The American Sociological Association held its 117th Annual Meeting from August 5–9, 2022 in Los Angeles, California. This event gathers sociologists and those involved in the scientific study of society every August to share their work and learn from each other in nearly 600 different sessions, collaborating and growing the sociological research field.
This year’s ASA theme, chosen by the president of the association each year, was “Bureaucracies of Displacement.” In her explanation of her choice, ASA President Cecilia Menjívar writes that the theme is a reflection of the many disparities—“social, legal, economic, political, physical, geographic, intellectual,” among others—that vulnerable populations experience, which were brought to light by the COVID-19 pandemic. She urges sociologists to “consider the role of the state in creating and amplifying the inequalities and inequities that a crisis makes so visible, and to provide a lens to examine long-term effects.”
With that in mind, Equitable Growth was excited to again participate in and contribute to this event. Grantees and members of our broader academic community were featured in at least a dozen different panels, roundtables, and paper sessions at this year’s ASA conference.
A few highlights:
A session titled “Wealth and Inequality,” looked into wealth inequality and its causes and consequences. Robert Manduca of the University of Michigan—a frequent guest author for Equitable Growth—discussed his research on how expectations about future events are a fundamental part of determining one’s net worth and presents a “future-oriented” perspective on wealth. Equitable Growth grantee Fabian Pfeffer, also of the University of Michigan, presided over the session and served as a discussant.
“Inequality and Job Quality” was a paper session featuring research on access to good jobs in the U.S. economy, highlighting the role of intersectional inequalities in shaping labor market outcomes and the relationship between job quality, inequality, and social change. Equitable Growth grantee Janet Xu of Harvard University presented her Equitable Growth-funded research, which studies the effects of the reputation of diversity scholarships and pipeline programs on labor market outcomes for recent college graduates. Two-time Equitable Growth grantee Nathan Wilmers of the Massachusetts Institute of Technology presented a co-authored paper on wage growth strategies for non-college-educated workers.
A thematic session, “The Far-Reaching Impact of Job Precarity and Displacement,” examined the risks and outcomes—socioeconomic, health, and others—for workers who experience job instability, many of whom tend to be workers of color and those with lower levels of human capital. The panel discussion featured Equitable Growth grantees David Pedulla of Harvard University and Cristobal Young of Cornell University, alongside Allison Pugh of the University of Virginia and Pennsylvania State University’s Sarah Damaske.
“Causes and Consequences of Poverty” was a paper session focused on individual and household material hardship and how that informs sociologists’ understanding of inequality and mobility. In this session, Equitable Growth grantee Jasmine Hill of the University of California, Los Angeles presented her paper on institutions’ role in perpetuating racial inequality in the U.S. labor market in the neoliberal era.
The paper session titled “Gendered and Racialized Organizations” centered around research on intersecting inequalities in workplaces, academia, and other institutions, including those seeking to challenge theories of gendered or racialized organizations. Equitable Growth grantee and incoming ASA President-elect Joya Misra of the University of Massachusetts Amherst presented her co-authored study of the intersectional experiences and challenges faced by faculty (mostly women of color) in science, technology, engineering, and mathematics departments.
Equitable Growth also organized a half-day training course for the first time at the ASA conference. The session, titled “Getting the Grant: Understanding Private Funder Requirements and Grant Writing Strategies,” was targeted at researchers who wanted more details on how to apply for funding from a philanthropic organization. Equitable Growth’s Director of Academic Programs Korin Davis led the workshop, alongside Stephen Glauser of the Russel Sage Foundation, Jenny Irons of the William T. Grant Foundation, and OiYan Poon of The Spencer Foundation. The funders discussed best practices for developing and writing a successful grant proposal, as well as their organizations’ funding priorities and grantmaking processes, and led the participants in peer review exercises to build their grant-writing skills.
The session also featured presentations from several of the foundations’ grant recipients, including Equitable Growth grantee and the University of Michigan’s Pfeffer, as well as the University of Southern California’s Ann Owens, UC Irvine’s Kristin Turney, and New York University’s R. L’Heureux Lewis-McCoy. The grantees each provided insight into their experience with application and review processes as grant-seekers and external reviewers.
Over the course of the conference, Equitable Growth was able to raise our visibility among sociologists and learn about cutting-edge research on inequality and growth. We hope to further our participation in future ASA annual conferences.
