Budget analyses of U.S. income support programs must incorporate long-term benefits for children

Posted on by Emilie Openchowski
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When any piece of legislation is considered by the U.S. Congress, it typically goes through a budget analysis to establish its impact on the federal government’s bottom line. These analyses, performed by the nonpartisan Congressional Budget Office, look at the changes in government spending and revenue that may arise over the next 10 years as a result of the proposed bill being enacted, accounting for predicted responses to the law by individuals, firms, and local governments.

The results of these analyses are expressed as budget “scores”—a single dollar amount reflecting the total cost to the government of enacting the legislation—and they are hugely influential in the legislative debate. In fact, bills that are deemed to cost more than they bring in over the 10-year budget window often face very long odds of being enacted, for both rhetorical reasons (claims of fiscal irresponsibility, for example) and procedural ones (such as so-called Pay as You Go rules in the House and Senate, which can require super-majority vote thresholds to waive).

While these budget analyses are useful tools to allow policymakers to evaluate potential future effects on the federal budget, they are not foolproof. Indeed, our recent paper shows that CBO scores for income support programs that provide assistance to low-income families with children in particular miss the mark.

Income support programs are part of a broader network of social infrastructure that provides essential assistance to families. Social infrastructure that specifically targets families with children can take the form of direct cash or near cash transfers to children, investments in child care, early education, paid family leave, and family services, and financial support through the tax system.

Studies show that countries that provide less of this kind of support to families with children have higher rates of child poverty. According to data from 37 countries in the Organisation for Economic Co-operation and Development, for example, the United States spends less on social infrastructure programs as a share of Gross Domestic Product than most other high-income countries. At the same time, in the same group of 37 countries, only Turkey and Costa Rica have higher rates of child poverty than the United States.

The fact that the United States spends so little, compared to peer countries, on social infrastructure can be explained in part by a previous emphasis on the immediate behavioral effects of these programs on parents (such as impacts on labor supply decisions), rather than a focus on the vast returns these investments in children and their human capital yield down the road. In other words, economists and policymakers alike have paid too much attention to costs in the short term and not enough to the benefits over the long run.

This focus led to a bias toward austerity and away from public spending on important programs that support children and boost their outcomes in adulthood. As a result, U.S. income support programs in particular have largely shifted from unconditional cash transfer programs to conditional transfers based on parental work requirements. This change in policy has been driven by policymakers seeking to avoid certain behavioral effects—for instance, parents staying out of the labor market or delaying marriage in order to remain eligible for certain targeted programs—that could arise from various design elements of income support programs, such as who the aid targets, how it is delivered, and whether there are any conditions for eligibility.

The evidence is mixed on whether this policymaking strategy has succeeded in affecting these behaviors. But what is clear is that it means families have more difficulty accessing the programs they need, and these programs are not working at their full capacity to keep U.S. children out of poverty. Likewise, this short-sighted policy approach ignores the many long-term benefits to children—and to society and the broader economy—of income support programs.

To be fair, economic research also largely tended to focus on the short-run costs of income support programs. Our recent paper finds that of 239 articles examining such programs since 1968, only 40 percent looked into the benefits of programs such as the Earned Income Tax Credit, Medicaid and the Children’s Health Insurance Program, Temporary Assistance for Needy Families and its predecessor, Aid for Families with Dependent Children, or the Supplemental Nutrition Assistance Program. Prior to 2010, that number was less than 27 percent.

Often, when researchers did examine benefits, they were in the short term, such as the impact of Medicaid on infant mortality or the link between access to SNAP during pregnancy and the birth weights of newborns. It wasn’t until research began to examine the long-run outcomes for children attending high-quality preschools—such as the Perry Preschool or Abecedarian programs and, later, Head Start—that economists broadened both their time horizons and how they define human capital benefits.

These studies changed how researchers evaluated income support programs, from the timeframe and types of outcomes studied to the incorporation of noncognitive benefits. This, combined with studies examining declining economic mobility in the United States, spurred researchers to look more closely at how economic conditions in childhood shape future outcomes in adulthood.

Newer studies are better able to examine the long-term benefits of income support programs on children, and many find that the most effective interventions are those that children receive between birth and age 5. These research projects look at such impacts as college admission and completion rates, future neighborhood quality and homeownership rates, reliance on income support programs and poverty levels as adults, income and earnings in adulthood, connection to criminal justice system, and even physical and mental health outcomes. Studies also now find that programs that target children deliver very large returns on investment for the government, and even pay for themselves in the long run, compared to programs that target adults.

This research boom over the past decade—in which 2.5 articles examining benefits have been written for every article on disincentives—should signal to policymakers that their fixation on the short-term costs rather than long-term benefits isn’t giving them the full picture they need to properly evaluate the impact of social infrastructure policy. The Congressional Budget Office limit its budget analyses to 10-year periods—a timeframe that clearly does not capture the adulthood outcomes of a program delivered to a child before age 5 but does capture the short-term costs to the government of implementing such programs. And that 10-year window is an extremely narrow view of what outcomes constitute human capital gains.

While this focus on the short-run costs is explainable—it is indeed easier to understand the effects of a policy using data available in the moment than it is to estimate benefits that won’t be fully known for two or three decades—it ignores the fact that these programs are more than income supports that bolster consumption in the current moment. These programs represent investments in our children’s human capital—and the returns on these investments should be measured well into the future and using a variety of metrics.

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Factsheet: What the research says about the economics of income support programs

By Equitable Growth,

September 16, 2021

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The child allowance will pay dividends for the entire U.S. economy far into the future

By Liz Hipple,

March 24, 2021

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Income support programs boost earnings for low-wage workers by reducing household poverty in the United States

By Michael A. Schultz,

August 26, 2021

Our paper shows that researchers have already begun to widen their lens when it comes to examining the benefits of income support programs. We suggest ways they can offer further support, including by improving our understanding of why the estimated impacts of various programs on children differ across populations and environments, and whether it’s possible to use evidence on short-term impacts to predict long-term outcomes.

The COVID-19 pandemic led to a temporary shift away from austerity in income support programs. But the policies providing extra assistance to U.S. families over the past 2.5 years have largely expired, erasing many of the gains that were achieved in that period, such as the drastic cut in child poverty from the expanded Child Tax Credit. Research shows these measurable short-term gains for children, if sustained, would have long-term benefits.

Policymakers, alas, have yet to make adjustments to their budget scoring practices. Congress would do well to act, adopting longer timeframes when performing budget analyses on programs that affect children or finding another way to consider the long-run benefits of these programs. Without a shift, these vital investments in our future workforce will continue to be pushed to the back burner because an incomplete picture of their effects on society and the broader U.S. economy minimizes what our nation truly has to gain from these programs.

Posted in Uncategorized

Policymakers can still use American Rescue Plan funds to bolster the U.S. child care system and ensure it has a strong future

Posted on by Maria Monroe
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In January, the 118th Congress will draw to a close following a productive session that saw legislative action on pandemic relief, infrastructure investments, manufacturing and research incentives, and critical investments in climate, health, and tax policy as part of the Inflation Reduction Act. All of these achievements will contribute in various ways to broad-based U.S. economic growth in the future.

Yet despite this impressive string of legislative accomplishments, this congressional session is set to close without progress on much-needed investments in the child care industry and the broader care economy of the United States—both of which remain diminished following the COVID-19 recession.

