-being. The second reason is because the work that I have begun to do on reparations kept pointing me back to the racial wealth gap as the most important manifestation of the effects of racism and discrimination over time in the United States.

Those two considerations kept directing me toward an emphasis on wealth inequality. But it is also my sense that all economic inequalities—particularly group-based economic inequalities unfortunately—have been assigned to be the purview of labor economists.

Of course, the work that labor economists do can point us toward some explanations for disparities that are associated with earnings and occupational status, but their perspective doesn’t take us very far in explaining wealth inequalities.

Stratification economics offered a relatively simple but, I think, much more powerful explanation for why we observe wealth inequality in general but also wealth inequality by race. One of the big findings that has emerged from our work, which is now being replicated in other people’s research, is a very simple but important conclusion that education in and of itself does not eliminate racial economic disparity.

There are tons of people who focus on education as the answer. I certainly think improving education for everyone is a great idea, but it’s not going to close the racial wealth gap. Thus far, it has not eliminated discriminatory differences in wages or in unemployment rates. Simply put, education is far from enough to solve the kinds of disparities that we are concerned about.

Schmitt: You did your Ph.D. at the Massachusetts Institute of Technology in the late 1970s, so you’ve been in the business for a little while. What’s your take on how the economics profession has developed, say over the past 30 years or so? Do you think that it is moving in a good direction, bad direction, indifferent? Do you think it is more or less open to some of the ideas that we’ve been talking about right now?

Darity: That’s a tough one. I don’t know that in my experience it’s been particularly open to any of these ideas. I think that there’s been a greater receptiveness or interest in these ideas from scholars in other disciplines. To be frank, I think that the economics profession has a certain anti-intellectualism. That’s a pretty strong statement, but I mean that in the sense that if you think about intellectual activity as involving wide-ranging curiosity and also wide-ranging interests in research unbounded by disciplinary lines, I think the economists are very, very inclined to be somewhat incurious and to treat every problem from the standpoint of a fixed package of ideas.

In that sense, I think there’s a certain anti-intellectualism, and therefore, very little receptiveness to ideas that go outside of the standard box. I’m not sure the conditions are a lot different now in the economics profession; I mean, there’s a sense in which I think it’s long been that way, particularly ever since the quantification revolution in economics that largely was spearheaded by one of my mentors, [the late Nobel Laureate] Paul Samuelson. The process of making economics appear to be more of a mathematical science was accompanied by driving out some of the more interesting ideas and approaches, rather than incorporating them into the process of making it a mathematical science.

Schmitt: Do you take any comfort from the rise of informational economics, or search models, or the rise of the importance of behavioral economics?

Darity: If you are talking about search models that are associated with search and employment, I’m not a real enthusiast for imperfectionism. Because the implication is that if we did not have those frictions, if we did not have those imperfections, then everything would be glorious. But it is my view that a smoothly functioning market economy would still generate high degrees of inequality, and certain kinds of inequities, because those processes pay very little attention to inherited advantages and disadvantages. I don’t necessarily see imperfectionist approaches as providing a solution. I particularly don’t like search theories of unemployment because I think what they say is people are out of work because they are looking for work, rather than people are looking for work because they are out of work.

Stratification economics actually attempts to be somewhat of a departure from behavioral economics. Behavioral economics, to my way of understanding it, suggests that people actually behave irrationally, and so it’s trying to explore and understand irrational behavior, whereas the whole historical thrust of much of economics has been oriented toward suggesting that there is rationality to people’s behavior. Stratification economics accepts the premise that there’s a rationality to behavior, but it also presumes that there is rationality to the behavior of social groups, as well as individuals. It’s a rationality that’s predicated on the notion that these groups frequently, or typically, act as if they view themselves as being in competition with one another.

Schmitt: One of the things that’s important for us at the Washington Center for Equitable Growth is to look at the rise of inequality from a high level, beginning at the end of the 1970s to an extremely high level now, based on almost any metric you want to use. Do you have a working model in your mind for what explains that big increase in inequality over this period? And do you have any guidance as to what policymakers could do to turn things around?

Darity: One of the things that I mentioned at the start of our conversation was the importance of social structures and policies. And I think that the run-up in inequality that we’ve observed in recent years is closely tied to a set of social policies that have produced virtually unlimited capacity to generate extraordinary levels of wealth. One is a form of profit sharing, which is what we call super salaries for high-level executives at the nation’s most highly resourced corporations. Another is the deregulation of the financial markets, while maintaining a moral hazard problem, in the sense that the investment bankers can anticipate that they’ll be bailed out in the event of a crisis. And a third is the reform of the tax system, where we’ve moved from having marginal tax rates for folks at the upper end of the income distribution, in the vicinity of 90 percent to less than 30 percent today. The Great Recession also contributed to a greater explosion or extension of inequality, both in wealth and in income.

In short, I think we can look directly at a set of policies and, more recently, at the advent of the Great Recession to understand the rise in economic inequality.

Schmitt: So my last question: Do you have any advice for a young person who wants to get a Ph.D. in economics? Or a Ph.D. in a social science? In particular, do you recommend studying economics?

Darity: I definitely don’t want to forsake the economics profession. I still have hope that there will be other, younger economists who will try to bring very fresh perspectives to the way in which we conduct economic research. I would encourage folks to go into the field, but I’d want them to have their eyes open. I think that they need to be very selective about which institutions they choose to attend to try to do their work.

If graduate students have ideas that are not conventional or are unorthodox, then they need to have their eyes set on trying to identify departments that have the flexibility and open-mindedness to allow them to pursue the kind of approaches that they want to undertake. There are some, and it’s not just departments that we view as being explicitly heterodox. I think that there are some departments that are more conventional, where there are faculty members who are extremely open-minded, in comparison with other places.

A new graduate student really has to make a very careful choice about which department to go to, and once there, who they should work with in that department. I would say that’s the research that needs to be done carefully, rather than telling people they shouldn’t go into economics.

Schmitt: Thank you so much, Sandy, for your time.

Darity: Thanks for inviting me to do this. Take care.

Supply chains and equitable growth

Posted on by Austin Clemens

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About the author: Susan Helper is the Frank Tracy Carlton Professor of Economics at the Weatherhead School of Management at Case Western University.

The U.S. economy has undergone a structural transformation in recent decades. Large firms have shifted from doing many activities in-house to buying goods and services from a complex web of other companies. These outside suppliers make components, and provide services in areas such as logistics, cleaning, and information technology. Although this change in the structure of supply chains began decades ago, neither public policy nor business practice have adequately dealt with the challenges posed by this restructuring. As a result, weakness in supply chains threatens U.S. competitiveness by undermining innovation and contributes to the erosion of U.S. workers’ standard of living. This essay suggests policies to promote supply chain structures that stimulate equitable growth—that is, policies that both promote innovation and also insure that the gains from innovation are broadly shared.

The role of supply chains
in the U.S. economy

A supply chain links companies, often in multiple industries and multiple locations, to design, produce components, assemble and distribute a final product, such as a car, a computer, or a restaurant meal.1 For much of the 20th century, a significant part of the U.S. economy was characterized by supply chains that were vertically integrated.2 Beginning in the 1970s and 1980s, large firms in many industries began to sell off assets and outsource work. Today, a lead firm typically designs products and directs production by multiple tiers of suppliers in many locations, but does not own most of these suppliers.3

Delivering equitable growth

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Supply chains made up of these financially independent firms are now the largest driver of firms’ costs. The average U.S.-based multinational firm buys intermediate inputs that comprise about 75 percent of the value of its output; a domestically owned firm buys intermediate inputs equal to about 50 percent of output value.4 Contrary to the common impression, most of these suppliers are domestic, even in manufacturing.5 These outsourced supply chains differ from vertical integration in that the lead firm does not own supplier facilities. The lead firm benefits from this arrangement by gaining access to products made by suppliers with experience in making similar products for multiple customers and by not being responsible for subsidiaries’ fixed costs.

These supply chains also typically differ from economists’ model of perfect competition, in which transactions between firms are at arm’s length and the only information that crosses firm boundaries is price information. In contrast, many suppliers make products specifically tailored to meet the needs of the lead firm and frequently exchange information with the lead firm regarding designs, production processes, and future plans. Lead firms find this arrangement advantageous because they are able to quickly obtain components tailored to their specific needs. The complementary disadvantage is that firms are often unable to change suppliers easily.

On one hand, sharing suppliers with other lead firms has significant benefits, such as shared knowledge across customers and reduced fixed costs. On the other hand, lead firms may lack incentive to invest in upgrading the supplier’s capabilities if that supplier may also use those capabilities to serve a competitor. Firms’ success depends upon having robust networks of suppliers, but no one firm is responsible for keeping these networks healthy.

Implications of supply chain
structure for innovation

Because innovation is concentrated in manufacturing—two-thirds of private-sector research and development is performed in manufacturing—this section looks at supply chains in manufacturing only (data is not readily available for innovation in other sectors.)6

Firms with fewer than 500 employees are an increasing share of manufacturing employment, accounting for 42 percent of such workers in 2012. These small firms struggle at each phase of the innovation process. They are only 15 percent as likely to conduct research and development as large firms. Small firms also struggle to obtain financing and a first customer to help them commercialize a new product or process. Finally, small manufacturers have trouble adopting new products or processes developed by others, due to difficulty in learning about and financing new technology. As a result, small manufacturers are only 60 percent as productive as large firms.7

A skeptic may ask why large lead firms cannot innovate enough to support their entire production network. But problems such as reducing the vibration of a wind turbine requires holistic problem-solving; a machine composed of many parts that exert strong forces on each other cannot simply be divided into one problem for the gearbox manufacturer to solve, one for the rotor manufacturer to solve, and another for the assembly team to solve. Limiting innovation to lead firms deprives the supply chain of insights that come from being very close to a particular type of production or use.8 In addition, long-term supplier-customer relationships built upon trust and collaboration best facilitate progress toward these goals; lack of such relationships accounts for many of the problems U.S. industries face in moving new technologies from lab to market.

Implications of supply chain
structure for job quality

Workers are employed in supply chains in a variety of ways. Instead of being hired directly by lead firms as regular employees, workers may be hired by temporary help agencies and are often referred to as “contingent workers.” Alternatively, they may be hired as regular workers at supplier firms or as independent contractors.

A variety of studies find that these forms of outsourcing of employment, especially as carried out in the United States, typically create undesirable outcomes for workers in areas such as wages, benefits, job security, and safety.9 Contingent workers earn 10.5 percent less per hour and 47.9 percent less per year than non-contingent workers, and are more likely to suffer workplace injury.10 Workers employed at suppliers, even as regular workers, generally earn less than workers at lead firms, which tend to be larger.

Wages are typically lower at suppliers than at lead firms because of the barriers to innovation discussed above, which reduce productivity; the absence of pressures to reduce wage differentials within a firm due to norms of fairness; and greater pressure on wages at outside suppliers, which are more easily replaced than are internal divisions.

