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New Fed paper suggests it’s not all millennials’ fault after all

Posted on December 6, 2018December 6, 2018 by Emilie Openchowski

A commonly cited statistic about trends in absolute mobility over the past half-century is Harvard economist Raj Chetty and his co-authors’ finding that while more than 90 percent of people born in 1940 grew up to earn more than their parents—that is, they experienced upward mobility—the same was true of only about half of people born in 1980. This striking finding is echoed by a new discussion series paper by researchers at the Federal Reserve Board looking at how measures of millennials’ economic conditions compare to those of prior generations at similar ages.

Using data from the Panel Survey of Income Dynamics and the Current Population Survey’s Household Surveys, as well as the Pew Research Center’s definitions of millennials and other generations, the paper compares the income, assets, and debt of millennials (those born between 1981 and 1997) to Generation Xers (those born between 1965 and 1980) and baby boomers (those born between 1946 and 1964) at similar ages. It finds that “millennials tend to have lower income than members of earlier generations at comparable ages,” as well as fewer assets.

Specifically, average real (inflation-adjusted) labor earnings for men working full time were between 18 percent and 27 percent higher for Gen Xers and baby boomers, respectively, than millennials after controlling for demographic factors such as race and work status. In examining assets, the paper found that while the average value of assets held by millennials was more or less equivalent to that held by Gen Xers at a similar age, the median value of assets held by millennials ($55,000) was significantly lower than that of both Gen Xers and baby boomers at similar ages ($104,700 and $63,300, respectively). The fact that the average has held steady while the median has fallen suggests that the brunt of this downward mobility in assets has fallen more on those lower down on the distribution.

In examining debt, both the average and median debt held by millennials wasn’t dramatically different than that compared to Generation Xers overall—but not so the composition of that debt. Millennials are significantly less likely to have mortgage debt that Gen Xers at similar ages and significantly more likely to have student loan debt. “In 2004, 28 percent of Generation X members had a mortgage, well above the 19 percent share of millennials that had one in 2017,” according to the Fed report. Similarly, “While only 20 percent of Generation X members had a student loan balance in 2004, more than 33 percent of millennials had one in 2017,” says the report.

The increased prevalence of student loan balances on their own wouldn’t necessarily be concerning for millennials if the paper hadn’t also found the decline in income, which means this generation has less money to actually pay off that debt. Furthermore, because mortgage debt is less prevalent among millennials than among the immediately preceding generation, there is evidence suggesting that student loan debt is part of the reason that millennials are delaying homeownership—an asset that represents the bulk of wealth for most Americans.

What are the possible explanations for why millennials have lower incomes and fewer assets than did prior generations at similar ages? The authors conclude: “These balance sheet comparisons likely reflect, in part, the unfavorable labor and credit markets conditions that prevailed during the 2007–09 recession, some of which had prolonged effects.”

The Fed paper’s emphasis on the importance of the labor market conditions into which millennials graduated echoes the arguments made in my and my co-author Elisabeth Jacobs’ recent report, “Are today’s inequalities limiting tomorrow’s opportunities?” In the report, we lay out a framework for understanding the channels via which upward mobility can either be facilitated or impeded, arguing that while a great deal of attention is paid to factors that develop human capital such as education, more research is needed to understand how things such as prevailing labor market conditions can impede the deployment of that human capital.

Oftentimes, when seeking to understand or explain economic outcomes, researchers and policymakers place a great deal of emphasis on the importance of the development of human capital. Two examples of this focus are the emphasis on education and training to ensure that workers have the skills required in an increasingly global and technical marketplace. Certainly, education and training are crucial components of human capital and are key to ensuring workers are able to reach their full potential, but an emphasis on improving education alone as the policy solution to ensuring economic opportunity is insufficient. As the Fed paper discusses, each generation has been more educated than the one before it, and yet the most educated generation so far has lower incomes than prior generations—and more student loan debt to boot—at similar stages in their lives.

That’s why Jacobs and I argue that more attention is needed to how factors related to the deployment of human capital can help us understand how upward mobility and economic well-being are facilitated. As the Fed paper’s findings highlight, the labor market in which a generation first finds itself seeking employment can have profound implications for their economic conditions. There is extensive economic research finding that entering the labor market during recessions has deep and persistent effects on the earnings of those workers across their lifetimes.

The importance of labor markets rather than education for explaining economic outcomes is highlighted in a recent Equitable Growth working paper by University of California, Berkeley economist Jesse Rothstein, “Inequality of educational opportunity? Schools as mediators of the intergenerational transmission of income.” In it, Rothstein studies the intergenerational mobility differences for lower-income children growing up in areas where the gap in test scores is small between lower- and higher-income families. If education is a key driving force for intergenerational mobility, then one would expect to see the children from low-income families in communities with low gaps in test scores grow up to be more upwardly mobile, compared to those from areas with large test-score gaps between lower- and higher-income children. Yet his results find that children’s mobility outcomes aren’t dramatically different between low test-score gap areas and high test-score gap areas.

As Rothstein explains in a column for Equitable Growth about his working paper, these results suggest that, “There is little evidence that differences in the quality of primary, secondary, or postsecondary schools, or in the distribution of access to good schools, are a key mechanism driving variation in intergenerational mobility. The evidence instead points toward other factors influencing income inequality. In particular, labor markets seem to be quite important.”