Policymakers who wish to build a more stable, equitable, and affordable child care system, however, still have tools at their disposal to do so. The American Rescue Plan Act of 2021 included tens of billions of dollars in funding to help stabilize the child care industry, and unspent flexible funds from other components of the law—including the Coronavirus State and Local Fiscal Recovery Funds program—could allow policymakers to direct even more aid to the struggling sector.

Such aid cannot replace robust, committed public investments in child care—which research suggests would lower costs for most families, increase parental employment, and improve compensation for the child care workforce, all of which would ultimately lead to short- and long-term economic growth. But by using the American Rescue Plan’s resources to their fullest—before they expire—policymakers can construct a stable foundation on which future child care investments can someday stand.

The American Rescue Plan’s dedicated child care funds provide states with flexibility to address their child care needs

In response to the lingering fallout from the COVID-19 pandemic, the U.S. Congress passed the American Rescue Plan in March 2021. Building upon smaller packages bolstering the child care industry that were included in the CARES Act and the Consolidated Appropriations Act of 2021, the American Rescue Plan provided a long-awaited and much-needed infusion of resources: $39 billion to stabilize the industry and implement new programs that reduce families’ costs, support care workers’ wages, and expand the supply of care in communities across the country.

This funding, designed to be flexible, can be spent in numerous ways. With their ARP Implementation Tracker, Child Care Aware of America—a nonprofit organization for many child care resource and referral agencies—provides a detailed accounting of how states and territories alike have allocated and distributed these funds, including:

  • Some states, such as Alaska and Pennsylvania, have used this money to waive or reduce subsidized parents’ co-payments for child care.
  • Rhode Island decided to cap parents’ co-payments at no more than 7 percent of household income, mirroring proposals in the Biden administration’s original Build Back Better framework.
  • Colorado, Minnesota, and others set up programs to help unlicensed and prospective providers meet licensing standards and thus increase the supply of subsidy-eligible care.
  • Several jurisdictions, including New Jersey and Iowa, are providing bonus payments and financial incentives directly to child care workers—a move that a 2019 pilot program in Virginia found to halve costly staff turnover at child care centers.

The examples above hardly scratch the surface of the various ways in which states and territories have used the American Rescue Plan’s dedicated child care dollars. And there is early evidence that the law achieved its desired effects: An analysis by Julie Kashen and Rasheed Malik for the Century Foundation, for example, finds that millions of child care slots may have been saved thanks to the American Rescue Plan’s stabilization grants that prevented child care providers from shutting their doors.

Yet all of these various initiatives also have one thing in common: They will soon end. The law requires states and territories to liquidate the American Rescue Plan’s child care funding by September 2024 at the latest.

Remaining American Rescue Plan funds can further support states’ child care systems

Fortunately, other American Rescue Plan programs provide state and local policymakers with additional resources, flexibility, and time to support their child care industries. The law includes both targeted and flexible payment programs to assist states and localities in responding to the COVID-19 pandemic and recession. One of the more flexible programs is the Coronavirus State and Local Fiscal Recovery Funds program, which provides $350 billion to state, local, and Tribal governments to, among other purposes, assist workers, households, small businesses, and nonprofits that have been negatively impacted by the pandemic.

While most of that money has already been distributed and allocated, 30 states recently received the second half of their recovery funds—nearly $40 billion in total. Metro cities, counties, and qualifying local governments also received the second half of their payments at the same time. The remaining states and all territories received their full funding previously in a single payment. States received either half or full payments depending on their unemployment rate relative to pre-pandemic periods. (See Figure 1.) 

Figure 1

Disbursement of State and Local Fiscal Recovery Funds, by states that received one lump sum payment or two half payments

Somestates and localities have fully allocated these funds in their budgets already, but others are still deciding how best to utilize them. While not specifically for child care, the final rule regulating these funds allows them to be used for specific payments and programs that complement those included in the American Rescue Plan’s child care provisions. And unlike the law’s child care-specific funds, the Coronavirus State and Local Fiscal Recovery Funds are available until December 31, 2026. 

As such, these funds can be used to enhance and expand the American Rescue Plan’s child care aid as it expires over the next 2 years. According to the U.S. Department of the Treasury, the fiscal recovery funds can be used for child care support in a few different ways: ensuring “premium pay” for child care staff—up to an additional $13 per hour—similar to policies implemented in Kansas, Washington, DC, Utah, and elsewhere; providing loans or grants to repair child care facilities or help providers reopen or start a new facility; establishing technical assistance or programmatic support for smaller, home-based providers that need access to the subsidy system, expanding the supply and quality of care in the process; and offering expanded child care options for parents looking for work.

Since these funds arrive and expire later than the child care-specific funding, state and local policymakers can identify where need still exists in their child care markets and are afforded more breathing room for the child care sector to recover before the funds run out. For an industry still struggling to recover from the COVID-19 recession, these resources can meaningfully improve child care’s ongoing supply crisis in the short run and help protect the industry from a future economic downturn or recession.

The American Rescue Plan can still support child care today while building evidence for tomorrow’s investment

In many ways, the American Rescue Plan has served as an important test run for future public investments in child care. While not as sweeping or robust as President Joe Biden’s Build Back Better framework, this money has nevertheless allowed states and localities to pilot many of the components in the broader reform plan, developing some of the baseline infrastructure necessary for these kinds of public investment and a roadmap for the child care sector moving forward.

The flexibility of the American Rescue Plan’s aid also provides important policy variation for researchers and academics to evaluate programs and compare outcomes, building useful evidence that Congress can take into account when tackling additional reform in the future. 

While this test run has been important, it is also imperfect. States may be hesitant to use this one-time infusion of cash to expand child care slots or raise workers’ wages only to have to roll them back once the funds expire. After all, the American Rescue Plan was not intended to replace robust and permanent public investment in the U.S. child care system.

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Policymakers tackling inflation can’t overlook the impact of higher interest rates on the U.S. child care market

By Sam Abbott,

August 11, 2022

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Factsheet: What the research says about the economics of early care and education

By Equitable Growth,

September 15, 2021

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The economic evidence behind the Inflation Reduction Act and why it will boost strong, broad-based economic growth

By David S. Mitchell,

August 5, 2022

The aid certainly has helped some state and local policymakers avoid, or at least delay, an even greater child care crisis, but it is not a long-term solution. Expanding and extending the policies in the American Rescue Plan will ultimately be necessary for creating the equitable, accessible, and affordable child care system needed to generate broad-based and sustainable economic growth in the United States.

Until then, policymakers must use all the tools at their disposal, including the American Rescue Plan, to help ensure a functioning child care system in the United States for providers, workers, and families.

Posted in Uncategorized

Better data collection can help lift the LGBTQ+ community out of economic hardship in the United States

Posted on by Maria Monroe

Over the past 2-plus years amid the COVID-19 pandemic, widespread evidence has underscored the reality that various communities and demographic groups in the United States experience socioeconomic hardships differently. Numerous studies have explained how communities of color have experienced greater rates of job loss, financial instability, and negative health outcomes than their White counterparts.

This information is known largely because of disaggregated data collection that asks respondents specific questions about their race and ethnicity. Federal surveys, for instance, that ask such questions provide insight into the economic well-being of different demographic groups and how they are treated by society with respect to their identities.