Market and network
failures in supply chains

Three forms of market failure contribute to the central tendency of U.S. supply chains to suppress innovation and make jobs worse:

  • Free-rider problems between firms. When a lead firm makes investments in upgrading its suppliers—by providing technical assistance to suppliers, training supplier workers, or helping them invest in new equipment—some of this improved capability will often spill over to benefit a supplier’s other customers, including the lead firm’s rivals. Lead firms thus have less incentive to invest in their suppliers than would be socially beneficial.11
  • Siloes within firms. Internal conflicts between departments within a lead firm can mean a focus on finding suppliers with low prices rather than on those providing high quality and innovation. An easy way for firms to evaluate their purchasing departments, for example, is the extent to which they reduce the price per unit they buy. A purchasing agent could thus be rewarded for choosing a supplier whose costs are $1,000 less than a rival supplier’s—even if that supplier’s skimping on quality control later causes the shutdown of a production line that costs the operations department $100,000. It may seem unlikely that sophisticated companies would fall prey to such problems, but quality and innovation are harder to measure than prices, and their benefits often accrue to departments other than purchasing.12
  • Profit protection. Outsourcing of work often reduces workers’ access to profits earned by the lead firm. Organizational structures tend to minimize wage differentials within firms, due to both norms of fairness and to a desire to promote cooperation within an organization. Firms with a high degree of market power have lots of profits to protect, which they often do by adopting policies that make their suppliers interchangeable, even at a cost to efficiency.13

The result of these market failures is an emphasis in the United States on arm’s length rather than collaborative governance of supply chains, and a hollowing out of productive eco-systems, as firms set up incentives for their purchasing departments that privilege supplier firms that can win competitive bidding wars. These “winners” tend to be small firms with low expenditures on overhead costs, covering such things as salaries for managers and engineers and worker training. In extreme cases, such as garment production or janitorial services, competition is so fierce that firms compete in part by violating laws on safety, minimum wages, overtime, and disposal of toxic waste. In the rare instances in which these firms are caught, they often can file for bankruptcy and re-open under another name.14

Policies to promote innovative
supply chains with good jobs

Outsourcing has its advantages, principally in making possible a potentially efficient division of labor in which specialist firms can achieve economies of scale and diffuse best practices by serving a variety of customers. Yet lead firms’ zealous embrace of the non-collaborative version of this strategy has resulted in significant weaknesses in innovation and job quality in the United States. Tackling these challenges will help address some root causes of wage inequality and productivity stagnation in U.S. manufacturing and service industries. Policies in five areas will help:

Encourage firms to adopt collaborative supply-chain practices

Public support for economic growth has long focused on the diffusion of physical technologies, yet the diffusion of operational insights may be just as valuable. Evidence suggests supply chains with more collaborative practices are more innovative.15 The next Administration should use its convening power to encourage lead firms to take steps such as:

  • Offer suppliers assurance that they will receive a fair return on investments they make in new technologies and in upgrading their capabilities. In order to become partners in innovation, suppliers need to develop better capabilities in product and process design, and to upgrade equipment.
  • Promote information-sharing and make changes in their own operations as a result of supplier suggestions. A key insight from the Toyota Production System is that firms and workers who are close to production have access to information not easily available to those at the top of the chain.16 Firms that establish mechanisms to learn from their suppliers can significantly improve cost and quality.
  • Use a “total cost of ownership” approach when making purchasing decisions. Firms should consider impacts of sourcing decisions on quality and innovation as well as on price per unit purchased.17 Forming long-term, collaborative relationships with highly competent suppliers may be in a firm’s best overall interest, yet purchasing departments are not always incentivized to consider these benefits.

Nurture productive eco-systems of firms, universities, communities, and unions

One reason for the struggles that small- and medium-sized U.S. firms face is that they are “home alone,” with few institutions to help with innovation, training, and finance.18 For reasons of both equity and efficiency, these firms should not depend solely on their customers for strategic support.

Policies that nurture small firms, local universities, their communities, and unions could help the firms leverage their advantages over their larger brethren in nimbleness and strong community ties. Germany’s Mittelstand (medium-sized firms) are the backbone of the German manufacturing sector due to the help they get from community banks, applied research institutes, and unions.19 In the United States, the unionized construction sector has developed structures that create good jobs and fast diffusion of new techniques, even though the industry remains characterized by small firms and work that is often intermittent. Building trades unions work with signatory employers to provide apprenticeships, continuing education programs, and portable benefits.20

Federal technology assets should be better deployed as well, continuing the work begun by the Obama White House Supply Chain Innovation Initiative.21 National labs can be encouraged to work with small as well as large firms, for example, and the Manufacturing Extension Partnership can expand its efforts to work with entire supply chains (rather than firms one by one) to identify sources of inefficiency. A century ago, the federal government played this role in agriculture by funding land grant universities, which led not only to the creation of knowledge, but also created durable networks of researchers and practitioners through which such knowledge could quickly spread.22

Promote formation of supply chains in industries that advance national goals

The free-rider problems discussed above are likely to be particularly acute in forming collaborative supply chains for new products, such as improved solar panels or wind turbines. These industries face additional market failures leading to underinvestment in addressing climate change. The Obama Administration’s Clean Energy Manufacturing Initiative helps to move new technologies out of the laboratory and into production. It would be useful to explicitly address the incentive and information issues in supply chains for producing and installing these products. The next administration could convene firms throughout the supply chain to engage in value analysis to improve product designs, to uncover hidden pockets of inventory, and to adopt total-cost-of-ownership techniques.

Promote good jobs and high-road strategies

Much research documents the ways that firms can utilize “high-road” policies or “good-jobs” strategies to tap the knowledge of all their workers to create innovative products and processes.23 High-road firms remain in business while paying higher wages than their competitors because their highly skilled workers help these firms achieve high rates of innovation, quality, and fast response to unexpected situations. The resulting high productivity allows these firms to pay high wages while still making profits that are acceptable to the firms’ owners. Collaborative supply chain governance plays an important role in providing the stability needed to support these strategies, from which lead firms also benefit.

Dis-incentivize low-road production strategies

Even in collaborative scenarios, wages are often less than in the old vertically integrated model. The corrosion of labor union power enables outsourcing, and the increase in outsourcing has, in turn, further decreased workers’ bargaining power.

Thus, as important as it is to “pave the high road,” it is also important to “block the low road.”24 The Department of Labor has begun to take advantage of modern supply chains’ emphasis on “just-in-time” delivery, recognizing that reduced inventories make regulators’ threat to shut down suppliers for violation of wage and hour laws a more potent threat.25 New policies could combine such sticks with some carrots. The federal government could offer technical assistance, for example, to help small garment manufacturers move away from the existing low-road model, in which ill-trained workers typically do one simple operation to a garment and then pass it on to the next worker. Instead, these firms could adopt a more agile production recipe, one that involves more broadly trained and higher-paid workers collaborating in teams—a high-road model sustained by greater productivity and reduced lead times.

Government should implement collaborative supply-chain practices within its own purchasing, building on the Obama Administration’s nascent efforts to measure total cost of ownership and to ban supply chains with recent violations of labor and other laws from selling to the government.26

Current outsourcing practices allow lead firms and their suppliers to reap the benefit of paying workers only when needed, while the risks of being left without earnings are borne by workers. Several proposals could improve the balance here: encouraging work-sharing in downturns (which would make hiring regular workers less costly), continuing to improve the portability of benefits across firms, and promoting schedule stability.

Retooling supply chains for equitable growth

Decisions about how to structure supply chains matter greatly for working Americans, yet this topic rarely takes a front seat in policy discussions of how to address rising inequality and stagnating productivity. In order to promote equitable growth, policymakers must understand how the economic pie is created—not just how it is divided.

Fundamental changes in the way supply chains operate threaten U.S. economic competitiveness by undermining innovation, and erode American workers’ economic security. The rise over the past few decades of supply chains with small, weak firms leads to an increased presence of firms that innovate less and pay less. It is unlikely and undesirable, however, that the United States would return to the often bureaucratic and stifling vertically integrated supply chains of the mid-20th century.

We can do better. This essay outlined government and corporate policies to promote both more innovation and better job quality in supply chains. In particular, more collaborative supply chains and better-supported local eco-systems could significantly improve the viability of “good jobs strategies.” The way the economic pie is created affects the way it is divided.

(For more detail on these proposals and the analysis behind them, see Susan Helper and Timothy Krueger, “Supply chains and equitable growth,” Washington Center for Equitable Growth, September 29, 2016.)

What new administrative data reveals about access to consumer credit and the U.S. economy

Posted on by Austin Clemens

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About the authors: Kyle Herkenhoff is an assistant professor of economics at the University of Minnesota. Gordon Phillips is the C.V. Starr Foundation Professor and Academic Director of the Center for Private Equity and Entrepreneurship at the Tuck School of Business, Dartmouth College.

The aim of this essay is to provide several pertinent facts about the way unemployed households in the United States use consumer credit and the way bankruptcy flags affect job finding rates and business creation. These facts can be used by policymakers, including legislators and central bankers, in order to better understand the implications and feasibility of both consumer credit regulations and monetary policy.

The basis for these facts is a new dataset whose construction was funded by the National Science Foundation, implemented in large part by one of the co-authors of this essay, Gordon Phillips, and University of Maryland finance professor Ethan Cohen-Cole, and recently analyzed in joint work with the other co-author of this issues brief, Kyle Herkenhoff.27 There were four major observations and implications that came out of our dataset:

  1. Credit cards are a form of unemployment insurance
  2. Expansionary monetary policy (lowering interest rates) may give unemployed consumers more ‘breathing room’ and allows them to find jobs at higher paying, larger, and more productive firms
  3. Access to consumer credit facilitates self-employment as well as the transition into hiring an entrepreneur’s first employee
  4. Bankruptcy flags disrupt job finding, business creation, and reallocation of workers across jobs

In the remainder of this essay, we explain each of these findings, the circumstances under which they obtained, and the implications for policymakers and lawmakers.

Credit cards are a form
of unemployment insurance

Our first main finding is that consumer credit (credit cards, personal revolving loans, and other forms of revolving credit) has an effect on unemployed households that is comparable to unemployment insurance. In simple terms, being able to borrow allows unemployed households to search more thoroughly for a job. Just like unemployment insurance, credit cards and other forms of revolving credit allow unemployed individuals to “hold themselves over” by, say, buying groceries, or in economic terminology, it allows them to “smooth consumption.” Therefore, consumer credit allows them to find better job matches, and, as a consequence, they are paid higher wages.

We begin with a sample of 3 million workers. We first focus on a set of 20,000 displaced workers, some of whom have significant amounts of credit limits, while others have very limited consumer credit access. We use exogenous increases in credit that result from the removal of bankruptcy flags and from automatic increases in credit to isolate credit increases that are not related to an individual’s job prospects and their underlying employability or quality. We find that the more credit unemployed workers have, the longer they take to find a job. Among those who find a job, they find jobs with higher wages.

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These findings suggest that consumer credit acts in a very similar way to unemployment insurance. Existing unemployment insurance studies find that unemployment insurance protracts unemployment durations, and workers generally find higher paying jobs. (This is true in the United States and Europe;28 European estimates, however, are sometimes insignificant or negative).29 The similarity between the way unemployed individuals use consumer credit and unemployment insurance suggests that households have some degree of private insurance against job loss through credit markets, and that government programs in which consumer credit is extended to unemployed individuals rather than as a transfer payment may produce similar disincentive effects.

Expansionary monetary policy may give unemployed
consumers more breathing room to find better jobs

What are the implications of our findings for monetary policy? The new dataset allows us to measure the impact of consumer credit access on labor market outcomes for the first time. Our results suggest that if interest rates are lowered, or if the government provides some more “breathing room” for unemployed consumers, then they may take longer to find a job, and they may ultimately find better job matches. A direct consequence of this mechanism is that if the government lowers interest rates then the unemployment rate may initially increase. With lower interest rates, and a greater ability to smooth consumption, households may be able to hold themselves over while searching more thoroughly for a job.

Consequently, the duration of unemployment and the unemployment rate will initially be higher following an interest rate decline. Yet the wages of those workers who find jobs will be higher because they are searching more thoroughly and finding better matches. Thus, our research suggests that a central economic-performance indicator of the Federal Reserve should be the wages of new hires, not necessarily the unemployment rate. We believe that by focusing on measures of match quality, the Federal Reserve can take into account the role that credit plays in household job-search decisions as well as have a more complete picture of the health of new labor market matches.

Access to consumer credit facilitates self-employment as
well as the transition into hiring an entrepreneur’s first employee

Consumer credit is not just used to facilitate a thorough job search, it is also a critical component of financing for the self-employed and job creation.30 To examine the importance of consumer credit for the self-employed, we build another new dataset with 200,000 individuals who have previously filed for bankruptcy and link these individuals to Internal Revenue Service entrepreneur tax records with administrative employment histories, credit histories, and so called SS-4 IRS business ownership data.