Acquisition of human capital is, of course, a crucial factor to ensure people are as best prepared as possible to make the most of their potential. But the development of human capital is insufficient on its own to ensure that people experience upward mobility and economic well-being. Factors beyond their control—particularly the condition of the labor markets they find themselves in—play a significant role in their ability to fully deploy that potential. More attention needs to be paid to what the factors might be that impact that deployment of potential and what policies could ensure that upward mobility isn’t stymied by economic conditions outside of any individual’s control.

New financial health survey shows that traditional metrics of economic growth don’t apply to most U.S. households’ incomes and savings

Posted on December 5, 2018 by Emilie Openchowski

Headlines regarding the state of the U.S. economy often tout statistics that indicate robust economic expansion and a booming stock market. High Gross Domestic Product growth rates and low unemployment rates are important, but these single aggregate data points do not capture how economic growth is experienced by different people in very different ways. Similarly, a galloping stock market does not benefit all that many people because a majority of the population doesn’t own stocks.

Underscoring the importance of knowing who specifically benefits from a strong economy is a new survey by the Center for Financial Services Innovation, “U.S. Financial Health Pulse: 2018 Baseline Survey,” which takes aim at addressing this information deficit by disaggregating the data collected on U.S. households’ financial health and preparedness. The survey contains metrics that explain how the current economic expansion is being felt by various socioeconomic and demographic groups.

The Center, in collaboration with researchers at the University of Southern California’s Dornsife Center for Economic and Social Research, circulated the baseline survey to members of the university’s “Understanding America” study, which recruits participants using address-based sampling. Of the 6,161 panelists invited, 5,109 completed the survey, and 5,019 respondents were used to create the baseline survey sample. Questions asked revolved around the financial behavior of the respondents’ households, though the survey also collected the demographic data of individual respondents.

Their first survey, released last month, found that of the approximately 5,100 respondents, 55 percent are financially coping and 17 percent are financially vulnerable. Those in the “financially vulnerable” group are individuals “struggling with all, or nearly all, aspects of their financial lives,” while their counterparts in the “financially coping” category are those “struggling with some, but not necessarily all, aspects of their financial lives.” (See Figure 1, pulled from the report.)

Figure 1

The financial health of individuals naturally depends in part on their income. Roughly 36 percent of respondents with a household income of $30,000 or less are financially vulnerable, compared to just 20 percent of respondents with household incomes between $30,000 and 60,000. But there are a variety of other factors that affect financial health. The study shows that 78 percent of respondents between the ages of 18 and 25 are financially coping, while 13 percent are vulnerable. But for those between the ages of 26 and 35 who responded to the survey, 57 percent are financially coping, while 19 percent are financially vulnerable.

The results also address economic outcomes by race and ethnicity. The survey finds that 68 percent of Native Americans, regardless of income, are financially coping and 24 percent are financially vulnerable. Similarly, 58 percent of African Americans are coping, while 24 percent are vulnerable. These percentages drop for white, non-Hispanic respondents, where 52 percent are coping and only 15 percent are vulnerable. (See Figure 2, pulled from the report).

Figure 2

Respondents to the survey were more likely to be financially vulnerable if they were less well-educated. Thirty percent of respondents with less than a high school degree are financially vulnerable, but only 7 percent of those with a bachelor’s degree fall into this category.

Poor financial health in a good economy can have effects on the ability of individuals to save in preparation for emergencies or negative income shocks. The survey suggests that many Americans are shockingly unprepared for emergencies. Approximately 45 percent of those who are financially vulnerable said that if they had to live off the savings they had readily available, without withdrawing from retirement accounts or taking out a loan, they would survive less than a week. This could be because only 2 percent of financially vulnerable respondents said they were actively saving in a checking account, and only 6 percent were actively saving in a savings account. There is a $3,200 difference in the total median value of liquid savings accounts between financially coping and financially vulnerable respondents.

Many households also find themselves behind in saving for retirement. Approximately 42 percent of survey respondents have no retirement savings, while 75 percent of financially vulnerable respondents are not confident in their ability to meet their long-term savings goals. The median value of a financially vulnerable individual’s retirement account is $4,000, whereas the median value for a financially healthy individual is around $106,000.

These savings and retirements findings underscore that we should approach the glut of good news about the aggregate growth of the U.S. economy cautiously. Even amid a strong economy, when savings are poor, small downturns in the labor market can lead to crisis for many households and can result in widespread economic problems.

Investments in early childhood education improve outcomes for program participants—and perhaps other children too

Posted on December 4, 2018December 4, 2018 by Emilie Openchowski

According to a growing body of empirical work, governments that spend money on early childhood education get a lot of bang for their buck—an estimated 7 percent to 10 percent annual return for programs targeted at disadvantaged children. Research by University of Chicago economist James Heckman and Princeton economist and Equitable Growth Steering Committee member Janet Currie found strong evidence that early childhood education results not only in substantial short-term boosts in test scores but also long-term improvements in human capital and earnings. But do those test-score gains last? A handful of studies on individual early childhood programs in recent years have reached mixed conclusions on the durability of test score improvements from early childhood education over time.