Yet one group is often overlooked in federal data collection: the LGBTQ+ community. Currently, only the Census Bureau’s Household Pulse Survey—just one of the dozens of federal economic surveys—asks demographic questions explicitly related to the respondents’ sexual orientation or gender identity, or SOGI. (While the Census Bureau’s American Community Survey does not ask people to self-report their sexual orientation or gender identity, some research has nonetheless leveraged this survey using self-reported data on partners of the same sex who live in the same household, but this represents a small fraction of all LGBTQ+ households.) This lack of data limits our understanding of the LGBTQ+ community’s economic experiences, which, in turn, limits policymaking that could provide essential support targeting the specific needs of LGBTQ+ workers and families in the United States.

The need for more federally collected data on the LGBTQ+ community was the focus of an event that the Washington Center for Equitable Growth hosted on July 12. This latest installment of Equitable Growth Presents, titled “LGBTQ+ Economic Data and Disparities: What We Still Need to Know,” was a virtual convening featuring Lee Badgett, professor of economics at the University of Massachusetts, Amherst, and Sharita Gruberg, vice president of economic justice at the National Partnership for Women and Families, and was moderated by Equitable Growth’s Director of Economic Measurement Policy Austin Clemens.

Badgett kicked off the event, summarizing her research on the economic experiences of the LGBTQ+ community, which focuses on how sexual orientation and gender identity shape economic outcomes. While labor economists often discuss gender or racial wage divides, Badgett’s research looks at the wage disparities between gay and lesbian or bisexual men and women and their heterosexual peers—for example, emerging literature finds that gay and bisexual men earn 7 percent to 11 percent less than their heterosexual counterparts. There is suggestive evidence that this pay divide is the result of discrimination, as it tends to widen in regions where there are fewer legal protections against discrimination on the basis of sexual orientation and gender identity and shrinks where more protections are in place.

Badgett explained her findings that lesbian women earn 7 percent to 9 percent more than heterosexual women, while bisexual women earn 10 percent less than heterosexual women. She attributes this inverted gap to the labor experiences of lesbian workers in the United States. Data show, for example, that lesbian women work more hours and weeks in a year, compared to heterosexual women. At the same time, Badgett reiterated that all women, regardless of sexual orientation, earn less than gay, bisexual, and heterosexual men.

Badgett also discussed her work examining how earnings vary before and after an individual’s gender transition. She finds that trans women face an earnings drop, while trans men face little to no changes in earnings post-transition. These findings indicate that both stigma against transgender individuals and wage gaps between cisgender males and females play a role in how an individual is compensated after their gender transition.

At a time when transgender and gay rights are threatened in states across the country, understanding the socioeconomic challenges faced by this community is vital. Badgett’s research finds, for example, that LGBTQ+ people face higher rates of poverty than cisgender and heterosexual people. (See Figure 1.)

Figure 1

Poverty by gender identity and sexual orientation, 2014-2017

The main contributor to these high poverty rates is discrimination. Experimental studies on hiring processes, for example, find that resumes with LGBTQ+-coded language—such as including gender non conforming pronouns—were 35 percent less likely to get called for an interview than resumes without such language. In an economy where most people rely on employment to receive health insurance, discrimination that makes it difficult to obtain or keep employment can create healthcare access inequities. This system can further trap an already-vulnerable population into greater poverty.

After Badgett presented her research, NPWF’s Gruberg explained that the first step to tackling this issue is to collect more data on the economic and lived experiences of LGBTQ+ Americans. Gruberg praised the Census Household Pulse Survey, which began asking SOGI questions in 2021, as a tool allowing researchers to better understand the disparities LGBTQ+ people have faced during the COVID-19 pandemic.

Yet as valuable as the Household Pulse Survey is in breaking down the effects of the pandemic, Badgett and Gruberg pointed out that it is still very limited in what it tells us.

Gruberg also highlighted two major successes in the campaign to collect more disaggregated data for the LGBTQ+ population: the LGBTQI+ Data Inclusion Act and the Biden administration’s executive order on Advancing Equality for Lesbian, Gay, Bisexual, Transgender, Queer, and Intersex Individuals.

The LGBTQI+ Data Inclusion Act, which passed in the House and has been introduced in the Senate, would require federal agencies that administer surveys to individuals to ask for voluntary self-identification of sexual orientation and gender identity on those surveys. As mentioned above, this data collection is essentially limited to the Household Pulse Survey, which is the first—and currently only—economic survey to explicitly feature such questions. Private institutions have tried to fill the gaps in the data by conducting their own surveys of the LGBTQ+ community. But to capture accurate and nationally representative statistics, the federal government needs to take on the responsibility of collecting thorough data on LGBTQ+ Americans.

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The importance of anti-discrimination enforcement for a fair and equitable U.S. labor market and broadly shared economic growth

By Carmen Sanchez Cumming,

December 21, 2021

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Measuring economic outcomes for all U.S. workers and their families will hold policymakers accountable to creating broad-based growth

By Austin Clemens,

October 7, 2021

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Stratification economics: What it is and how it advances our understanding of inequality

By Kate Bahn, Carmen Sanchez Cumming,

February 28, 2022

Meanwhile, President Joe Biden’s executive order addresses the discriminations LGBTQ+ people face in schools, housing, healthcare, the judicial system, and employment, as well as in accessing federal programs. It also “establishes a new federal coordinating committee on SOGI data, which will lead efforts across agencies to identify opportunities to strengthen SOGI data collection.”

The combined efforts of the executive order and the LGBTQI+ Data Inclusion Act indicate that a “whole of government” approach to collecting meaningful data on the LGBTQ+ population, while also protecting their privacy, can provide clarity on the unique economic metrics and outcomes of LGBTQ+ individuals. These actions will greatly expand our understanding of the economic and lived experiences of LGBTQ+ people in the United States and thus guide policymakers in crafting legislation that responds to the specific economic hardships of—and that builds equity for—this often-overlooked community.

Posted in Uncategorized

New research shows that 1 in 4 adults in the United States suffers from transportation insecurity

Posted on by Emilie Openchowski
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Access to transportation is crucial to ensuring that people can meet their basic needs and participate in society and the economy. It goes without saying that if people can’t get where they need to go, they will struggle to work and learn, to buy food, to see friends and family, and to receive medical care.

When a person can’t regularly move from place to place in a safe or timely manner because they lack the resources necessary for transportation, that person is experiencing transportation insecurity. Until recently, the number of people experiencing transportation insecurity in the United States had been a mystery, largely because researchers have lacked the tools to measure transportation insecurity.

Thankfully, this is no longer the case. Yesterday, my colleagues Alexandra Murphy, Jamie Griffin, Karina McDonald-Lopez, Natasha Pilkauskas (all of the University of Michigan), and I published new findings that use a novel measurement tool—the Transportation Security Index—to quantify the prevalence of transportation insecurity in the United States.

Modeled after the Food Security Index, the Transportation Security Index identifies those experiencing transportation insecurity by looking at their symptoms, such as feeling stuck at home because of a lack of access to transportation or arriving early or late somewhere due to transportation scheduling issues. Researchers can administer a questionnaire, score responses to each question, and add up the scores to come to a quantitative measure of a person’s overall level of transportation insecurity. (See Table 1.)

Table 1

The Transportation Security Index questionnaire and how the scoring works

When my co-authors and I administered the Transportation Security Index questionnaire to a nationally representative sample of 1,999 adults aged 25 and older in the United States, the results were striking. In 2018, the year of the data collection, about 1 in 4 adults experienced transportation insecurity, with nearly 1 in 10 experiencing moderate or high levels of insecurity. (See Figure 1.)