Using this dataset, we are able to follow individuals over time and observe all possible employment transitions, comprised of: transitions in and out of working for another business; transitions in and out of self-employment; and transitions in and out of owning an employer firm in the Integrated Longitudinal Business Database, or ILDB, which is the merged dataset of SS-4 ownership records with firm employment.31 Our main source of exogenous variation in credit access comes from the removal of consumers’ bankruptcy flag.32 We show that following bankruptcy flag removal, individuals receive a large increase in consumer credit access. Following this large, discrete, and unanticipated increase in consumer credit access,33 we find what we call the “credit access effect.”

Bankruptcy flags disrupt job finding, business
creation, and reallocation of workers across jobs

We show, for the first time to our knowledge, that consumer credit is critical for making the leap from a non-employer business to an employer business. In other words, consumer credit facilitates the hiring of the first initial employee, allowing individuals to make the transition out of self-employment into becoming a job-creating entrepreneur. Specifically, we find that:

  • Flows into self-employment increase disproportionately after credit access improves. Those individuals who start new businesses earn 4 percent more Schedule C Net Income ($1,000) versus comparable bankrupt individuals who have not yet had their bankruptcy flag removed.
  • Following the discrete rise in credit access, these individuals are more likely to become employer firms in the Integrated Longitudinal Business Database
  • New-firm owners in this database borrow $40,000 more using mortgages and home equity lines of credit

These findings suggest that consumer credit matters for the subgroup of individuals who want to start a business, and moreover, it matters disproportionately for those individuals who want to grow their businesses.

A crucial fact for subsequent mortgage regulation is that self-employed individuals who make their initial hire borrow $40,000 more than the control group, and they primarily use mortgage credit to facilitate this transition. In particular, they borrow using home equity lines of credit and other forms of high-interest-rate revolving credit.

This is an important set of facts for regulatory institutions, such as the Consumer Finance Protection Bureau, because this implies that restrictions on access to mortgage credit have direct implications not just for “mom-and-pop” self-employed individuals but also for those who intend to grow rapidly and hire additional employees. Consumer credit may not be the only source of financing for these businesses, but our results indicate that it is, on average, an important part of the debt portfolio of young, growing firms.

The United States is currently witnessing a long-run trend decline in startups.34 By further curtailing or restricting consumer credit, startup rates (and in particular high-growth startup rates) may drop. Our research therefore calls for follow-up studies on regulations that the CFPB may consider, and in particular, mortgage restrictions, especially home equity lines of credit.

Using the same dataset, we are able to measure the impact of bankruptcy flag removal on employment prospects and wages as well as on self-employment and business income. Our final policy relevant finding on the topic of consumer credit is that bankruptcy flags are likely misallocating workers across sectors. Using the same dataset of 200,000 individuals who previously filed for bankruptcy, we are able to study the way bankruptcy flag removal affects labor markets, self-employment, and earnings. We notice four broad patterns following bankruptcy flag removal:

  • Individuals flow into formal sector unemployment-insured jobs. In simple terms, following bankruptcy flag removal, individuals find jobs that qualify them for unemployment insurance. These jobs provide a safety net to the worker in the case of job loss.
  • Those who flow into formal-sector jobs after bankruptcy flag removal earn significantly more and are extremely attached to the formal sector. In simple terms, they earn more and are less likely to end up non-employed than are other comparable individuals without a flag removal.
  • Individuals flow out of “informal” sector self-employed jobs. In simple terms, individuals leave self-employment after bankruptcy flag removal, and they subsequently find jobs in the formal sector.
  • Individuals also flow into “informal” sector self-employed jobs (as mentioned above). With greater credit access, nascent entrepreneurs can quit their formal sector jobs and use credit to finance their ideas.

The main policy implication of our bankruptcy-flag removal findings has to do with the current debate over the use of credit checks by human resource departments.35 Our results indicate that after bankruptcy flag removal, there is a significant amount of reshuffling of workers across sectors. In economic terms, there appears to be reallocation, although whether this is a welfare-improving reallocation remains to be determined. Based on the wages of new hires and their subsequent job transitions (especially the fact that they do not exit to non-employment), our findings suggest workers with bankruptcy flags are not going to the jobs that value them the most. We therefore suggest to policymakers who are considering credit-check bans to consider the impediments that bankruptcy flags generate for self-employment, formal-employment, and new employment in their cost-benefit analyses.

Labor mobility: Guidance for the next Administration

Posted on by Austin Clemens

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About the author: Abigail Wozniak is an associate professor of economics at the University of Notre Dame.

Many Americans take pride in the idea that our country offers frequent opportunities for determined individuals to improve their economic lot in life. We imagine earlier generations moving West when agricultural conditions deteriorated during the 1930s; or moving North to fill in-demand blue collar jobs in our manufacturing centers in the 1940s and 1950s; or quickly moving through a series of entry level jobs before settling into the right job match. Yet economists who study these issues have reached a high level of consensus that these types of transitions have declined over the past three to four decades.

Regardless of how labor transitions are measured—as a change of employer, change of industry or occupation, change of location, or movements into or out of work—all are at substantially lower levels today than they were at the close of the 1970s. Rates of employer-to-employer job change have declined 25 percent, and inter-state moves are down 15 percent or more. According to one summary measure, overall fluidity has declined by 10 percent to 15 percent since the late 1970s.

The numbers are clear and there is widespread agreement—something about labor mobility in the United States has certainly changed. But it is less clear, and there is less agreement, about whether this change is good or bad. One leading economist remarked at a recent conference that if we replaced the word “mobility” with “turnover” then we would be celebrating its decline.

This remark highlights that transitions can happen for good and bad reasons. Transitions can indicate that workers are taking advantage of improved opportunities and are reaching better work and location arrangements. Or they can indicate that opportunities are scarce and require extensive searching. Conversely, the decline in transitions may indicate that workers are better matched to or better compensated by their current firms, requiring fewer changes. Or the decline may mean that opportunities for advancement have become fewer and farther between, and possibly, that the risk of an unsuccessful change has become greater.

What do we know about why
labor mobility has declined?

The broad consensus around declining U.S. labor mobility is a recent development. Although some key research on the question began in the late 1990s, interest in labor market adjustments among scholars and the public took off as the country began what would be a long recovery from the Great Recession of 2007-2009. It was clear to all that many changes would have to be made to return U.S. workers to a situation like that of the mid-2000s. Families would have to move to booming cities from elsewhere. College graduates would have to switch into jobs that more intensively used their skills. Workers who had become discouraged and left the labor force would have to search for and return to employment. Yet as scholars began to look more systematically at measures of these transitions at the close of the last recession, it became apparent that not only had such transitions declined during the recession but in fact had been in decline for decades.

Given that the consensus of broad-based decline in labor mobility is a recent development, it is not surprising that scholars have yet to settle on a single explanation. There is a long list of potential explanations, however, that have been considered, and there has been some success in determining which of these are most plausible.36

Here are four plausible explanations that deserve more investigation:

  • Rising compensation flexibility may mean workers are paid what they earn more consistently, reducing the need to change employment to adjust wages. The data to fully investigate this are limited and restricted to a small set of researchers. There is some evidence that earnings volatility has risen, which might reflect more frequent compensation adjustments, but there is little evidence of an ongoing trend toward greater volatility.
  • Declining firm dynamism (fewer start-up firms) may have reduced opportunities for workers to jump ship from stagnating firms to high-potential new firms, lowering overall labor movement. There is ample evidence of a decline in the rate of new firm formation. But the links between this and overall labor market fluidity are the subject of ongoing research.
  • Employers may be sharing fewer productivity gains with workers, limiting their incentive to change their employment situations. This is equivalent to an explanation that says bargaining power of workers has declined. Stagnant wage growth may be one symptom of this, but as with compensation flexibility, the data to fully investigate this are lacking, and it seems at odds with an increasingly competitive product market.
  • Lower social capital and trust may make both employers and workers reluctant to change their situation, slowing overall fluidity in the labor market. There is strong evidence of declining trust and social capital (connectedness) in the United States dating back to the 1970s, but as with declining firm dynamism, the connection between the two declines has not yet been fully tested by researchers.

Here are seven explanations that have been investigated and found to play little role:

  • Aging population and other demographic changes lead to fewer transitions in the labor market as workers age and become more settled (for example, through home purchases), but these changes are too modest to explain the overall fluidity decline.
  • Occupational licensing now affects one-quarter of the U.S. workforce, and licensing requirements may slow movement into and out of licensed jobs, or across states. But evidence of the rise in licensing at the state level does not appear related to state declines in fluidity, casting doubt on in as an explanation for the overall decline.
  • More sophisticated job search and recruiting may lead to better matching between workers and firms, reducing the need for employment changes, but since this is not reflected in worker wage growth, the decline in fluidity seems unlikely to be the result of better worker-firm pairings.
  • As jobs become more technology-intensive, firms may increase employer-provided training to workers, raising their incentive to retain workers and making worker knowledge more specialized. This could reduce employment transitions, but there is little direct evidence to support an increase in employer-provided training.
  • Health insurance-related job lock is an unlikely explanation, since fluidity has fallen for workers both with and without employer-provided health insurance.
  • Dual-career spouses can face challenges when co-locating in a city, making them reluctant to move once a workable arrangement is reached. However, they should make other types of employment changes at similar rates, and their rise in the population is too modest to explain the fluidity decline.
  • Changes in homeownership, land regulation, industrial regulation, and formalization of hiring have been tested and do not correspond to declining fluidity at the state-level.

Why do people feel like their economic
situation is unstable if fluidity is declining?

Before transitioning to an examination of policies that could boost labor mobility, it is worth pausing to acknowledge what appears to be a puzzle: If employment transitions are declining then why do workers feel so insecure in their jobs? Can it really be the case that workers are staying with their jobs longer when there is broad consensus that the era of “career jobs” is over? The answer to the second question is yes. Job duration has increased at the same time that labor market fluidity has declined. This is in part because of a decline in short-duration jobs—those lasting less than a year or less than a quarter. Yet this brings us back to the first question: Why, then, do workers feel less secure? Potentially it is because the incidence of very long duration jobs has also fallen. So the era of career jobs is ending, but the era of staying with an early employer for months or years longer than one’s parents did is here.

Workers may also feel a heightened sense of insecurity because finding a new job after losing one has become harder. The data show that movement into employment out of non-employment or unemployment has also declined. Separating from an employer without a new job in hand therefore means a longer period of unemployment and job searching than in the past. Although the length of unemployment spells received increased attention during the Great Recession, these are longer-run trends that date back several decades and reflecting a changed landscape of employment in the United States.

How the next Administration
should act on labor mobility

The forces behind declining labor mobility likely have deep roots. The fact that they have been in operation for at least three decades suggests they are unlikely to be affected by short-run policy. The fact that the forces themselves remain to be fully determined mean that it is not yet clear what the appropriate long-run policy responses would be. Still, there are at least five concrete policy steps that are appropriate now:

  • Step 1: Reform the Unemployment Insurance system to reflect the fact that unemployed workers face longer spells of unemployment, and are more skilled and older than in the past
  • Step 2: Develop a pilot program of relocation vouchers for young workers, and use gold-standard methods to evaluate its success
  • Step 3: Assist community colleges and four-year colleges in counseling students who will face longer tenures with any given employer and heightened difficulty changing employment
  • Step 4: Pivot the policy focus on occupational licensing to emphasize job access and rationalizing the burden on practitioners across fields and states
  • Step 5: Develop and improve access to data on the specifics of how firms hire and compensate workers

These steps will inform the ultimate long-run policy response and greatly help workers adapt to the situations they face today. Let’s examine each of them in turn.

