Category: Vision 2020

Improving competition to lower U.S. prescription drug costs

Posted on by Maria Monroe

This essay is part of Vision 2020: Evidence for a stronger economy, a compilation of 21 essays presenting innovative, evidence-based, and concrete ideas to shape the 2020 policy debate. The authors in the new book include preeminent economists, political scientists, and sociologists who use cutting-edge research methods to answer some of the thorniest economic questions facing policymakers today. 

To read more about the Vision 2020 book and download the full collection of essays, click here.

Prescription drugs are among the most effective and cost-effective interventions in medicine, and the drug industry plays an important role in bringing these products to market, which can require substantial resources. Yet drug prices in the United States continue to rise without a direct connection to the costs of development, which can make breakthroughs unaffordable for many patients, leading to bad clinical consequences.

Rising drug prices also are a major driver of U.S. healthcare spending, now accounting for about one-fifth of overall spending, with one private insurer reporting that 25 percent of healthcare dollars are going to prescription drugs.1 The United States spent about $476 billion on prescription drugs in 2018.2 This is an increase of about $100 billion as compared to $361 billion in spending in 2014,3 with the discovery and testing of new drugs accounting for additional tens of billions of taxpayer and private dollars.

In recent years, there have been great advances in the use of prescription medications for treating heart disease and certain types of cancer, but high prescription drug prices have threatened to limit the availability of new transformative medications such as treatments for the hepatitis C virus infection,4 new gene therapies for devastating illnesses, and decades-old products such as insulin5 and antibiotics.6 By contrast, many key pharmaceutical therapies for chronic diseases such as high blood pressure and depression can be obtained for $4 per month or less, due to a vibrant generic drug marketplace in the United States.7

In this essay, I will review the origins of high prescription drug prices in the United States, as well as various policy mechanisms that can lead to more rational spending. There are four main periods in the development process of a prescription drug:

  • The discovery process leading up to approval by the U.S. Food and Drug Administration
  • The brand-name-only period of market exclusivity that lasts a median of 12–14 years or more after drug approval8
  • The end of market exclusivity and the transition to a competitive market with the introduction of generic drugs
  • The multisource generic drug period

High drug prices are driven by a variety of factors in each of these time periods, and the policy solutions that I present in this essay vary based on when in the process the drug currently sits. These policy recommendations, in their entirety, would dramatically lower spending on prescription drugs while ensuring continued funding for true innovation.

Drug discovery period

Government-funded research laboratories and those based in nonprofit academic centers are the origin of most key fundamental discoveries on which new drugs are based and are frequently cited in the research underlying new drugs.9 This support is derived from taxpayer funds through the National Institutes of Health. Whether the seminal study leading to the development of a new therapeutic approach arises through public support or in the private sector, considerable (and costly) work is then required to bring a drug to market. This is generally done within the pharmaceutical company that comes to own the intellectual property for a given compound.

Studies show the central role that public funding plays in the discovery, development, and even clinical testing of a growing number of transformative drugs.10 As a result, there is concern that the public funds this key research that generates innovation while manufacturers then obtain exclusive rights to the products and charge high prices to the very taxpayers who funded the research in the first place.

More government and academic institutions supported by public funding have sought to patent and license the discoveries they make that are relevant to drug discovery. In a recent study, my colleagues and I examined all new drugs—excluding biologics, or those drugs produced from living organisms, as opposed to drugs produced through chemical synthesis—approved in the United States from 2008–2017 and found that publicly supported research in nonprofit institutions or spin-off companies that had their origins in public-funded research made important late-stage intellectual contributions to at least one in four of these new drugs.11 But few such patent licenses have traditionally not had clauses that restrict manufacturers’ ability to charge excessive prices to government payers or return royalties to support future public funding of science.

Policy recommendations for the drug discovery period

One way to lower drug prices when public funding leads to patents covering approved prescription drugs would be for the National Institutes of Health to require a reasonable pricing provision in the technology transfer from the public sector to the private sector. This provision could, for example, require that the ultimate price of the product be no greater than its value-based price—a price reflecting the drug’s potential ability to improve patient outcomes over comparable interventions—as determined by independent organizations.

A less-effective version of such a clause was part of the NIH Combined Research and Development Agreement process from 1989–1995, but it was never implemented fully and ultimately was dropped under substantial lobbying pressure from the pharmaceutical industry.12

Notably, according to the Bayh-Dole Act of 1980, which established the basic rules for commercialization of technology arising from government funding, the federal government retains a license in such patents and can even “march-in” to invalidate an exclusive commercialization license if the product is not made available on “reasonable terms.” The NIH, however, does not interpret reasonable terms as applying to pricing and has never invoked the march-in provision when public interest groups have requested such a move.

In addition, few drugs have all of their patents linked to government funding because pharmaceutical manufacturers usually build a broad thicket of dozens, or hundreds, of patents around the product prior to approval. So, it is unlikely that greater reliance on the march-in provision will serve as an effective lever to reduce drug prices in all but a few cases.13

Finally, it is important for policymakers to recognize that focusing on patented technology misses the manifold ways that information and insights generated by publicly funded science get taken up by for-profit manufacturers and applied to drug discovery. Many of the policy proposals discussed subsequently in this essay can lead to more rational drug prices and are ethically justified by the publicly supported science currently serving as a primary engine of innovation for the for-profit pharmaceutical industry.

Brand-name-only period

After drugs are approved by the U.S. Food and Drug Administration, manufacturers hold patents and other exclusivities on their products to prevent direct competition. There is thus no direct competition that could help lower drug prices. Competition between brand-name drugs that treat the same conditions has not been shown to effectively lower prices, apart from a few cases. In such an environment, the most direct way to lower prices is to empower the buyers to negotiate better terms with the exclusivity-holding manufacturers. So, the best solution is to provide the U.S. government with the authority to negotiate reasonable prescription drug prices that reflect the value that the treatments provide to patients.

Currently, in the United States, brand-name manufacturers can set any price they choose during the market exclusivity period, while the buyers’ markets for prescription drugs are served by a patchwork of public and private payers with far less equivalent negotiating power.14 Medicare—the government program that covers payment for people older than 65 years of age—is forbidden by law from negotiating prices with drug manufacturers. This is despite Medicare’s ability to negotiate or set the price for every other kind of medical service it covers. This imbalance in power between the sole-source supplier and the multiple, competing buyers is made worse by various rules and restrictions on the payers and their abilities to decline to cover certain drugs.

Medicare Part B, for example, accepts payment rates for FDA-approved drugs based on their average sales price, and Medicare Part D plans must cover at least two drugs in each class in addition to substantially all drugs in six “protected classes” (including cancer and HIV).15 But Medicare cannot negotiate the price of these mandatory drugs on behalf of the individual plans that implement coverage. Similarly, Medicaid programs, which cover care for the poor and disabled, are required to list virtually all FDA-approved drugs on their formularies.16

In the private sector, insurers can refuse to pay for particularly costly drugs that have equivalently less expensive alternatives, but they may also impose high co-payments to discourage patient demand for such lower-value medications. The latter approach is counteracted by manufacturer coupons to patients and patient assistance programs.17 For these and other reasons, commercial payers receive lower rebates, on average, than Medicare.

Policy recommendations for the brand-name-only period

During this period, the most direct way to address excessive drug prices would be for the government to negotiate the price of drugs. Numerous other countries have health technology assessment organizations that assess a newly approved drug’s clinical value and help determine what a fair price would be based on how well it is expected to perform against other available treatments.18 These publicly funded organizations gather data on the effectiveness, safety, and cost of new drugs, compared with other interventions, to assess whether the payer should cover the price.

This does not occur in the United States, making it difficult for value-based assessments to drive medication use and cost. Currently, several smaller public and private entities take on this role.19 The United States needs a similar body operating at the national government level that can make such a determination within the first year after approval; until then, manufacturers might be permitted to charge the price they believe is appropriate.20 Past legislative efforts to establish such a body have been derailed by the political process, but it would be best situated within the Department of Health and Human Services and could accept information about the cost of development and cost of failure as a way of determining a rational, value-based price.

Once the price is established, price increases each year should not be able to exceed inflation, unless the manufacturer brings new evidence that changes knowledge about the drug’s value. Similarly, future technology that lowers the cost of care for the indication should lead to price declines. As a safety net for particularly essential and high-priced medications for which a negotiated price cannot be reached, the government has the authority to reimburse pharmaceutical manufacturers at a fair market-value price for use of their intellectual property (along with a reasonable royalty rate to account for the cost of failure) under Section 25 of the U.S. Code, §1498.21

During this period, brand-name pharmaceutical manufacturers spend billions of dollars annually to persuade physicians and patients to use their products, but there is a shortage of noncommercial information disseminated about drug benefits, risks, and cost effectiveness. As an alternative, we need to support independent programs designed to generate unbiased information about evidence-based management of disease and then invest in actively disseminating this educational information to physicians, so that it can translate optimally into more cost-effective prescribing.22

In addition, at present, manufacturers are limited to only actively promoting their drugs primarily for the diseases or conditions that the FDA has reviewed and approved, even though prescribing for non-FDA-approved (or “off label”) prescription drug uses can be common. Recent federal court decisions interpreting the First Amendment have extended protection of commercial speech and put these rules in jeopardy, potentially allowing manufacturers to engage in widespread promotion of off-label drug uses. Such uses often lack the same level of evidence as FDA-approved uses, and so can be potentially dangerous to patients.23 And they can be costly to the system, too.24 Thus, the FDA must reaffirm its commitment to current off-label marketing rules, which should be enforced even under the evolving commercial speech doctrine in this area.25

Transition to a competitive market period

The only type of competition that consistently and substantially lowers drug prices comes from introduction to the U.S. market of interchangeable, FDA-approved generic drugs. When the market exclusivity period ends for a given medication, generic manufacturers can enter the market and prices generally fall, reducing healthcare spending by patients and payers and promoting greater access to the drug.26

Yet brand-name manufacturers often employ product life-cycle management strategies to extend market exclusivity periods.27 This involves exploiting the interpretations of the standards for patenting under the Patent Act and seeking “secondary” patents on peripheral aspects of the drug, such as its appearance or coating, that can extend market exclusivity periods indefinitely. In one review of two HIV medications, my colleagues and I identified 108 different patents covering the products that could have extended their market exclusivity by 12 years or more.28 This practice also can be extended further to “tertiary” patents covering a drug’s delivery via a device, such as an injectable pen, a patch, or an inhaler.29

Secondary and tertiary patents also enable product-hopping strategies, in which manufacturers introduce new versions of their products with incremental changes that do not provide advancements in drug efficacy, safety, or convenience that are commensurate to the higher prices being charged. In one case, a manufacturer of an antibiotic successively changed its formulation from capsules to tablets and then altered its strength and scoring marks, allowing it to stay ahead of generic entry.30

In addition, manufacturers use various strategies to prevent the timely entry of generic drugs. These include filing Citizen Petitions with the Food and Drug Administration, restricting supplies of their product for generic manufacturers to use in bioequivalence studies, and entering into settlements with generic manufacturers seeking to challenge patents that include agreements to drop the challenge and delay or terminate its plans to market a competing generic product.

Policy recommendations during the transition to a competitive market period

There are currently some pieces of legislation being considered in Congress that try to address generic-delaying strategies in a piecemeal way, such as by making it illegal to restrict samples or requiring greater disclosure of a product’s patent landscape. Similarly, more common use of the administrative Patent Trial and Appeals Board’s patent review process—such as automatic Patent Trial and Appeals Board review at the time any drug patent is listed with the FDA—could help weed out insufficiently innovative patents.31 Congress also could change federal law and direct the Food and Drug Administration to grant interchangeability ratings to drugs that offer nonclinically significant changes.

The states also have a role to play. Regulations permitting or requiring the substitution of generic drugs for brand-name products is managed at the state level, with variation across the states. These state laws could be adapted to permit “therapeutic substitution” of drugs proven to work comparably even if they are not pharmaceutically equivalent, such as a tablet and a capsule.

Another policy solution that would help prevent secondary and tertiary patents from delaying generic entry would be to restrict a brand-name drug’s market exclusivity period to a particular time period and not permit secondary or tertiary patents—or any of the other strategies—from being able to block FDA approval of a generic version. My colleagues and I have proposed that manufacturers be restricted to the single patent for which they seek and receive Patent Term Restoration (a period of up to 5 years to account for time spent in clinical trials and FDA review), plus the 6-month patent extension manufacturers receive for testing their drugs in children. At the end of this period, generics should be permitted to enter, no matter what other patents have been obtained. The failure of a generic to enter the market should spark a formal federal investigation to determine whether some anticompetitive strategies have been used.

Multisource generic period

After a drug has lost exclusivity protection, prices may not fall if there are not enough generic manufacturers in the market.32 Similarly, older, off-patent drugs can transition from markets served by multiple manufacturers to markets served by three or fewer, allowing the remaining manufacturers more flexibility to raise prices. Such older products may not be lucrative enough for other generic manufacturers to enter the market.

Policy recommendations for the multisource generic period

In the past, long delays in generic drug approval times at the FDA have limited generic entry in these kinds of cases, but the agency has substantially accelerated review times due to increased funding from user fees starting in 2012. More resources must be invested at the FDA to ensure that there are not unnecessary delays in generic drug approval and that guidances are produced in a timely fashion for the types of studies generic manufacturers will need to complete to receive FDA approval of interchangeable products, particularly for complex small molecule products (generic versions of nonliving organic compounds) and biosimilars (competitor versions of biologic drugs).

Importation is a possible solution in cases of high prices for off-patent drugs, particularly if there are manufacturers selling these products in other similar regulatory systems around the world that, for any reason, have decided not to pursue FDA approval yet. In one study of 170 off-patent drug products being sold in the United States by three or fewer manufacturers, more than half (109, or 64 percent) had at least one manufacturer approved by a non-U.S. regulator and 32 (19 percent) had four or more.33

In these cases, a process for facilitating United States-wide imports, followed by an expedited process for formal FDA approval, could help prevent and respond to price spikes.34 Here’s just one example: Pyrimethamine—the drug used for a complication of advanced HIV that was famously subject to a 5,000 percent price increase in the U.S. market by Turing Pharmaceuticals, from $13.50 to $750 per pill—is being sold by some manufacturers for as little as $0.03 per pill.35

Another solution would be to pursue a system of government-sponsored drug manufacturing. In recent years, some private organizations have developed their own efforts at drug manufacturing, and other nonprofit drug manufacturers have emerged. A government-run manufacturing plant, as proposed in Congress in 2018, could be set up to ensure a continued supply of off-patent products that for-profit generic manufacturers have lost interest in producing.

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Improving competition to lower U.S. prescription drug costs

Conclusion

There is no one single solution for reducing unnecessary spending on prescription drugs because the market changes so substantially during the course of a drug’s development and then its widespread use after FDA approval. But with sensible changes directed toward the different forces that affect the market at different times, the United States can help contain rising drug costs, better ensure that we pay for clinical value in the system—rather than whatever price drug manufacturers believe they can extract—and better ensure availability of important drugs for the patients who need them.

—Aaron S. Kesselheim is a professor of medicine at Harvard Medical School Program and the Director of the Program On Regulation, Therapeutics, And Law, or PORTAL, in the Division of Pharmacoepidemiology and Pharmacoeconomics in the Department of Medicine at Brigham and Women’s Hospital. His research is supported by Arnold Ventures, with additional support from the Engelberg Foundation and the Harvard-MIT Center for Regulatory Science.

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Wage and employment implications of U.S. labor market monopsony and possible policy solutions

Posted on by Maria Monroe

This essay is part of Vision 2020: Evidence for a stronger economy, a compilation of 21 essays presenting innovative, evidence-based, and concrete ideas to shape the 2020 policy debate. The authors in the new book include preeminent economists, political scientists, and sociologists who use cutting-edge research methods to answer some of the thorniest economic questions facing policymakers today. 

To read more about the Vision 2020 book and download the full collection of essays, click here.

Overview

When a firm cuts wages by 5 percent, how many workers will quit in the next year? If the labor market works the same way as the market for chairs, then virtually all of the workers should leave for other firms. This is because, in a perfectly competitive market, there will always be another firm that is willing to pay the worker the value of what she produces. But ask any human resources manager or any worker, and they will tell you that it is extremely unlikely that all the workers would leave their jobs.