Figure 1

Proportion of adults ages 25 and older experiencing marginal, low, moderate, high, and no transportation insecurity in 2018

As one might expect, my co-authors and I find that transportation insecurity and poverty are highly correlated. Indeed, we find that more than half of adults who experience poverty are also experiencing transportation insecurity—a relationship that remains strong even when controlling for factors such as car ownership, race, education level, and urbanicity. (See Figure 2.)

Figure 2

Proportion of U.S. adults ages 25 and older experiencing marginal, low, moderate, high, and no transportation insecurity in 2018, by income level

Perhaps less intuitively, though, our results suggest that car ownership and transportation insecurity are not as correlated as one might expect. While car owners are much less likely to experience transportation insecurity than people who do not own cars, car owners are not immune from transportation insecurity—perhaps because cars, while helpful for getting around, are not effective tools if their owners cannot afford gas, insurance, or repairs, or if they must share the car with many other family members. (See Figure 3.)

Figure 3

Proportion of U.S. adults ages 25 and older experiencing marginal, low, moderate, high, and no transportation insecurity in 2018, by car ownership

As is the case with other forms of material hardship, my co-authors and I find that transportation insecurity rates in the United States are highest among the racial and ethnic groups that also often experience racism and discrimination: Black and Hispanic adults. (See Figure 4.)

Figure 4

Proportion of U.S. adults ages 25 and older experiencing marginal, low, moderate, high, and no transportation insecurity in 2018, by race/ethnicity

This creates a vicious cycle, in which experiences of discrimination in institutions, such as the labor market, education system, and financial system, as well as in city planning, lead Black and Hispanic adults in the United States to have fewer resources to access adequate transportation. Transportation insecurity, in turn, prevents them from accessing more and better economic opportunities and even from meeting their basic needs.

In sum, our research demonstrates that transportation insecurity can be measured—and shows how prevalent it is in the United States.

Future research is needed, however, to determine how rates of transportation insecurity in the United States have changed since 2018. For instance, transportation insecurity levels may have fallen as staying home and working from home became more common amid the COVID-19 pandemic—or they may have risen as the price of used cars and gas increased. Likewise, further research is needed to examine the causal links between transportation insecurity and outcomes that are crucial to the functioning of the U.S. economy, including labor force participation, access to healthcare, school attendance, and consumption patterns.

Such research would help guide policymakers as they seek solutions to address widespread transportation insecurity and its impacts on U.S. workers and their families.

Posted in Uncategorized

Consumers initially spend less than a third of their stimulus checks, on average, amid recessions

Posted on by Emilie Openchowski
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Economists and policymakers alike generally agree on the effectiveness of sending out direct stimulus checks to individuals to help reverse an economic downturn by encouraging more consumer spending. But they vigorously debate the appropriate amount of money that should be disbursed. U.S. policymakers in the past three recessions sent out stimulus payments ranging from $600 to $1,200. Was that too much, too little, or just about right?

Stimulus payments are meant to ease the pain of the economic downturn for families, and the payments help stabilize the economy. How much of the stimulus payment is immediately spent to help the economy rebound is known in economics as the marginal propensity to consume, or MPC. How much families spend varies, of course, depending on the size of the stimulus checks, whether they are unemployed when they receive the checks, and how much savings they have squirreled away that is easily converted into cash, among many other variables.

In a new working paper, “Marginal Propensity to Consume in Recessions: A Meta-analysis,” economist Anna Sokolova at the University of Nevada, Reno provides some data-driven evidence for U.S. policymakers to ponder and for economists to research further for even more evidence of the effectiveness of stimulus payments. She examined data from 40 different studies around the globe on the spending patterns of consumers within the first 3 months of receiving their stimulus checks over the course of the past three recessions—the dot-com recession of 2001, the Great Recession of 2007–2009, and the COVID-19 recession of 2020—and including other small transitory or predictable payments over the time period spanning all three recessions.

Sokolova finds that, on average, consumers spent 29 percent of these stimulus payments purchasing goods and services in the 3 months after receiving it—or, in economic parlance, their marginal propensity to consume was 0.29 when the stimulus was $1,200, though that propensity to consume depends on the size of the stimulus payments. (See Figure 1.)

Figure 1

Estimates of quarterly marginal propensity to consume based on a meta-regression model, conditional on different stimulus payment sizes

At first glance, then, it would seem that U.S. policymakers may be overly optimistic about the direct effects of stimulus checks to help reverse recessions. After all, sending $300 billion to people, as happened with the first COVID-19 payment, but only having about $87 billion of it spent in the first 3 months would not seem to deliver the robust kick to the U.S. economy needed to spark the beginning of a quick turnaround.

But aggregate spending on average by consumers doesn’t capture the very different circumstances in which individual consumers make those spending decisions. Importantly, the new working paper finds that when unemployment rates are high—a leading indicator that a recession is severe—the marginal propensity to consume also rises within the first 3 months of receiving stimulus checks. (See Figure 2.)

Figure 2

Estimates of quarterly marginal propensity to consume based on a meta-regression model, conditional on different unemployment rates

This indicates that stimulus payments are much more effective at prompting more spending more quickly by households when recessions are more severe. This makes sense. A higher percentage of the stimulus payments will be spent because more people are out of work and need the money to buy everyday expenses such as food and paying the rent.

So, U.S. policymakers are probably correct when they send stimulus payments to U.S. households to boost their marginal propensity to consume when the economy is in more dire straits. Or, as economists would say, the countercyclical features of MPC-driven stimulus are effective. Indeed, Sokolova finds evidence suggesting that U.S. households spend more of their stimulus money, compared to households from other countries.

The new working paper also shows that U.S. policymakers can use these results to estimate how much of the stimulus payments will be spent immediately. In this way, policymakers can calculate how much money they need to spend in the form of stimulus payments by using the marginal propensity to consume to calibrate the size of the stimulus needed. Sokolova’s research finds, for example, that a higher percentage of that money will be spent directly and more quickly in an economic downturn when there is less of it landing in consumers’ mailboxes or bank accounts.

Policymakers also should consider the levels of household savings when sending out stimulus payments while also factoring in the economic benefits of distributing those payments to everyone more swiftly to spark more consumption effects, as well as the political benefits of making these payments universal to garner broad-based public support. This new working paper finds that households with high levels of liquid assets tend to have marginal propensities to consume that are lower, but by about only 9 percentage points to 10 percentage points, compared to the general population.

This new research also points economists to other ways in which the marginal propensity to consume could be further studied using data-driven evidence, alongside other qualitative measures. For instance, economists could explore further the relationship between the marginal propensity to consume from households’ one-time stimulus checks, compared to money they receive as recurring payments, such as annual tax refunds. More data-driven research on the many ways in which the marginal propensity to consume affects the U.S. economy would certainly be useful when U.S. policymakers consider future rounds of stimulus payments to combat a recession.

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Consumption volatility across the U.S. income distribution is highest among low-income workers and their families

By Jonathan Fisher, Bradley Hardy,

February 3, 2022

working paper

Estimating the marginal propensity to consume using the distributions of income, consumption, and wealth

By Jonathan Fisher, David Johnson, Jonathan Latner, Timothy Smeeding, Jeffrey Thompson,

April 19, 2018

Coronavirus Recession

The coronavirus recession highlights the importance of automatic stabilizers

By Greg Leiserson,

June 30, 2020

Research should also go beyond estimating the marginal propensity to consume from these stimulus payments. As Equitable Growth Steering Committee member and Harvard University professor Karen Dynan recently wrote, more research is needed to understand how this type of countercyclical fiscal policy protects the most vulnerable households from harm. Research by Equitable Growth grantee and University of Chicago economist Christina Patterson finds that the disproportionate impact of recessions on low-income and young workers amplifies recessions due to their higher marginal propensities to consume, so it’s also critical to understand the spillover impacts of stimulus to households in need during recessions to forestall worsening economic outcomes.