Reform the Unemployment Insurance system to reflect the fact that unemployed workers face longer spells of unemployment, and are more skilled and older than in the past

Given longer tenures that workers have with a given employer, the typical worker may experience unemployment spells that are more distant than in the past. With the decline of “career jobs,” more experienced and higher-skill workers will enter the Unemployment Insurance system. Both forces suggest that UI should be reformed to better serve clients who are at more advanced stages of a developed career. Older UI requirements may be a hindrance to such workers. In many states, for example, job search is monitored by requiring UI recipients to apply regularly for available jobs in their fields. This may not be appropriate for more experienced workers, who may rightly pass on applying for a job in their field that entails significantly less responsibility than they had before. Such workers also may be actively searching without applying for jobs, for example, by attending networking events or arranging informational interviews.

Yet it is important to consider the rising share of unemployed workers who face longer spells of unemployment than in the past. These workers will need longer access to assistance in order to keep them connected to the labor market and prevent large negative consequences to their household budgets. There are many ways to support such workers. The UI system could use data it has at its disposal to try to identify workers most at risk of a long unemployment spell, and direct them to enhanced resources sooner.

Benefits also could be offered at a tapered rate to such workers. The idea here is to lower the monthly benefit amount for at-risk workers in order to extend the total months of benefits. Such workers also might qualify for enhanced benefit access, for example, while they are enrolled in a training program. Increased targeting of benefits streams to those at risk for long-term unemployment seems likely to lead to greater welfare gains than other types of expanded access to UI, such as expansions to allow receipt while holding part-time employment.

Develop a pilot program of relocation vouchers for young workers, and use gold-standard methods to evaluate its success

There is limited but compelling evidence that relocation can benefit individuals who are strongly encouraged to do it, leading to higher earnings, better health outcomes, and better schooling outcomes for children.37 The evidence is limited, however, and there is also evidence that some families and individuals fare poorly after relocation. It is therefore appropriate to proceed with a limited program using cutting-edge design and careful monitoring to evaluate its impacts. Evidence and theory suggests that the groups most likely to benefit from such a program are young workers and families with young children. Relocation entails fewer benefits for older children and can potentially be detrimental.

The limited evidence also suggests that any voucher amount would need to be fairly large to encourage take up, perhaps equal to 20 percent to 50 percent of the price of a modest home. Such a program might be financed by allowing individuals to borrow (in whole or in part) against future Unemployment Insurance or Earned Income Tax Credit entitlements. The program could, but need not be, targeted by place of origin. Such programs have been tried on a small scale in the United States in the past. Anecdotally these seem to have had low take-up, and there is little evidence of success.38 Improved targeting and high-subsidy amounts could lead to substantially greater successes for such a program.39

Assist community colleges and four-year colleges in counseling students who will face longer tenures with any given employer and heightened difficulty changing employment

Students need to understand that their first job will have a greater impact on their lifetime career path than it did for their parents. They should be encouraged to search more intensively during their first major period of job search. This is a key time in which marginally greater investment in job search could have payoffs decades into the future. Students should be encouraged to be more ambitious than “just finding a job” by sorting out what they want to do later. That first job is increasingly important for their career path, and they should plan accordingly.

Pivot the policy focus on occupational licensing to emphasize job access and rationalizing the burden on practitioners across fields and states

Many licensing practices can be reformed to rationalize the system and promote access for new entrants, but the evidence is scant that this will substantially jump start labor mobility. Policy on licensing should therefore primarily focus on access and appropriate burden (requirements) and secondarily on labor fluidity.

Develop and improve access to data on the specifics of how firms hire and compensate workers

All available evidence points to key changes in the way that firms hire and compensate workers, but researchers have limited access to the best available data for investigating these issues and no access to other key information because it simply is not collected. While we collect large amounts of information on individuals and families, the information we collect on what firms are doing to attract and retain workers is extremely limited. The last time the U.S. Bureau of Labor Statistics was able to field a survey to ask firms about their employer provided training was in 1995.40

Addressing income volatility in the United States: flexible policy solutions for changing economic circumstances

Posted on by Austin Clemens

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About the author: Bradley L. Hardy is an assistant professor in the Department of Public Administration and Policy at American University

Many low-income individuals and families also have highly unstable incomes between weeks, months, and years.41 This “income volatility” is an economic phenomenon driven largely by earnings, with a tendency to rise during recessions,42 and is attributed to short-term economic shocks such as job loss as well as larger, permanent structural changes throughout the economy,43 including the decline of blue-collar manufacturing jobs and the emergence of part-time and contingent work arrangements.44

Survey-based data suggest that volatility has been on the rise for most families, and I argue that this warrants concern for three reasons related to imperfections in the economy and social welfare policy:

  • The poorest families face the highest volatility
  • Low-wage workers and their families have limited credit market access and savings
  • Low-income workers with children face a weakened cash-based safety net

This essay examines these three issues and then offers several different policy solutions to the problems.

The poorest families face
the highest volatility

Over the past 30 years, income volatility45 is highest among the nation’s poorest families. Tabulations in Figure 1 using the U.S. Census Bureau’s 1980-2013 Current Population Survey show that income volatility is highest for low-income families—those in the bottom 20 percent of the income distribution. Higher income households, in the top 20 percent of the income distribution, in turn have the lowest levels of volatility. Thus, poor families are effectively stuck with the worst possible financial portfolio—one with a low mean and high variability. While transfer policies could perform better, they do benefit low-income families by reducing income volatility, whereas higher income families are buffered from income volatility by the tax system. (See Figure 1.)

Figure 1

Low-wage workers and their families have
limited credit market access and savings

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Many low-wage workers and their families lack access to savings and also face imperfect capital markets and limited access to loanable funds.46 Such families may be denied loans or credit cards that allow for consumption smoothing against negative income shocks—perhaps the first solution many households pursue when faced with an unanticipated expense or income shortfall. Whether due to displacement from employment altogether or unpredictable hours, credit and loan denials can lead to far costlier alternatives such as payday lenders. Such financial streams provide financial assistance for low-income families facing liquidity constraints, but they do so at interest rates that can exceed 100 percent and cause longer-term damage to borrowers.47

This stands in contrast to the predictions derived from standard economic models which perhaps better characterize the circumstances of higher income families in a position to save more and then draw upon those same savings in the event of an unanticipated negative income shock. Similarly, higher income families possess greater access to credit markets that can serve the same purpose in response to temporarily low income.

Low-income workers with children
face a weakened cash-based safety net

Low-income workers with children face higher income volatility on average, and are less likely to have affordable access to credit markets. These families are increasingly underserved by the nation’s welfare program—Temporary Assistance for Needy Families, or TANF. This program could be altered to be more responsive for low-income workers with volatile income. Returning to Figure 1, the after-transfer reduction of income volatility from safety net programs is somewhat diminished in the post-1996 years, coincident with the new welfare reform law enacted at the time. This appears to be the case as well for female-headed families, and black families.48

This is consistent with the dramatic fall in TANF caseloads since the middle 1990s. The program today provides less in cash assistance per case than in the 1980s and 1990s, and appeared to be unresponsive during the Great Recession of 2007-2009.49 The welfare reform law that created TANF occurred amid a large economic expansion, and the program should be adjusted to reflect new realities.

Flexible policy solutions to address
income volatility and job displacement

Income volatility is driven by a combination of aggregate macroeconomic shifts alongside individual-level events such as job losses and gains. Especially for low-income and less-educated workers, this volatility is indicative of a riskier labor market. With these conditions in mind, the first set of solutions presented below are the most ambitious and call for reforms to TANF and the Supplemental Nutrition Assistance Program, or SNAP. The reforms would enhance job training in sectors of high local-labor demand, providing both financial and employment support, suspend time limits on TANF assistance, create minimum state requirements for the provision of TANF cash assistance, and increase SNAP generosity.

The remaining solutions presented below would provide families with greater liquidity to buffer against economic risk and uncertainty through an expanded Unemployment Insurance system. These reforms also would reconsider program recertification periods and re-introduce advance Earned Income Tax Credits (as an elective option for tax filers. Below, I summarize each of these policy solutions.

Ambitious policy solutions

Broader education and training as work-related activities within the Temporary Assistance for Needy Families program

As a share of gross domestic product, the United States lags several other developed countries’ investments in job training.50 I recommend expanding allowable work-related activities to include education and job training with cash assistance during the training period, up to 3 years.51

Following the spirit of recent reform proposals by Georgetown University public policy professor Harry J. Holzer related to community colleges,52 such training programs would include community college career training, and would be coordinated with Workforce Innovation and Opportunity Act providers and, as a result, be deemed by WIOA providers as subject-training areas of high local-labor demand to ensure trainees have strong employment prospects.53 States would be encouraged to include non-custodial parents in such training programs, and job-seekers within TANF would be eligible for public-sector employment and infrastructure jobs as they become available.54 Due to years of under-investment, there are labor shortages and opportunities to train workers in local sectors with high demand, including healthcare as well as elements of the nation’s aging transportation, water, and electricity infrastructure-related trades.

Conditional TANF time limit suspensions

Income volatility is a reflection of an increasingly competitive, dynamic, and at times unpredictable employment situation in the United States, particularly among low-income and less-educated workers. The Temporary Assistance for Needy Families program can help buffer against this risk by suspending time limits under qualifying circumstances while maintaining work requirements. Approved education and training would be permitted to occur full time and without work/job search, and would not count against the 5-year federal time limit—stopping the clock. Adults who satisfactorily complete TANF- and WIOA-approved education and training and/or engage in continuous job search efforts would receive assistance, even if they breach the time limit.

Next, states would be required to allow qualifying recipients to remain on welfare for the entire 5-year federal time limit—the current policy sets five years effectively as a maximum with a state option to provide extended benefits, but this would now be a minimum standard. Finally, following the recommendations of Marianne Bitler at the University of California-Davis and Hilary Hoynes at the University of California-Berkeley,55 time limits would be suspended during periods of high local unemployment or joblessness, much like the allowable suspension for high local unemployment in the Supplemental Nutrition Assistance Program for able-bodied adults.

Importantly, work requirements would remain in place, and TANF participants would still be subject to sanctions and removal via administrative rules and/or rules violations. This modified version of TANF—with its work requirements and rules—retains a design promoting temporary participation relative to the predecessor policy, whereas time limits in their current form in some states potentially undermine the capacity of the program to respond to changing economic circumstances.

Increase TANF cash spending and responsiveness

Welfare reform had unintended consequences, one of which was the dramatic decline in cash benefits. While there is fairly broad consensus that the program rightly emphasizes employment, many states have done so at the expense of maintaining a cash safety net for vulnerable families with children. In some instances, states are merely responding to financial incentives from the block-grant design of TANF to plug a variety of budgetary holes where available, and spending has moved from cash assistance to non-assistance in the post-welfare reform era.56

Following the recommendations of Bitler and Hoynes, I recommend that states be required to spend at least 25 percent of their TANF funds on cash assistance.57 Increasing cash assistance will help to ensure that the nation’s most vulnerable families are better protected against negative income shocks.

Food stamp reforms, work requirements, and time costs

Workers with low, volatile income are increasingly reliant on programs such as SNAP and the Earned Income Tax Credit. Recent evidence suggests that caseload declines throughout 2016 are being driven in part by states that are implementing the 3-month SNAP time limit for so-called ABAWDs—able bodied adults without dependents.58 I and my co-authors in a 2015 working paper show that SNAP participation is increasingly predicted by structural economic variables such low wages and the decline of full-time employment.59 To account for this, the work requirement for ABAWDs could be lowered to 10 hours per week, from 20 hours. These low-wage workers are also more likely to face long, costly commutes that preclude the most time consuming, cost efficient forms of food preparation. With this in mind, I follow the recommendations of University of Kentucky economist James P. Ziliak for SNAP benefits to be increased to account for higher food preparation costs and transportation costs.60

Buffer policy solutions

Optional year-round Earned Income Tax Credit

The Earned Income Tax Credit is the largest cash transfer for the working poor. While the EITC program has well-documented employment and anti-poverty benefits, it is not constructed to address income volatility in its current form. First, the refund occurs as a lump sum at tax time. While this benefits families as a form of precautionary savings, those that face weekly or monthly income shortfalls do not benefit from support that is backloaded until tax season.