Recent economic research is able to quantify this: Between 10 percent and 20 percent of workers will quit. New estimates of this number—known as the elasticity of a firm’s labor supply—which rely on administrative data or innovative experiments, are arriving all the time.36

Economists have a word for this phenomenon: monopsony power. While literal monopsony power in the sense of a labor market with one employer is rare, the modern model of monopsony applies to markets where there are still many firms. The fundamental reason employers have this power is that jobs are complex transactions where the preferences of both workers and firms over job characteristics and performance are important and idiosyncratic. Because job shopping is rare and sporadic, workers don’t have many tools with which to figure out how much they will value a particular job before they take it.

A modern job in the United States is integrated in a constellation of relationships among co-workers and managers. Many workers possess skills that are specialized for particular employers and particular tasks. They also have preferences about their work environment. They may need to have a short enough commute. They may enjoy working with certain people. And they may have strong preferences about the communities in which they live.

Furthermore, searching for a job in the labor market takes time and energy. All potential job offers are not immediately observable by all workers who might accept them. Both of these facts mean that employees will only slowly respond to wage changes at their jobs. They may poke around the web for new job listings or they may ask their friends or former colleagues about possible job opportunities. None of this happens quickly, however, giving firms monopsony power over their workforces.

Monopsony power hinders wage growth for workers, which, in turn, slows consumer demand and reduces overall savings in the U.S. economy. This slows U.S. economic growth over the long term. Understanding the influence of monopsony power on the U.S. labor market is important because it helps make sense of why, from the point of view of employers, labor is often scarce. This perception often leads employers to demand policies that increase the supply of properly skilled workers, be they training programs, education, or increased migration. Some of the perceived “skills gap” may simply be because employers can’t find skilled workers at a wage they are willing to pay.

Fortunately, there are a number of policy actions that can be taken that are effectively “free lunches,” in the sense that there may be room for policymakers to increase wages without reducing employment. Other basic labor market institutions, such as unions, wage mandates, and mandated benefits may also improve workers’ welfare.

In this essay, we review the evidence for firms’ monopsony power in the U.S. labor market and explain what this means for wage growth and wage inequality. We then explain why, in a labor market where monopsony power is ubiquitous, policies that restrain firms’ wage-setting power and policies that bring workers to the bargaining table will stimulate wage growth without costing jobs. Furthermore, policies that encourage competition in the labor market—such as restricting the use of noncompete or nonsolicit agreements—are likely to help workers throughout the wage distribution.

All of these outcomes, we argue, could help ameliorate income inequality in the United States and generate more broad-based and sustained economic growth.

Economic evidence for U.S. labor market monopsony

The academic literature on monopsony—and the term itself—date back to 1933, when Joan Robinson published The Economics of Imperfect Competition.37 Mainstream mid-20th century U.S. labor economists were enthusiastic proponents of the view that laissez-faire labor markets were characterized by monopsony.38 Sometime in the late 20th century, however, this viewpoint fell out of favor, and economists started to emphasize models where wages were determined primarily by the value of an individual worker’s skill.

In recent years, research using new matched employer-employee data, which allows researchers to track workers’ careers across employers, casts doubt on the idea that workers’ wages are only determined by their individual skills. Pioneering recent research asked a simple question: Do workers’ wages depend not only on their skills but also on the identity of the firms they work at?39

One answer comes courtesy of graphs such as the one below, produced using Oregon unemployment records. Figure 1 shows that the wage gains experienced by Oregonian workers who transition from the firms paying the lowest overall wages (by quartile) to those in the highest quartile of wage payers is strongly positive and is similar to the wage decreases experienced by their counterparts who transition the other way. Figure 1 also shows that while workers do transition to higher-wage jobs more than to lower-wage jobs (as measured by the thickness of the line), there are almost as many transitions from high-wage firms to low-wage ones. (See Figure 1.)

Figure 1

This would not be true if workers’ wages depended only on their skill levels. In that case, workers’ wages would not depend on the identity of their employers. This empirical research shows that firms played an independent and significant role in determining wages. In short, the outdated “law of one price” for an individual worker is, at best, a suggestion in the labor market.

Of course, there are a variety of reasons workers at different firms may be paid different wages. There could be differences in how productive workers are at different firms or differences in working conditions. The cleanest test for the presence of firms’ monopsony power involves experimentally manipulating wages and seeing how much turnover among employees changes. What monopsony models predict is that the separations response to randomized wages is low, as it is for new recruits. That means that only some of the workers leave, and that the firm is still able to recruit new workers, though fewer of them.

The recent availability of administrative data from firms and labor market platforms, such as Amazon Mechanical Turk and Burning Glass, have made it possible to examine contexts where wages can be experimentally manipulated in “real world” labor markets. One of these studies comes from the type of labor market that would seem to be the least likely to be plagued by monopsony power: an online labor market with thousands of workers and thousands of easy-to-find employers. Economist Arindrajit Dube at the University of Massachusetts Amherst and his co-authors conducted a series of experiments on Amazon Mechanical Turk, where they asked workers who had already completed a simple task if they would like to complete a given number of additional tasks at a specific rate.40 The take-up of this offer across workers with different, randomly assigned wage offers allowed the researchers to estimate the amount of wage-setting market power held by employers posting on the platform.

The researchers found that, even in this setting, there were sufficient frictions—economic parlance for the difficulty workers face in searching for jobs—such that a 10 percent increase in the offer increased take-up by only 1 percent, on average. This means that because workers aren’t able to easily match into the best possible job option, they end up accepting lower wage offers than would be predicted in a competitive market.

Another popular research strategy to identify firms’ monopsony power focuses on documenting the extent of concentration in the labor market and then examining the impact of this concentration on wages.41 Intuitively, more concentrated markets are those in which there are fewer employers competing for workers.42 The two federal antitrust agencies, the Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice, have long used the Herfindahl-Hirschman Index, or HHI, a measure of concentration in product markets when evaluating the impacts of potential mergers. Finance professor Efraim Benmelech at the Kellogg School of Management at Northwestern University and his co-authors use administrative data from the U.S. Census Bureau to calculate the level of concentration of each labor market in the United States. The researchers find an HHI level of 2,300.43

This research shows that firms, at the very least, enjoy moderately concentrated labor markets for their employees. The main antitrust agencies in the United States classify product markets as concentrated if the HHI level is more than 1,500; the cutoff for a market to be considered highly concentrated is 2,500. By this metric, many labor markets in the United States are moderately concentrated. Researchers also uniformly find a negative correlation between concentration and wages, meaning that wages are, on average, lower in more concentrated markets.44

Mergers in more concentrated product markets typically face more government scrutiny. New research by labor market economists question whether mergers in more concentrated labor markets should also face antitrust scrutiny. While some economists have found that the average merger has no impact on wages, more careful research—such as by Elena Prager at Northwestern University and Matt Schmitt at the University of California, Los Angeles—finds that mergers greatly reduced wages for workers with healthcare industry-specific skills, who have fewer outside options than workers with more general skills.45 That is, hospital mergers reduced wages for workers in more concentrated markets.

In some cases, reducing wages may even be an explicit goal of the merging firms. Recent research conducted in Denmark finds that firms there target high-wage firms for acquisition, then, after the acquisition, they fire the managers and lower workers’ wages.46 As we discuss in the final section of this chapter, scrutinizing mergers for impacts on labor market outcomes is well within the orbit of current U.S. antitrust legal doctrine and enforcement capacity.

Implications of monopsony in the U.S. labor market for wages and wage inequality

Firms with monopsony power set pay policies, taking into account that if they want to hire more workers, they have to pay higher wages. This leads to workers earning less than they produce, as well as to higher unemployment. The unemployment created by firms’ monopsony power is not a result of market power, per se, but rather firms’ inability to perfectly pay each worker the minimum amount required to get that worker to become an employee at the firm.

Because employers cannot observe each worker’s reservation wage—the minimum the firm would have to pay to get the worker to accept the job—employers pay relatively uniform wages to their employees. So, even a small degree of monopsony power—a labor supply elasticity of around 4 (meaning 40 percent of the workers leave if the firm cuts wages by 10 percent)—would imply that workers take home only about 80 percent of what they produce, with the rest accruing as profits for their employers.

These pure monopsony profits can raise the measured capital share of income, which, in the national accounts, combines pure economic profits with the returns to productive capital, as well as the wealth-to-income ratio and the ratio of market-to-book values of firms. The increase in all these measures are part of the so-called Piketty facts, named after the Paris School of Economics professor Thomas Piketty, the author of the best-selling Capital in the 21st Century.47 These facts point to the increasing importance of wealth in the economy, and a monopsonistic lens suggests that some of this rise may be due to the erosion of policies that mitigated the use of monopsony power.

And because capital income is more concentrated than labor income, these pure monopsony profits would likely increase overall income inequality as well. Yet the inequality induced by these additional profits could be offset somewhat by some high-income workers facing potentially quite high degrees of monopsony power (think software engineers, whose high levels of pay shouldn’t obscure the fact that they work for employers who have considerable market power due to concentration and anticompetitive conduct such as no-poaching agreements).

Lowering monopsony power may, in fact, raise wages for some already high-paid occupations. In the United Arab Emirates, for example, research by one of the co-authors of this essay, Suresh Naidu, and the co-authors of that paper find that weakening monopsony power raised wages the most both at the bottom and at the top of the wage distribution.48 While the overall effect of monopsony on income inequality is an open question, there are reasons to suspect monopsony is, on net, disequalizing.

Firms’ monopsony power also can contribute to racial and gender wage gaps. In fact, the original use of monopsony, first put forward by the famous 20th century economist Joan Robinson, was to explain why equally productive workers might earn different wages. In her formulation, monopsony power might lead to a gender wage gap, as employers could use “female” as a tag for less elastic labor supply, identifying workers who are less willing (or able) to leave their current jobs for better opportunities elsewhere. They could then exploit this fact to pay these workers lower wages.

There are at least three reasons women and minorities may be less elastic and thus earn lower wages. First, as in the original Robinson formulation, women, particularly married women, may face geographic constraints on their job search that men do not face. For instance, women may need to work close to their homes if childcare is not widely accessible.

Second, the presence of discriminatory employers in the U.S. labor market can lead to a wage gap—even at the firms that do not discriminate. This is because the presence of discriminatory employers affects the wages of nondiscriminatory employers, worsening the overall labor market for some individuals more than others.

Third, some groups of workers, including women and minorities, may have less access to information about new openings than their nonminority male colleagues, making the market effectively less competitive for them.49 This may contribute to gender and racial wage gaps. A commonly cited statistic is that half of all jobs in the United States are found through informal contacts or social networks, which are themselves segregated and unequally distributed.50

Then, there’s the rising practice among companies that use or sell software, which these firms claim can accurately predict which workers are likely to leave, as well as when and at what wage. An important open question today is whether modern human resource analytics, by predicting turnover and retention and producing recommended wage policies based on the data of many firms, facilitates employer collusion on wages or wage discrimination.

If firms use these predictions to target wage increases or bonuses—and do not train their algorithms to be gender- and race-blind—then this may lead to a wage gap over time. Yet software tools that make competing offers increasingly visible to workers may prove to play some role in mitigating monopsony. The interaction of technological change and labor market monopsony is clearly an area that needs further research.

Public policy implications of monopsony in the U.S. labor market

There are several ways policymakers can address the potential negative consequences of firms’ market power on wages and employment in the U.S. labor market. First, antitrust regulation could be updated to more comprehensively and explicitly cover labor market monopsony.51 This means both considering potential labor market harms when evaluating mergers and acquisitions, and increasing the amount of funding available to the two federal antitrust agencies to investigate anticompetitive practices, including wage fixing or no-poaching agreements.52

Even in the absence of antitrust action, policies that encourage firms to compete more aggressively for workers, such as restrictions on the use of noncompete clauses or nonsolicit agreements, may be effective at helping workers throughout the wage distribution. Using data from the U.S. Census Bureau, researchers find that increased enforceability of noncompete clauses across states in the United States led to lower wage growth and decreased job-to-job mobility.53 Using discontinuities in laws at state borders, these researchers further showed that the enforceability of noncompetes had spillover effects on workers who were not directly affected. These results highlight why noncompete clauses and nonsolicit agreements reduce workers’ wages both by reducing workers’ ability to take advantage of new opportunities and by reducing their ability to renegotiate their wages on the job.

A classic intervention in the presence of monopsony power is the minimum wage. By restraining firms’ wage-setting ability at the lower end of the U.S. labor market, policymakers can increase wages for the lowest-paid workers and stimulate higher wages for those just above them on the wage ladder. What’s more, modest increases in the minimum wage can lead to gains in both wages and employment.

The reason increases in the minimum wage may increase employment is that, in the absence of a minimum wage, firms with market power have to trade off the benefit of hiring more workers against the cost of raising wages for all workers (not just the additional worker). A minimum wage removes this trade-off for many firms. Prior empirical research documents that increases in the minimum wage increased employment in the most concentrated labor markets.54 These include areas of the country where there are few firms hiring stock clerks, cashiers, or other retail sales workers. In Germany, the minimum wage has also been shown to reallocate labor from low-productivity to high-productivity employers.55

Of course, changes in the minimum wage only benefit low-wage workers. But if firms’ monopsony power is pervasive even for mid- to high-wage workers, then tools such as unions or wage boards—which can raise wages for workers further up in the wage distribution—may also have quite limited disemployment effects. A few states, including New York and New Jersey, already have wage boards, whose power could be strengthened. These institutions could be copied in other states.

Finally, in the presence of monopsony power, policies that nominally target large individual firms, including public-sector employers, may have economywide effects. A classic paper by economists Douglas Staiger at Dartmouth College, Joanne Spetz at the University of California, San Francisco, and Ciaram Phibbs at Stanford University showed that increases in wages at government-funded Veterans Administration hospitals led to wage increases at nearby hospitals due to labor market competition.56 One way to partially reconcile the interests of small businesses and workers may be to target wage increases to large employers (including the government), and rely on labor market competition to transmit those increases to smaller employers.

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Wage and employment implications of U.S. labor market monopsony and possible policy solutions

Conclusion

Labor market monopsony in the United States means that firms pay workers much less than the value of what their workers produce. Policymakers can hope to stimulate wage growth both by promoting competition in the labor market and by placing constraints on firms’ wage-setting capabilities. In doing so, policymakers also can help tackle rising U.S. income inequality and set the table for more sustainable, broad-based economic growth.

—Sydnee Caldwell in 2020 will be an assistant professor of business administration at the University of California, Berkeley’s Haas School of Business and an assistant professor of economics at UC Berkeley. Suresh Naidu is a professor of economics and international and public affairs at Columbia University.

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Aligning U.S. labor law with worker preferences for labor representation

Posted on by Maria Monroe

This essay is part of Vision 2020: Evidence for a stronger economy, a compilation of 21 essays presenting innovative, evidence-based, and concrete ideas to shape the 2020 policy debate. The authors in the new book include preeminent economists, political scientists, and sociologists who use cutting-edge research methods to answer some of the thorniest economic questions facing policymakers today. 

To read more about the Vision 2020 book and download the full collection of essays, click here.

Overview

Just 6 percent of private-sector workers belong to a union in the United States, down from a peak of nearly a third in the early 1950s.57 Yet this steep decline in membership does not reflect a lack of worker demand for unions. If anything, workers’ interest in joining unions has increased over this period. In 2017, nearly half of all nonunion workers expressed interest in joining a union if one were available at their jobs.58 U.S. laws governing labor organizing and collective bargaining clearly do not reflect what most workers want.

Indeed, workers across the country are strongly supportive of some aspects of traditional unions, especially collective bargaining. They also value features of labor organizations that are either prohibited by existing federal and state labor laws or are not widely available, such as industry- or statewide collective bargaining and union-administered portable health and retirement benefits. These kinds of worker preferences for labor union representation have been suppressed in the United States for most of the 20th century up to today.

In this essay, I briefly examine the ossification of U.S. labor law over this time period, alongside the steady decline in union membership since the early 1960s. I then summarize new academic research that probes workers’ preferences for labor representation and organization that could inform reforms to federal labor law.59 I conclude by describing a range of possible federal legislation that could help bring labor law in line with the preferences espoused by majorities of U.S. workers—reforms that give workers greater access to representation and voice, broaden access to collective bargaining rights, build the provision of social benefits and training into unionization, and expand the scope of collective bargaining.