Lastly, these types of stimulus payments are needed because the United States does not have a robust system of automatic stabilizers and social infrastructure. These one-off stimulus payments are inefficient because of the time it takes to pass new legislation and because they are often poorly targeted. Policymakers should explore how to automate programs that mitigate negative consequences for families and workers during economic downturns, as well as foster overall economic security by building up our social infrastructure.

Indeed, the inadequate state of U.S. social infrastructure and lack of automatic stabilizers may well explain why U.S. households spent more of their stimulus money than households in other countries. They needed to because they were economically more precarious when the COVID-19 recession hit. Further research on the potential built-in resiliency of U.S. workers and their families amid an economic crisis by enacting robust automatic stabilizers and social infrastructure will help policymakers design these programs for possible implementation.

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Equitable Growth names Shayna Strom as interim president and CEO

Posted on by Emilie Openchowski
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The Washington Center for Equitable Growth today announced that Shayna Strom has been named its interim president and CEO. Strom comes to the organization with decades of experience bridging nonprofits, government, philanthropy, and academia, along with a deep commitment to fostering economic growth by addressing inequality.

“I am honored to join the Washington Center for Equitable Growth as its interim president and CEO,” Strom said. “Equitable Growth’s mission is more important than ever—to support research that shows how inequality affects economic growth and to promote policies reflecting that. I have long been an admirer of Equitable Growth’s work, and I am thrilled to contribute as interim president and CEO in its next chapter.”

“For nearly a decade, Equitable Growth has worked to advance ideas and policies that promote strong, stable, and broad-based economic growth,” said Equitable Growth Board member Steve Daetz. “Shayna brings a wealth of expertise from her time spent in government, nonprofits, and the academy that is critical in this role, and I am confident she will do an outstanding job leading Equitable Growth forward as one of the most influential economic research organizations.”

In addition to serving on the Biden-Harris transition team, Strom’s career in government includes 4 years working for the Obama administration, as an adviser to the head of the Office of Management and Budget and as chief of staff and senior counselor at the Office of Information and Regulatory Affairs, where she negotiated the policy and politics of many of President Barack Obama’s high-profile regulations. She previously served as counsel on the Senate Judiciary Committee for Sen. Al Franken (D-MN), where she worked on antitrust issues, among other topics.

Strom served as chief deputy national political director at the American Civil Liberties Union, where she helped launch a 75-person department focused on policy, issue campaigns, and grassroots organizing. She also served on the initial leadership team that set up the nonprofit organization Indivisible.

Additionally, Strom has taught at Johns Hopkins University, Sarah Lawrence College, and the Biden Institute at the University of Delaware. She was a 2021–2022 SNF Agora visiting fellow at Johns Hopkins University and a fellow at the Labor and Worklife Program at Harvard Law School. She has written and testified about labor policy and the changing workplace economy.

Strom graduated summa cum laude from Yale College, and received a J.D. from Yale Law School and an M.Sc. from Oxford University, where she was a Rhodes Scholar.

Strom will lead Equitable Growth as interim president and CEO while the national executive recruitment firm BoardWalk Consulting works to find the next permanent president and CEO.

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Measuring spending inequality in the United States in real time

Posted on by Emilie Openchowski
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The onset of the COVID-19 pandemic and the resulting recession in 2020, followed by a swift U.S. economic recovery, offer lessons today about why real-time data are so crucial to understanding the scale of an economic crisis and determining the appropriate government response. Policymakers would be helped immeasurably by greater access to data that allow them to gauge the efficacy of their policy decisions in real time. Especially crucial are data that show how U.S. households are affected by those decisions.

Yet there is little real-time aggregate consumer spending data or real-time data on spending inequality published by federal statistical agencies, academic economists, or private actors. The main government survey that is used by the U.S. Census Bureau and the U.S. Bureau of Labor Statistics to estimate spending is the Consumer Expenditure Survey, which is released on a significant delay.

Without a real-time measure of spending inequality, academics and policymakers alike are blind to this important measure of economic activity before, during, and after an economic crisis. We created Real-Time Spending Inequality, a new web-based project, to fill this gap, providing timely updates on the status of U.S. consumer spending inequality. Our first data release and report, updated quarterly, covers the first two years of the ongoing pandemic, starting in January 2020 and currently updated through April 2022.

We use data provided by Earnest Research to analyze transaction-level data from credit cards, debit cards, checks, store cards, and bank account transfers from a panel of more than 10 million U.S. households. The ultimate source of the data is an anonymous large personal finance and payments aggregator.

These data include both expenditures and inflows of income into bank accounts. And importantly, the account aggregator data contain information on all accounts, even if the individual U.S. household has accounts at multiple financial institutions. The dataset spans the time period of January 2018 to the present and is updated in near real time.

To study spending inequality, we sort individual U.S. households into quartile cohorts based on their 2019 annual income and then calculate the average amount of spending and spending growth for these different cohorts over time. Our primary measure of spending is year-over-year total spending growth, which compares spending of the cohorts in a week to their spending a year ago in the same week. Looking at year-over-year spending automatically adjusts for seasonality in our data.

In addition to looking at these 1-year-before comparisons, we also chart how consumption has changed compared to the same week in 2019, instead of the year before. These graphs (Figures 3 and 4 in this column) show how spending compares only to 2019, before the pandemic introduced enormous distortions into the economy.

Our first finding is that spending inequality decreased in 2020 and 2021, but is rising in 2022. During calendar year 2020, we find a hierarchy of spending growth: The lowest income quartile, earning between $10,000 and $35,000 annually at the time, shows the highest spending growth, followed by the next three quartiles in succession ($35,000 to $66,000, $66,000 to $115,000, and more than $115,000, respectively).

Average year-on-year spending growth is 16 percent for the bottom 25 percent of income-earning households in 2020, compared to 6.5 percent for the top 25 percent. In 2021, average year-over-2019 spending growth for the bottom quartile was 35.3 percent, compared to 15.3 percent in the top quartile. For 2022, year-over-2019 spending growth was 32.7 percent for the bottom income quartile, compared to 19.7 percent for the top. (See Figure 1 and Figure 3 below.)

Figure 1

Spending by the bottom 25 percent of U.S. households by income increased the most over the course of the COVID-19 pandemic

Growth in spending by U.S. households, by income quartile, compared to the same week in 2019, from January 2020 to March 2022

Growth in spending by U.S. households, by income quartile, compared to the same week in 2019, from January 2020 to March 2022
Source: Loujaina Abdelwahed and others, “Real-time Spending Inequality” (n.d.), available at https://spendinginequality.org/.

To visualize how the surge in spending by U.S. households in the lowest quartile of income impacted consumption inequality, we also compute the ratios of spending by the high-income cohort to that of the low-income one, and then track the year-on-year growth rate of the ratios. We find there is a marked decrease in total spending inequality during 2020 and 2021, with the ratio of total spending by the highest-income quartile of households to spending by the lowest-income quartile of households declining by as much as 28 percent in 2020.  

The year 2021 saw a continued substantial decline in spending inequality, with an average decline in the ratio of spending by the bottom quartile of income-earning households and the top quartile of 14 percent over 2019 levels. Through the first 3 months of 2022, when most of the pandemic-induced government income support programs were ending, there was a moderate rise in spending inequality. The average income-quartile-4-to-income-quartile-1 ratio was 9.2 percent less in 2022 than the same week in 2019, compared with -14 percent in 2021. (See Figure 2 and Figure 4 below.)