Re-introducing an optional Advance EITC, whereby filers could elect to have the EITC distributed paycheck-to-paycheck over the entire year, would provide families with several thousand dollars of immediate income support.61 Hybridized versions similar to the Advance EITC would allow a portion of the full EITC to be made available throughout the year.62 Although participation in the Advance EITC program was low prior to being discontinued in 2011, employers and human resources professionals could more aggressively promote it as a financial tool.

Expanded Unemployment Insurance coverage for part-time and less experienced workers

The Earned Income Tax Credit is of little or no use for low-income individuals who are jobless—by design EITC receipt is predicated on labor market earnings.63 At the same time, a growing share of workers are part-time and many have work-history gaps leaving them uncovered by the current Unemployment Insurance system.

Rachel West and her co-authors at the Center for American Progress offer a range of suggested reforms to the Unemployment Insurance system that would provide financial incentives for workers who find new employment in a lower paying job—from covering part-time workers to covering workers with less than five quarters of work history.64 These workers, varying state-to-state, generally lack protection via the unemployment insurance system. Many hold more than one part-time job, and do so in the absence of access to stable, full-time employment. Such reforms can provide an important buffer in the event of earnings loss due to unemployment, and would reflect the modern growth in part-time, contingent work arrangements. In the absence of substantial Unemployment Insurance reform, the aforementioned TANF solutions loom especially large—many individuals are currently underserved by both programs.

Longer and clearer program re-certification

In some states, low-income families participating in SNAP, TANF, Medicaid, and low-income housing assistance are required to provide eligibility verification, by program, throughout the year. As a consequence, many such households flow in and out of eligibility for these programs, raising the possibility that families lose out on benefits when they find themselves to be temporarily in need—or when complexity in the renewal process causes qualifying families to cycle off the program. Currently the typical program requires re-certification at a rate of every six months to one year. I recommend extending recertification periods to once per year while simplifying and aligning recertification across safety net programs.

Conclusion

Income volatility is highest among lower income and less-educated Americans. While the safety net provides some buffer against volatility, changes can be made to better address the reality of low and volatile income. Some firms see this need, and are introducing flexible pay plans that allow workers to withdraw their earned income on a daily basis to meet immediate consumption needs that arise between pay periods.65 Still, such private initiatives are working at the margins of a larger challenge—many workers find themselves unemployed or under-employed in sectors of the economy offering low, unpredictable earnings.

Moreover, many families lack the resources to buffer against negative and unanticipated economic shocks. To address this, the safety net can provide greater cash assistance via TANF and SNAP, including financial assistance to support families while they participate in approved job training as well as during periods of high unemployment. Such assistance would operate in part through a conditional suspension of time limits in TANF. In addition, part-time and less-experienced workers should have greater access to the unemployment insurance system, and the working poor and near poor could benefit from an optional Advance EITC that spreads the credit over the year.

Taken together, the policy recommendations put forth in this essay aim to address income volatility among low-income workers by providing greater liquidity and insurance against negative shocks while providing a wider range of job training opportunities to move workers into higher demand, stable employment opportunities. These policies retain the values of work that are embedded in the current set of programs while providing a pathway for workers to respond to economic risks that characterize today’s dynamic, globally competitive economy.

International trade and U.S. worker welfare: understanding the costs and benefits

Posted on by Austin Clemens
FILE - In this June 12, 2013, file photo, workers assemble Volkswagen Passat sedans at the German automaker's plant in Chattanooga, Tenn. AP Photo/ Erik Schelzig, file)

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About the author: David Autor is the Ford professor of economics at the Massachusetts Institute of Technology

Economists have long recognized that free trade has the potential to raise living standards in all trading countries. The logic is sound and simple. A given country, say the United States, will want to buy goods from another country, say China, only if the United States receives goods from China that are worth more to it than the goods it is trading in return. Similarly, China will want to trade with the United States only if the goods it receives in return are more valuable to it than the goods it is trading. That is, countries trade if they both view themselves as getting the better end of the bargain. How can it be that both get the better end of the deal? When the United States sells China civilian aircraft and buys Chinese-made apparel and consumer electronics, the United States and China each end up with a bundle of goods (aircraft, apparel, consumer electronics) that it prefers to the goods it had originally. In this sense, trade among nations is akin to a vast open-air market: each country displays its wares and makes mutually beneficial swaps with other countries.

Countries do not simply sell the surplus stuff that they have on hand, however; they make goods specifically for trading. And this adds to the gains from trade. Knowing that there is a vast world market, countries focus their resources on making the goods that they are best at making. They then swap these goods for the items that other countries are best at making. It is no accident, of course, that the United States is exporting aircraft and importing footwear. As a technologically advanced, high-skill nation, the United States can make aircraft better, cheaper, and faster than other countries. In economic lingo, it has a comparative advantage in producing aircraft. China, as a rapidly developing country with an abundance of capable but not (yet) highly educated workers, has a comparative advantage in making labor-intensive goods such as apparel, footwear, and assembled electronics. Thus, both gain from trade.

This logic offers a strong prima facie case for why policy makers should foster free trade. Lifting quotas and tariffs and removing artificial trade barriers abets national growth by lowering consumer and producer prices and permits countries to specialize in doing what they do best. Trade raises gross domestic product whether countries run trade deficits or surpluses; whether countries specialize in high-tech or low-tech goods; and whether trade is among rich countries (the United States and Germany), among poor countries (Zimbabwe and Mozambique), or among rich and poor countries (the United States and Bangladesh). It is not an overstatement to say that trade among consenting nations raises GDP in all of them.

Winners and losers

What applies to the welfare of a country in aggregate, however, does not necessarily apply to all of the citizens within a country. Consider again the case of aircraft and apparel. As the United States opened to trade with China, it began producing more planes and fewer articles of clothing than it otherwise would have done. Employment rose in the domestic aircraft industry, accordingly, and fell in the domestic apparel industry (again, relative to what would have occurred). If workers in apparel and aircraft had identical skillsets and, moreover, lived and worked in the same towns, then displaced apparel workers might quickly be rehired in aircraft manufacturing, perhaps at better wages. All good!

In reality, there are two reasons why this all-good scenario will not happen in practice. First, workers cannot change jobs at no cost. Decades of economic research demonstrate that workers who are involuntarily displaced from career jobs—particularly manufacturing jobs—suffer substantial earnings losses. These losses average one-and-a-half to nearly three years of annual earnings over the following 20 years, with the deepest scars felt by workers who are displaced during recessions.

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Even more fundamentally, trade integration reshapes labor markets in a way that is likely to be permanently beneficial for some skill groups and permanently harmful to others. The reason is that when the United States integrates with large, labor-intensive countries such as China, the aircraft-apparel parable plays out on a vast scale. The United States gains employment in numerous skill-intensive sectors, such as aircraft, pharmaceuticals, passenger vehicles, integrated circuits, and high-tech metals. It simultaneously loses employment in many labor-intensive sectors, such as apparel, footwear, furniture and bedding, toys and sports equipment, and assembled electronics. The aggregate contraction in labor-intensive production depresses the employment-and-earnings opportunities of workers who compete most directly with Chinese workers, typically high-school educated workers, many of them males and minorities.

Meanwhile, the expansion of skill-intensive production raises the real earnings of highly educated workers, those who might design and build the high-tech products that the United States exports. And there’s the rub—even as trade increases the size of the national pie, it shrinks the slices received by some citizens, most especially, blue-collar, non-college workers.

This analogy also suggests its own solution. If trade makes the pie larger then isn’t it feasible in principle to restore every slice to its original size and still have some extra pie left over to share? And the answer is emphatically yes: because the pie is bigger it is possible for every person to have a bigger slice. But this will not happen without policy intervention. Absent active redistribution, trade will create both winners and losers—larger and smaller slices.

The evidence

That’s the theory. What is the evidence? For the first three or four decades of the post-war era, there was little occasion to scrutinize the benefits of trade. Most goods flowed “North to North,” that is, between nations with relatively similar average incomes, which helped to subdue distributional impacts. When U.S. inequality began to rise in the 1980s, economists vigorously renewed their study of the impacts of trade on labor markets. They found, reassuringly, that trade had not had substantial adverse distributional effects, either for low-skill workers specifically or for import-competing industries more generally. The broad sentiment that emerged at that time was that the rise of earnings inequality was primarily attributable to technological changes that complemented high-skill workers and reduced labor demand in manufacturing. The impact of international trade seemed to be modest, at best.

Just as the economics profession was reaching consensus on the consequences of trade for wages and employment, an epochal shift in patterns of world trade was gaining momentum. China was finally emerging as a great power after decades as an economic laggard, toppling established patterns of trade accordingly. China’s rise has provided a rare opportunity for studying the impact of a large trade shock on labor markets in developed economies.

The advance of China also toppled much of the received economic wisdom about the impact of trade on labor markets:

  • The consensus that trade could be strongly redistributive in theory but was relatively benign in practice has not stood up well to these new developments.
  • The belief that trade adjustment is relatively frictionless, with impacts that diffuse over large skill categories rather than being concentrated among groups of workers in trade-competing industries or locations.

After quantifying these impacts and adjustment frictions, current research finds that the short- and medium-run adjustment costs demanded by large trade shocks are sizable entries in the accounting of gains from trade.

What these findings mean in practice is that not only does trade create winners and losers but also the losses are much more concentrated than economists had previously understood. They are borne most heavily by workers originally employed in import-competing sectors, such as those footwear workers, secondarily by the surrounding local labor market in which those employers are housed, and only thirdly by the overall “skill group” to which displaced workers belong. Concretely, employment at U.S. textile plants has fallen by nearly two-thirds (from more than 700,000 to less than 250,000) over the past 20 years as fabric production and apparel manufacturing shifted overseas in search of lower labor and production costs.66 The elimination of nearly half-a-million textile jobs appears enormous, but it is actually a drop in the bucket for a U.S. labor market of 150 million workers—and hence unlikely to substantially affect earnings opportunities for blue-collar workers nationwide. But this contraction constitutes a powerful and sustained blow to the regions of the United States that formerly engaged heavily in textile production. In 2000, half of U.S. textile and apparel production was located in just eight southeastern states (Alabama, Georgia, Kentucky, Mississippi, North Carolina, South Carolina, Tennessee, and Virginia). And within those states, productions was heavily concentrated in counties where it constituted more than 15 percent of employment.67 And within those counties, the workers employed in career textile jobs were most adversely affected.

Main implications

There are seven main implications:

  1. Trade among consenting nations raises GDP in all of them. Policymakers should always be looking for ways to take advantage of the opportunities that trade offers.
  2. Because trade grows the national pie, it creates an opportunity for every citizen to acquire a modestly larger slice. No one necessarily need have a smaller slice.
  3. Absent policy intervention, trade will almost necessarily shrink some slices of the pie even as it causes the pie to grow.
  4. The benefits from trade tend to be small at the individual level but broadly shared—that is, they are diffuse. Importing Chinese apparel rather than producing it domestically, for example, lowers the costs of clothing nationwide—and perhaps lowers it most for consumers who purchase clothing inexpensively from big box retailers and fast-fashion outlets. Aggregating across all goods, these benefits amount to one or two percentage points of annual income for most households. That’s meaningful, but it’s not life changing.
  5. Conversely, the adverse impacts of trade are highly concentrated among specific worker groups and locations. These losses can be quite sizable, as the apparel example highlights. Thus, it is entirely possible for trade to grow the size of the national pie by one percent or two percent while shrinking some individual slices by 20 percent or 30 percent.
  6. Recognizing these points, policymakers should refrain from asserting that ‘everyone wins’ from trade. When rich countries primarily traded among themselves in the first few decades after World War II, trade likely had very modest distributional costs in rich countries—that is, there were many winners and few losers. That era is behind us. Over the past two decades, trade integration between the developed and developing world—most particularly between China and the West—has produced large aggregate gains in GDP in rich and poor countries alike. It also has generated concentrated economic costs for low-skill workers in wealthy countries. Those harms have not been offset either by lower consumer prices (cheaper apparel) or by the very modest set of policy tools that the United States has used to assist workers adversely affected by trade.
  7. While discussion of trade policy has entered U.S. politics with a ferocity not seen in decades, this discussion is largely reactive and backward looking. Looking forward, the great China trade shock may soon be over, if it is not already. China is moving beyond the period of catch up associated with its market transition and becoming a middle-income nation. Rapidly rising real wages (after accounting for inflation) indicate that the era of cheap labor in China is no more. China’s comparative advantage in the future will likely be less about making cheap goods and more about making high-quality products that compete with those made by middle- and high-income countries such as Japan, South Korea, Mexico, and the United States. Absent any change in U.S. trade policy, the next decade of trade integration will be far less dramatic and wrenching than the two decades that preceded it.