The ossification of U.S. labor law—and its heavy toll

Several trends are immediately apparent in the rise and fall of private-sector union membership in the U.S. labor force from 1920 to present day. First, membership remained relatively low until the mid-1930s. Amid the Great Depression, President Franklin Delano Roosevelt signed into law a sweeping bill intended to provide a comprehensive federal right for private-sector workers to organize unions and collectively bargain with their employers. Coupled with a later surge in wartime manufacturing, the National Labor Relations Act of 1935 boosted union membership to around a third of the private-sector workforce.

Yet, as important as the National Labor Relations Act was for the U.S. labor movement, the law still imposed substantial limits on union growth.60 It excluded large portions of workers from its reach, including the disproportionately nonwhite agricultural and domestic-workers labor force, as well as public-sector employees and any worker with supervisory or managerial duties, however limited. The law and subsequent amendments and court cases also sharply curbed union rights to picket, boycott, and strike against recalcitrant employers, thus weakening workers’ most important economic leverage. What’s more, penalties for employers who violated workers’ rights during union drives have remained low and poorly enforced, creating strong incentives for businesses to flout federal law.61

Most crucially, the law established a firm-based model of organizing and bargaining—as opposed to one where workers in an entire industry or region could bargain with broad swaths of employers. Firm-based bargaining may have worked well in an economy dominated by massive factories employing tens of thousands of workers. But today, when many employers contract or franchise out most of their workers, it makes unionization virtually impossible in many sectors.62 (See Figure 1.)

Figure 1

These cracks in federal labor law—alongside the increasing brazenness of employers in opposing union drives—greatly contributed to the sharp decline in union membership since the 1960s and 1970s. Today, union membership in the private sector is now lower than it was before the passage of the National Labor Relations Act—and the fall in membership has exacted a significant toll on U.S. workers and the economy as a whole. Decades of research demonstrates that unions boost both unionized and nonunionized workers’ wages and benefits.63 Stronger unions also compress top-end pay, contributing to lower levels of income inequality.64 Aside from their effects on pay, unions give workers greater voice in the workplace, and this leads to safer and more equitable working conditions.65

Unions are important outside of the workplace, too. Stronger unions foster civic skills and political participation among workers and then channel that mobilization into representing the interests of low- and middle-income workers and their families.66 A number of studies indicate that economic policies are more aligned with the preferences of less-affluent citizens where union membership is higher.67

What workers want from labor representation

U.S. workers have not been clamoring for the demise of the labor movement. If anything, support for unions has actually increased over the past five decades. About a third of nonunion workers said that they would join a union if they could in 1977 and again in 1995, and this proportion grew to nearly half of all nonunion employees in a 2017 poll.68 Looking more broadly, more than 60 percent of workers in 2018 said that they approved of unions, compared to only 30 percent who disapproved.69

While these results indicate strong worker support for unions, they do not say much about the specific representation that workers would want from labor organizations. To answer that question, I have been working with Thomas Kochan and William Kimball at the Massachusetts Institute of Technology’s Sloan School of Management to understand how workers think about workplace representation and the kinds of labor law reforms that would best match workers’ preferences. To that end, we have conducted large-scale, nationally representative surveys of workers, asking respondents to indicate how likely they would be to join and financially support various labor organizations. We varied how these organizations were structured, which permitted us to identify how much respondents valued individual characteristics of unions.

The characteristics we described in the survey included some common features of traditional U.S. unions, but also features of new organizations operating outside of conventional labor law (sometimes called “alt-labor” groups) and components of unions from other countries currently absent from the United States.

Which features of labor organizations were most—and least—important to workers? The most important features of hypothetical labor organizations to workers as they were considering whether they would join an organization include the following 12 characteristics in Figure 2. The presence of all of these features made workers more likely to say that they would join and support a labor organization. But some of these characteristics were clearly more popular than others. (See Figure 2.)

Figure 2

Several broad conclusions emerge from our findings. First, some features of traditional unions are still very popular with workers, especially collective bargaining at the firm or establishment level. But workers also voiced considerable enthusiasm for other potential features of labor organizations that are uncommon or even barred under current U.S. workplace law. Workers found the idea of sectoral or regional bargaining—much more common in Western Europe than in the United States—about as appealing as traditional collective bargaining. Expanding the scope of labor bargaining beyond the individual shop floor to whole industries or states would go far in rebuilding labor power in the United States, giving unions the opportunity to match the national scale of capital.

Another set of features that workers found very appealing involved portable social benefits administered through unions. Workers were substantially more likely to say they wanted to join unions that offered health insurance, retirement benefits, jobless benefits, and training and job search help that they could take with them from job to job. While some unions in the United States offer all those services, most do not. The provision of social benefits and training programs through unions could be an effective way for unions to attract new members, engage existing members more deeply, and raise revenue independent of member dues.

In fact, research indicates that the Nordic countries have managed to retain very high rates of union membership precisely because labor organizations in those countries are responsible for administering unemployment insurance and retraining programs.70 Similar findings from research I have conducted with public-sector unions in the United States also bolster this conclusion—providing highly valued benefits, such as training and professional development, to union members can foster increases in union interest and participation.71

The final bundle of attributes that attracted worker interest related to greater input in management decisions at the shop-floor level (determining how workers do their day-to-day jobs) and at the firmwide level (determining how businesses structure their operations). Unions in the United States have frequently shied away from these activities, even where they are legal.72 Our results buttress the idea that workers would be supportive of unions that did much more to gain voice on workplace issues, both small and large alike.

National reforms for building greater worker representation and voice

In all, our findings reveal a substantial gap between the labor organizations that workers say that they want and the representation they actually receive in the workplace. Not only do most workers who say they want traditional unions fail to receive any union representation at all, but current labor law also bars unions from offering many of the benefits and services that workers say they most value.

New federal legislation offers the most promise in overhauling labor law in the United States. There are several areas where policymakers ought to pursue change. Here are four proposals.

Giving workers greater access to representation and voice

At a basic level, Congress ought to make it easier for workers to form and join traditional unions. This means expediting union elections, giving union organizers greater rights to communicate with workers and share information about unions, and, above all, ensuring that employers have strong incentives not to violate existing worker protections. It also means strengthening workers’ rights to strike, boycott, and picket employers—without these tools, workers are outmatched against the economic and political strength of business.

More ambitiously, Congress might consider requiring regular union elections across all workplaces. Polling I have conducted indicates that only about 1 in 10 nonunion workers say they would know how to form a union at their job if they wanted to.73 Automatic, regularly scheduled union elections would thus go far in granting workers the functional right to form a union, regardless of whether there are union organizers at a worksite or if union leaders deem a workplace a strategic target.74 In a similar vein, Congress could mandate that all employers permit some minimal level of worker representation and voice—perhaps through joint management-worker committees—that could turn into, or complement, full-blown unions with collective bargaining rights if workers expressed sufficient interest.

Broadening access to collective bargaining rights

Given the importance of collective bargaining to U.S. workers, Congress ought to close the exclusions that exist in the National Labor Relations Act—specifically those that shut out many disproportionately minority workers from the benefits of such bargaining. All domestic workers and agricultural and public-sector employees should have the right to bargain with their employers, as should workers who are low-level or intermediate supervisors or managers.

Congress also should ensure that employers cannot simply turn workers into independent contractors to avoid unionization drives. Independent contractors and other self-employed individuals working for businesses that exercise substantial control over working conditions and pay should be permitted to organize and bargain with employers, just like conventional employees. Similarly, labor law should permit bargaining between workers and their immediate employers, as well as other businesses with substantial control over working conditions, as in franchise and contracting relationships. And Congress should ensure that employers bargain in good faith with newly recognized unions, rather than dragging out negotiations to end union drives.

Building the provision of social benefits and training into unions

Congress might create more opportunities for unions to provide the sort of social benefits and training opportunities that workers indicated they value very highly in my research. Unions are currently limited in their ability to offer health insurance and retirement plans as benefits in the organizing process, but they should be permitted to do so.

Congress also ought to free unions up to offer portable health and retirement plans to workers across entire industries. Union-administered plans could compete with employers and other private alternatives, raise nondues revenue for the union, and generate stronger incentives for workers to enroll as dues-paying members. Unions should have the legal right to manage these funds independently of employers—something they cannot do under current law.75

One especially promising approach to labor-administered social benefits is for Congress to permit states to run unemployment insurance benefits through unions, as is common in Northern European countries. Not only would union-run jobless funds give workers good reasons to join unions, but they could also be paired with high-quality training and job skills programs tailored to the needs of specific sectors and employers.

Expanding the scope of collective bargaining

On the most sweeping level, Congress could move the National Labor Relations Act beyond the traditional, firm-based model for organizing and bargaining by giving unions greater scope for representing workers across entire sectors or regions. While there are a number of different models that Congress might pursue, at a minimum lawmakers should set ground rules about how union and employer representatives would be defined and the rights and responsibilities of union, employer, and government representatives in bargaining and contract administration and enforcement.76

At the same time, moves toward broader levels of collective bargaining need to be accompanied by greater voice for workers at the shop-floor level. Accordingly, Congress might consider expanding the reach of unions to help address workers’ grievances in their day-to-day jobs. That could mean, for instance, combining sectoral or regional bargaining with mandatory worker committees as described above. Those committees could deal with shop-floor grievances and firm-specific contract negotiations, while sectoral or regional labor representatives negotiate broader wage and benefit standards.

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Aligning U.S. labor law with worker preferences for labor representation

Conclusion

As these reforms suggest, there is enormous scope for improving the representation and voice that workers possess on their jobs. Moving forward on these priorities will not only help better align labor law with worker preferences but also help to accomplish many of the other goals described in this set of policy essays. A reinvigorated U.S. labor movement holds the promise of directly boosting stagnant pay and benefits for workers, improving working conditions and safety, closing yawning gaps in compensation between business executives and the workers they employ, and curbing abuses of employer power in the U.S. labor market. More broadly, history suggests that policies aimed at broadly shared prosperity and growth are only possible when supported by vibrant unions.77 For all these reasons, an overhaul of U.S. labor law ought to be a top—and early priority—for the Congress and the president in 2021.

—Alexander Hertel-Fernandez is an assistant professor of international and public affairs at Columbia University.

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International trade policy that works for U.S. workers

Posted on by Maria Monroe

This essay is part of Vision 2020: Evidence for a stronger economy, a compilation of 21 essays presenting innovative, evidence-based, and concrete ideas to shape the 2020 policy debate. The authors in the new book include preeminent economists, political scientists, and sociologists who use cutting-edge research methods to answer some of the thorniest economic questions facing policymakers today. 

To read more about the Vision 2020 book and download the full collection of essays, click here.

Overview

International trade comes with many benefits for Americans. It lowers the cost and increases the variety of our consumer purchases. It benefits workers who make exports, as well as those who rely on imports as key inputs in their work. It helps fuel innovation, competition, and economic growth. And it helps strengthen international partnerships that are crucial for addressing global policy problems.

Yet trade also poses risks. Because the United States is a country with large amounts of capital and a highly educated workforce, we tend to specialize in products that use those key resources intensively. That’s why we export complex products such as software, airplanes, and Hollywood movies. Yet we import products that reduce demand for our less-educated labor because countries with lower wages are able to make labor-intensive products more competitively.

As a consequence, international trade has harmed many U.S. workers by lowering demand for their labor. Studies find that increased imports, particularly those from China during the early 2000s, displaced more than 1 million U.S. workers.78 There is no evidence that particular trade agreements, such as the North American Free Trade Agreement, or NAFTA, created anywhere near so much displacement, yet many U.S. workers are also skeptical of trade agreements, which they associate with poor labor market outcomes in the U.S. economy over prior decades.79

Indeed, since 1980, the U.S. economy has delivered a poor performance for U.S. workers. While Gross Domestic Product growth has been strong, median household incomes have been relatively stagnant. Income growth in the bottom parts of the income distribution has fallen short of expectations just as income growth at the top has soared.80 Yet, as disappointing as these outcomes are, the evidence indicates that factors beyond trade are driving most of these outcomes.81 Such factors include dramatic technological changes, the increased market power of companies, and important tax and regulatory policy changes.

This essay first examines why blaming our trading partners and our trade agreements for disappointing labor outcomes carries two essential risks—it harms the very workers we are trying to help, as our recent experience with trade wars shows, and it distracts us from far more effective solutions to workers’ woes. I then discuss effective solutions that should be at the heart of U.S. international trade policy, among them expanding the Earned Income Tax Credit, implementing wage insurance, and strengthening and modernizing corporate taxation, alongside recommendations for improvements in international trade agreements. International trade works best when it works for everyone, and policymakers have the tools at their disposal to make that happen.

What not to do: Regressive responses to trade challenges

Unfortunately, U.S. international trade policy has taken a serious turn for the worse over the past 3 years. Aiming to correct perceived injustices in past trade agreements, the Trump administration has engaged in a series of costly and ineffective trade conflicts, levying unusually high tariffs, and issuing frequent disruptive threats.

U.S. workers have borne the cost of these trade wars in three important ways. First, it is important to remember that tariffs are a tax, and, beyond that, they are a regressive consumption tax.82 Low- and middle-income families spend a higher share of their income on tariffs than do the rich, both because they consume all or most of their income (and tariffs don’t burden savings) and because they typically consume a higher share of the taxed import goods. Indeed, concerns over economic inequality were a key reason why reformers advocated for creating an income tax in the early 20th century, since tariffs fell too heavily on the poor.83 Early evidence indicates that the new Trump tariffs have already cost U.S. households hundreds of dollars each year.84

Second, both export workers and workers in industries reliant on imports as part of their production process are harmed by the disruption of global supply chains and export opportunities. Many countries facing new U.S. tariffs have retaliated, risking the livelihoods of workers, from soybean farmers to whiskey distillers. Disruptions to international supply chains have harmed U.S. auto production, negatively impacting auto industry employment.85 And the chaos of constant tariff threats has introduced uncertainty and disruption into business planning, hampering investment while also weakening U.S. alliances and our ability to work with other countries in solving global problems.86

Third, and perhaps most importantly, all of the sound and fury surrounding these trade conflicts has distracted voters and policymakers from far more direct and productive ways to help workers. In fact, instead of using tax policy to make workers more secure, the recent tax legislation, known as the Tax Cuts and Jobs Act (passed in late 2017), increased worker insecurity. While those at the top received large tax cuts, most workers received only tiny tax cuts that disappear over time, leaving only greater government debt and the promise of higher taxes or spending cuts down the road.87

Moreover, the Tax Cuts and Jobs Act weakened health insurance markets by removing the mandate to purchase health insurance. This directly results in higher health insurance premiums in the health insurance market. Indeed, premium increases are likely to dwarf tax cuts for most families.88

What does a progressive response to trade look like? It supports labor.

There are far better ways to modernize economic policy to suit our global economy. The key is to ensure that all of the forces that buffet the U.S. economy (whether trade, technological change, or others) ultimately result in benefits for all U.S. workers.

How do we do that? Federal tax policy is our most effective tool. By taking more in tax payments from those who have “won” due to trade, technological change, and other market changes, and giving more in tax rebates to those who have “lost,” we can make sure that gains in GDP translate into gains for typical workers. This can be done while also funding the important fiscal priorities of the federal government.

Elsewhere, I have elaborated on the outlines of such substantial tax reform.89 Here, I will focus on two essential tools that go directly to worker problems: the Earned Income Tax Credit and wage insurance. The EITC rewards work and increases standards of living by generating negative tax rates for those with low incomes. Presently, this credit is far more generous for a parent with children than for a childless worker. At low incomes, the Earned Income Tax Credit turns every $10 of wages into $14 for a parent with two children; credits can top $5,800 for such families. But credits for childless workers are paltry, peaking at about $530. (In both cases, credits are phased out at higher incomes.)

Since linking the Earned Income Tax Credit to children adds complexity and compliance issues, one ideal reform would be to make the EITC more generous for all workers while simultaneously expanding refundable child tax credits.90 It is important to make such credits refundable since many workers with lower incomes do not end up owing federal income tax, although they all pay payroll taxes and many also pay substantial state and local taxes.