Figure 2

The ratio of spending by high-income U.S. households to that of lower-income ones fell significantly amid the COVID-19 pandemic

Ratio of growth in spending by U.S. households, by income quartile, compared to the same week in 2019, from January 2020 to March 2022

Ratio of growth in spending by U.S. households, by income quartile, compared to the same week in 2019, from January 2020 to March 2022
Source: Loujaina Abdelwahed and others, “Real-time Spending Inequality” (n.d.), available at https://spendinginequality.org/.

Our analysis of this dataset enables us to examine the effectiveness of the stimulus payments that were sent to some U.S. households. We find that the stimulus payments contributed to reducing spending inequality.

Figure 3, which compares spending to the same week in 2019 only, shows that the three government stimulus payments are associated with large spending increases, yet the different groups are not affected equally. There is a hierarchy of spending: The lowest income quartile shows the greatest jumps, followed by the middle income quartiles, and finally the highest income quartile with the smallest increase. For this analysis, we focus on the second and third stimulus payments, in December 2020­ and January 2021 and in March 2021, respectively, because the first stimulus payment in April 2020 occurred close to the start of the pandemic. (See Figure 3.)

Figure 3

Federal stimulus payments during the COVID-19 pandemic resulted in a consistent decline in spending inequality, compared to before the pandemic

Growth in spending by U.S. households, by income quartile, compared to the same week in 2019, from January 2020 to March 2022

Growth in spending by U.S. households, by income quartile, compared to the same week in 2019, from January 2020 to March 2022
Source: Loujaina Abdelwahed and others, “Real-time Spending Inequality” (n.d.), available at https://spendinginequality.org/.

The second stimulus payments were sent out in December 2020 and January 2021, with up to $600 paid out to eligible U.S. households. Around the time of the payment, spending growth by those in the lowest-income quartile increased from 21 percent before the stimulus payments were sent to 42 percent afterward. The highest income quartile experienced more moderate spending growth, from 9.7 percent to 23 percent. 

The third stimulus payment of up to $1,400 for eligible U.S. households was sent out in March 2021. Spending growth by the lowest quartile increased by 35.2 percentage points around these payments, compared with 11.7 percentage points by the highest income quartile. (See Figure 4.)

Figure 4

The three federal stimulus payments during the COVID-19 pandemic led to substantial decreases in spending inequality

Ratio of spending growth by high-income households to low-income households, by income quartile, compared to the same week in 2019

Ratio of spending growth by high-income households to low-income households, by income quartile, compared to the same week of 2019
Source: Loujaina Abdelwahed and others, “Real-time Spending Inequality” (n.d.), available at https://spendinginequality.org/.

Our analysis of the data in Figure 4 finds that the ratio of spending inequality between the lowest-income quartile of U.S. households and the highest quartile decreased by 4 percent pre- to post-stimulus payment for the second stimulus payment of up to $600. The third stimulus payment of $1,400 was associated with an even more dramatic decline in inequality, with the same ratio decreasing by 25 percent pre- to post-stimulus payment.

Going forward, we will continue to use real-time data at Real-Time Spending Inequality to study how spending inequality evolves as the U.S. economy continues to recover from the pandemic. Our next report will focus on the effects of the federal Child Tax Credit on spending inequality, as well as how inflation is shaping spending patterns across the income distribution.

As the U.S. economy and society enter the third year of the pandemic, fast-moving events continue to point toward the importance of real-time data in understanding the state of the U.S. economy and the impacts of economic policies and critical U.S. social infrastructure. While the federal government has made important steps forward in collecting real-time data, the substantial lags at which consumption inequality data is available should move policymakers to use alternative data sources to study this crucial measure of our well-being.   

—Loujaina Abdelwahed is an economist at The Cooper Union. Jacob Robbins is an economist at the University of Illinois-Chicago. Cole Campbell, Shogher Ohannessian, and Todd Czurylo are Ph.D. candidates in economics at UI-Chicago.

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New research suggests that social circles affect upward mobility among U.S. children and young adults

Posted on by Emilie Openchowski
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In recent weeks, students across the United States headed back to school to continue their educations. From Kindergarten through high school and into college, these students are gaining valuable human capital that will help prepare them for their future careers and are building their knowledge base, as well as the social circles that will accompany them through their years of learning ahead.

While studying hard and getting good grades certainly has an impact on students’ future success, new findings from a pair of research papers suggests that who one studies and becomes friends with can also have important implications for upward economic mobility, particularly among lower-income children. Indeed, the studies find that if low-income children grew up in neighborhoods where 70 percent of their friends were from higher-income families, the lower-income children’s future incomes went up by an average of 20 percent.

The papers suggest that this boost in income is driven by so-called economic connectedness—a kind of social capital that looks at the proportion of children from low socioeconomic status who have friends from high socioeconomic backgrounds. In fact, the studies find that economic connectedness is the strongest predictor of upward mobility—more so even than other oft-studied mobility factors, such as neighborhood income level, poverty rates, family structures, or school quality—and is the main reason why some places offer higher rates of mobility than otherwise-similar places. The studies also explain that high schools and colleges both prove to be important places to build and foster these connections.

The link between social capital and upward mobility has been examined before, but the two new papers do so on an unprecedented scale. The four lead co-authors—Raj Chetty of Harvard University, Matthew Jackson of Stanford University, and Theresa Kuchler and Johannes Stroebel of New York University—worked alongside a team of researchers to examine anonymized data from Facebook for more than 70 million individuals and 21 billion friendships. Because the amount of data was so large, the authors were able to measure the link between social capital and upward economic mobility better than ever before, thus allowing them to identify economic connectedness as the most relevant factor to achieving improved outcomes in the future.

In the first paper, the authors measure and analyze three types of social capital by U.S. ZIP code using the Facebook data: connectedness between different types of people, including economic connectedness, or friendships between low- and high-income people; social cohesion, or the level of connection between one’s social circles; and civic engagement, such as rates of volunteering for or self-reported trust in local organizations. The co-authors find that economic connectedness is the strongest of the three in predicting whether someone from a low socioeconomic background as a child has a higher socioeconomic status as an adult.

To be sure, the other two types of social capital matter as well. Yet the study suggests that in places where social cohesion and civic engagement are lacking, higher economic connectedness alone is enough to positively impact future economic outcomes.

The second paper by Chetty, Jackson, Kuchler, and Stroebel delves into how these so-called cross-class friendships actually form. The co-authors find that two main factors affect these relationships: exposure to socioeconomically diverse groups and friending bias, or the tendency for low socioeconomic status children to befriend high-income children at lower rates, even after exposure.

The research team explains that while both exposure and friending bias matter about equally in determining the proportion of high-income friends that low-income students have, exposure is the critical first step. After all, a willingness to become friends with people from different backgrounds can only be acted upon if the opportunity to meet each other happens first.

The co-authors then look at where children actually make friends, finding that high schools and colleges are critical places that enable exposure to socioeconomically diverse groups—that is, if the schools are sufficiently diverse. Yet many schools and districts in the United States are highly segregated by race and, increasingly, self-segregated by income—meaning opportunities for exposure are more and more limited for these children.