Policy options

There is no magic policy that can fully shield workers from the challenges of trade adjustment while simultaneously allowing the nation to realize all of the benefits that come from trade integration. When industries contract or shut down—due either to trade, technological advances, or even to shifts in consumer tastes—workers in those industries typically experience real and sustained economic losses. These losses are larger among less-educated workers, who tend to lack the skills and flexibility to quickly adapt to new circumstances, and these losses are larger when they occur during recessions because workers tend to remain involuntarily employed for extended durations.68 The following policy ideas address some of those costs.

Increasing the accessibility and flexibility of Trade Adjustment Assistance

The current U.S. Trade Adjustment Assistance program is difficult to access and places artificial strictures on workers’ reemployment options. To access TAA, a group of workers (generally employees of the same firm) must petition the U.S. Department of Labor to recognize that they have experienced a reduction in employment or wages due to foreign trade. If their petition is granted after investigation, then the workers may access services that include job training, job search and relocation allowances, income support, and assistance with healthcare premium costs. In general, these services are only available while displaced workers are undergoing training and remain out of the labor market. If a displaced worker wanted instead to take a new job at a lower wage soon after losing her original position, TAA would not provide assistance.

Providing wage insurance

Workers displaced from career jobs typically have trouble getting back into the labor market. One psychic barrier is that the jobs available to displaced workers often pay less than their previous work. Concretely, consider what occurs when an apparel factory shuts down. Because of widespread contraction of the apparel sector, displaced apparel workers are unlikely to find equally well-paid jobs nearby. But many displaced workers will be reluctant to immediately take a large pay cut, locking in a lower standard of living and, arguably, acknowledging economic defeat.

But waiting is costly. The longer workers spend unemployed, the harder they find it to get a new job. Economic research demonstrates that employers are reluctant to hire the long-term employed. And when workers are unemployed for extended periods of time, they may lose confidence and motivation. Thus, getting displaced workers back into the game is potentially valuable—even if it means taking a pay cut.

In January of 2016, the Obama administration proposed a so-called wage insurance policy that was intended to facilitate this goal.69 The president’s plan would provide workers with an insurance policy that would replace half of lost wages, up to $10,000 over two years. Displaced workers making less than $50,000 who were with their prior employer for at least three years would be able to leverage these resources to help them get back on their feet and on the way to a new career.

The simple idea of wage insurance is to ease the economic and psychic pain of transitioning to a new line of work. If a displaced worker must take a pay cut to get reemployed then the wage insurance policy would meet them half way. Once reemployed, workers may find that they are able to move quickly up the wage ladder, in which case, the wage insurance policy would not make further payments. If this doesn’t occur, however, then workers would be afforded up to two years to make other adjustments.

Of course, a policy as generous as the president’s proposed wage insurance plan must also be carefully targeted, otherwise the fiscal cost would be prohibitive. The need for careful targeting has costs—it makes the program difficult to access and may deter deserving beneficiaries. Moreover, a policy targeted only at trade adjustment does not assist workers displaced by other exogenous economic events such as firm failure or technological advances that make their skills redundant, the latter of which is surely even more important than trade for job loss over the longer run.

Extending the Earned Income Tax Credit to workers without qualifying children

The Earned Income Tax Credit is among the nation’s most significant tools for reducing poverty and encouraging people to enter the workforce. In 2014, the EITC and the refundable Child Tax Credit supported 32 million working families, many with children. Because receipt of the EITC is contingent on work, much reputable economic research confirms that the EITC increases both income and employment.

Workers without qualifying children, however, miss out on the anti‐poverty and employment effects of the EITC. In 2015, workers with three-plus dependent children could receive up to $6,242 in EITC income from the federal government. By contrast, adults without children and non-custodial parents could receive at most $503 in EITC income—which in economic parlance is bubkas. As such, the EITC provides little cash assistance or employment incentive to childless workers and non-custodial parents.

Many of the individuals who do not qualify for EITC due to childlessness or non-custodial status are low-educated males and minority males. Ironically, low-education and minority males are also disproportionately likely to be impacted by adverse shocks to manufacturing.70 Thus, unintentionally, the EITC appears targeted to not help the group that is arguably most sorely in need of such assistance.

The White House proposed in 2014 to expand the EITC to cover childless workers and non-custodial parents.71 This is an excellent idea. In addition to facilitating trade adjustment, the proposed EITC expansion would ameliorate another pressing economic problem: the declining labor force participation rate of prime-age males in the United States. Since 1990, the United States has experienced the second-largest decrease in prime-age male participation among all the developed or leading developing member nations of the Organisation for Economic Cooperation and Development. At present, the United States has the third-lowest labor force participation rate in this group. The fall in participation for prime-age men has largely been concentrated among those with a high school degree or less, and participation rates have declined more steeply for black men than for white men. Expanding the EITC may help to stem or even reverse this ill tide.72

The proposed EITC expansion would also assist workers suffering adverse employment consequences from any of multiple causes—trade exposure, technological displacement, and general declines in economic conditions—all of which are economically damaging, and most of which are outside of workers’ individual control.

While there is no magic policy that makes trade adjustment painless, the policy options above are better than the ones that the United States is currently pursuing. Moreover, the natural alternative policies of either restricting trade or refusing to acknowledge the distributional costs of free trade are the worst options of all. Restricting trade and rejecting forward-looking trade deals such as the Trans Pacific Partnership would reduce long-run U.S. prosperity and cause considerable collateral damage to U.S. allies. (It bears note that China would likely be delighted if the TPP were scrapped.) The latter idea—insisting that “everyone wins” from trade—is also counterproductive. Indeed, the Pollyannaish boosterism surrounding past trade agreements is arguably one key reason why trade deals have become increasingly unpopular.

Placing China’s growth in
historical and global context

It is fair to say that China’s rise has likely done more to alleviate global poverty and reduce world inequality than any single economic event occurring in centuries. China’s economic growth has lifted hundreds of millions of individuals out of poverty. The resulting positive impacts on the material well-being of Chinese citizens are abundantly evident. Just consider Beijing’s seven ring roads, Shanghai’s sparkling skyline, and Guangzhou’s multitude of export factories—none of which existed in 1980 and all of which are indicative of China’s success. China’s growth generated a commodity boom that spread prosperity across South America and the commodity-producing regions of South Asia and Southeast Asia. China also has emerged as Africa’s largest trading partner, providing demand for the continent’s energy and minerals. China’s newfound wealth has permitted it to make large direct investments in Africa, often in some of the poorest countries from which Western investors have historically shied.73

Politicians should not lose sight of these enormous gains in world welfare when lamenting the comparatively modest adverse impacts felt by some U.S. workers. China is right to suspect that many U.S. politicians would rather see China’s billion citizens face economic stagnation rather than allowing a comparatively small set of American manufacturing workers face new competitive challenges.

Two and a half decades: Still waiting for change

Posted on by Austin Clemens

AP Images

About the author: Sylvia A. Allegretto, Ph.D. is an economist and Co-chair of the Center on Wage and Employment Dynamics at the Institute for Research on Labor and Employment, University of California-Berkeley.

Over the past few years, minimum wage policy has been propelled to the forefront of the economic debate boosted by “Occupy Wall Street,” the “Fight for $15,” and other pro-worker campaigns. One result has been the adoption of numerous minimum wage policies at state and local levels that increased wages for many of our lowest-paid workers. Much action on the minimum wage front is owed to the discussion on inequality as it relates to decades of stagnating or falling wages at the bottom end of the pay scale coupled with the long erosion of the federal minimum wage. Often overlooked in wage policy is the recognition that the federal subminimum wage received by tipped workers has been frozen at $2.13 since 1991.74 There is often confusion and misinformation around the sub-wage floor, the workers who earn it, and the two-tiered system that makes it possible. Future debate and policy consideration on wage floors must include the often forgotten subminimum wage workforce.

Delivering equitable growth

Next article: Income volatility, Bradley Hardy

This essay shows that tipped workers are overwhelming female who typically earn low wages. They also have few workplace benefits, live disproportionately in poverty, and experience high rates of sexual harassment—especially in states that set their sub-wage floor at $2.13. These workers also face workplace challenges unique to tipped workers such as unreliable shifts that result in extreme fluctuations in pay. Importantly, the full-service restaurant industry that employs most of the tipped workforce is rapidly growing and is becoming a larger share of the overall workforce—this is the case even in the states that do not allow for a subminimum wage.75

A bit of history will lend some perspective. In 1938 the Fair Labor Standards Act, a New Deal initiative, was signed into law. The new law banned oppressive child labor, set the maximum workweek at 44 hours, and established the first minimum wage at 25¢ an hour. But the law applied to few industries whose combined employment represented about one-fifth of the labor force. The 1966 amendment extended protections to hotel, restaurant, and other service workers who had previously been excluded. At the same time it punctured a permanent hole in the law’s umbrella via the introduction of a “subminimum wage” to be paid to workers who “customarily and regularly receive tips” —otherwise, most of the newly covered workforce.76

The two-tiered system is dependent upon the tip-credit provision—in other words, the amount of the wage bill an employer can pass on to customers in the form of tips. Thus tips are, at least in part, a wage subsidy provided by customers to employers and the subsidy has grown considerably over time. Both wage floors, after adjusting for inflation, are trending downward over time—the difference between them is the allowable federal tip credit. Customers now pay the lion’s share (71 percent) of a tipped worker’s wage bill—while employers pay a base wage that is just 29 percent of the regular minimum wage. (See Figure 1.)

Figure 1

There is a sort of quasi-natural experiment being conducted across the country as there are three general state policy scenarios regarding tipped wages. Additionally, each state’s regular minimum wage is set at the federal policy of $7.25 or above.77 There are 18 states that follow the federal policy of $2.13 (that is, they take advantage of the full tip credit provision) and most also have a $7.25 minimum wage. On the other end of the spectrum there are seven states that do not allow for a subminimum wage (states without a tip credit provision)—all seven also have regular minimums above the $7.25 federal level including $10.00, $9.75, and $9.50 in California, Oregon and Minnesota, respectively. In between there are 25 states and the District of Columbia that pay tipped wages above $2.13 but below their state regular minimums, which take advantage of a large range of partial tip credit provisions. (See Figure 2.)

Figure 2

The majority of these states also have minimums above the federal rate. The largest tip credit is $8.73 in Washington DC, where the minimum wage is $11.50 and the tipped wage is $2.77, meaning customers pay 76 percent of the wage bill for tipped staff.

Subminimum wage workers

A common misconception is that wait staff and other tipped workers make “a lot” of money; thus there is no need for concern. Sure, there are some workers in fine dining restaurants where large bills may result in generous tips and decent annual earnings, but this is the exception. Tipped workers are most commonly working at modest establishments—think of those working at a Denny’s in Alabama, a diner in rural Pennsylvania, or at a 24-hour truck stop in Texas.