Wage insurance is a second important way to help workers. Wage insurance targets those who have lost higher-paying jobs, helping workers cope with the painful nature of economic transitions. Wage insurance currently exists on a very small scale for some older trade-displaced workers, but it can be expanded to reach workers regardless of their age or the source of job loss.

With wage insurance, the government would make up 50 percent of the difference between the wage received at the old job and the new, lower-paying job. So, if a worker earning $50,000 lost her job and had to instead take a job (or multiple jobs) that paid $30,000, then the government would make up half of the difference. Of course, benefits could be capped and time-limited, and some employment experience would be required in order to qualify. Yet wage insurance would make economic disruption easier to bear. Wage insurance also provides more income to communities that are hit by geographically concentrated disruption due to trade, technological change, domestic competition, or other factors.

Both programs support work and, because they are linked to work, they have a far lower cost than universal support programs, allowing greater generosity. These two policies focus on the key economic problem at hand: It’s not that the U.S. economy doesn’t provide plentiful job opportunities, it’s that existing jobs are too often poorly compensated. If recessions, disability, or child-rearing prevent employment, then those challenges can be handled through programs that target those populations directly.

What does a progressive response to trade look like? It modernizes taxation.

In order to finance wage insurance, an expanded Earned Income Tax Credit, and the many important fiscal priorities of the federal government, we need an efficient, fair, and administrable tax system. Unfortunately, the international mobility of capital creates a conflict between the globalization of economic activity and the revenue needs of the government. It is therefore paramount that we modernize the tax system to ensure that it is suited to a global economy.

One key challenge is addressing the profit shifting of multinational companies. Estimates indicate that the U.S. government was losing more than $100 billion a year due to the profit shifting of multinational corporations before the Tax Cuts and Jobs Act.91 And while that law took some steps to reduce profit shifting, it took other steps that made profit shifting worse by offering U.S. companies a territorial tax system that exempts much of their foreign income from U.S. taxation and by taxing other foreign income at a reduced rate.92

The new tax law also directly encourages the offshoring of U.S. physical assets by U.S. multinational companies because foreign income in low-taxed countries is more lightly taxed when companies have more assets offshore. Early evidence shows that U.S. multinational companies receiving large tax breaks under the law have responded to such incentives by increasing foreign investment.93

Improving the collection of the corporate tax is an important step toward a better tax system. The corporate tax is an essential part of taxing capital since the vast majority of U.S. equity income goes untaxed at an individual level by the U.S. government, as it is held in tax-exempt accounts or by individuals or institutions that are exempt from U.S. tax.94 Capital is becoming a larger share of national income, and taxing capital is an integral part of a fair tax system. This is because capital income is more concentrated than labor income, and capital income is often the result of “rents” that stem from market power or from reaping the gains of global markets and technological change.

Fortunately, there are simple ways to modernize the U.S. corporate tax. One step that could be taken nearly immediately is to strengthen the minimum taxes that are part of the Tax Cuts and Jobs Act, while also raising the corporate tax rate.95 In the medium run, it would be useful to rethink our entire system of international taxation in a way that makes it less vulnerable to profit shifting. A system of formulary apportionment is promising in this regard, and it is already being considered by other countries and as a model for digital taxation.96

The latter proposal works best within a context of international cooperation. Modernizing international trade agreements could provide an excellent forum for such coordination.

What does a progressive response to trade look like? Better trade agreements.

Our multilateral trading system was built over the seven decades since World War II, and it serves an essential function—implementing the rules of the world trading system. The United States should restore our commitment to the World Trade Organization, continuing multilateral efforts to foster the free flow of trade, while at the same time reforming domestic policies to ensure that the resulting prosperity is widely shared.

Preferential trade agreements such as the North American Free Trade Agreement have often been vilified for prioritizing corporate interests over those of workers.97 While there is little evidence that such agreements have harmed workers, there is still substantial room to improve U.S. trade agreements by better balancing corporate and social interests. So-called investor state dispute settlement provisions and intellectual property provisions should either be eliminated or substantially rethought because they unnecessarily prioritize corporate interests over larger social aims.98

In fact, trade agreements can be a useful tool for governments to constrain corporate power. By combining trade liberalization with joint agreements on issues such as tax and regulatory competition, agreements can help counter the negative consequences of capital mobility. When companies threaten to relocate based on tax or regulatory considerations, governments often choose lower tax rates and looser regulations than would otherwise be socially desirable.

Modern trade agreements can pair the “carrot” of open market access with other socially desirable aims, such as combatting corporate tax avoidance or tackling climate change. International trade agreements, for example, could explicitly allow border adjustments to counter inadequate climate policies among trading partners. Global externalities such as climate change require global cooperation. International trade agreements provide a useful forum to build trust and cooperation. In contrast, as we’ve seen lately, trade wars breed distrust, making cooperation less attainable.

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International trade policy that works for U.S. workers

Conclusion

Even ideal international trade agreements will not address the increased economic inequality and wage stagnation of the previous decades since trade agreements had very little to do with these trends. Responding by ramping up trade conflicts and erecting trade barriers only adds insult to injury, harming U.S. workers instead of helping them.

To best help workers, we need to focus on policies that target their needs most directly. An expanded Earned Income Tax Credit can put more of the gains from trade (and other economic forces) in workers’ pockets, and wage insurance can ease the pain of those who have lost jobs due to economic disruption.

We also need to recognize that the global economy generates new policy challenges. Tax rules need to be modernized to combat international tax avoidance, and trade agreements also need to be modernized, both to put workers at the center of the conversation and to better address global policy challenges such as tax competition and climate change.

—Kimberly Clausing is the Thormund A. Miller and Walter Mintz Professor of Economics at Reed College.

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Rebuilding U.S. labor market wage standards

Posted on by Maria Monroe

This essay is part of Vision 2020: Evidence for a stronger economy, a compilation of 21 essays presenting innovative, evidence-based, and concrete ideas to shape the 2020 policy debate. The authors in the new book include preeminent economists, political scientists, and sociologists who use cutting-edge research methods to answer some of the thorniest economic questions facing policymakers today. 

To read more about the Vision 2020 book and download the full collection of essays, click here.

Overview

Over the past 40 years, the United States has experienced a sustained rise in wage and income inequality. This high level of inequality reflects both a disconnect between average wages and productivity and between top and bottom wages, with much of the growth in labor productivity accruing to wages at the top of the distribution.

The results: a growing gap between median compensation and average productivity and between the capital and labor shares of national income. While net productivity grew by 72 percent between 1973 and 2014, median real compensation grew only by 8 percent over that same period. (See Figure 1.)

Figure 1

Much of the gap between mean productivity and median compensation arises from growing inequality in the labor market, which has risen steadily over this period and especially since 1980. This is evident because mean compensation grew by around 43 percent over this period, versus 9 percent for the median. Further underscoring this dynamic, real wage growth for those at the 90th percentile of income was more than 35 percent between 1973 and 2016, compared to 6 percent real wage growth for median income earners and the bottom 10th percentile.

Globalization and technological change have likely played a role in these growing income inequality trends, but a sizable body of evidence in economics suggests institutions have been important contributors to these trends as well—including collective bargaining and statutory minimum wages. The stagnation of the federal minimum wage since 1980 contributed to real wage declines at the bottom of the income distribution.99 And the erosion of collective bargaining led to wage declines for middle-income workers.100

This essay first examines the evidence demonstrating that raising the federal minimum wage boosts the incomes of those workers at the bottom of the income distribution without any significant job losses for those workers. I then present the case for establishing so-called wage boards in the United States, akin to those now in place in Australia, where they set minimum pay standards by industry and occupation. Indeed, the legal infrastructure for wage boards in the United States is in place in several states already and could be emulated or expanded upon by policymakers.

If federal policymakers are interested in raising the pretax earnings for American workers in our nation, then these are important arrows in our policy quiver. As I detail below, raising the federal minimum wage (and indexing it to the median wage) is an obvious starting point. Going beyond just raising the minimum wage, policymakers should also consider wage boards, which could also raise wages for the typical U.S. middle-income worker.

Raising the federal minimum wage

Between 1938 and 1968, wages throughout the wage distribution were generally growing together, and the minimum wage also kept up with the wages of most other workers in the U.S. economy. The high-water mark for the minimum wage was in 1968, when it reached $10.50 an hour in 2019 dollars. The minimum wage then began to decouple from both productivity and even the median wage starting around 1980, reaching a historic low of $6.63 an hour in 2006 (in 2019 dollars) and today stands at $7.25 per hour.

Consider also the shrinking size of the federal minimum wage compared to the median wage of full-time workers. This ratio (sometimes called the Kaitz index) reached a high of 55 percent in the United States in 1968. Today, it is around 35 percent, one of the lowest in the developed world. The stagnant federal minimum wage has led 29 states to raise their minimum wages above the federal standard. Yet for a large share of the U.S. workforce, the federal minimum is the only standard in effect—and this standard is at an all-time low in both historical and comparative terms.

A substantial increase in the federal minimum wage is an important lever for raising pretax earnings for those workers at the bottom of the pay distribution.

Are there unintended consequences of raising the minimum wage?

Minimum wages raise the pay of workers at the bottom of the income distribution, but one concern is that a higher minimum wage also may lead employers to cut back on hiring. There is a large and sometimes contentious literature that has looked at this question with varying conclusions.101 In my assessment, the overall weight of recent research strongly supports the view that the minimum wage increases of the magnitude we have seen in the United States in recent years generate only modest employment effects.

In their 2014 book What Does the Minimum Wage Do?, economists Dale Belman at Michigan State University and Paul J. Wolfson at Dartmouth College’s Tuck School of Business review a large body of literature, and conclude that it was unlikely that the minimum wage increases under study led to substantial job losses. A similar conclusion was reached by other economists doing formal meta analysis, a well-defined statistical approach of pooling the results from a large number of separate analyses. And a meta analysis conducted by economists Hristos Doucouliagos at Deakin University and T.D. Stanley at Hendrix College, along with one released in 2015 by Belman and Wolfson, also concludes that the overall impact of minimum wages on employment is small.102

While meta analyses are helpful in summarizing the overall state of the literature, not all studies are created equal. This is why policymakers and economists alike should put more weight on high-quality evidence. In a paper I co-authored that was recently published in the Quarterly Journal of Economics, we provide arguably the most complete picture to date of how minimum wages impact low-wage jobs.103 The basic idea is simple. Imagine the minimum wage rises from $9 to $10 an hour in Nebraska. Clearly, there will be fewer jobs paying less than $9 per hour in Nebraska after the policy is enacted. Some of those jobs that would have paid less than $9 are now simply paying $9 or a bit more; other jobs may be destroyed if the costs exceed benefits to employers.

By comparing how many fewer jobs paying less than $9 there are due to the policy to how many additional jobs are paying $9 or slightly more, we can infer the total change in low-wage jobs caused by the minimum wage policy change. Of course, it’s possible that wages would have risen even absent the policy change in Nebraska; to account for that, we compare the changes in sub-$9 jobs and above-$9 jobs in Nebraska to the same in other states that did not raise the minimum wage. Finally, we pool across 138 prominent minimum wage changes instituted between 1979 and 2016 across various states. The following figure summarizes our key findings. (See Figure 2.)

Figure 2

Figure 2 shows the effect of an average minimum wage increase on the wage distribution at each wage level relative to the minimum wage. As we would expect, minimum wage increases led to a clear reduction in jobs paying less than the new minimum wage, confirming employers are abiding by the law. Yet the reduction in jobs paying less than the minimum was balanced by a sharp increase in the number of jobs paying at the new minimum, along with additional increases in jobs paying up to $5 more than the new minimum.

As Figure 2 also shows, my co-authors and I found virtually no change in employment higher up in the wage distribution. Overall, then, low-wage workers saw a wage gain of 7 percent after a minimum wage increase, but little change in employment over the 5 years following implementation.

Our research also shows why methods used in some of the previous studies are more susceptible to biases resulting from shocks to local labor markets, especially when comparing across long periods of time. These methods also insufficiently focus on workers or jobs that are likely affected by minimum wage policies. In other words, our research doesn’t just provide new evidence—we also show why it’s better evidence. This is one reason why, in my assessment, the 2019 report by the Congressional Budget Office predicted job losses larger than warranted from a federal minimum wage increase by putting equal weight to some of the studies suggesting very large job losses that my co-authors and I showed were flawed.

Encouragingly, we found that minimum wages as high as 59 percent of the median wage generated little indication of job losses. Moreover, in new work updating the published Quarterly Journal of Economics study, I find that minimum wage increases in the seven states with the highest minimum wages have (through 2018) not experienced losses in low-wage jobs.104 Finally, another recent study using sub-state variation focusing on low-wage areas reaches a similar conclusion.105

Overall, the weight of evidence suggests a substantial increase in the federal minimum wage is likely to attain its intended effects of boosting bottom wages and family incomes without substantial unintended consequences in the form of reduced employment growth.106

Beyond the minimum—reaching U.S. middle-income workers using wage boards

A major increase in the federal minimum wage can raise wages for tens of millions of U.S. workers, but its reach will still be limited to the bottom third of the workforce. What about those workers in the middle—what tools do we have to move their wages higher? First, let’s look at why wage boards—defined in detail below—are necessary in the United States today.

In the era following World War II, the key countervailing force to employer-side power in the United States labor market came from unions. Overall union membership reached a height of around 35 percent of the workforce in the mid-1950s. Since then, however, union membership has steadily fallen, and stands at around 12 percent today—and less than 7 percent in the private sector. Unions affected wages both directly and indirectly through pattern bargaining, as in the so-called Treaty of Detroit agreement between the United Auto Workers and the Big Three automakers at the time—General Motors Co., Ford Motor Co., and Chrysler (now Fiat Chrysler Automobiles NV).107

The impact of falling union membership has been particularly acute due to the enterprise-level bargaining structure in the United States (and other countries such as the United Kingdom and Canada), which differs greatly from countries such as France, Germany, and Australia, where collective bargaining coverage (the share of jobs covered by collectively bargained contracts) is much greater than union membership rates.

France, for example, has an 8 percent union membership rate (similar to the United States), yet more than 95 percent of its workforce is covered by extensions of nationally negotiated collective bargaining contracts. While coverage rates also have fallen across the developed world over the past several decades, the outcomes have varied greatly among countries with different legal systems. Consider that:

  • Union membership and coverage have remained high in so-called Ghent system countries such as Denmark, where labor unions are generally responsible for unemployment benefits rather than the government (and named after the city of Ghent in Belgium, where this system was first implemented in the early 20th century).
  • Union coverage has remained high even as membership has fallen in countries with sectoral bargaining and extension of contracts (rather than negotiating a new collective bargaining agreement), such as France.
  • Membership and coverage rates have both fallen sharply in countries with enterprise-level bargaining, as in the United States. Overall, this decline in union density has likely led to substantial reductions in wages of workers in the middle of the income distribution.108

While reforming labor laws to facilitate organizing is important, given the very low coverage rates in the United States today, such changes are unlikely to affect the overall wage distribution in the near term. One way to reach middle-income workers in the United States more immediately would be through instituting a wage board that sets multiple minimum pay standards by sector and occupation—potentially chosen using consultation with stakeholders, such as business and worker representatives.109 This system would allow for raising wages not just for those workers at the very bottom of the overall pay scale, but also for those in the middle. This is effectively done in countries where there are extensions of collective bargaining contracts, but it also can be done by setting multiple minimum pay levels statutorily.

An example of a wage board approach comes from Australia, which has a combination of a national minimum wage, a system of industry- and occupation-specific minimum wages, and enterprise-level collective bargaining, called the Modern Awards system. Around 36 percent of the workforce is covered by collective bargaining contracts, but another 23 percent are covered by the wage board standards. Most of these standards are by industry, although some workers, among them nurses and pilots, are covered by occupation. There are 122 such standards, and within each one, there are a host of wage rates based on skill requirements or experience; there may be anywhere between a handful to several dozen pay grades specified in each agreement.

How to set up wage boards in the United States

In order to institute wage boards at the national level in the United States, federal law would need to be changed. But there are institutions in place already at the state level upon which to build or emulate.

At least five states (Arizona, Colorado, California, New Jersey, and New York) already have legislation on the books that allows for constituting wage boards by industry or occupations. But these boards have been used infrequently. Most prominently, they were used to raise the overall minimum wages in California in the 1990s, and more recently to establish a fast food minimum wage in New York. But there has been little effort to use the wage board mechanism to target wages for those in the middle of the income distribution.