Mariana Zerpa, an Equitable Growth grantee and an economist at the University of Leuven in Belgium, addresses this question in a new Equitable Growth working paper. Zerpa constructs the largest and most representative dataset of targeted and universal state preschool programs in the United States, using individual-level data from the Current Population Survey and the National Health Interview Survey to analyze the short- and medium-term effects of early childhood education on academic outcomes. Zerpa compares 15 states that implemented or expanded early childhood programs between 1997 and 2005 to states where programs were not implemented during this period. While previous research has analyzed data on specific programs, Zerpa’s is the first to include such a wide and representative array of targeted and universal state-level programs.

Zerpa finds that children in states with early childhood education programs are 30 percent less likely to repeat a grade between ages 6 and 8—and that this effect lasts at least until age 12. Pre-Kindergarten programs also substantially reduce the probability of developmental and behavioral problems for children between ages 4 and 8, with approximately 60 percent of the effect sustained through age 12. Though the study uncovers one potential negative effect of early childhood programs—that pre-K expansions are associated with an average increase of 0.6 days in absences from school due to illness—this small effect disappears after 4 years. Furthermore, while Zerpa finds that universal programs result in greater “crowd-out” via switching from private to public preschools, she does not find statistically significant differences in the effects of the two categories of programs—in contrast to previous research finding universal programs to be more effective.

In addition to using her combined dataset to examine outcomes for all children ages 4 to 12 who live in states with pre-K programs, Zerpa also incorporates Current Population Survey data on individual pre-K enrollment to drill down and focus on the subset of children who participated in early childhood programs. In this secondary analysis, Zerpa again finds large, statistically significant improvements in academic—as well as developmental—outcomes for children who participated in early childhood education. The Current Population Survey data does not measure which specific pre-K programs students take part in, so Zerpa calculates ranges (instead of precise estimates) for the effect of enrolling in a state pre-K program.

Zerpa estimates that participation in a state early childhood program could reduce the likelihood of grade repetition between ages 6 and 8 by 13 percentage points to 34 percentage points for children who otherwise would not have been in center-based preschool. Zerpa hypothesizes that the large size of this effect reflects the fact that students who enroll in early childhood education programs from informal home care have particularly high risks of grade repetition, as they are more likely to be economically disadvantaged. Furthermore, this finding is consistent with several studies whose estimated impacts of preschool programs such as Head Start fall squarely within the intervals Zerpa calculates.

In addition to addressing a pressing question in the economic literature on early childhood education—do academic gains from early childhood education last?—Zerpa’s paper confirms that pre-Kindergarten programs are a worthwhile investment with direct and indirect returns lasting at least 8 years after preschool. Specifically, Zerpa demonstrates that pre-K expansions durably reduce grade repetition, as well as the occurrence of developmental and behavioral problems, for at least 8 years for the cohort of children who enroll in pre-K at age 4.

Taken as a whole, the magnitude of Zerpa’s findings indicates that state early childhood programs might have effects not only on children who otherwise would not have attended preschool, but also on children drawn from other, lower-quality preschools and even on other children who don’t attend preschool at all via peer effects. These results represent a powerful message to state policymakers considering expanding or creating early childhood programs.

While Zerpa’s paper presents more evidence of the positive effects of pre-K expansions, it also raises additional questions on the mechanisms through which these effects operate. To better understand the long-term effects of preschool on children and the associated savings for taxpayers, researchers need data tracking the educational and labor market outcomes for program participants across the course of their lives. Moreover, to separate out the direct and indirect effects of these programs, researchers also need data that tracks the outcomes of the siblings, future classmates, and other peers of program participants. While this will be a substantial undertaking, policymakers at all levels should work with researchers to make these data available for statistical analysis.

Previous research by former Equitable Growth economist Robert Lynch and former Research Analyst Kavya Vaghul has found that the aggregate benefits of early childhood programs more than cover their costs over time. If confirmed, the peer effects Zerpa references could result in even greater improvements in educational, developmental, and labor market outcomes for children—and thus even greater savings for society as whole.

Weekend reading: “Jobs and the Holidays” edition

Posted on November 30, 2018 by Maria Monroe

This is a weekly post we publish on Fridays with links to articles that touch on economic inequality and growth. The first section is a round-up of what Equitable Growth published this week and the second is the work we’re highlighting from elsewhere. We won’t be the first to share these articles, but we hope by taking a look back at the whole week, we can put them in context.

Equitable Growth round-up

New research reveals that workers who receive low pay, have unstable working schedules, and are offered few fringe benefits also experience a lower propensity to marry. Alix Gould-Werth explains that while existing research shows that, among older men, higher earnings are a predictor of marriage, workers with poor quality jobs—regardless of pay—are less likely to get married when compared to their counterparts with adequate job quality.

A recent report by the Congressional Budget Office finds that there has been significant growth in income inequality since 1979, with the CBO inferring that growing inequality has disproportionately affected the middle class. Austin Clemens argues for a more careful interpretation of the CBO report, especially in the way taxes and transfers impact income distribution, in order to create a more accurate metric to measure growing inequality.

Brad DeLong compiles his most recent worthy reads on equitable growth both from Equitable Growth and outside press and academics.

Kate Bahn discusses the research that addresses the effects of increasing the U.S. minimum wage, particularly how the research shows that there are very few negative economic effects on employment. Instead, when looking at earning trajectories of workers earning the minimum wage, economists find that the gains are greatest among the bottom of the quartile for up to five years after a minimum wage increase.