Though the study does not look specifically at the racial breakdowns of friendships—an important limitation to keep in mind—it remains an important reminder of why efforts at integration in schools are so beneficial, and segregation so deeply harmful, for U.S. children. The team of researchers makes several suggestions for how to better strengthen engagement and increase cross-class friendships, such as changing how students are grouped together in school, how school campuses are designed, where public spaces such as parks and libraries are located and what activities they offer, and which extracurriculars are encouraged and available.

post

In Conversation with Raj Chetty

By Heather Boushey,

April 24, 2019

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Low intergenerational mobility in the United States shows impact of race and public policy

By Liz Hipple,

May 30, 2019

report

Are today’s inequalities limiting tomorrow’s opportunities?

By Elisabeth Jacobs, Liz Hipple,

October 3, 2018

But the co-authors also caution that integration must go beyond simply ensuring race and class diversity or bringing people together. For policies that promote integration to really have an impact, they must allow for meaningful interaction, personal development, and shared power and goals. And they must be done in coordination with other efforts to strengthen the financial well-being of lower-income Americans.

Simply put, cross-class friendships are not a substitute for policies that strengthen U.S. schools, boost U.S. workers’ earnings and bargaining power, or facilitate wealth-building for those who have historically been prevented from such opportunities.

While it remains unclear why having higher-income friends matters, other research does suggest some potential explanations. For instance, having friends from higher socioeconomic status—or friends whose parents completed college—can influence a child’s own expectations about going to college. These parents and their broader social networks also can serve as role models, exposing children to new career paths and opportunities, and even helping place them in relatively well-paying jobs. Studies also show that having higher-income friends can strengthen a lower-income child’s cultural capital, which can signal to potential employers a good cultural fit in prestigious, high-paying occupations.

Ultimately, the findings underscore that it’s not only what you know, but who you know, that matters. Policymakers in the United States should keep these two new papers in mind as they craft proposals seeking to boost upward mobility and address growing income inequality.

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How corporate governance strategies hurt worker power in the United States

Posted on by Emilie Openchowski
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Researchers studying the decades-long rise in earnings inequality and wage stagnation in the United States point to a number of reasons why the country’s income divide grew over the past 40 years or so. Declining union membership, racist labor policies, and changes in the industrial composition of the United States, for example, all have been found to be important drivers of economic disparities.

In addition to these trends and intentional policy choices that make workers worse-off, social scientists are studying how corporate governance affects workers’ wages, employment, and ability to bargain collectively. These researchers are also looking into how the rise of shareholder value as the main objective of U.S. corporations relates to income inequality, productivity, and labor’s share of economic growth in the United States. This research offers evidence that the rise in shareholder power reinforces the impacts of the decline of the U.S. labor movement—a decline that has had broad spillover effects across the country’s economy and has limited workers’ ability to share in the gains of the economic value they create.

How corporate governance strategies hurt worker power in the United StatesDownload

In this issue brief, we examine a series of important changes to corporate governance in the United States between the 1970s and 1990s, the simultaneous decline in the country’s job quality and worker power, and the relationship between the two trends. Specifically, we discuss some of the academic evidence on the relationship between the rise of shareholder primacy, new management practices, and workers’ labor market outcomes. We then turn to policy recommendations that have the potential to strengthen labor vis-à-vis shareholders—a set of proposals that would rebalance bargaining power in the labor force, boosting productivity and promoting broadly shared economic growth. 

How maximizing shareholder value became the main objective of U.S. corporate governance

“Shareholder primacy” is an economic and legal theory that proposes that maximizing wealth for shareholders should be the main, if not the sole, objective of publicly traded companies. This framework became the dominant model driving corporate governance in the United States beginning around four decades ago, gaining prominence as a number of economic, social, and academic shifts allowed it to displace the “managerialist” philosophy that guided public companies’ decision-making processes during the mid-20th century. 

As legal scholar Lynn Stout explains, for most of the post-World War II era, large U.S. corporations generally thought of themselves as serving the interest of a wide variety of stakeholders—customers, suppliers, workers, and local communities. Yet between the 1970s and the 1990s, maximizing shareholder value came to trump every other corporate interest and priority.

A number of economic changes led to the growth of shareholder primacy. In the 1970s, for example, corporations began to look for new business models after facing several economic crises, alongside an increase in international competition in industries such as car manufacturing and consumer electronics, and poor performance as companies grew too big. At the same time, William Lazonick at the University of Massachusetts and Mary O’Sullivan at the University of Geneva propose, there was a shift in the distribution of stockholding away from households and toward large institutional investors. This occurred as the U.S. financial sector loosened restrictions on the extent to which life insurance companies and pension funds could own corporate equities. Indeed, the share of U.S. corporate equities held by institutions soared from 10 percent in the early 1950s to more than 60 percent in the early 2000s. 

As shareholders in general—and institutional investors in particular—came to have greater influence over business operations, U.S. corporations underwent a series of changes. Executives and managers looked to maximize shareholder value by increasingly engaging in mergers, downsizing their workforces, deploying de-unionization tactics, and increasingly using corporate funds for shareholder payments in the form of stock buybacks and corporate dividends. As the interests of shareholders and executives became more tightly aligned through equity-based and other incentive pay schemes, the compensation of executives skyrocketed.

U.S. job quality and workers’ bargaining power simultaneously declines

Meanwhile, economic sociologists Neil Fligstein and Take-Jin Shin at the University of California, Berkeley write, the advent of shareholder primacy meant that publicly traded firms increasingly perceived workers as input costs rather than as contributors to be included or considered in the corporate decision-making process.

As such, overall job quality in the United States started to decline in the late 1970s. Real wages for nonsupervisory workers started to fail to keep up with productivity gains. Union membership shrunk from more than 20 percent in 1983 to 10 percent in 2021. A variety of factors, including international trade, ineffective labor laws, increasingly hostile labor-management relations, and deindustrialization and the decline of manufacturing, reinforced one another and exacerbated the decline of institutionalized worker bargaining power in the final decades of the 20th century. 

Playing into this changing economic landscape, according to David Weil at Brandeis University, was a fundamental change in the way firms organized themselves and structured their workforces. This so-called fissuring of the workforce describes how big firms stopped directly employing workers that perform roles outside the core competency of their businesses. Janitorial services, for example, were largely transferred to a smaller network of firms through arrangements such as subcontracting and franchising, allowing large corporations to avoid the costs and obligations of traditional employment relationships with their janitorial staff. For workers, this shift generally resulted in lower compensation, less access to employer-provided benefits, fewer opportunities for career advancement, and greater vulnerability to labor law violations.  

Similarly, Arne Kalleberg at the University of North Carolina at Chapel Hill and David Howell at the New School University argue that the rise of the financial sector and the prevalence of shareholder value strategies in the United States contributed to the erosion of labor market institutions, including the fall in the real value of the minimum wage, weakening union bargaining power, and the decline in the protective effect of laws and regulations that govern employment relationships.

Christopher Kollmeyer at the University of Aberdeen and John Peters at Laurentian University likewise find evidence that between the early 1970s and the early 2010s, U.S. corporate governance strategies that shrunk labor costs and redirected resources away from productive investment contributed to the decline in union density in a number of high-income countries, including the United States.    

To be sure, firms’ growing concern with maximizing shareholder value was not the only important change in U.S. business strategies between the 1970s and 1990s, let alone in the U.S. economy writ large. Yet there is evidence that the advent of shareholder value as the most important concern for corporate governance had important effects on wage growth, income inequality, and workers’ ability to bargain for better workplace conditions in the United States. 