At the same time, the machinery is in place to push for a broader array of wage standards. State experimentation with wage boards to set standards higher up in the wage distribution—as in the Australian case—could play a possibly useful role in mitigating wage stagnation and inequality. Moreover, other states can follow suit and establish similar wage board legislation to those in place in California.

While details can vary, a wage board system would set minimum pay standards by sector and occupation. This allows the mechanism to affect the distribution of wages not just at the very bottom but additionally toward the middle of the distribution. As an illustration, below I simulate the effect of a wage board by imposing region-by-industry-by-occupation standards, separately calculated by region (specifically using nine U.S. Census Bureau divisions), 17 two-digit industries, and six occupational groups—producing a total of 102 wage standards.

The choice of standards is, of course, a key issue. To show how this may affect wage inequality, I consider two standards. In the first, “low” standard, I set the minimum wage to 30 percent of the median wage in each of the 102 categories in that particular Census division. In the second, “high” standard, I set it to 35 percent of the median. While as a share of the median wage, these two standards seem to be not very far apart, they do imply quite different bites for the policy.

As a starting point, the wage standards would be binding for 20 percent and 31 percent of workers under the low and high standards, respectively. In other words, the low and the high standards straddle the Australian case—where around 23 percent of workers’ wages are set by the Modern Award system. Australia, however, also has a substantially higher set of workers with collectively bargained wages (36 percent) than the United States (12 percent). Therefore, the high standard would still imply a smaller set of workers who are covered by either collective bargaining or by a wage board than in Australia. (See Figure 3.)

Figure 3

As shown in Figure 3, overall, both the high and low standards imply substantial wage gains, especially for the bottom and middle of the wage distribution. Under the low standard, the 20th, 40th, and 60th percentile of wages rises by 13 percent, 9 percent, and 4 percent, respectively. Under the high standard, the wage gains extend somewhat further. Wages at the same percentiles would rise by 19 percent, 15 percent, and 12 percent, respectively.

Contrast these distributional impacts of wage boards with those from typical minimum wage increases in the United States. The consequences of raising the federal minimum wage mostly fades out by the 20th percentile of the wage distribution, whereas the wage boards extend wage gains well into the middle of the distribution. In short, wage boards are much better positioned to deliver gains to middle-wage jobs than a single minimum pay standard.

Of course, these calculations are illustrative and make many simplifying assumptions such as ruling out additional spillover effects and changes in composition of jobs, to name a few. But what they show is that a suitably chosen wage standard can substantially raise middle and bottom wages and reduce wage inequality.

While it is difficult to definitively assess the impact of the Australian system of labor standards, there are broad metrics that offer a positive verdict. Household inequality in Australia is more muted compared to the United States: While Australian families at the 90th percentile earn around 4.3 times as much as those at the 10th percentile, in the United States, they earn around 6.3 times as much.110 Importantly, the median wage has kept up with the mean wage in Australia much more than in the United States, where the median has stagnated since the 1980s.

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Rebuilding U.S. labor market wage standards

At the same time, the more muted growth in inequality in Australia is not associated with any obvious differences in labor market performance. While the Australian unemployment rate in August 2019 was 5.3 percent as opposed to 3.7 percent in the United States, over the past 10 years, Australia has averaged 5.5 percent unemployment versus 6.9 percent in the United States. Focusing on younger or lower-skilled workers does not yield very different comparisons. Overall, the Australian evidence is broadly consistent with the perspective that judiciously applied wage setting using a wage board system can help ameliorate wage inequality without causing any serious harm to the labor market.

Finally, at the national level, a wage board system can complement efforts to reform labor law to allow sectoral bargaining in the United States. In particular, having statutory sectoral wage standards can serve as a backstop, which can be superceded by sectoral agreements between unions and employer associations if union membership exceeds a minimal threshold. Overall, policymakers would be well-advised to experiment with a variety of institutional reforms to help reverse wage stagnation and inequality than has afflicted the labor market in the United States.

—Arindrajit Dube is a professor of economics at the University of Massachusetts Amherst and research associate at the National Bureau of Economic Research.

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The economic imperative of enacting paid family leave across the United States

Posted on by Maria Monroe

This essay is part of Vision 2020: Evidence for a stronger economy, a compilation of 21 essays presenting innovative, evidence-based, and concrete ideas to shape the 2020 policy debate. The authors in the new book include preeminent economists, political scientists, and sociologists who use cutting-edge research methods to answer some of the thorniest economic questions facing policymakers today. 

To read more about the Vision 2020 book and download the full collection of essays, click here.

Overview

Many workers across the United States have caregiving responsibilities. The majority of mothers and fathers of infants and small children work in the labor force, and the aging of the baby boomer population implies that many workers have parents and other older relatives who may require care. Paid family leave policies are designed to help employees balance the competing needs of work and family by allowing them to take time off from work with partial wage replacement to care for newborn or newly adopted children or ill family members.

Yet the United States remains one of only a few countries in the world without any national paid family leave policy and the only high-income country without one.111 Only 17 percent of U.S. private-sector workers have access to paid family leave through their employers, and this access is highly unequal—meaning that low-income workers have much less access than their higher-income counterparts.112 Federal law requires 12 weeks of job-protected unpaid leave under the 1993 Family and Medical Leave Act, but stringent eligibility requirements mean that less than two-thirds of the U.S. workforce is eligible. Not surprisingly, the majority of working parents report that their work-family balance is a significant challenge.113

Paid family leave is receiving significant attention in the political discourse. At the end of 2019, Congress and the Executive Branch reached agreement to extend six weeks of parental paid leave for a newly born or adopted child to the federal workforce. During the 2016 election, for the first time in U.S. history, both Democratic and Republican presidential candidates included paid leave proposals in their campaign platforms. Advocates credit paid family leave with encouraging career continuity and advancement for women and improving child and family health and well-being. There is also growing interest in encouraging men to take leave, in an effort to promote gender equality both at home and in the labor market. Yet some business groups and other opponents of paid family leave argue that it could impose substantial costs on employers. Paid time away from work could lower employees’ attachment to their jobs, and even lead to discrimination against women (who are more likely than men to take leave).

In this essay, we first examine paid family leave programs at the state and local level, which are helping to set the stage for a federal paid leave program. We then describe the current research on the impacts of paid family leave on workers, children, and employers, with an eye toward understanding the economic costs and benefits of a potential federal program and the key policy levers to consider. We also briefly discuss how paid family leave may relate to the growth in economic inequality in America and whether a federal policy could help curb this trend.

Paid family leave policies can cover both bonding with a new child and caring for other relatives, but in this essay, we will focus the discussion on the effects of bonding leave. This restriction stems from a lack of research on the impacts of nonbonding leave and the fact that bonding leaves currently make up the vast majority of all claims in states with paid family leave programs.114

Paid family leave at the state and local level

There has been substantial policy action for paid family leave at the state and local level. California became the first state to enact legislation in 2004, followed by New Jersey (in 2009), Rhode Island (in 2014), and New York (in 2018). Washington state and the District of Columbia both recently passed legislation, with benefits available starting in 2020. Massachusetts, Connecticut, and Oregon also recently passed laws to start providing paid family leave benefits in 2021, 2022, and 2023, respectively.115 At least 16 other states have introduced similar legislation.

The current state and local paid family leave laws are all similar in that they provide partial wage replacement during leave and cover a broad segment of the workforce through minimal eligibility requirements. But they differ on several key policy levers: duration, benefit amount, job protection, funding mechanism, and what constitutes a qualifying event.

Wage-replacement rates vary from 50 percent to 100 percent (up to a weekly maximum benefit amount) for 4–12 weeks. The maximum benefit amount currently ranges from $650 to $1,250 per week. While higher-income workers receive higher total benefit amounts, the replacement rate is higher for low-wage workers in California (as of 2018), the District of Columbia, Massachusetts, Washington state, Oregon, and Connecticut. Paid family leave legislation in California, New Jersey, and the District of Columbia do not have any provisions for job protection, which require that employers allow workers to return to their preleave jobs after the leave has ended, though eligible workers can simultaneously take job-protected unpaid leave under current federal or state law. The other states specifically include job security provisions for most employees in their paid family leave laws.

Most states fund paid family leave entirely through employee payroll taxes, while the District of Columbia has a payroll tax on employers. In Oregon and Washington state, the leave will be jointly financed between employees and employers. This payroll tax is currently between 0.1 percent and 1 percent of wages (up to a cap) across states.

All states cover leaves associated with the arrival of a new child (through birth, adoption, or foster care) and serious health conditions of close family members. But the definition of close family members varies somewhat across programs. Additionally, Massachusetts and Washington state will cover needs related to the military deployment of a family member. New Jersey and Oregon include specific provisions to cover victims of domestic violence and their caregivers.

Paid family leave and take-up by employees

Most Americans support a national paid family leave policy.116 But how many workers would such a policy benefit? Evidence from California indicates both mothers and fathers value it. The leave-taking rate of mothers with infants nearly doubled after paid family leave became available, while fathers were 50 percent more likely to take leave.117 This increase in leave-taking indicates that access causes new parents to take more time away from work following the birth of a new child than they would in the absence of the policy. But even those who do not change their leave-taking behavior may benefit by receiving partial wage replacement during periods of leave that would have otherwise been unpaid. Overall, a recent study by one of the co-authors of this essay, along with two other colleagues, estimates that about 47 percent of employed new mothers and 12 percent of employed new fathers in California made a paid family leave claim in 2014.118

Why don’t all new parents access this paid family leave program? There are a number of barriers that may limit take-up, including lack of policy awareness, too-low pay, or the absence of job protection.119 These barriers may be especially high for workers in low-wage jobs, who are less likely to be eligible for job protection through the current federal unpaid leave law and less likely to be able to afford to take even partially paid leave.120

Paid family leave and workers’ labor market trajectories

Paid family leave could impact workers’ subsequent labor market outcomes such as employment and wages in several different ways. Because paid leave increases the time parents spend away from work, it could lead to a loss of job-specific skills and make re-entry into the labor market more difficult. Yet the availability of paid family leave, particularly when job protection is available, may reduce the probability that new parents quit their jobs upon the birth of a child. This could have a positive effect on job continuity and future earnings.

Although employers are not responsible for paying employees during the leave, extended absences are costly in other ways. The productivity of firms, for example, may decrease if it is difficult to reassign tasks or hire a replacement while an employee is on leave for several weeks. Employers who find leaves particularly costly may discriminate against groups most likely to take up the leave—new mothers or women of childbearing age—by being less likely to hire them or offering them lower wages.

Studies on these programs in other countries typically find that provisions of leave up to 1 year in length increase the employment of mothers shortly after childbirth and have positive or zero effects on wages, though longer leave entitlements can have adverse effects on maternal long-term employment and wage trajectories.121 There is no evidence that paternity leave impacts fathers’ subsequent labor market outcomes.122

The evidence on the employment effects of paid family leave in the United States is mixed. While several studies have found the introduction of paid family leave in California had positive impacts on employment and wages of new mothers in the short term, recent work using large-scale administrative data finds zero or small negative impacts on long-term employment and wages.123

Moreover, it is possible that the design of the leave policy in terms of its specific components (such as duration, replacement rate, and the inclusion of job protection) matters. Yet there is limited research on this question because it is hard to isolate the effect of a particular policy lever from the other features that are implemented at the same time. That said, new research by one of the co-authors of this essay, along with two other colleagues, isolated the impact of the wage-replacement rate in California’s paid family leave program for relatively high-income mothers, finding that higher benefit amounts do not affect either the duration of leave or the probability of making a claim, but may improve job continuity by increasing the likelihood that women return to their preleave employers.124

Paid family leave and family health outcomes

A lot of the discussion about the importance of paid family leave focuses on women’s labor market trajectories, yet these policies may also be beneficial for families more broadly. For instance, paid leave could impact maternal and child health and well-being. Access to leave may lower maternal stress during pregnancy, which has been shown to adversely affect child well-being at birth and in later life.125 Paid family leave also may impact breastfeeding duration, enable parents to obtain prompt healthcare for their infants, improve maternal postpartum physical and mental health, and strengthen parent-child bonds.

While studies of the impacts of extensions in already-generous paid family leave policies on children from other countries find no effects, they offer little guidance on what one might expect from the introduction of a shorter-but-similar federal program such as those now being considered in the United States.126 There is one instructive example that comes from research on the long-term impacts of the 1977 implementation of a four-month paid maternity leave policy in Norway. That research shows that it led to a reduction in high school drop-out rates and an increase in adult earnings, concentrated among children from disadvantaged backgrounds.127 Another study further shows that the same policy improved a range of maternal health indicators, with the benefits again concentrated among women from less advantaged backgrounds.128

We can also draw on a small body of research conducted in the U.S. context. One study shows that the introduction of paid maternity leave in five U.S. states lowered rates of low birth-weight and preterm births, with the largest impacts among African American and unmarried mothers. Improvements in these measures of health at birth have been correlated with improvements in long-term health, suggesting that paid leave may have long-lasting benefits for kids. The introduction of paid family leave in California also is associated with increases in the duration of breastfeeding, reductions in hospitalizations for infants due to avoidable infections and illnesses, and improvements in maternal mental health.129

Although paid family leave policies at the state and local level in the United States have not existed long enough to study the long-term impacts of children’s health into adulthood, there is already some evidence of improvements in later childhood health. The introduction of California’s paid family leave program is associated with lower rates of being overweight, attention deficit hyperactivity disorder, and hearing problems in Kindergarten.130 Recent work finds that paid family leave also increases time mothers spend in childcare activities, suggesting that improvements in childhood health may be driven by both physiological and behavioral channels.131

Paid family leave and employers

A central concern among opponents of government-mandated paid family leave is the costs imposed on employers. Even if employers do not have to fund the leave, they could face indirect costs from the need to hire replacement workers, coordinate employee schedules, or reassign work tasks. Alternatively, employers could experience cost savings if workers who would have otherwise quit instead return to their jobs and reduce turnover rates.

The existing evidence on the impacts of paid family leave on employers is sparse. Surveys of selected firms in California and New Jersey find that the vast majority of employers report either positive or neutral effects on employee productivity, morale, and costs.132 These studies do not find much evidence that program administration has been challenging or that employees resent their co-workers who take leave.

Then, there’s the recent survey of small and medium-sized businesses in the food services and manufacturing sectors in Rhode Island, Connecticut, and Massachusetts just before and shortly after Rhode Island’s paid family leave program went into effect.133 Comparing Rhode Island employers pre- and post-law to Massachusetts and Connecticut employers over the same time period, the study found no evidence of significant impacts of the law on outcomes such as turnover rates or employee productivity. Still, the sample sizes were small, limiting the conclusions that could be drawn from this analysis.

One of the co-authors of this essay and another colleague used administrative data on nearly all California employers that ever existed between January 2000 and December 2014 to study how employers’ labor costs and productivity respond to changes in employee leave-taking rates.134 They find no evidence that employee turnover or wage costs change when leave-taking rates rise. In fact, the average firm has a lower per-worker wage bill and a lower turnover rate today than it did before California’s paid family leave program was introduced.

But there still may be significant differences in the costs of paid family leave faced by different firms. Again using administrative from California, another recent analysis finds that take-up of paid leave is substantially higher in firms that pay similarly skilled workers relatively higher wages.135 These firms also have higher employee retention following periods of leave. That research posits that better-paying firms may have cultures that are more conducive to leave-taking, suggesting that changing firm behavior and norms may be important for encouraging the use of leave more broadly.

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The economic imperative of enacting paid family leave across the United States

Conclusion

As other states and the nation as a whole consider paid family leave legislation, it is critically important to understand the costs and benefits of existing programs and identify key policy features. The current research yields five key take-aways.

First, both mothers and fathers respond to the introduction of paid family leave programs through higher leave-taking rates and longer leave duration, but barriers to take-up remain, especially among low-wage workers in small firms. Job protection and high wage-replacement rates for workers at the bottom of the wage distribution may be important for encouraging more widespread take-up.

Second, relatively short leave entitlements can improve job continuity for women and increase their employment rates several years after childbirth. Paid leaves longer than 1 year, however, could have adverse consequences for mothers’ long-term career opportunities.