On November 2, we lost Harvard University sociologist and Equitable Growth grantee Devah Pager to cancer. Pager played a pivotal role in highlighting race-based hiring discrimination by finding that white men with a criminal record have a greater probability of achieving employment compared to black men without a record. Equitable Growth is proud we had the opportunity to support Pager and send our thoughts to those who are grieving her loss.

Links from around the web

Homeownership has traditionally been the sole opportunity for low- and middle-class Americans to accumulate wealth, yet institutional racism within federal housing policy has made it difficult for African-American households to grow that wealth, invest in businesses, and even attend college, says a new report from The Brookings Institute. It finds that the devaluation of black homeownership has led to an average of $48,000 in lost value of homes in black communities due to racial biases. This report shows that even though the practice of racial housing policies, such as redlining, are now illegal, there are still strong biases in the real estate market that make it difficult for members of black communities to experience mobility. [brookings]

A final farm bill backed by House Republicans no longer includes work requirements for recipients of supplemental nutrition assistance who have children over the age of six. Attaching work requirements to this federal program would have affected between 800,000 and 1.1 million American households—especially households living in regions with relatively stagnated employment growth. [wapo]

The Institute for Women’s Policy Research released a new report regarding the current status of gender wage inequality in the United States. They find that when measuring total earnings across 15 years, data shows that women earn 49 percent of men’s earnings. The report examines the penalties and inequalities women face in the labor market and what policies can help alleviate this economic burden. [iwpr]

Small companies are increasingly not going public on U.S. stock markets because they are often persuaded by venture capital firms to stay private or are bought out by a large organization—contributing to decreasing entrepreneurship and competition in the business-creation field. Early-stage buy-outs contribute to slow wage growth and innovation. Increasing the number of small businesses in public stock markets can increase productivity and provide higher-quality goods and services available to consumers. [nyt]

New data from the Center for Disease Control and Prevention shows that average life expectancy in the United States has dropped for the third year in a row. When dissecting their data, the CDC found that poor and middle-class Americans die earlier than wealthy individuals. This gap may continue to grow as healthcare policy changes in the future make it difficult for low and middle-class households to afford adequate healthcare. This Vox report referenced both the CDC’s work and former Equitable Growth Steering Committee member Raj Chetty’s work analyzing income data and mortality data to from 2001-2014, which found that the wealthiest Americans gained five years of longevity, and poor and middle class Americans saw no change in their mortality. [vox]

Friday Figure

Figure is from Equitable Growth’s, “U.S. income growth has been stagnant. To what degree depends on how you measure it.”

Measurement matters. An equitable economy is impossible without it.

Posted on November 29, 2018 by Maria Monroe

“What we measure affects what we do. If we measure the wrong thing, we will do the wrong thing. If we don’t measure something, it becomes neglected, as if the problem didn’t exist.” That’s the bottom-line message of a new report from the Organisation for Economic Co-operation and Development that recommends changes in how nations measure their economic progress and the well-being of their citizens. Equitable Growth has long argued that many of our topline economic statistics are doing a poor job of measuring the welfare of citizens. As a first step to remedying the problem, Gross Domestic Product growth should be disaggregated so that each report tells us to whom growth is accruing. Academic analyses of federal tax data show that economic growth is too often benefitting only those at the top of the wealth and income ladders, leaving working- and middle-class Americans behind.

Advocating for one federal agency to generate a couple of new numbers may strike many readers as inconsequential, the kind of technocratic window dressing that will do nothing, in itself, to address the challenges posed by rising economic inequality. But as the OECD report makes clear, the policies that governments implement are influenced by the data available to them and by the data that dominate public discourse.

This lesson is plain from our experience in the United States. A few key economic statistics dominate our discussion of economic progress. Chief among them is GDP growth. The value of growth is an article of religious faith for most politicians and the political press. Small wonder that presidential candidates promise specific growth targets if they are elected and trumpet gains in GDP as proof of their success. But these conversations are often misguided. They often overlook the fact that not all GDP growth is the same and, moreover, that GDP growth in the aggregate means little for any individual person. In fact, GDP growth could be rising while the majority of workers see stagnant incomes. That we nonetheless pay so much attention to it is proof of the agenda-setting power of government statistics.

The impact is not simply rhetorical. What we measure has a strong impact on policy. Consider the Tax Cuts and Jobs Act of 2017. The bill’s sponsors promised strong growth gains from the cuts, and critics engaged with this point specifically, arguing in many cases that these claims were unrealistic, and that the actual contribution to growth would be low. But GDP growth really isn’t the right metric at all. The core analytic tools necessary for evaluating a tax cut, as Equitable Growth pointed out at the time, are distribution tables and revenue estimates. Distribution tables provide estimates of the change in economic well-being that results from tax legislation for people at different income levels.