Empirical evidence demonstrates that shareholder primacy lowers workers’ wages and worsens employment outcomes

While several scholars have long proposed that the rise of shareholder power affects workers, recent empirical studies contribute to the academic understanding of the size and importance of shareholder power’s effect, and the precise mechanisms through which shareholder primacy influences labor market outcomes.

For example, an analysis by José Azar of the University of Navarra, Yue Qiu of Temple University, and Aaron Sojourner of the Upjohn Institute finds that greater common ownership in a labor market—or the concentration of investment positions of public companies in the hands of a few large institutional shareholders—is associated with both lower wages and a lower employment-to-population ratio. With about 1 in 3 U.S. private-sector workers employed in publicly traded firms, the concentration of shareholders across firms through common ownership by institutional investors could play a significant role in the overall structure of the labor market.

Likewise, in a new working paper, Antonio Falato of the Federal Reserve Board, Hyunseob Kim at the Federal Reserve Bank of Chicago, and Till von Wachter at the University of California, Los Angeles examine the relationship between shareholder power and workers’ earnings and employment. The authors find that as establishments experience an increase in ownership by institutional shareholders, they also experience a decline in employment and payroll costs. This finding holds both at the establishment and the industry level.

Moreover, Falato, Kim, and Von Wachter find that an increase in ownership by institutional shareholders explains about a quarter of the decline in the ratio of total wages and salaries to Gross Domestic Income—a metric that has seen an important drop in the past four decades— between 1980 and 2014. (See Figure 1). 

Figure 1

Percent of U.S. Gross Domestic Income paid to workers in wages and salaries, 1980–2021

Lenore Palladino at Smith College also studies the relationship between profits, shareholder payments, and wage growth, finding that as shareholder payments as a percent of companies’ profits grew, the share of profits that went to workers’ wages declined. In addition, through firm-level empirical analysis and accounting for macroeconomic factors and a number of firm-specific characteristics, Palladino shows that as shareholder payments as a portion of operating expenses increased between 1984 and 2017, wages paid to workers fell. 

Evidence also shows that as shareholder primacy and the financialization of the U.S. economy more broadly influence workers’ outcomes, these trends also contribute to widening racial and gender inequality in the U.S. labor market. Indeed, a team of researchers finds that between the 1980s and the 2010s, the pay for workers in managerial occupations did not only outpace the pay of workers in other types of jobs, but White and Latino men also have benefited disproportionately from this financial and managerial wage premium. 

Business practices that lead from shareholder primacy to inefficient and inequitable workplace outcomes

What mechanisms underlie the effect of shareholder primacy on workplace outcomes? One body of research looks at the role of managers and management practices. Indeed, it appears as though the rise of the shareholder primacy ethos, as taught in business schools, has reduced any tendency toward rent-sharing with workers. Following the guidance of economist Milton Friedman, who proclaimed “the social responsibility of businesses is to increase profits,” business school philosophy tends to view workers as costs rather than stakeholders.

For example, Daron Acemoglu of the Massachusetts Institute of Technology, Alex He of the University of Maryland, and Daniel le Maire of the University of Copenhagen investigate how the rising number of managers with business degrees affects wages within workplaces in both the United States and Denmark—a research strategy that isolates policy and institutional landscapes across two different countries. The authors find that a greater proportion of managers with business degrees is associated with lower worker wages.

Acemoglu, He, and le Maire also are able to causally estimate this impact by looking at scenarios in which there is a retirement or death and a manager without a business degree is replaced by another person with a business degree. In the United States, the authors find that the appointment of a manager with a business degree results in a 6 percent decline in wages in the following 5 years. The authors estimate that these dynamics explain 15 percent of the slowdown in wage growth and 20 percent of the decline in the labor share in the United States since 1980. 

What’s more, the increasing preponderance of managers with business degrees is not associated with higher firm output or productivity.  

Policy proposals to return bargaining power to workers and foster broadly shared economic growth

Most evidence shows that efforts to maximize shareholder value do not just hurt workers’ labor market outcomes and lead to an increase in economic inequality, but also do little to increase firm profitability. Further, research suggests the shift toward shareholder primacy is a drag on economic growth. In Equitable Growth-funded research, for example, Florian Ederer of Yale University and Bruno Pellegrino of the University of Maryland find that common ownership—an ownership arrangement where a few institutional investors hold investment positions in a number of competing firms—reduces competition between firms, similar to monopolization, and decreases overall economic welfare across the U.S. economy. 

The promise of broadly shared growth in a market-based economy can only be realized in a legal, economic, and institutional context that supports worker power to offset the inefficient tendency toward inequality and wealth-hoarding under financial capitalism. In the current environment of shareholder primacy, research shows that these tendencies result in declining wages, deadweight loss, and a distorted distribution of economic value.

Measures to reinforce countervailing worker power include policies that will restore the strength and presence of unions in the United States. The decline of unions is associated with a variety of deleterious impacts for the U.S. economy. Reforming labor law to make worker organizing easier—such as provisions in the Protecting the Right to Organize, or PRO, Act that protect the right to strike, ensure union elections are fair, and make it harder for companies to misclassify their workers as independent contractors—would help restore union density.

Another effective measure is to increase worker and union representation on corporate boards. Research by Simon Jäger of the Massachusetts Institute of Technology, Benjamin Schoefer of the University of California, Berkeley, and Jörg Heining of the German Institute for Employment Research finds that so-called co-determination—or when workers have secured spots on company boards—does not diminish firm performance but does, in fact, diminish the likelihood that a firm will outsource work, without impacting wage levels.

Sectoral bargaining, where multiemployer groups bargain with unions for an entire employment sector in a specific location, and wage boards that include union representation would also provide a much-needed counterbalance to corporate strategies that push managers to cut wages and exploit workers. 

Another piece of the puzzle for restoring balance in the economy and ensuring robust, broadly shared growth is reforms that diminish the exploitative power of finance. This would set the U.S. economy on a path toward a system of so-called stakeholder capitalism, in which corporate strategy is reoriented toward the interests of all relevant stakeholders, including workers, suppliers, and local communities.

To accomplish these goals, limiting stock buybacks and establishing board fiduciary duty to stakeholders would help reshape corporate governance away from shareholder primacy. This, in turn, may help ensure that workers can share in the value they create, as well as offset the potential for negative externalities, such as environmental costs.

These proposals would go a long way to fostering equitable economic growth in the United States by boosting worker power and shifting corporate strategies away from policies that center shareholder primacy.

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Equitable Growth’s Jobs Day Graphs: August 2022 Report Edition

Posted on by Raksha Kopparam

On September 2, the U.S. Bureau of Labor Statistics released new data on the U.S. labor market during the month of August. Below are five graphs compiled by Equitable Growth staff highlighting important trends in the data.

Total nonfarm employment rose by 315,000 in August, and the employment rate for prime-age workers increased to 80.3 percent.

Private-sector employment continued to rise in August, while public-sector employment has recovered more slowly and remains below pre-pandemic levels.

The unemployment rate increased to 3.7 percent in August and remains higher for Black workers (6.4 percent) and Latino workers (4.5 percent), compared to White workers (3.2 percent) and Asian American workers (2.8 percent).

Employment in many sectors is now back to or surpassing pre-pandemic levels, including construction, retail, and educational services, but employment in leisure and hospitality has yet to recover.

The unemployment rate rose to 6.2 percent for workers with less than a high school degree and 4.2 percent for high school graduates, but is just 2.9 percent for workers with some college and 1.9 percent for college graduates.