Third, the current paid leave programs at the state and local level in the United States have positive impacts on child health and development, as well as maternal well-being. Thus, while there is no research identifying the “optimal” duration of leave precisely, it appears that programs of up to six months in length are likely to generate benefits for families without significant costs to women’s careers.

Fourth, the current evidence shows minimal negative impacts of existing state programs on employers, suggesting that paid family leave programs afford benefits to workers and their families at little to no cost to the employers. These benefits may be especially important for the least advantaged families, in which workers are the least likely to have access to any employer-provided paid leave.

Finally, a growing body of evidence underscores that rising economic inequality and persistent intergenerational transmission of low socioeconomic status in the United States are perpetuated through disparities in early childhood circumstances.136 The current research suggests that a federal paid family leave policy could level the playing field for children from all backgrounds and help curb the growth in inequality and boost long-term U.S. economic growth and stability.

—Maya Rossin-Slater is an assistant professor of health policy in the Department of Medicine at Stanford University School of Medicine. Jenna Stearns is an assistant professor of economics at the University of California, Davis.

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Addressing the need for affordable, high-quality early childhood care and education for all in the United States

Posted on by Maria Monroe

This essay is part of Vision 2020: Evidence for a stronger economy, a compilation of 21 essays presenting innovative, evidence-based, and concrete ideas to shape the 2020 policy debate. The authors in the new book include preeminent economists, political scientists, and sociologists who use cutting-edge research methods to answer some of the thorniest economic questions facing policymakers today. 

To read more about the Vision 2020 book and download the full collection of essays, click here.

Overview

In 2017–2018, most children in the United States under 6 years of age—68 percent of those in single-mother households and 57 percent in married-couple households—lived in homes in which all parents were employed.137 Most of these families require nonparental early care and education, such as childcare centers, preschools, family childcare homes, or informal arrangements with relatives or neighbors, to care for their children while at work. In a typical week in 2011, the most recent year for which complete data are available from the U.S. Census Bureau, 12.5 million of the 20.4 million children under the age of 5 living in the United States (61 percent) attended some type of regular childcare arrangement.138

Unfortunately, on average, the early care and education settings attended by many young children, particularly low-income children or children of color, provide quality at levels too low to adequately promote children’s learning and development.139 This exacerbates socioeconomic and racial and ethnic inequalities. At the same time, in most regions of the country, families with young children are spending more on childcare than they are on housing, food, or healthcare.140

In this essay, I argue that greater policy attention to early childcare and education is warranted for three reasons:

  • High-quality early care and education promotes children’s development and learning, and narrows socioeconomic and racial/ethnic inequalities.
  • Reliable, affordable childcare promotes parental employment and family self-sufficiency.
  • Early care and education is a necessary component of the economic infrastructure.

I then provide the research underlying these three statements, and follow with a discussion of several policy solutions to address the current problems of affordability, quality, and supply of early care and education in the United States. The overwhelming evidence shows that more public investment is needed to help ease the cost burden for families and ensure that a trained, stable workforce has adequate compensation. A universal early care and education plan, particularly one with a sliding income scale to provide progressive benefits, may not pay for itself in the short term, but will very likely do so in the long term by boosting broad-based U.S. economic growth and stability while narrowing economic inequality.

High-quality early care and education promotes children’s development and learning and narrows inequality

Early childhood, especially the first 3 years of life, constitutes a sensitive period of the life course, one during which caregiver warmth, responsiveness, and developmentally appropriate stimulation are vital for development.141 Experiences during early childhood—whether positive, such as language exposure, or negative, such as high and chronic levels of stress or deprivation—have lasting effects.142 Research demonstrates that socioeconomic disparities in cognitive skills and physical development are apparent in infancy.143

Over the past five decades, a wealth of research has examined how early care and education affects children’s development. Most studies find that the majority of the intensive, high-quality, at-scale model programs promote children’s academic school readiness in the short term. These include the Abecedarian project (studying a set of children born between 1972 and 1977 into their adult years), the Perry Preschool project (studying of a select group of children born between 1962 and 1967), the Infant Health and Development Program (a 1980s program that studied low birth-weight children in their first 3 years), and longstanding federal at-scale early care and education programs such as Head Start, state pre-Kindergarten programs, and high-quality center-based programs.144 Effects are generally strongest for disadvantaged children, suggesting that early care and education may help to narrow socioeconomic, racial, and ethnic disparities in achievement.145

Among the early care and education programs in existence long enough to have data on long-term effects, research finds substantial and lasting benefits for educational and economic outcomes, including higher rates of high school completion, college attendance, and earnings, and reduced criminal activity and public assistance reliance into adulthood.146 There also is emerging evidence for intergenerational benefits.147 Yet the research is somewhat mixed for the mid-term effects of early care and education programs. Research finds benefits of participation for reduced grade retention, or repeating a grade in school.148 The short-term benefits on test scores, however, appear to “fade out” or converge with children who did not attend early care and education programs as they age.149 But some research suggests that may be due to the quality of the schools attended after early childhood.150

A largely separate body of research examines the health effects of early care and education. Studies find that the initial entrance of young children into group care is associated with a short-term increase in the incidence of communicable diseases.151 But there are substantial and lasting benefits of early care and education participation for health, including increased on-time immunization rates, early screening rates, improved cardiovascular and metabolic health, and reduced smoking.152

Reliable, affordable childcare promotes parental employment and family self-sufficiency

Early care and education provides a context for child development, as well as temporary relief to parents for childcare, allowing them to work. Indeed, increased access to affordable childcare increases parents’ labor force participation, particularly among single mothers. A recent review of the labor effects of childcare estimates that a 10 percent decrease in childcare costs would lead to a 0.25 percent to 1.25 percent increase in parental labor force participation.153 Research finds that public preschool programs, which typically offer part-day, school-year programming, have some but potentially limited effects on parental employment.154 But full-day, full-year early care and education—particularly for infants and toddlers for whom care is expensive and hard to find, and who are less likely to attend center-based care (See Figure 1)—would likely have larger effects on parental labor force participation.155

Figure 1

Early care and education is a necessary economic infrastructure component

Childcare can be considered an infrastructure component akin to transportation. Without reliable, affordable sources, workers cannot regularly get to work or stay there. In the short term, early care and education settings support the productivity of two types of workers: employed parents and childcare workers. Research by University of Chicago economist and Nobel Laureate James Heckman and others suggests that many early childhood programs pay for themselves before children begin kindergarten via increased maternal employment, which generates both household income and tax revenue.156 Further, research from the early 2000s suggests that investments in childcare have strong local economic development effects, or multiplier effects, because much of those dollars are spent on childcare worker wages that they, in turn, spend locally.157

In the long term, early care and education supports the preparedness and skills development of the future workforce of the country. Benefit-cost analyses of several intensive model programs and public early care and education programs indicate that the benefits—such as improved educational, economic, and health outcomes, and reduced criminal activity and receipt of public assistance—outweigh the initial program costs, demonstrating positive returns for participants, as well as the public.158

Barriers in accessing the promise of early care and education

Unfortunately, families with young children today face barriers in accessing and paying for the opportunities offered by early care and education. High-quality early care and education is expensive and hard to find, particularly for infants and toddlers.159 Families with young children spend about 10 percent of their incomes on childcare expenses, but families in poverty—families below 100 percent of the Federal Poverty Level of about $12,000 per year for a family of three—spend 30 percent.160 These expenses represent families’ actual expenses at a mix of regulated centers and homes and informal lower-cost arrangements with relatives, not necessarily what they may choose to spend if more options were available.

In 2017, infant childcare at centers or licensed homes cost an average of $9,000 to $12,000 per year across the country, more than public college tuition in most states.161 These high childcare costs accrue during a period when parents are at the lowest earning years of their careers and when the financing mechanisms of grants and low-interest loans are unavailable.162 The public programs that exist to help families access early care and education—namely the Early Head Start/Head Start program and childcare subsidies provided under the federal and state Child Care and Development Block Grant program—serve a small fraction of those eligible. In 2016–2017, 35 percent of 3- to 5-year-old children in poverty attended Head Start, and 10 percent of children under age 3 in poverty attended Early Head Start.163 In 2015, of the 13.5 million children eligible for childcare subsidies under federal rules, only 15 percent received them.164

Public investments in preschool contribute to dramatic increases in participation in early learning programs in the year or two prior to children’s entry into kindergarten. Whereas in 1970, about 1.09 million (27 percent) 3- to 5-year old children in the United States attended preschool, by 2016, 4.701 million (60 percent) were enrolled.165 Yet these overall rates mask disparities in attendance. While income-based gaps in enrollment in preschool narrowed in recent decades, children in low-income families continue to be less likely to attend center-based care than their higher-income peers.166 As shown in Figure 1, among children under age 5 with employed mothers, only 28 percent of those in homes under the poverty line attend center-based care, versus 39 percent of those above the poverty line. This is problematic, as center-based settings tend to provide higher-quality, more stable care, on average, than unregulated arrangements.167

Further, centers that low-income children attend provide lower quality care, on average, than those attended by their higher-income peers.168 Research shows that higher-income families are enrolling children in formal early care and education programs at increasingly younger ages.169 In 2005, for example, 22 percent of 1-year-olds from families with incomes above 200 percent of the federal poverty line (at that time, about $32,000 per year for a family of three) attended center-based settings, compared to just 11 percent of 1-year-olds from families with incomes below 200 percent of the federal poverty line.170 Our system’s reliance on private family investment in early childhood is a driver of inequality, putting children on unequal playing fields well before they walk through the doors of their kindergarten classrooms.171

Despite their high expense, early care and education programs should actually cost more, not less. The quality of early care and education depends on the warmth and responsiveness of teachers and caregivers and on the strength and consistency of caregiver-child relationships, which means economies of scale do not apply to childcare in the same way as with other economic sectors. For good reason, state and local regulations set child-adult ratios and group sizes and teacher training requirements. In turn, most childcare costs are directed to labor expenses.172

Yet, despite parents paying as much (or more) than they can afford, childcare workers are paid little. In 2018, the median hourly wage for childcare workers was $11.17 ($23,240 per year).173 This is considerably less than the $16.56 median hourly wage for bus drivers ($34,450 per year).174 What’s more, there are wide racial and ethnic gaps in teacher pay and benefits such as health insurance coverage or paid sick leave.175 Many workers earn so little that they rely on public assistance. Between 2014 and 2016, more than half (53 percent) of childcare workers lived in families that participated in one or more of four public programs.176 This compares to 21 percent in the general population.177

Low pay and few benefits present barriers in attracting and retaining a skilled early care and education workforce. Teacher educational qualifications and stability are associated with the quality of early childhood settings and, in turn, a wide range of children’s outcomes.178 In 2012, 25 percent of childcare centers had turnover rates of 20 percent or higher.179 A 2018 study found that 10 percent of children in Head Start (whose teachers average lower pay than those at public preschool programs) had a teacher who left Head Start entirely during the program year, with harmful consequences for children’s outcomes.180 Adequate caregiver and teacher compensation and training is necessary for supporting quality and stability in, and augmenting the supply of, early care and education.

This lack of reliable, affordable childcare has reverberating effects for parents, employers, and the U.S. economy. Interrupting a career due to a lack of adequate childcare—something more often done by mothers—has both short- and long-term economic ramifications for families in terms of lost wages, retirement savings, and other benefits, with an estimated average reduction of 19 percent in lifetime earnings.181 Even when maintaining labor force participation, working parents and their employers feel the economic consequences of childcare inadequacy. A 2018 survey found that workers with children under the age of 3 lose an average of 2 hours per week of work time due to childcare problems, such as leaving early or arriving late. One-quarter of respondents reported they reduced regular work hours, turned down further education or training, or turned down a job offer due to childcare problems.182 One recent study estimated that the childcare crisis results in $57 billion in lost earnings, productivity, and revenue each year.183

Policy solutions

Most early care and education policies are designed for one or both of two purposes: to provide care while parents work or to promote children’s readiness to enter kindergarten by supporting cognitive, social-emotional, and behavioral development. This is a false dichotomy. As detailed above, high-quality, affordable, reliable programs accomplish both purposes. Yet there are simply too few high-quality, affordable, reliable programs in the United States today, and most are out of reach for low- and middle-income families.

In order to address families’ and employers’ early care and education needs, policies must address the affordability, quality, and supply problems in our current system. More public investment is needed to help ease the cost burden for families and ensure that a trained, stable workforce has adequate compensation, which will promote affordability and quality. Low-income families disproportionately shoulder the economic and other burdens caused by the lack of childcare, although middle-income families are also economically squeezed during the years in which their children are young.

A universal plan, particularly one with a sliding income scale to provide progressive benefits, may not pay for itself in the short term, but will likely do so in the long term.184 A universal plan that offers benefits such as mixed-income classrooms may have beneficial peer effects.185 And these kinds of plans have fewer administrative barriers and stigma, and a broader base of political support.186 Further, an analysis of the Infant Health and Development Program estimates that socioeconomic achievement gaps would be substantially narrowed from universal programs.187 Policies should be flexible enough to meet families’ diverse needs, address the overall supply of early care and education, and cope with the gaps that are particularly troublesome for families today, such as care during nonstandard hours and for children with special needs.188

Two examples of universal policy solutions that would improve affordability, quality, and supply are the Child Care for Working Families Act and the Universal Child Care and Early Learning Act. Both of these proposed bills would increase public investment in early care and education to limit families’ out-of-pocket payments to 7 percent of family income (the threshold recommended by the U.S. Department of Health and Human Services), increase childcare worker compensation and training, and expand public preschool and the supply of childcare for infants and toddlers. The Child Care for Working Families Act does so by expanding childcare subsidies, nearly doubling the number of children eligible.189 The Universal Child Care and Early Learning Act relies more on public provision, expanding a network of early care and education options through federal-state or federal-local partnerships.190

Both bills, if passed by Congress and signed into law, would lead to substantial increases in the availability of high-quality, affordable early care and education programs. An analysis of the Child Care for Working Families Act estimated that, at full implementation, the availability of new childcare subsidies and reduced childcare costs would lead to 1.6 million more parents joining the labor force, the bill would create 700,000 new jobs in the childcare sector, and pay among teachers and caregivers would increase by 26 percent.191

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Addressing the need for affordable, high-quality early childhood care and education for all in the United States

Conclusion

The recent increases in state and local paid family leave programs in a handful of states and cities are laudable and help parents manage their own health and their newborns’ needs, while maintaining their jobs and a basic income.192 Likewise, federal and state public preschool programs and Head Start serve increasing numbers of children, with 44 percent of 4-year-olds and 16 percent of 3-year-olds enrolled in public programs across the country.193 But in the years following the (relatively brief) period of paid leave and preceding the availability of preschool, families require affordable, high-quality, stable early care and education arrangements that match their working hours.

To ignore early care and education policy means to ignore a major expense and pressing concern for families and employers across the nation. Moreover, the research shows that early care and education can promote children’s cognitive and other outcomes, narrowing disparities and leading to greater economic growth.194 Our nation’s current lack of investment in early care and education—unique among our peer countries—constitutes a lost economic opportunity to enhance our global competitiveness, as well as a lost opportunity for narrowing pervasive social and economic inequalities among families today.

—Taryn Morrissey is an associate professor at the School of Public Affairs at American University.

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Fair work schedules for the U.S. economy and society: What’s reasonable, feasible, and effective

Posted on by Maria Monroe

This essay is part of Vision 2020: Evidence for a stronger economy, a compilation of 21 essays presenting innovative, evidence-based, and concrete ideas to shape the 2020 policy debate. The authors in the new book include preeminent economists, political scientists, and sociologists who use cutting-edge research methods to answer some of the thorniest economic questions facing policymakers today. 

To read more about the Vision 2020 book and download the full collection of essays, click here.

Overview

Scheduling practices in low-wage jobs are the focus of increasing public concern in the United States, as awareness has grown of their potential harmful effects on workers and families. Changing work schedules requires changing the behaviors of frontline managers because they are the ones who schedule employees. Policymakers in the next Congress and administration can enact new federal laws to shift incentives on the frontlines of firms to help establish work-hour standards that benefit both employers and employees.