Moving “Beyond GDP,” as the OECD report’s title suggests, is a significant challenge. Economists need to agree on what the right metrics are and how to calculate them. But U.S. policymakers can move ahead on some reforms now. Earlier this year, Sens. Charles Schumer (D-NY) and Martin Heinrich (D-NM) and Rep. Carolyn Maloney (D-NY) introduced bills in their respective chambers of Congress to task the Bureau of Economic Analysis with providing distributional estimates of GDP growth. Rather than one GDP growth estimate, this legislation would require estimates for Americans in each decile of income and would further break out gains made by those in the top 1 percent. Passage of the bill would fulfill “Recommendation 6” of the OECD report. In addition to refocusing the public and policymakers on the need for broad-based growth, these statistics may help economists diagnose weaknesses in the economy earlier and respond to them better. The OECD report persuasively suggests that having better statistics might have prompted a better policy response to the Great Recession worldwide.

But we will also have to train politicians and pundits to stop paying attention solely to GDP, which is increasingly divorced from the experience of everyday Americans in this age of widening inequality. The additional complexity of tracking a range of growth numbers instead of one need not be terrifying. If anything, it is terrifying that one-number economic barometers devised in the 1950s still guide our actions, despite their declining relevance to the economic fortunes of average Americans.

Brad DeLong: Worthy reads on equitable growth, November 16–29, 2018

Posted on November 29, 2018June 7, 2019 by Maria Monroe

Worthy reads from Equitable Growth:

An excellent paper from two of Equitable Growth’s grantees, Claire Montialoux and Ellora Derenoncourt, on the key role of the minimum wage extensions of the 1960s in reducing inequality—doing so along a pronounced racial as well as class dimension as a result of the racial skew of employment categories. It was not just that African Americans were in predominately low-wage jobs, but also that the categories of jobs they were in had previously been exempt from the minimum wage. Read “Minimum Wages and Racial Inequality,” in which the authors write: “The earnings difference between black and white workers fell dramatically in the United States in the late 1960s and early 1970s … the extension of the minimum wage played a critical role.”
Americans do want inheritances to be taxed. They are much more ambivalent about taxing savings—perhaps because savings are seen as uniquely virtuous sources of income. In a working paper that Equitable Growth issued in 2017 (but that did not get the attention and resonance that I think it deserves), “Do Americans Want to Tax Capital? Evidence from Online Surveys,” Raymond Fisma, Keith Gladstone, Ilyana Kuziemko, and Suresh Naidu write: “Via a survey on Amazon’s Mechanical Turk … we provide subjects with a set of hypothetical individuals’ incomes and wealth and elicit subjects’ preferred (absolute) tax bill … unobtrusively map[ping] both income earned and accumulated wealth into desired tax levels. Our regression results yield roughly linear desired tax rates on income of about 14 percent … positive desired wealth taxation … 3 percent when the source of wealth is inheritance, far higher than the 0.8 percent rate when wealth is from savings.”
Even though the unemployment rate is gratifyingly low, it is still the case that the Great Recession continues to cast a huge shadow, reducing the U.S. economy’s potential output. And we cannot confidently look forward to a time when this effect will have dissipated. The failure to make rapid employment recovery “job one” in 2009–2010 was a catastrophe, as Equitable Growth grantee Danny Yagan detailed in his 2017 working paper, “Employment Hysteresis from The Great Recession.” He writes: “This paper uses U.S. local areas as a laboratory to test whether the Great Recession depressed 2015 employment … exposure to a 1 percentage point larger 2007–2009 local unemployment shock caused working-age individuals to be 0.4 percentage points less likely to be employed at all in 2015, likely via labor force exit. These shocks also increased 2015 income inequality.”
Equitable Growth Research Advisory Board Member Jesse Rothstein presents a different interpretation than former Equitable Growth Steering Committee Member Raj Chetty and his co-authors of the great American sociological deserts, out of which upward mobility is nearly unthinkable. Chetty and his colleagues focus on school—perhaps because pouring resources into schools is something we can do and would, in all likelihood, be somewhat effective. But how effective? Are schools the key link or just one of many factors? Rothstein believes the second, and I think he is right. Read his “Inequality of Educational Opportunity? Schools as Mediators of the Intergenerational Transmission of Income,” in which he writes: “I use data from several national surveys to investigate whether children’s educational outcomes (educational attainment, test scores, and noncognitive skills) mediate the relationship between parental and child income … There is … little evidence that differences in the quality of K–12 schooling are a key mechanism driving variation in intergenerational mobility.”
Another piece from grant recipient Ellora Derenoncourt is, I think, the best piece I have read in the past week. It is also the most horrifyingly depressing case I have read in the past week. Derenoncourt’s thesis is that the Great Migration of African Americans from the south to the urban north set in motion political, economic, and sociological changes in local power structures that made those migration destinations poor places—and dangerous places—to raise young black men. Read her “Can You Move to Opportunity? Evidence from the Great Migration,” in which she writes: “The northern United States long served as a land of opportunity for black Americans, but today the region’s racial gap in intergenerational mobility rivals that of the South. I show that racial composition changes during the peak of the Great Migration (1940–1970) reduced upward mobility in northern cities in the long run, with the largest effects on black men.”