Here I draw from an issue brief on tipped workers and the tip credit as well as a published peer-reviewed academic paper on the wage-and-employment effects of subminimum wages in the United States to bring some salient facts to light.78 Tipped workers, like minimum wage workers, are often thought of as young workers just getting a foot in the door of employment. The reality is that 63 percent of tipped workers are at least 25 years old, the vast majority (67 percent) are women, and among female workers, one in three have children. The typical hourly wage of tipped workers in the United States is $10.55 including tips. For wait staff and bartenders, who represent the largest share of the tipped workforce, it is $10.44. Importantly, average hourly earnings of tipped workers is about 21 percent higher in states that do not have a sub-wage floor compared to states that follow the federal $2.13 policy.

The norm is that workers in tipped occupations are overwhelmingly low-wage earners.79 Even as the tipped workforce in states without a sub-wage floor has relatively higher earnings, those working full-time, full-year, are typically earning just around $24,000 annually. Low wages translate into low family incomes for many tipped workers. About 30.5 percent of all U.S. workers are in families that earn less than $40,000. That share jumps to 47.2 percent for all tipped workers and 49.9 percent for waiters and bartenders (52 percent for female waiters and bartenders).80

Tipped workers and their families experience elevated rates of poverty. The U.S. poverty rate of non-tipped workers is 6.5 percent, while it is 12.8 percent for the tipped workforce, and 14.9 percent for waiters and bartenders.81 Importantly, poverty rates for non-tipped workers do not vary much by state tipped-wage policies. (See Figure 3.)

Figure 3

Yet for tipped workers, and particularly for waiters and bartenders, the negative correlation between low-tipped wages and high poverty rates is dramatic. Among wait staff and bartenders, for example, 18.0 percent are in poverty in states that follow the $2.13 subminimum wage, compared with 14.4 percent in medium-tipped-wage states, and 10.2 percent in states without a sub-wage floor. This pattern strongly suggests that higher tipped wages mitigate poverty to some extent, yet it is still the case that poverty among tipped workers is far too high even in states that do not allow for a subminimum wage.

Unique challenges
facing tipped workers

For any job, overall job quality is important and goes beyond wages to include benefits such as paid sick leave, paid vacation, health insurance, and retirement. Job quality also includes other important issues such as workplace conditions, worker voice, and scheduling practices. In previous work I documented that tipped workers are far less likely to receive even the basic benefits such as paid sick leave let alone benefits such as retirement or disability.82 For instance, the problem of sick restaurant workers handling food is real—just 23 percent of all workers in the Accommodation and Food Services industry are offered paid sick leave compared to 61 percent of the private sector workforce. This low figure includes managers and supervisors and is undoubtedly much lower for tipped staff.83 Many workers simply cannot afford to take leave when they are sick.

Many tipped workers, especially in states with the $2.13 sub-minimum wage, effectively go home after each shift with the tips they are left with after they “tip-out” other staff such as hostesses, bartenders, bar backs, and bus persons. These workers also owe taxes on tips and their hourly base pay—which means they are often without a regular pay check. Thus pay is often based solely on tips that vary tremendously by the day of the week and the time of a scheduled shift. Schedules can vary down to an hourly basis at the whim of an owner or manager, as restaurants and bars are intense users of “just-in-time” employment practices. This means that many workers cannot even rely on the hours of a pre-scheduled shift, as restaurants and bars often utilize a “first one in, first one out” practice determined solely by customer demand. Constantly changing shifts make it difficult to have a second job or to plan for childcare.

As mentioned earlier, in states that allow for a subminimum wage, a worker’s tips plus their tip wage must equate to at least the regular state minimum wage. If not, the employer must make up the difference. This poses several problems. First, if the law is even known, it often puts the onus of enforcement on tipped workers who may not feel comfortable confronting management about whether they were shorted on wages, to remedy the situation. Additionally, this regulation is difficult to implement in practice. First, it is logistically difficult as many tipped workers work irregular schedules. Second, a portion of tips are often given to secondarily tipped workers. Third, management would need an accounting system to keep track of pay, hours, and actual tips. And finally, at what point does an employer stop the clock to tally up hours, tips, and base wages?

Time and again, where there is adequate monitoring by regulators, they find that non-compliance is an issue especially in the full-service restaurant industry. A 2010–2012 compliance sweep of nearly 9,000 full-service restaurants by the U.S. Department of Labor’s Wage and Hour Division found that 83.8 percent of investigated restaurants had some type of violation. In total, the federal government recovered $56.8 million in back wages for nearly 82,000 workers, assessing $2.5 million in civil money penalties. Violations included 1,170 tip-credit infractions that resulted in nearly $5.5 million in back wages.84 Most states do not have adequate investigators to monitor sufficiently the tipped wage workforce and the two-tiered system.

Research shows that the practice of tipping is often discriminatory and harmful to workers. For instance, white service workers receive larger tips than black service workers for the same quality of service.85 Michael Lynn, and expert on tipping and the Burton M. Sack Professor in Food & Beverage Management at the Cornell University’s School of Hotel Administration, reports on a range of aspects regarding tipping, such as how tips vary by race, physical appearance, and religious affiliation.86 The worker advocacy group Restaurant Opportunities Centers United has published numerous testimonies that echo what I have found in much of my work. Their reports, based on worker surveys, document an array of problems from low earnings and low-to-no benefits, to overtime violations, working off the clock, and issues of safety.87

Of particular importance, given the overwhelmingly female-dominated tipped employee workforce, is the incidence of sexual improprieties. Restaurant Opportunities Centers United reports that in the states with the $2.13 subminimum wage tipped female workers are twice as likely to experience sexual harassment compared to those working in states that pay the full minimum wage to all workers.88 In fact, all workers in these $2.13 states, including men, reported higher rates of sexual harassment, indicating that the sub-wage floor may perpetuate incidences of sexual harassment.

The protections of union representation could help many workers with issues of pay, benefits, scheduling, and unfair and dangerous working conditions. Yet just 1.9 percent of workers in food services and drinking places are represented by a union.89 This is one reason why worker organizations, such as Restaurant Opportunities Centers United, exist—to help to give workers justice and a fair voice in the workplace.

Policy action

The most basic question concerning the tipped wage is who should pay the workers—employers who hire them or by means of customer tips? The quasi-natural wage floor experiment going on across the county is proof at the very least that the $2.13 federal subminimum wage can easily and without undue economic harm be increased.90 The restaurant industry is booming in states that do not allow for subminimum wages—and those no-tip-credit states also have regular minimums significantly above $7.25. Lending credence to the immediacy of policy action are the low wages, low-to-no benefits, and high poverty rates of tipped workers, especially acute for women in states that follow the federal $2.13 sub-wage floor.

Furthermore, 46 percent of tipped workers and their families rely on public assistance to make ends meet—compared to 35.5 percent of the non-tipped workforce.91 It is good policy that low-wage workers can turn to public assistance for help, but these programs were not designed to serve as a permanent wage subsidy or part of the business strategy for low-wage employers.

Relevant to all low-wage workers, and even to middle-tier workers, is an imperative to increase wage growth, enforce and strengthen labor protections, and provide a seamless path to unionize. We also need to upgrade workplace benefits and scheduling practices. How can it be that of all advanced economies in the world, it is the U.S. worker who, regardless of anything, gets no mandated paid time off? After a quarter of a century, the time is past due to raise the federal subminimum wage (along with the minimum wage) and have a discussion about the merits of complete abolishment of this sub-wage floor. A stronger wage policy would be a start to address two of the biggest problems in our economy—growing inequality and poverty among the working poor.

A fresh look at the wage gap on African American women’s Equal Pay Day

Posted on by Austin Clemens
Ultraviolet members protest Macy's lobbying against an equal pay bill. They're asking the retail giant to pledge to never lobby against equal pay again. Photo Credit: Melissa Byrne

According to the National Organization for Women, today is African American women’s Equal Pay Day, when African American women will have worked all of 2015 through today—an additional 236 days—in order to earn the same amount that men made last year. In other words, in 2015, on average, black women earned about 63 cents per every dollar earned by a man. This isn’t necessarily surprising given what the research says about pay equity, but it sparked further interest at Equitable Growth to see what the wage gap looks like for African American women up and down the income ladder.

Equitable Growth’s new interactive tool allows for a careful look. Though our interactive’s numbers don’t quite match the National Organization for Women’s Equal Pay Day levels due to methodological differences (primarily, our interactive covers a slightly different time period), they still prove the same point: Men across the board are paid substantially more than African American women. By our calculations, men earn a median wage of $19.61 per hour, while African American women earn a median wage of $14.25, an hourly wage differential of $5.36 or a pay gap of about 38 percent relative to African American women’s hourly rate. (See Figure 1.)

Figure 1

When looking across the wage distribution detailed in Figure 1, the same pattern is clear—men get paid more. Low-wage male workers make about $9.22 per hour compared to the $8.15 earned by low-wage black women, a pay gap of about 13 percent. Near the top, however, the pay gap is substantially larger, approximately 46 percent, with men earning $47.44 and African American women earning $32.50.

These data also demonstrate that the pay gap between men and black women is narrower for workers at the bottom, but widens as a worker moves up the wage distribution. This same pattern also holds when we observe the wage distributions for different genders, races, and ethnicities. (See Figure 2.)

Figure 2

At the bottom of the distribution, low-wage workers from different demographic backgrounds have relatively similar wages. Low-wage Latinas and African American women earn the least ($8.14 and $8.15 per hour, respectively), while low-wage white men earn the most ($10.00). This clustering of wages at the bottom is likely a result of current federal and state minimum wage policies, which legally mandate employees to be paid at least $7.25 per hour (or more, in many states).

For workers in the middle range of each demographic group, the gender gap is bigger. Median-wage Latinas and African American women are the lowest-wage recipients, earning $12.65 and $14.25 per hour, respectively. In contrast, white men earn the highest median wages, making $21.79. At the top, where the gap is largest, the lowest wages are $28.83 (Latinas) and $32.50 (African American women), while the highest wage is $50.54 (white men), a difference of more than $20.00. The spreading out at the top reflects discrimination across both gender and race.

What explains these wage gaps? On one hand, social and cultural norms at work, occupational sex segregation, and a lack of workplace policies, among other factors, play a role in pushing women out of higher-paying jobs. On the other hand, racial discrimination, which appears in hiring practices and other labor market interactions, disproportionately leaves workers of color with lower pay than their white counterparts. African American women (and Latinas) are doubly disadvantaged, as they experience both of these forms of discrimination.

Increasing educational attainment by women of color is probably the most commonly suggested solution to closing the gender wage gap. Yet over the past two decades, women have outpaced men in college enrollment and college enrollment for black women has surged. Despite these gains in education, African American women still earn less. So other solutions would seem to be in order. But first, it’s worthwhile to examine the wage distribution by a worker’s educational attainment. Comparing the earnings of white men with high school degrees to African American women with college degrees shows there are many similarities in their wages despite the much higher level of educational attainment for this group of African American women. (See Figure 3.)

Figure 3

The lowest-paid white men with high school diplomas earn $9.31 per hour, which is only about 15 percent less than the $10.69 earned by African American women with a four-year college degree. At the median, white men with a high school degree make $18.00 per hour, or only about 17 percent less than the $21.08 earned by the median college-educated African American women. Even for the best paid workers in both groups, the pay gap is only about 22 percent, with white male high school graduates receiving $34.79 per hour, compared to $43.27 top-earning African American women with college degrees.

Closing the pay gap for African American women clearly is no simple task. On the policy front, raising the minimum wage and the tipped minimum wage at the federal, state, and local levels would make a positive difference for women of color. So, too, would increased unionization, crackdowns on workplace discrimination, and improved work flexibility and childcare policies. But the wage gap will persist for African American women as long as structural racism goes unaddressed, which admittedly is a more complex and challenging issue. In the meantime, African American women’s Equal Pay Day helps serve as a reminder that much work is left in order to achieve pay equity across gender and race.