In this essay, I first detail the problematic scheduling practices prevalent in today’s U.S. economy and their serious ramifications for firm productivity and worker well-being. I draw on recent evidence indicating that improving work schedules can be good for families, employees, and employers alike. I then suggest two promising directions for public policy: legislating new work-hour standards in low-wage jobs and helping businesses meet them.

Problematic scheduling practices: Serious ramifications, widespread prevalence, and unproductive results

Research tells us that several dimensions of work schedules in today’s jobs—instability, unpredictability, inadequacy, and lack of input—undermine worker health and family economic security. Specifically:

  • Schedule instability and unpredictability make it difficult to fulfill a host of family responsibilities, from arranging childcare and attending parent-teacher conferences to securing benefits through public safety-net programs.195
  • Shortfalls in weekly work hours fuel financial insecurity and distrust in societal institutions, including Congress.196
  • Problematic scheduling practices are more strongly associated with psychological distress, sleep quality, and unhappiness than are low wages.197

These problematic scheduling practices are widespread in today’s labor market, especially among low-paid workers. More than three-quarters of hourly-paid workers in the bottom third of the wage distribution report fluctuations in weekly work hours that average more than a full day of pay.198 Fully 40 percent of hourly workers say that they “know when they will need to work” one week or less in advance, and 1 in 6 know their schedule a day or less in advance.199 What’s more, between 2007 and 2015, involuntary part-time employment increased almost five times faster than voluntary part-time work and about 18 times faster than all work.200 And about half of hourly workers report that they have little or no input into the number or timing of the hours they work.201

Work scheduling problems are multidimensional problems. The most disadvantaged workers experience fluctuating, unpredictable, and scarce hours, determined by their employers. A larger proportion of black than white workers have highly fluctuating work hours at the behest of their employer, not by choice.202 And a larger proportion of low-paid than higher-paid workers, and black than white workers, experience the “triple whammy” of work-hour volatility, short advance notice, plus lack of schedule control.203

Importantly, evidence indicates that scheduling practices that are problematic for employees can also be problematic for employers. The latest research on the operations of retail firms reveals an inverted U-shaped curve between store-level labor flexibility and profit, demonstrating that too much labor flexibility undermines business goals.204 A recent randomized experiment at the U.S. retailer Gap, Inc. finds that improving schedule stability and predictability for hourly sales associates increased labor productivity and store sales, suggesting that improving scheduling practices can yield positive business benefits.205

Policy answers to problematic scheduling practices

Depending solely on employers to improve work schedules voluntarily is risky if policymakers are to improve the quality of jobs and quality of life for all U.S. workers and their families.206 The business models revered by Wall Street emphasize the importance of minimizing the cost of labor in order to maximize returns to shareholders.207 These pressures trickle down to frontline managers who are held accountable for operating within increasingly tight labor budgets.208

Frontline managers adopt practices that allow them to keep their workers’ schedules flexible so they can readily adjust staffing levels to perceived business needs. Key among managers’ labor-flexibility tools are the scheduling practices that create the problems for workers: posting schedules with little advance notice, making last-minute changes, and maintaining a large pool of workers just in case they need more.209 The incentive structures of firms make it difficult for frontline managers to change their scheduling behaviors.

Public policy can shift incentives on the frontlines of firms. Since 2014, one state (Oregon) and six municipalities (San Francisco, Seattle, New York City, Philadelphia, Chicago, and Emeryville, California) have passed comprehensive scheduling laws, and more than a dozen additional cities have legislative initiatives underway. The new regulations are intended to establish universal standards for scheduling hourly employees in targeted industries, primarily in retail, food service, and hospitality, and in large corporations.210

Although the administrative rules vary across municipalities, these laws are coalescing around common provisions that align with the problematic dimensions of work schedules. By addressing multiple dimensions of work schedules, the laws are consistent with social science research indicating a multidimensional approach is needed to accomplish meaningful change. The major provisions included in current legislation and the scheduling dimension each one is intended to improve are compiled in Table 1.

Table 1

Scheduling legislation is designed to preserve flexibility for both employers and employees

One concern of employers is that regulating scheduling practices will impede profitability by limiting their ability to adjust labor to changing demand. But the provisions of the laws place more emphasis on improving schedule predictability rather than schedule stability. This focus on predictability preserves labor flexibility for employers. Notably, even though workers’ schedules are to be posted two weeks in advance of each workweek, these laws do not prohibit employers from making changes to the schedules once they are posted. Instead, the laws require employers to provide a premium—“predictability pay”—to workers when a manager requests a change, commonly an extra hour of pay.

Predictability pay for schedule changes is a risk-sharing approach. It acknowledges that schedule changes create costs for workers such as by disrupting childcare arrangements, school and training schedules, and transportation arrangements. Just as an overtime premium compensates hourly employees for working beyond what is conventionally viewed as a reasonable workweek, predictability pay helps to compensate employees for the adjustments they have to make when accommodating employer requests for flexibility. Predictability pay also provides an incentive to managers to limit schedule changes to those literally worth it to the business.

Of equal concern is that by increasing the cost to employers of schedule changes, scheduling legislation will reduce flexibility for employees. But the predictability premium only pertains to employer-driven schedule changes. The laws do not require that employers pay a premium when employees swap shifts with one another or actively initiate a change, including requesting additional hours or even leaving work early.

And, although it may seem logical that employers may become hesitant to grant an employee’s request for time off out of fear that they will have to provide predictability pay to another employee who works those hours, the administrative rules governing the implementation of current laws outline procedures employers can follow to respond to such employee-driven schedule changes without having to pay a predictability premium. Moreover, the “right to request” and “access to hours” provisions, along with the “right to refuse” to work hours not on the original work schedule, expand employee control over work hours.

In sum, the concern that scheduling legislation will necessarily curtail employer or employee flexibility appears overstated, as does the assumption that low-paid jobs provide substantial flexibility to begin with—more than 50 percent of low-paid hourly workers say they have little or no input into the number or timing of their work hours.211 Nonetheless, such concerns are important and are being addressed in ongoing research on the implementation and effects of current scheduling legislation, described below.

Problematic scheduling practices are often driven by factors under employers’ control

The common view is that schedule instability and unpredictability are driven by factors outside the control of employers, notably variations in consumer demand. But research indicates that much of the variation in employees’ schedules is driven by internal corporate processes, such as the accountability practices discussed above and adjustments to scheduled sales promotions and deliveries rather than by changing consumer demand.212

A telling case in point is data from one store that participated in the Gap scheduling experiment referenced above. Specifically, the data show that although there are certainly peaks and valleys in traffic and overall store labor hours, individual employees’ hours vary much more dramatically. (See Figure 1.)

Figure 1

Each thin line represents a store employee and shows how much an individual employee’s hours diverged from his/her average hours over a six-month period. The thick blue line graphs how much the store’s overall labor hours varied from its mean over the months. And the orange line shows how much customer traffic varied. As is evident, although there are certainly peaks and valleys in traffic and overall store labor hours, individual employees’ hours vary much more dramatically. This and other evidence indicates that there is more stability and predictability already in business that can be passed on to workers by improving basic business and scheduling practices.213

Is scheduling legislation effective?

Given that scheduling legislation is new, so too is research on its effects. To date, state-of-the-art studies conducted in Seattle and Emeryville, California suggest these laws are making a difference in the lives of workers in jobs in retail and food service. By comparing survey responses of retail and food-service employees working in the same firms but in municipalities with and without scheduling legislation, sociologists Kristen Harknett and Véronique Irwin at the University of California, San Francisco and Daniel Schneider at UC Berkeley are able to isolate changes in workers’ scheduling experiences due to Seattle’s Secure Scheduling Ordinance, which became law in 2017. They find that just eight months after the new scheduling law went into effect, the share of covered employees reporting at least 14 days advance notice increased by 20 percent (more than 9 percentage points). The new law also more than doubled the reported receipt of “predictability pay” for schedule changes (a 7 percentage point increase relative to baseline).214 In the second year of the evaluation of Seattle’s scheduling ordinance, Schneider and Harknett will examine the possible effects on employee health and well-being.

In Emeryville, economist Elizabeth Ananat at Columbia University and child development expert Anna Gassman-Pines at Duke University have fielded time-diary studies with mothers of young children that enable them to track the effects of scheduling legislation on parents’ daily well-being. They find that the Emeryville Fair Workweek Ordinance decreased daily instances of schedule unpredictability overall and also reduced last-minute schedule changes. They also find an overall effect on the well-being of working parents, with the law improving subjective reports of sleep quality.215

Research conducted by myself and my colleague Anna Haley at Rutgers University on the implementation of scheduling laws by frontline managers in Seattle, New York City, and Philadelphia indicates that compliance will take time. The laws are complex, and firms and managers are still figuring out strategies of implementation.216 The full effects of the laws may not be realized for some time.

A consistent challenge for managers is complying with requirements for documentation of the scheduling process, especially documenting schedule changes. Even though most covered employers are part of large chains, not all use sophisticated software, and the manager/owners of franchises are often left to develop their own systems. The federal government could help businesses by subsidizing research and development of technology to ease compliance and documentation, facilitating enforcement too.

Is federal legislation a useful next step?

The federal-level Fair Labor Standards Act of 1938 was informed by decades of prior state-level legislation demonstrating that businesses could, in fact, thrive without child labor and testing employer incentives to reduce the punishingly long work hours characteristic of the industrial revolution—what is now our overtime premium. Eight decades later, similar policy innovation at the state and local level to improve the quality of U.S. jobs in the 21st century lays a foundation for federal legislation, providing evidence of the feasibility of changing employer scheduling practices and the consequences for workers, families, and firms of doing so.217

In addition to establishing universal work-hour standards, federal legislation might also lessen implementation challenges. Both corporate representatives and software vendors express a reluctance to change their scheduling and “workforce optimization” technologies, given that administrative rules vary from one city to another.218 Perhaps most importantly, without federal legislation, there is no clear incentive for corporations to change the labor-cost accountability structures that drive these practices.

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Fair work schedules for the U.S. economy and society: What’s reasonable, feasible, and effective

Conclusion

Workers in low-paid hourly jobs often face a constellation of problematic scheduling conditions, among them fluctuating hours, short notice of their work schedules, too few scheduled hours, and little input into when and how much they work. Research is clear that the consequences of these conditions can be grim. Unstable, unpredictable hours over which workers have little control make it difficult to care for loved ones, do well in school, and achieve economic security.

But change is feasible. The best available evidence indicates that it is possible for employers to improve the predictability and stability of employees’ schedules while also meeting business imperatives. Currently, firms’ accountability metrics focus managers’ attention on the instability and unpredictability in business demands, leading managers to discount the substantial stability and predictability that also exists. Scheduling legislation shifts incentive structures and the focus of managers. With the right tools and assistance, managers can learn to identify and deliver greater stability and predictability to workers. The federal government has an opportunity to provide leadership in transforming problematic scheduling practices into fair scheduling standards that will support the vitality of U.S. families and firms.

—Susan Lambert is a professor at the University of Chicago’s School of Social Service Administration.

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Earnings instability and mobility over our working lives: Improving short- and long-term economic well-being for U.S. workers

Posted on by Maria Monroe

This essay is part of Vision 2020: Evidence for a stronger economy, a compilation of 21 essays presenting innovative, evidence-based, and concrete ideas to shape the 2020 policy debate. The authors in the new book include preeminent economists, political scientists, and sociologists who use cutting-edge research methods to answer some of the thorniest economic questions facing policymakers today. 

To read more about the Vision 2020 book and download the full collection of essays, click here.

Overview

Rising inequality in earnings is a fact of the U.S. economic landscape. The rise in earnings inequality has occurred because earnings have become more unstable in the short term, and because the more stable, or permanent, part of earnings has become more unequal in the long term. As permanent earnings have become more unequal, workers find it harder to move up the earnings distribution over their careers.219

Instability in year-to-year earnings, or earnings volatility, can result from economywide trends such as increases in unemployment or decreases in work hours during recessions, or from more microeconomic trends such as changes in the prevalence of precarious work arrangements, job turnover, or bonuses and other types of performance pay.220 Some volatility, such as receiving a large bonus or switching to a higher-paying job, is welcome. Yet an unexpected negative earnings shock can be difficult to manage, especially for low-income workers facing an involuntary or unanticipated decline in earnings.221

Permanent earnings inequality reflects longer-term trends in the U.S. labor market such as changes in the returns to education and other skills, international trade and technological change, changes in unionization, and the value of the minimum wage.222 Growing permanent earnings inequality not only increases persistent disparities in living standards among workers but also is associated with declines in long-run earnings mobility. The result is that an increasing number of workers will have persistently low earnings while other workers will spend large parts of their working lives at the very top of the earnings distribution.223

In this essay, we briefly review what recent research suggests about trends in short-run earnings volatility, permanent earnings inequality, and mobility, as well as the causes of these trends. We then offer a number of policy recommendations that we think will help alleviate some of the negative effects of these recent changes. In particular, we discuss the merits of incentives and reforms to boost household incomes and savings alongside education reforms to help today’s workers find good jobs and our future workers be better prepared early in life to contribute productively over the long term.

What do we know about earnings volatility, permanent earnings inequality, and mobility?

Most evidence shows that year-to-year volatility in men’s wage and salary earnings increased considerably from the 1970s through the early 1980s as inequality increased rapidly.224 Since the 1980s, short-term earnings volatility for men is highly cyclical, increasing during recessions and declining during expansions, though whether the trend is broadly increasing, flat, or decreasing differs between datasets and studies.225

Earnings volatility is the highest for men with less education and with lower earnings—that is, for workers who likely have the hardest time maintaining their well-being during periods of low earnings.226 For women, earnings are more stable than in the past, with falling earnings volatility since the 1970s, though earnings volatility for women is higher than for men.227 Volatility in family income—which includes both wage and salary earnings and other sources of income such as transfers from government programs, including the Earned Income Tax Credit and Supplemental Nutrition Assistance Program—is rising over time, and government transfers are less able to buffer earnings fluctuations than in the past.228

Even ignoring the year-to-year fluctuation in earnings and focusing instead on the more constant part of earnings over a lifetime, permanent earnings inequality is growing rapidly. Much of this increase is driven by an increase in inequality in earnings early in workers’ careers.229 This increase in permanent earnings inequality means that individuals are more “stuck in place” in the earnings distribution throughout their careers, with smaller chances of upward mobility than in the past.230

What are the risks that U.S. workers face?

Workers face two distinct types of risk. Despite the relatively flat trend in short-term earnings instability since the 1990s for all workers, short-term earnings risk remains large and is growing for less-educated and lower-earning workers. Unanticipated declines in earnings are particularly problematic for low-income families and less-educated adults who have little in savings. Only 29 percent of low-income households have savings for unexpected emergencies, and 42 percent of adults with a high school degree or less could not pay their monthly bills if faced with an unexpected $400 expense.231 These workers have limited ability to weather earnings shocks because of the weakening of the public safety net, because low earnings make saving difficult, and because they lack access to formal low-cost credit markets.

At the same time, the vast majority of workers face a new risk: If early-career earnings are low, the likelihood that earnings remain low has increased. Workers with more education are more likely to have high earnings, but even for these workers, the likelihood of rising up through the earnings distribution over a career is declining.

These dual risks necessitate investment in policies that reduce short-run earnings volatility and enhance workers’ ability to cope with temporarily low earnings, particularly for workers with fewer resources, alongside policies to promote careers that provide for long-run upward mobility.

Policy remedies for short-term earnings volatility

Earnings can be volatile because of both positive changes such as end-of-year bonuses, or negative ones such as unexpected cuts in work hours. We focus on policies that address the source and consequences of negative earnings changes, particularly for families who are less likely to be able to adequately weather periods of lower earnings.

Policies to reduce volatility

Outside of employment transitions, we know relatively little about the sources of earnings volatility, which makes articulating policies that reduce volatility difficult. Reducing employment transitions reduces earnings volatility. We focus on policies to reduce earnings volatility from two specific sources—poor health and family caregiving responsibilities—that would be particularly helpful to lower-income families.