Worthy reads not from Equitable Growth:

I do not understand why there are people claiming the U.S. economy is at full employment. Full employment is defined as the level at which nominal and real wage growth visibly accelerates. They have not yet started to do so. Maybe the U.S. economy will be at full employment next year. But the real and nominal wage series would look different if it were at full employment right now. Read Ernie Tedeschi, “Unemployment Looks Like 2000 Again. But Wage Growth Doesn’t,” in which he writes: “Trying to solve an economic mystery … This is, to put it mildly, a mystery. If workers are as scarce as the unemployment rate and many other measures suggest, employers should be raising wages to compete for them.”
Similar to wood fires and nuclear fusion, ideology is a very bad master. But also similar to wood fire in nuclear fusion, ideology is a most excellent servant. Therefore, I cannot sign on to Jerry Taylor‘s decision to abandon “ideology.” The task, I think, is to make ideologies “useful” by making them self-reflective. After all, if a libertarian founder such as John Stuart Mill can say that “Positive Liberty is essential”—that the British working class of his day was “imprisoned” in spite of all their negative liberty by Malthusian poverty—there is ample space for a libertarianism that keeps its good focus on human choice, potential, and opportunity without blinding itself to a great deal of reality. Read Jerry Taylor, “The Alternative to Ideology,” in which he writes: “When we launched the Niskanen Center in January 2015, we happily identified ourselves as libertarians … heterodox libertarians … left-libertarianism concerned with social justice (a libertarian perspective that I’ve defended in debates with more orthodox libertarians here and here).”
The world is becoming richer, and dire poverty is becoming rarer, but is the world becoming more equal? Smart thoughts from Dietz Vollrath, “New Evidence on Convergence,” in which he writes: “Dev Patel, Justin Sandefur, and Arvind Subramanian posted the other day some new evidence on cross-country convergence … poor countries grow faster than rich ones, on average.”
A piece heading more into political sociology than I am comfortable assessing, but I trust Sandy Darity as a very thoughtful economist. Read his “The Latino Flight to Whiteness,” in which he writes: “Hispanics collectively are unlikely to share common cause with black Americans over a common racial identity … If a coalition ever forms … it will not be on the basis of linked fate or fictive kinship anchored on race.”
I would find the wise and public-spirited Ricardo Haussmann more convincing here if he’d had an explanation for why mandated wage compression by John Dunlop in the United States during World War II was not a huge success. Read Ricardo Hausmann, “How Not to Fight Income Inequality,” in which he writes: “Trying to combat income inequality through mandated wage compression is not just an odd preference. It is a mistake, as Mexico’s president-elect, Andrés Manuel López Obrador, will find out in a few years, after much damage has been done.”
I have never understood this argument—that raising and then lowering interest rates does more good to fight recessions than does not raising them in the first place. And, to my knowledge, there is no underlying model behind it at all. What is the mechanism by which raising interest rates now so you can lower them later beats keeping interest rates the same now and then lowering them later if both ultimately wind up at the same place? Martin Feldstein makes his case in “Raise Rates Today to Fight a Recession Tomorrow,” in which he continues to argue: “As I have argued in these pages since 2013, the Fed should have begun raising the Fed funds rate several years earlier. Doing so would have prevented the recent sharp increases in the prices of equities and other assets, which will collapse when long-term interest rates rise.”

U.S. income growth has been stagnant. To what degree depends on how you measure it.

Posted on November 28, 2018December 10, 2018 by Maria Monroe

A recent Congressional Budget Office report on the distribution of incomes in the United States back in 2015 has sparked debate over whether Americans are actually experiencing good income growth. By some measures, middle-class Americans have seen very little income growth, dating back to the 1990s or even the 1980s. It is a common view among economists that wage growth is the one sore spot in an otherwise good U.S. economy—to the point that the trend boasts the colloquial name of the “wage puzzle.”

But according to Washington Post columnist Robert Samuelson, the new CBO report is evidence that talk of stagnation is overblown. This report, called “The Distribution of Household Income 2015,” is one of the best federal data products for tracking income and income inequality in the United States. Instead of relying on survey data, as the Census’s “Income and Poverty in the United States” report does, CBO uses administrative tax data, which gives a clearer picture of how incomes are changing for high-income individuals.

Nonetheless, the CBO report needs to be interpreted carefully. Ultimately, this debate is a reminder that we do not currently have a regularly produced national data product that is designed to accurately measure the distribution of income in the U.S. economy. The adoption of better official measures of inequality is long past due.

Overall, the CBO report finds a significant growth in inequality since 1979, with incomes among the top 1 percent rising 242 percent, compared to an overall average of just 70 percent (after accounting for inflation). But Samuelson points to what he considers strong growth of 79 percent for the bottom fifth of income earners. CBO finds that earners in the middle class—those between the 20th and 80th percentiles of income—fared the worst over this same period, accruing income gains of only 46 percent. (See Figure 1.)

Figure 1

But this graph should be interpreted carefully. Despite the name of the report—“The Distribution of Household Income”—the statistical design is primarily focused on analyzing the impact of federal welfare policy and federal taxation on incomes of Americans up and down the income ladder. In fact, earlier iterations of this report were simply called “Effective Federal Tax Rates.”

This analytical focus has important consequences for talking about income growth, as Samuelson does, and about income inequality generally. State taxes, for example, are not part of the analysis at all—even though state taxes are generally regressive, and including them would increase income inequality and could also have an impact on income growth patterns over time.

But the most significant and often overlooked aspect of CBO’s focus on the impact of federal policy is how it treats incomes before and after the federal government redistributes income in the form of transfer and tax policies such as supplemental nutrition assistance and the Earned Income Tax Credit. CBO calculates income before these taxes and transfers and then ranks everyone by income.¹ After separating individuals into quintiles, they hold those groups constant and report incomes after taxes and transfers for each of those quintiles without re-ranking any of the individuals in them.