As families in the United States grapple with rising prices and ongoing supply shortages, fiscal and monetary policymakers are shifting their focus from the COVID-19 recession and recovery to the ongoing issue of inflation. Headline inflation was 8.5 percent in July 2022—cooling slightly from earlier in the year—while core inflation, which excludes volatile energy and food prices, neared 6 percent.
While policymakers and economists are in the middle of a heated debate on the efficacy, relative dangers, and potential benefits of interest rate increases to address inflation, less attention is being paid to the sector-specific impacts of interest rate hikes and a subsequently cooling labor market. One particularly overlooked sector is child care, which has yet to fully recover from the COVID-19 recession and remains particularly exposed to the ebbs and flows of the macroeconomy.
As the Federal Reserve Board’s Federal Open Market Committee considers further rate increases in the coming months, it should weigh the potential impact on the child care sector, which underpins much of the rest of the U.S. economy and, as such, the country’s ability to achieve broad-based economic growth. Meanwhile, policymakers who control fiscal policy should make targeted, public investments in the stability of child care to minimize the damage that potential rate hikes could inflict on an already-fragile market.
This column looks at the state of the child care industry in the United States, the impact of a recession on the weakened care economy, and the details of policy actions that policymakers can take to protect the industry from collapse—thus protecting the broader U.S. economy as well.
The strong overall U.S. labor market masks fragilities in the child care sector
In July 2022, the economy added 528,000 new jobs while the unemployment rate ticked down to 3.5 percent. While some at the Federal Reserve suggest the U.S. labor market is “strong enough” to handle higher interest rates, these topline numbers mask lingering weaknesses in certain sectors.
Despite a slight uptick in hiring this summer, child care is still missing more than 8 percent of pre-pandemic jobs, even as the rest of the private sector has completed its recovery. (See Figure 1.)
Figure 1
Even prior to the onset of the COVID-19 pandemic, the supply of child care could not meet the demand for care in most communities in the United States. While low unemployment in the broader economy provides the Federal Reserve some space to pump the breaks on the labor market—and, in turn, slow down wage growth and consumer demand—doing so while the child care sector is still lagging will only exacerbate the child care supply problem.
Interest rate hikes may only exacerbate these problems. Decreasing the demand for labor and cooling the overall economy will likewise cool upward pressure on wages across the economy, which was just beginning to translate to higher salaries for child care staff. And by increasing the cost of borrowing and investing, the Federal Reserve also is making it more expensive for would-be child care providers to access the capital—for example, small business loans—they may need to open or re-open their businesses and expand the market.
Unprecedented fiscal investment in the broader economy during the COVID-19 crisis propelled a historically rapid employment recovery, yet those gains have not yet translated to the child care sector. To bring about a recovery in child care that parallels that of the broader economy, it is important to increase public investment—even more so if interest rates increase further.
The child care sector, still recovering from the previous recession, may not survive the next one
The aggregate strengths of the current economy have emboldened policymakers to tackle inflation more aggressively, even as Federal Reserve Chairman Jerome Powell acknowledges that a “soft landing”—in which inflation cools without significant harm to the economy—is far from guaranteed. Indeed, fears of a recession are growing among economists, even as other reliable indicators of recessions show it is not inevitable.
As discussed above, the U.S. child care sector is still in the midst of a delayed recovery from the COVID-19 recession. Slowing demand in the economy with interest rate increases could also cool demand for child care services. Since the child care sector is having trouble meeting current demand, some may say that a recession would provide some much-needed relief: Unemployed parents pull their children out of care, decreasing competition for limited slots and, potentially, lowering prices as well.
Yet this view is short-sighted. Reducing both the incentive and the resources for providers to hire staff and open new facilities will further exacerbate the nationwide child care supply crisis. Once the broader economy recovers, the child care sector will be in an even worse position than it is today.
While children always need care regardless of the state of the economy, the child care industry is not recession-proof. Reliance on parental fees leaves the child care market particularly exposed to broader economic trends. When parents are laid off, they often can no longer afford child care and may take their children out of care. Because profit margins for child care providers are so thin, if even just a few parents pull their children from care, then the provider may need to lay off staff—or even temporarily suspend operations entirely—to stay in the black. This makes care harder to find, especially for parents who remain employed and want to keep their children in care to be able to go to work.