Gender segregation at work: “separate but equal” or “inefficient and unfair”

Posted on by Austin Clemens
PepsiCo Inc. chairman and chief executive Indra K. Nooyi, left, and Jill Beraud, PepsiCo president of sparkling brands, meet with Barclays Capital investor relations representative Carmen Barone, right, at the post that trades Pepsi on the floor of the New York Stock Exchange Monday, Feb. 1, 2010. (AP Photo/Richard Drew)

Fifty years after the arrival of the contemporary women’s movement on the national stage, the U.S. workforce and the U.S. economy are the beneficiaries of the enormous strides in gender equality. Women are working in nearly all occupations that once were exclusively the domain of men, and many are in prominent leadership roles in business and government. Yet sex segregation in the workplace remains a problem as social norms continue to restrict occupational choices by women and men, thereby distorting labor markets, depressing wages, and hurting business innovation and productivity.

Despite the early gains of women in professional and service jobs that require a college education, many such occupations remain disproportionately male, particularly at the highest levels. Furthermore, most technical and manual blue-collar jobs have undergone little to no integration since the 1970s. Economists Francine Blau at Cornell University, Peter Brummund at the University of Alabama, and Albert Yung-Hsu Liu at Mathematica Policy Research, Inc., examined trends in occupational segregation between 1970 and 2009 and found that the process of desegregation has slowed significantly in recent decades, regardless of the education level necessary for a job. (See Figure 1.)

Why does occupational segregation by gender persist

Traditional economic theory explained occupational segregation by gender as an inevitable consequence of “natural differences” in skills between women and men, but contemporary economists have refocused the blame on gender discrimination by employers, coworkers, and other actors. According to the standard model, levels of segregation should be constant over time as they are determined by occupations’ supposed compatibility with “male” and “female” labor market preferences. Contradicting this prediction, economist Jessica Pan at the National University of Singapore finds that men abandoned formerly all-male professions in droves after women’s participation reaches “tipping points,” fearing the social stigma and wage penalties associated with belonging to “feminine” occupations.

Contemporary economic research has sought to better understand the causes of this male aversion to working with female colleagues. On one hand, the discrimination in hiring and promotion that reinforces segregation is based on stereotypes about women’s skills. As Harvard University economist Claudia Goldin argues in her “pollution theory of discrimination,” men often underestimate women’s skills based on their current underrepresentation in certain occupations and thus discriminate against women in these occupations on the false assumption that increasing their representation would lower overall productivity.

On the other hand, economists George Akerlof at Georgetown University and Rachel Kranton at Duke University argue that discrimination in male-dominated professions is caused by social pressures, interpreting women’s inclusion as a threat to the professions’ masculinity. By this account, men don’t discriminate against women because they view women as less qualified but rather because they are trying to protect the social power men hold through membership in the “boys’ club.” In a similar model of “stratification economics,” economists Sandy Darity of Duke, Darrick Hamilton of the New School for Social Research, and James Stewart of Pennsylvania State University detail how socially dominant groups create and reinforce prejudices against other groups in order to protect their economic, political, and social advantages.

Despite a decline in explicit sexism, researchers argue that gender discrimination today, whether in the form of stereotypes or social pressures, is perpetuated by a new, “egalitarian” form of gender essentialism—the belief that women and men’s social, economic, and familial roles are and should be fundamentally different. While most people now support women’s access to all economic opportunities, they simultaneously expect men and women to pursue traditionally “male” and “female” jobs and regard parenting as the primary responsibility of mothers. Sociologist Paula England at New York University and other researchers note that the resurgence in differential expectations is responsible for the recent stagnation in occupational desegregation and in other indicators of women’s economic inclusion.

Assuming different roles for men and women at work and at home, male-dominated occupations remain mostly structured to meet the needs of a stereotypical male who is expected to have a spouse at home, a work-schedule issue that not only fails to accommodate women but also often actively pushes women out. The idea that women are freely “opting out” of workforce opportunities because they have different career aspirations than men has been thoroughly debunked. Instead, women usually leave their jobs because of negative experiences in the workforce, especially in male-dominated fields. In particular, jobs in these fields often demand a culture of long hours, which does not accommodate flexibility for caregiving, forces many mothers to quit, and likewise discourages fathers from helping out at home.

To make matters worse, male-dominated workplaces are often hostile work environments for women, featuring the highest rates of sexual and gender-based harassment. Overt forms of sexual harassment remain part of the “culture” of many male-dominated jobs, particularly given the limited of application of anti-discrimination laws in many blue-collar occupations, as the late Barbara Bergmann, a pioneering feminist economist, once observed. Subtler forms of gender-based harassment in which men exclusively hire, socialize with, and promote each other are even more common in the STEM (science, technology, engineering, and mathematics) professions, in finance, and in other professional environments and have been demonstrated to limit women’s prospects for advancement, decrease female labor force attachment, and reinforce segregation.

How occupational segregation drives down wages and slows economic growth

At the microeconomic level, occupational segregation by gender substantially depresses female wages and contributes to the gender wage gap. Most of the U.S. economy’s highest paying occupations are predominantly male while most of the lowest paying occupations are predominantly female. (See Figure 2.)

By pushing women into lower-paying occupations, occupational segregation depresses female wages and hurts family economic security. A recent empirical review on trends in the gender wage gap since 1980 by economists Blau and her colleague at Cornell, Lawrence Kahn, attributes half of the present gap to women working in different occupations and industries than men. In addition to keeping women out of the highest-paying occupations, a report by the Institute for Women’s Policy Research authored by Heidi Hartmann, Barbara Gault, Ariane Hegewisch, and Marc Bendick details how segregation also excludes women from the best-paying middle-skills jobs in information technology, logistics, and advanced manufacturing, even though these jobs require similar skills as predominantly female jobs with worse pay. Other researchers clearly demonstrate that this “wage penalty” for occupational feminization is a product of discrimination against women’s labor as opposed to productivity differences between predominantly male and female jobs.

As AFL-CIO chief economist William Spriggs and Case Western University historian Rhonda Williams argue, these trends also are highly racialized: women of color at all education levels are segregated into jobs with lower wages than their white female peers of similar skill level. Conversely, occupational integration produces huge wage increases for women and people of color: econometric analysis by Chang-Tai Hsieh and Erik Hurst at the University of Chicago and Charles Jones and Peter Klenow at Stanford University shows that occupational integration since 1960 was responsible for 60 percent of real wage growth for Black women, 40 percent for white women, and 45 percent for Black men (after accounting for inflation). These patterns indicate that the persistence of segregation today results in a significant loss of income for working women and their families, which should be disconcerting to policymakers given the ameliorative effects of lifting women’s wages on poverty, unemployment, and inequality.

Beyond its effect on individual workers, occupational segregation limits optimal matching of workers with jobs where they can best leverage their skills and fulfill their ambitions. If men and women are pushed into careers based on societal definitions of “masculinity” and “femininity” then they aren’t able to choose the labor market opportunities that best match their skills and ambitions. Most of this issue brief is focused on how segregation limits women’s ability to contribute to traditionally male occupations, but it also limits men’s ability to contribute to traditionally female occupations—a significant policy issue as globalization and technology continue to decrease the availability of many predominantly male blue-collar jobs in the United States.

Indeed, a growing body of evidence demonstrates that occupational integration helps both sexes contribute their human capital to enhancing the productivity of firms. A variety of studies show that establishing a “critical mass” of at least 30-percent women in corporate leadership enhances firm innovation and overall performance. This is consistent with behavioral research that gender integration improves teams’ “collective intelligence.” In the financial sector in particular, occupational integration decreases systemic risk driven by masculine-stereotyped behaviors encouraged in sex-segregated environments, argues economist Julie Nelson at the University of Massachusetts-Boston.

These individual- and firm-level gains can have a massive impact on overall productivity and growth. Research by economists Hsieh, Hurst, Jones, and Klenow demonstrates that occupational integration was responsible for driving 15 percent to 20 percent of the increase in aggregate output per worker since 1960.

Where policymakers can jumpstart integration

To counteract gender discrimination, firms should set explicit targets for increasing female representation at all levels. Because children’s labor market preferences are largely shaped by the representation of women in leadership roles, increasing women’s representation in private- and public-sector institutions can decrease stereotypes and expand opportunity for women at all levels. According to research by economists Marianne Bertrand at the University of Chicago, Sandra Black at the University of Texas-Austin, Sissel Jensen at the Norwegian School of Economics, and Adriana Lleras-Muney at the University of California-Los Angeles, Norway’s 40 percent minimum requirement for women on corporate boards increased female representation, attracted female board members with greater qualifications, and reduced gender wage gaps on boards. While it may take time for these effects to trickle-down to entry-level workers, a study by Lori Beaman at Northwestern University, Esther Duflo at the Massachusetts Institute of Technology, Rohini Pande at Harvard University, and Petia Topalova at the International Monetary Fund, shows that a law mandating increased representation for women on municipal councils in India dramatically decreased bias against women in the population as a whole while expanding girls’ educational opportunities and career aspirations.

In addition to interventions at the top, researchers, including Harvard’s Rosabeth Moss Kanter, argue that by establishing a critical mass of women in all work environments employers can dramatically reduce the prevalence of discriminatory behaviors and force their workplaces to adapt to their female employees’ needs and demands. As Yale Law professor Vicki Schultz argues, anti-discrimination law and policy should thus emphasize increasing women’s numerical strength across occupations and dismantle the workplace structures discussed above that create sex differences in labor market choices—as opposed to simply reflecting them. Sociologists Sheryl Skaggs of the University of Texas-Dallas, Kevin Stainback of Purdue University, and Phyllis Duncan of Our Lady of the Lake University find significant “bottom-up” effects of increasing women’s general representation on their representation in managerial positions, complementing the “top-down” effects of increasing their numbers on corporate boards.

While work-life reforms benefiting both fathers and mothers are essential to developing an inclusive workplace, setting explicit targets for women at all levels would help reverse discrimination against women in promotion decisions based on their greater probability of taking leave, as Cornell economist Mallika Thomas documents. Furthermore, while male-dominated occupations can and must change to include women, it is equally important to elevate and integrate female-dominated occupations by mandating equal pay for jobs of equal value or “comparable worth,” as noted by, among others, economist and IWPR president Heidi Hartmann as well as economist and former Bennett College President Julianne Malveaux.

Beyond reforms within labor markets, ending occupational sex segregation will require a comprehensive strategy to prevent the formation of gender stereotypes at a young age that later “spillover” into the workplace. Cultivating inclusion must start early in order to have a lasting impact on children’s beliefs and experiences. Research demonstrates, for example, that unnecessarily segregating boys and girls in educational or social activities creates arbitrary categories of “us” and “them,” sending a message that children’s opportunities should be determined by their gender. Efforts to counteract gender stereotypes can also help women later on in their careers. Indeed, the IWPR report by Hartmann, Gault, Hegewisch, and Bendick argues for public-private partnerships to train and match women from “on-ramp occupations” to higher paying traditionally male jobs that require similar skills.

Achieving successful integration at all levels will take work. However, social scientists including legal scholar Joan Williams at the University of California’s Hastings School of Law and behavioral economist Iris Bohnet at Harvard are proposing a variety of strategies for decreasing bias, overcoming difference, and advancing women throughout their educational and professional careers. As Goldin and Princeton University economist Cecilia Rouse argue in their seminal study on the gender equity benefits of blind auditions for symphony orchestras, these strategies should focus on results-based approaches that decrease the influence of social networks and gender biases in evaluation, hiring, and promotion of women.

Leveraging these behavioral changes to promote gender equity and inclusion in all institutions boasts enormous potential to raise wages, boost productivity, drive innovation, and expand opportunity for women and men across the economy.

Will McGrew is an intern at the Washington Center for Equitable Growth and a Dahl Research Scholar at the Yale Institution for Social and Policy Studies. He is studying Economics and Political Science at Yale University.