This approach is useful for describing the impact of federal policy on the people who compose a pretax quintile. But it does not accurately describe the shape of the income distribution after taxes and transfers have been applied. Because many individuals in the bottom fifth of the income distribution on a pretax basis will move up into the second fifth of the income ladder on an after-tax-and-transfers basis, while others will move down the after-tax income ladder, the bottom fifth after taxes and transfers will consist of different people, and the group will overall be worse off than the group of individuals ranked by before tax and transfer income. If, instead, individuals are re-ranked in the post-tax-and-transfer distribution,² then incomes for those in the bottom fifth have increased by 62 percent since 1979 not 79 percent, as CBO reports, while income growth among the top 1 percent is virtually unchanged because government taxes and transfers do not cause significant re-ranking in this group.

Neither method is more correct; they just do different things.

CBO’s method is a better way to think about the effects of federal government policies related to U.S. incomes. Re-ranking is a better way to think about the overall shape of the income distribution and income growth within different quintiles of income earners over time. The CBO report is a great data product, but it’s not the right one for every situation. Importantly, its analytical limitations underscore how urgently we need better measurement of inequality by our federal statistical agencies.

Let’s return to Samuelson’s claim that the report shows that income stagnation is a myth. Is 62 percent income growth good income growth? That’s a matter of perception. From 1979 to 2015, overall income growth averaged 1.4 percent annually (with re-ranking, as described above). But for the middle class, it was just 1.1 percent. The top fifth of income earners accrued 1.9 percent growth annually, while the top 1 percent of households saw annual growth of 3.3 percent. The bottom fifth saw growth in line with the average at 1.4 percent.

And an analysis of just the recent data reveals even bleaker trends. Average annual growth between 2000 and 2015 is just 0.8 percent. This income growth was shared more equally, thanks to large declines in income at the top of the distribution due to the Great Recession (as seen in Figure 1). Stagnation is in the eye of the beholder, but income growth of less than 1 percent per year is consistent with the idea that our economy is producing poor wage gains for most workers.

Marriage is an unexpected fringe benefit of a quality job in the United States: Food for thought this holiday shopping season

Posted on November 27, 2018November 26, 2018 by Maria Monroe

The holiday shopping season is now upon us, and U.S. retail workers are in a crunch. They are working long, often unpredictable hours. The stresses of retail work are on high volume during the holidays, but retail workers experience low pay, lack of fringe benefits, and volatile hours year round. In fact, 87 percent of retail workers who are early in their careers report instability in their work hours.

While research has long shown that working under these difficult conditions causes stress, financial instability, and health problems, research released in an Equitable Growth working paper today shines a new light on a surprising consequence of poor job quality: Working a low-quality job affects a worker’s propensity to marry. Unstable working conditions reach past the bounds of the workplace to affect deeply personal aspects of workers’ lives, impeding their ability to form and formalize the families they desire.

Since 1970, low-educated workers, including retail workers, have experienced precipitous drops in compensation, job security, and job quality, while more highly educated workers have been relatively insulated from these changes. Over this same period, rates of marriage have declined and that decline, too, has been concentrated among people with low levels of education.

Existing research convincingly demonstrates the link between marriage and earnings. For men in older cohorts, higher earnings are predictive of marriage. And today, higher earnings for both men and women predict entry into first marriage. This means that low-earning men and women are less likely to tie the knot than their higher-earning counterparts.

The bifurcation of the U.S. labor market extends past earnings to job quality, and that’s where the new research by Kristen Harknett of the University of California, San Francisco and Daniel Schneider and Matthew Stimpson of the University of California, Berkeley comes in. The three authors take advantage of the rich set of job-quality variables in the National Longitudinal Survey of Youth, a unique survey that starts following people when they are young and collects data as their lives unfold. Using NLSY’s measures of job quality—including salaried pay and access to fringe benefits, paid maternity leave, and predictable schedules—the authors look at the trajectories toward romantic-union formation for men and women in recent cohorts. They find that for both men and women, these measures of job quality are predictive of marriage.

This in itself is not surprising. Low-quality jobs tend to be poorly compensated and demographers know that earnings levels affect marriage rates. But the authors use a rich set of controls that includes earnings, and yet they still find that differences in job quality explain at least 15 percent of the difference in rates of first marriage between people with bachelor’s degrees and people without high school diplomas. Overall, the authors find that a worker with a low-quality job and a worker with a higher-quality job who are taking home identical paychecks have very different chances of walking down the aisle.

While initially surprising, this finding makes intuitive sense. When a worker lacks fringe benefits that could cover a partner and struggles to make financial plans because her take-home pay changes week to week, when maternity leave is not in the cards, and when work hours fluctuate so that scheduling childcare (not to mention a date night) is a nightmare, formalizing a partnership and forming a family is hard. This is not a story about pay alone: Job quality matters.

In October, I wrote about the importance of ensuring that people have the resources they need to form the families they desire. Proponents of marriage should note that a larger paycheck is not enough—job quality matters, too. Marriage advocates should explore ongoing initiatives to provide today’s workers with the stable schedules and fringe benefits to which more of us had access in the past.

The next time the cashier scans your stocking stuffer, take a moment to think about the bifurcation of the U.S. labor market and its far-reaching consequences for America’s workforce.