It is true that demand for child care likely exceeds supply currently, but this may not ensure the market against the scenario described above. Indeed, demand for child care exceeding supply is not a new trend, and it has not served as a buffer against the rise and fall of the business cycle in the past.
Research by Jessica H. Brown from the University of South Carolina and Chris M. Herbst from Arizona State University, for example, demonstrates how this exposure to the macroeconomy has played out in periods of economic contraction in the decades prior to the COVID-19 pandemic: Every 1 percent decline in a state’s overall employment is associated with a 1.04 percent decline in child care employment, but every 1 percent increase in a state’s overall employment is only associated with a 0.75 percent increase in child care employment. Even when the economy is in recovery and newly employed parents wish to enroll their children back in care, there are inherent delays while the child care industry rebuilds capacity that was lost during weaker economic times.
Providers’ financial health also often depends on attracting the correct mix of clients based on subsidy status, age range, and even personal relationships. Profits made on preschool-age children, for example, are often used to subsidize the care of infants and toddlers, which is more expensive to administer. A decline in demand among a key group of clients could offset even excess demand among another group. Simply put, not all demand is of equal value to providers, and the uncertainty and instability that rising unemployment may pose is not something the struggling industry can easily afford.
Policymakers can take small steps to protect child care while tackling inflation
Further public investment in care remains the first and best solution for revitalizing the child care market, increasing care workers’ wages and the quality of care, and lowering prices for families in the United States. These long-overdue investments would bolster economic growth in the short- and long-term by expanding parental employment and contributing to the human capital development of today’s children and tomorrow’s workers.
Inflation may have some key policymakers hesitant about engaging in necessary and overdue child care reform. Fortunately, policymakers still could make some tweaks to the U.S. child care system that would bolster supply, sustain demand, and protect the sector from a cooling economy—while still attempting to slow inflation. These tweaks would be nowhere near as impactful as robust, sustained public investment, but that should not stop policymakers from exploring interim solutions to strengthen the child care sector so it can withstand any rate increases that come along.
Ensure parents continue to receive child care subsidy payments throughout the business cycle
Subsidies through the federal Child Care Development Block Grant help fund child care services for millions of children across the country, but children can lose eligibility for these funds if their parents lose their jobs. During recessionary periods, this can lead to revenue losses and financial instability for child care providers. Because child care is such a low-profit and often-tenuous business model, even small fluctuations in revenue can threaten the overall stability of the sector.
Under current law, children are eligible for subsidies if their parents are engaged in one of three allowed activities: employment, school, or job training. Some states also consider looking for work an eligible activity, allowing parents the time they need to focus on their job search, though they can end subsidy payments if the parent has not found employment after 3 months.
Currently, there is bipartisan support in the U.S. Congress for expanding these allowable activities. Both the House-passed Build Back Better Act and the Child Care and Development Block Grant Reauthorization Act of 2022, which was introduced by Sens. Tim Scott (R-SC) and Richard Burr (R-NC), expand federal eligibility to subsidies for parents who are looking for work, self-employed, on Family and Medical Leave Act unpaid leave, or undergoing health treatment, among other work-limiting situations.
Adopting these expanded activities would ensure that all states consider job searching an eligible activity for child care subsidies, an important lifeline for both U.S. families and providers should rate hikes lead to a period of higher unemployment. Since research shows that the likelihood of long-term unemployment increases with the overall unemployment rate, policymakers and regulators should also consider automatically expanding subsidy access for job-searching parents beyond the minimum 3-month window during recessions or periods of high unemployment.
Without additional funding from Congress, such changes to the block grant eligibility requirements would do little to expand the overall number of families receiving subsidies. But such tweaks would still assist job-seekers in accessing the child care they need in order to conduct a successful job search and ensure continuity of revenue for child care providers during economic downturns.
Build and maintain the supply of care by providing low-cost capital
With the child care market still reeling from the COVID-19 recession, further economic contraction could shrink the already-depressed supply of care, making it harder for working parents to find the care they need to go to work and potentially raising the cost of care for those families lucky enough to find an available slot.