The first policy is to increase access to paid leave for workers’ own healthcare needs and for family caregiving. Employees’ access to such leave is more common among high earners than low earners, though eight states, the District of Columbia, and the federal government for its own employees have enacted paid leave policies. Access to paid leave may reduce the instability of earnings for workers who themselves become ill or whose family members (including infants) require care.232

Similarly, access to flexible, low-cost childcare may also promote stable earnings. Such childcare arrangements would provide insurance against unanticipated childcare needs that can disrupt work and would be compatible with the irregular work schedules that are common for low-income workers.233

Policies to help families cope with downward earnings shocks

Because unexpected negative earnings changes are inevitable, families must be able to maintain basic living standards during periods of low earnings.

The Supplemental Nutrition Assistance Program is one of the most effective transfer programs to help all families cope with temporary spells of unemployment or low earnings because benefits through this program can be obtained quickly.234 Eliminating work requirements for this program entirely or establishing a national unemployment trigger in which work requirements would be automatically suspended when unemployment is high would help workers during recessions when short-term earnings volatility spikes.235 Because low-income and less-educated individuals face persistently volatile earnings, policymakers also should increase the value of benefits—for example, by accounting for the time required for food preparation and the geographic variation in food prices—helping those workers who face volatile earnings in both recessionary and expansionary periods.236

Government policies can also help households save to self-insure against short-term earnings losses. A suite of small policy changes would facilitate higher levels of savings for low-income households. First, improving access to banking services for low-income families would encourage saving. Only 17 percent of households without a bank account report saving for unexpected emergencies, compared to more than 55 percent of households who have at least one checking or savings account.237 These expansions must encourage savings vehicles such as no-overdraft accounts to prevent households with low levels of savings from incurring substantial costs from banking.238

Second, we should provide incentives for individuals to save regularly from each paycheck or from lump sum amounts from government transfer programs such as the Earned Income Tax Credit or the child tax credit. Encouraging employers to offer nonretirement savings plans to workers though payroll deductions and for households to receive tax refunds through direct deposit to a bank account would both help encourage saving.239 Ten states and one city have enacted legislation allowing for state-facilitated retirement savings programs, some of which feature autoenrollment, and nonretirement savings plans could follow a similar model.240 Direct deposit of tax refunds from the Earned Income Tax Credit are particularly relevant for low-income families and are large, worth an average of $2,488 in 2018.241

Policy remedies to address long-term inequality and stagnant mobility over our working lives

Policy proposals to decrease long-term inequality and increase long-term economic mobility should help young adults start their careers in strong economic positions. Many of these policies would be cost effective because the costs of the programs are offset by increased tax revenues and decreased transfer payments over the working lives of adults.

These policies start from early childhood. Expanding access to high-quality preschool has been shown to increase educational attainment and to improve income and health in adulthood, particularly for children from low-income families.242 Moreover, these programs have high rates of return: $1 invested in the Perry Preschool program—one of the most successful high-quality preschool interventions for black children with risk factors of failing in school—returned $7 to $12 back to society.243

Promoting college graduation is also important for reducing long-term earnings inequality and increasing long-term earnings mobility. The gap in college completion between individuals from high- and low-income families is growing.244 Because college-educated workers have higher levels of long-term mobility than less-educated workers, and because these workers begin their career at higher points in the earnings distribution and are more likely to stay there throughout their working lives, promoting college completion among children from low-income families is critical.245

There are several policy options to consider. The expansion of Pell Grants, which target low-income college students, is one such policy. Its costs are recouped within 10 years.246 Increasing state funding for community colleges to provide more clear pathways to both associates degrees and four-year colleges would also improve graduation outcomes for low-income students.247

Because much of lifetime earnings inequality is driven by inequality in early-career earnings, and permanent inequality is growing even among college graduates, young adults must start their careers on a solid trajectory.248 Assisting four-year and community colleges to develop programs to teach students how to conduct a job search to find a high-quality first job or to establish explicit pathways to apprenticeships for high-demand careers is another step toward maximizing early-career earnings and improving long-term earnings mobility.249

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Earnings instability and mobility over our working lives: Improving short- and long-term economic well-being for U.S. workers

Conclusion

Workers in the United States face the risks of high short-term earnings volatility for less-educated and lower-income workers, declining rates of mobility, and increasing permanent earnings inequality for most workers. To cope with these risks, workers require a combination of more accessible and robust public safety net programs and incentives to increase private savings to buffer short-term declines in earnings and spells of unemployment, alongside investments in education and pathways to high-quality employment to reduce long-term earnings inequality. Importantly, increases in education and high-quality employment—both of which reduce long-term inequality and increase long-term mobility—also reduce the number of workers with particularly high levels of short-term earnings volatility, thus providing a double benefit to U.S. workers.

—Emily E. Wiemers is an associate professor of public administration and international affairs at the Maxwell School of Citizenship and Public Affairs at Syracuse University. Michael D. Carr is an associate professor in the Department of Economics at University of Massachusetts Boston.

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Policies to strengthen our nation’s Supplemental Nutrition Assistance Program

Posted on by Maria Monroe

This essay is part of Vision 2020: Evidence for a stronger economy, a compilation of 21 essays presenting innovative, evidence-based, and concrete ideas to shape the 2020 policy debate. The authors in the new book include preeminent economists, political scientists, and sociologists who use cutting-edge research methods to answer some of the thorniest economic questions facing policymakers today. 

To read more about the Vision 2020 book and download the full collection of essays, click here.

Overview

Our nation’s Supplemental Nutrition Assistance Program, previously known as food stamps, is a central element of the U.S. social safety net. SNAP is the nation’s primary food support program, providing electronic vouchers that can be used to purchase most foods at participating retail outlets and helping low-income families afford the food that they need.

SNAP reaches a broad range of low-income individuals, including the elderly, disabled, families with children, workers, and the unemployed. During a typical month in 2018, the program helped 40 million people—about 1 out of every 8 Americans—afford the food they need. SNAP is means tested, and eligibility for the program requires that net household income (equal to total income less allowable deductions) be no higher than 100 percent of the poverty line, or about $1,780 per month for a family of three. This benefit is designed to supplement out-of-pocket spending on food, and benefits average about $4 per person per day. The result of this targeting is one of the most important anti-poverty programs in the United States.

A recent National Academy of Sciences report on child poverty finds that the elimination of the program would raise the child poverty rate from 13 percent to 18.2 percent. Only two federal refundable tax credits—the Earned Income Tax Credit and the refundable portion of the Child Tax Credit—are more successful at alleviating child poverty. Further, the report found that this supplemental nutrition assistance is the most effective program at reducing deep child poverty (income below 50 percent of the poverty line). Eliminating it would raise deep child poverty from 2.9 percent to an estimated 5.7 percent.

SNAP caseloads can quickly respond to increased need—for example, during economic downturns or natural disasters—and benefits are quickly spent, generally in the recipient’s community, which also stimulates the local economy. This program increases households’ spending on food, reduces recipients’ likelihood of experiencing food insecurity, and improves economic and health outcomes.250

A key priority of the next US. Congress and administration in 2021 should be to preserve this important program and to enact policies that enhance its impacts on the macroeconomy and on children. This essay examines currently proposed changes to key policy components of the Supplemental Nutrition Assistance Program—its broad-based eligibility category, its “public charge” criteria for legal immigrants, and conditions under which work requirements are waived—and then offers ways to strengthen the program’s ability to protect young children by increasing SNAP benefits to their families, as well as enhance its recession-fighting power.

Preserve work supports built into the Supplemental Nutrition Assistance Program

An increasing share of SNAP participants are low-wage working families, reflecting our nation’s recent shift toward a work-based safety net for those who are not elderly. Today, about 80 percent of the federal safety net spending on families with children goes to working families, compared to about a third in 1990.251 Per-child spending directed to nonworking families decreased in real terms by 20 percent over this period.252

But two recent policy changes by the Trump administration make it harder for many working families to receive SNAP benefits. First, the administration proposes to eliminate the program’s broad-based category eligibility, which allows families with total incomes above 130 percent of poverty to participate if they have certain characteristics, such as high expenses for housing or childcare, or if the earned-income deduction in the SNAP formula gives them eligibility (they must still meet the net income test whereby net income is below 100 percent of the poverty line). The overwhelming majority of benefits paid under this broad-based eligibility go to households with total incomes between 131 percent and 150 percent of the poverty line. This category also allows the program itself to be more efficient by waiving the requirement to collect detailed information on a household’s assets. Most SNAP participants have no or very low levels of assets, and documenting this for every case is costly to families that must provide documentation, as well as states that must collect it.

Families that include employed, elderly, or disabled family members are disproportionately represented among families receiving supplemental nutrition assistance through the broad-based category eligibility. The Trump administration’s proposed elimination of broad-based eligibility introduces a sharp cliff in benefits that may act to discourage these SNAP participants from working, which would hurt working families. States’ option to adopt broad-based category eligibility should be reinstated.

Second, the Trump administration has proposed changes to the public charge rule, a long-standing administrative rule that determines whether to confer citizenship to an immigrant, with one factor for consideration being whether the applicant is likely to become a “public charge” of the state. Recently, the Trump administration announced a change to the interpretation of this public charge rule, which will make it difficult for members of families of documented immigrants who receive SNAP benefits to obtain citizenship. This rule provides strong incentives for documented immigrants who are eligible for supplemental nutrition assistance to not participate in the program and other safety net benefit programs. Immigrant households make up a small share (only 6 percent) of the total SNAP caseload, yet the program provides an important source of supplemental food benefits to these families, many of which also include U.S. citizen children. Households that tap nutrition assistance often have immigrant members who are more likely to be employed than U.S. citizens who avail themselves of the program.

Removing documented immigrant families from the Supplemental Nutrition Assistance Program will cause harm to these families and to their local economies, as we note below. This proposed “public charge” categorization is grossly out of line with the modern realities of SNAP and related social safety net programs. Today, a large share of social benefits spending goes to support working families who need an extra boost to afford the food and medical care that they need, due to market realities such as stagnant wages and instability in employment and hours. The radical reforms proposed by the Trump administration that define anyone who is likely to use even modest amounts of SNAP benefits temporarily as a “public charge” should be rejected.

Supplemental nutrition assistance helps stimulate the economy

SNAP is an effective “automatic stabilizer” that responds quickly at times, in places, and for individuals experiencing the effects of periodic economic downturns.253 At the depths of the Great Recession of 2007–2009, 15 percent of Americans received benefits from the program. At the time, Congress authorized a temporary increase in maximum benefits, which was a very effective fiscal stimulus—every dollar in new SNAP benefits during this period was estimated to spur $1.74 in economic activity.254 We have elsewhere argued in more detail that temporary reforms to SNAP during the Great Recession were highly effective at increasing family well-being and fiscal stimulus.255

Learning from this experience, the next Congress and administration should implement two automatic-stabilizer reforms that would automatically kick in when an economic downturn occurs. Both would be triggered when the national unemployment rate rises at least 0.5 percentage points above its low in the prior 12 months, according to the so-called Sahm rule, developed by Claudia Sahm, former chief of the Consumer and Community Development Research Section at the Federal Reserve in Washington, D.C.256 (Sahm is now Director of Macroeconomic Policy at Equitable Growth.) First, maximum SNAP benefits should be automatically increased by 15 percent. Second, existing SNAP work requirements would automatically be waived by the U.S. Department of Agriculture when the Sahm rule indicates that a recession has begun. Automatic waivers at the beginning of a recession will quickly help alleviate hardship and stimulate the economy without costly delays. Note that this stands in contrast to the Trump Administration’s recent final rule on work requirement waivers to SNAP, which makes it more difficult for areas to qualify for waivers even when unemployment is increasing.257

Strengthen the protection of young children and intergenerational benefits

An increasing base of evidence demonstrates that children’s access to adequate resources in early life improves later-life health and economic outcomes.258 In particular, research by the two authors of this essay and another colleague used a variation in the original introduction of SNAP across counties to estimate the impact of having access to the program from conception through age 5.259 We found that access to food stamps before age 5 leads to large and statistically significant reductions in the subsequent adult incidence of “metabolic syndrome” (obesity, high blood pressure, heart disease, diabetes).

In addition, our research found that access to food stamps in early childhood for women (but not for men) leads to an increase in economic self-sufficiency. Our measure included current earnings and family income, and indicator variables for whether the individual graduated from high school, is currently employed, is currently not living in poverty, and is not participating in the Temporary Assistance for Needy Families program or SNAP. The effects were largest among those children who had access at the youngest ages and among those who spent their childhoods in the most disadvantaged counties.

More recent research extends our work and finds that early life access to SNAP benefits leads to improvements in long-term earnings and education, reductions in mortality, as well as a reduction in incarceration among black men.260 And other research finds that access to the program between conception and age 5 improves the child’s parent-reported health in later childhood, measured at ages 6 to 16 (with suggestive evidence of reductions in school days missed, doctors’ visits, and hospitalizations at ages 6 to 16).261

Despite the evidence on the importance of resources during early childhood, young children in the United States face high rates of poverty: 13 percent of children overall, 18 percent of black children, and 22 percent of Hispanic children live in families with income below the poverty line.262 Some straightforward changes to SNAP would yield a double dividend by reducing poverty for families with young children and improving the children’s life trajectories.

To address the unmet needs of families with young children, we propose introducing a “young child multiplier” that would increase maximum SNAP benefits by 20 percent for households with children between ages 0 and 5. For any family with a qualifying child in the household, the maximum benefit will be multiplied by 1.2, then the family’s benefits would be calculated according to the standard benefit formula for deductions and net income calculations.

Although SNAP is a universal program with no additional targeting besides income and asset criteria, it nonetheless serves a large number of young children and would be an effective lever for increasing resources in families with young children. As of 2017, more than one in five households receiving these benefits has a young child (aged 0 to 5), and 12.9 percent of all individuals receiving these benefits are young children. Of the $60.6 billion spent by the federal government to provide SNAP benefits in 2018, about $24 billion (40 percent of the total) went to families with young children.

A strength of the Supplemental Nutrition Assistance Program, compared to other programs such as the Earned income Tax Credit, is that SNAP benefits are paid monthly and can be incorporated into a household’s regular expenses on an ongoing basis. We estimate the annual cost of the young child multiplier to be $6.5 billion. This would serve as a supplement to the current Women, Infants and Children, or WIC, social benefit program that already targets low-income families with young children. Paying additional benefits through the Supplemental Nutrition Assistance Program would be more efficient and effective than expanding WIC for several reasons. First, SNAP benefits are more flexible than WIC benefits and are expected to have a stronger protective effect on other aspects of a family’s financial well-being. Furthermore, the WIC program is hampered by low participation rates among families with children—the participation rate drops from 35 percent of 1-year-olds to only 15 percent of 4-year-olds, while SNAP participation rates are relatively high, estimated at 85 percent in 2016263 and steady across these ages.264

Continue the progress of increasing take-up rates for SNAP benefits

Like any safety net program, for SNAP to be effective, it must reach those who need it. Participation rates have been steadily increasing in recent years, up from a low of 53 percent in 2001. Despite this progress, high take-up rates are not universal. There is substantial variation in take-up rates across states—from 72 percent in California and 73 percent in Texas, to near 100 percent in Illinois, Oregon, and Michigan.265 Participation rates are lower for the elderly and for those with lower expected benefit levels, such as eligible households with income above the poverty threshold.

Recent work shows that providing information on eligibility or information plus application assistance can meaningfully increase these rates for the elderly.266 Other work shows that regular recertification periods contribute to incomplete take-up.267 Overall, we need more experimentation and attention to maintaining and increasing SNAP participation.

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Policies to strengthen our nation’s Supplemental Nutrition Assistance Program

Conclusion

The Supplemental Nutrition Assistance Program has been effective and efficient, providing food benefits to a wide range of needy individuals and families that, in turn, purchase the foods they desire from local food retailers. The next Congress and administration should repair the damage done to the program by recent rulemaking in the Trump era, reversing the rule changes for eligibility and public charge determinations for legal immigrants, and preserving the ability to appropriately waive work requirements during economic downturns. And policymakers should strengthen the program’s ability to protect young children by increasing SNAP benefits to their families, as well as enhance its recession-fighting power. Each proposal would be a well-targeted incremental reform that would strengthen the program to better serve U.S. families.

—Hilary Hoynes is the Haas Distinguished Chair in Economic Disparities at the Richard and Rhoda Goldman School of Public Policy at the University of California, Berkeley. Diane Whitmore Schanzenbach is the Margaret Walker Alexander Professor of Education and Social Policy at Northwestern University, where she also directs the Institute for Policy Research.

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