Refocusing the minimum wage debate on the well-being of U.S. workers

Posted on November 20, 2018December 29, 2018 by Maria Monroe

The public debate over the minimum wage in the United States has not always aligned with the breadth of academic research that shows how this policy, by and large, does not harm workers’ employment opportunities. Meta-analyses of research on the so-called dis-employment effect find there is a negligible effect on the unemployment rates of low-wage workers, who are likely to be affected by minimum wage increases. Nonetheless, a study last year by the University of Washington made headlines because it called this academic research into question, concluding that minimum wage increases in Seattle led employers to cut worker hours and thereby reduced worker incomes.

That study was the subject of much debate because of the methodology it used to measure the impact of increasing the minimum wage. That research team recently released an updated study with more nuance, finding little overall impact on employment due to the minimum wage increase in Seattle but finding varying effects based on the employment status of workers in the months prior to the increase in the minimum wage in 2016. These more nuanced findings are still a hot subject of debate among economists, including the Economic Policy Institute’s Ben Zipperer, who told The New York Times that many of the effects found by the team at the University of Washington can be explained by the booming labor market that Seattle is now experiencing.

More broadly, the majority of academic research in economics does not find overall negative effects from raising the minimum wage. In a report for the Center for Economic Policy Research, economist John Schmitt reviewed the broad literature, including meta-analyses, and concluded that a majority of studies find “no discernible effects on employment” in the United States. And a recent Equitable Growth working paper by U.S. Census Bureau economists Kevin Rinz and John Voorheis, which looks at earnings trajectories of affected workers in the 5 years following a minimum wage increase, finds that gains are greater for those at the bottom of the income distribution—and that those gains grow over time up to 5 years.

A forthcoming paper by EPI’s Zipperer and U.S. Census Bureau economist Evan Totty presented recently at the Association for Public Policy Analysis & Management conference in November also analyzes the income dynamics for workers who are impacted by minimum wage increases to find positive outcomes in earnings over the long run.

These new lines of research—often made possible due to access to cutting-edge linked administrative data with U.S. Census surveys such as the Current Population Survey used in Rinz and Voorheis’ paper—redirect our attention in analyzing the impacts of minimum wage increases to worker well-being rather than dis-employment effects. Indeed, in an Equitable Growth working paper, economists David Howell at the New School, the late Kea Fiedler of the New School, and Stephanie Luce of the City University of New York’s Graduate Center argue that the focus on a “no job loss” standard of minimum wage impacts is too narrow and should be broadened to analyze a “minimum living wage.”

Looking ahead, when economists begin to conduct empirical research on minimum wage increases recently enacted through successful ballot initiatives in Missouri and Arkansas, they could consider broader measures of how low-income workers are doing. Specifically, are they earning a living wage over time that allows them to provide for themselves and their families?

The purpose of raising the minimum wage in the United States—whether at the municipal, state, or federal level—is to increase worker well-being and minimize employer exploitation. Remembering these goals should frame how economists and policymakers alike consider new research such as the original and recently revised study published by the research team at the University of Washington. Minimum wage increases should be considered within the larger goal of addressing economic inequality. Dis-employment is one important aspect of raising the minimum wage for which there is ambiguous or no evidence, but minimum wage increases also interact with income growth for low-wage workers and the standard of a minimum living wage. Stepping back, the body of evidence demonstrates that increasing minimum wages is an important tool to ensuring economic growth is broadly shared in a tight labor market with workers at the bottom of the earnings distribution earning more over time.

Remembrance: Scholar Devah Pager (1972–2018)

Posted on November 19, 2018November 20, 2018 by Maria Monroe

The Washington Center for Equitable Growth joins other friends and colleagues in mourning the loss of Harvard University sociologist Devah Pager, the recipient of a 2018 Equitable Growth grant, “The organizational bases of discrimination,” with Stanford University sociologist David Pedulla. Pager passed away on Friday, November 2 from cancer.

Pager’s research and its impact on policy discussions was a powerful example of why research matters and how well-formed policies based on evidence can make a difference. Pager’s research on labor market discrimination was pivotal to Equitable Growth’s understanding of how human capital development and deployment serves as a channel through which inequality affects economic growth and stability. The effective deployment of human capital in the labor market is a critical factor driving innovation and productivity, two key engines of economic growth. Pager’s pathbreaking work utilized cutting-edge methodologies to expose race-based hiring discrimination, an unjust practice that drags down individual outcomes and overall growth. Her research also showed that hiring discrimination is not an insurmountable problem—it can be addressed through thoughtful policies.

Equitable Growth is dedicated to furthering research and informing policy discussions, and we recognize the importance of community. Through the financial and professional support offered by our grant program, we seek to foster a community of academics to accelerate research and to strengthen the pipeline of scholars working in this space. We are proud we had the opportunity to support Pager, a scholar with an exemplary track record of rigorous research. Her reputation as a thoughtful collaborator and a tireless mentor only added to the value that she offered to our community.

The academic community has lost a skilled researcher, but in the many wonderful tributes to Pager that have been published elsewhere, it is clear that the community has also lost a dear friend, colleague, collaborator, and teacher. Our thoughts are with those who are grieving the loss of Devah Pager. Her example is an inspiration to all of us.

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