Policymakers must be proactive in ensuring that current and potential child care providers can access the capital they need to start a new business or keep their doors open. Access to such funds may take the form of startup and expansion grants for new and existing providers—both of which are included in the Build Back Better Act and the Scott-Burr Child Care and Development Block Grant Reauthorization Act mentioned above—as well as child care revitalization funds, similar to the existing Restaurant Revitalization Fund, to help existing providers offset ongoing financial losses from the COVID-19 recession.
Policymakers can also ensure access to low-interest or zero-interest loans though the U.S. Small Business Administration or similar entities, so that providers expanding their services can access cheaper capital even as the Federal Reserve raises interest rates. Indeed, there is currently bipartisan support for a policy change that would allow nonprofit child care providers to access more lucrative and flexible SBA loans that are currently reserved for their for-profit counterparts.
Additionally, policymakers can provide countercyclical and flexible Child Care and Development Block Grant funding so eligible providers can offset potential revenue losses during recessionary periods. Through the COVID-19 recession, Congress authorized flexible funds to stabilize the child care industry on several occasions, but many providers were forced to close before those funds were made available. Proactively allocating additional resources tied to economic conditions—following a model of automatic triggers—would ensure that these funds are available whenever the economy begins to contract.
Prioritize retaining and expanding the child care workforce through financial support
Low wages across the child care sector mean that many workers are paying an effective wage penalty for taking on this critical job. Low wages make it harder for child care providers to hire staff and contribute to costly turnover. (See Figure 2.)
Figure 2
To ensure that the child care sector continues to recover from the COVID-19 recession without backsliding during any potential interest-rate-hike-induced economic cooldown, policymakers must take steps to preserve the workforce and reduce the wage penalty associated with the profession.
For child care workers and early education providers with college degrees, expanding and clarifying eligibility for loan forgiveness programs, similar to the Teacher Loan Forgiveness Program, would entice new graduates to enter the field and discharge their loans after 5 years. For workers without a degree or loans, subsidized education and qualification programs could help keep workers connected to the sector and improve quality in the longer term. Because the economic gains to workers from such programs are realized across several years, such policies would minimally impact existing inflation.
At the state level, some jurisdictions have made one-time “recognition” payments to members of the child care workforce. Research from a 2019 pilot program in Virginia, for example, found that offering workers payments of just $1,500 if they stayed with their employer over an 8-month period halved turnover among teachers at child care centers. While sustained wage increases are desperately needed, these relatively low-cost payments can help reduce costly turnover for employers and bolster the supply of care across the market in the short term. States could use remaining American Rescue Plan funds to make such payments without requiring any additional new money, and because payments are modest and targeted to a specific subsection of workers, they are also unlikely to induce consumer demand and inflation to a meaningful degree.
Without stabilizing and expanding the supply of child care, families should expect to pay more for harder-to-find care or forgo child care services completely—and even their own employment as a result—to the detriment of their economic security and the overall health of the U.S. economy.
Conclusion
Following the COVID-19 recession and amid the ongoing pandemic, the child care industry remains weak and vulnerable to shifting economic conditions. Policymakers eying rate hikes should not overlook their potential to further damage the child care sector in the United States.
Making sustained, robust public investments in care would go a long way to protecting the child care sector now and in the future, regardless of the rate of inflation or other macroeconomic conditions. Yet even small fixes can yield large dividends for the fragile child care market. The above policy recommendations are examples of modest tweaks policymakers can undertake today. The purpose of these policies is to support the child care sector so it can weather a potential economic downturn and the higher cost of capital due to rising interest rates.
Yet these proposals alone are insufficient to protect and restore a healthy child care sector in the long term. Until Congress commits to making the necessary investments to expand child care access, raise care workers’ wages, and lower families’ out-of-pocket child care costs, it must ensure that the already-struggling sector is not further harmed by the monetary policy choices of the moment. Inflation may be an important economic concern today, but high-quality and affordable child care has the potential to unleash economic growth that will be with us today, tomorrow, and for generations to come.
As inflationary pressure continues to cause higher prices for U.S. families, policymakers and economists alike continue to debate whether the United States is entering—or already entered, or will soon enter—a recession.
This debate is complicated because current economic indicators tend to disagree with one another and diverge from historical recession trends, obscuring a definite answer. Though the U.S. economy’s recent performance does satisfy the widely used two-quarter rule—in which two back-to-back quarters of shrinking Gross Domestic Product can indicate a recession—it is far from clear whether the economy is indeed contracting, especially considering the very robust current labor market. Just last week, the U.S. Bureau of Labor Statistics announced that the U.S. economy added 528,000 jobs in July 2022, an extremely strong number that would normally be associated with a roaring economy.
So, what is a recession, and how do we know when the U.S. economy is actually in one? Who decides when it starts and ends, and why is recession dating important? This factsheet answers these questions and more to shine a light on how recessions are dated and why recession dating is a complicated and necessary economic calculation.
What is a recession?
There are three characteristics that define a recession, according to the National Bureau of Economic Research, the entity that analyzes U.S. business cycles: Economic activity must decline significantly, broadly across the economy, and for more than a few months. More specifically:
A recession is essentially an economic contraction. That is, it indicates that the economy is actively getting smaller. It is not an analysis of the actual health of the economy but rather of the direction in which the economy is headed. If the economy is getting worse, then it is in a recession. If the economy is getting better—even if it’s very slow or starting from a bad place—then it is expanding.
A range of economic indicators contribute to the calculations of this activity, but generally, the result closely mirrors Gross Domestic Product. Some indicators that NBER specifically mentions are personal income less transfers, nonfarm employment, consumption levels, retail sales, employment, and industrial production, though that is not a comprehensive list.
What is the difference between a recession and a depression?
There’s no official definition of a depression. The term “depression” is usually reserved for especially deep recessions. A drop in GDP of 10 percent or more is one rule of thumb, and most people think of depressions as being more prolonged than recessions, which are typically relatively short. The previous U.S. economic depression was the Great Depression in the 1930s.
The Great Recession was not deep enough to qualify as a depression, even though it was the deepest U.S. downturn since the Great Depression. The COVID-19 recession was arguably deep enough to be considered a depression, but it was too short-lived.
Who decides when a recession begins and ends?
In the United States, the National Bureau of Economic Research has a standing committee that, since 1978, has been officially tasked with recession-dating responsibility. (The committee does not declare or date depressions, however.) The NBER president determines who sits on the committee, which currently includes Robert Hall of Stanford University, Robert J. Gordon of Northwestern University, James Poterba of the Massachusetts Institute of Technology, Valerie Ramey of the University of California, San Diego, UC Berkeley’s Christina Romer and David Romer, James Stock of Harvard University, and Princeton University’s Mark W. Watson. Committee members are typically macroeconomists and other researchers who study the business cycle.
Other important details include:
NBER is a private nonprofit research organization, not a government entity. But the recession dates that NBER calculates are considered official and are recognized by all U.S. federal economic agencies, including the U.S. Bureau of Labor Statistics, the U.S. Bureau of Economic Analysis, and others.
Other countries have adopted a similar model using official business cycle dating committees, including Japan, France, Spain, Brazil, and Canada. The United States is not unusual or unique in this regard, though in most other countries, the committees do not have as much official buy-in as NBER’s committee does.
How does recession dating work?
The NBER committee identifies a peak month in the economy using the economic indicators mentioned above; the recession begins in the month after that peak. The committee then identifies a trough month, usually several months after the trough has occurred; that trough month is considered the end of the recession.
When dating the COVID-19 recession, for example, the committee labeled the peak month as February 2020, meaning it dated the start of the recession as March 2020. The trough month was April 2020, which NBER considers inclusive, so the recession started at the beginning of March 2020 and ended at the end of April 2020, making it a 2-month recession.
Why not use the two-quarter rule?
While the two-quarter rule is a convenient monitoring tool for more casual economic observers, economists do not use it when officially analyzing business cycles and dating recessions because it is not a consistent method of recession dating. The 2001 recession, for example, did not feature two consecutive quarters of declining economic growth. Other indicators suggested a contraction in the economy, leading NBER to label it a recession, despite just one quarter of contracting GDP.
There also can be measurement errors in GDP calculations, which is why NBER does not date recession using solely GDP. The 2008 recession, for instance, like the 2001 recession, did not feature two consecutive quarters of decline at the time, though later revisions of GDP did show negative growth in this period. In 2008, NBER decided it was a recession even as the Bureau of Economic Analysis showed positive GDP growth, because the committee could see from other indicators that the economy was performing very poorly.
What’s more, countries that use the two-quarter rule sometimes have to subsequently “roll back” a recession date when later revisions show that GDP was not, in fact, declining in a particular period of time.
What about the Sahm rule, or alternative methods of recession dating?
The Sahm rule states that an economy has entered a recession when the 3-month average of the unemployment rate is half of a percentage point or more greater than its minimum over the past 12 months. It was not initially meant to be a way of dating recessions. Rather, it was intended to predict recessions before they start so policymakers could respond accordingly or as a trigger for automatic stabilizers to kick in.
The Sahm rule is a better predictor of recessions than some other commonly proposed methods—for example, the inverted yield curve, which is when the market rate for short-term borrowing exceeds that of long-term borrowing. Applying the Sahm rule to past recessions results in very few false positives.
Some economists—UC Berkeley’s Christina and David Romer, for instance—prefer deterministic models that remove components of human judgement. Others lean toward using slightly different groups of aggregate economic indicators.
The recessions these alternative models generate are usually very similar to those identified by the NBER dating committee. They are frequently touted as being faster than the NBER method, which often is decided on a significant lag to avoid having to change recession dates due to new or recalculated data. That is, other methods can produce dates for the recession just a couple months after the trough, whereas the NBER method sometimes takes a year or more.
How does inequality affect recession dating?
Inequality has a significant effect on recession dating. Economic growth calculations are typically done at the aggregate level, meaning that some demographic groups or geographic areas can still experience economic contraction even as the broader economy is growing and thus considered to be in an expansion. This data aggregation, coupled with the fact that more and more wealth and income is controlled by a smaller group of people, means that an expansion for the top income-earners can look, in aggregate, like an expansion for the entire economy—even if it isn’t.
In fact, this is similar to what happened during the Great Recession of 2007–2009. Initially, the bottom 50 percent of the income distribution fared relatively well, propped up by recovery packages and increased use of income support programs and other government transfers. Yet when these programs ended and U.S. policymakers turned toward austerity policies, the bottom 50 percent suffered. (See Figure 1.)
Figure 1
As Figure 1 shows, the bottom 50 percent entered a recession that was particular to them as a group, lasting from at least 2010 to 2013. Because the economy overall grew during this period—driven largely by growth in the top of the income distribution—this period is not a recession.
Why is recession dating important?
Different stakeholders have different reasons for caring about recession dating. It matters to macroeconomists, who investigate the causes and consequences of recessions and need to know how to specify whether certain observations in their data occur before, during, or after a downturn. More specifically:
Recessions can affect economic activity and household and business decisions—all of which can also impact inflation.
Recession dating is not meant to be a signal to the public or policymakers, though it has obvious political implications. Having a common understanding of when or whether a recession takes place prevents the possibility of politics obscuring the reality of the economic situation for U.S. workers and households for political gain.
The short answer is that it’s hard to say. While the two-quarter rule would indicate that it is, there has also never been a recession declared without a loss in employment—and the U.S. labor market is adding hundreds of thousands of jobs each month.
Additionally, while GDP did shrink over the past two quarters, a related indicator of economic growth—Gross Domestic Income, a measure of total output that aggregates income instead of production—suggests that the economy is growing. GDP and GDI should be equal to one another, but there is always a discrepancy between the two. Currently, the two measures are offering very different views of the economy, with GDP suggesting the economy is shrinking while GDI indicating the opposite.
What is clear is that if the U.S. economy does enter a recession—or if it already has and just hasn’t been announced yet—it will likely look very different from previous recessions.
The importance of the Inflation Reduction Act must also be gauged not just by how well it will deal with rising inflationary pressures but also how the proposed legislation addresses persistent and growing economic inequality in the United States. Over the past five decades, inequality soared while growth stalled. Despite promises to the contrary, the old prescription of tax cuts for the rich and reduced public investment are not working for U.S. workers and their families. (See Figure 1.)
Figure 1
This wide and growing income divide became painfully clear amid the COVID-19 pandemic, which immediately exacerbated longstanding economic divides, especially by race and gender. The federal government’s decisive action during the pandemic, especially the enactment of the Coronavirus Aid, Relief, and Economic Security, or CARES, Act in 2020 and American Rescue Plan in 2021, helped ensure a quicker and more equitable recovery than in the past. Yet neither law thoroughly addressed the long-term economic challenges posed by economic inequality.
The Inflation Reduction Act is a critical next step. The proposed legislation would make long-overdue investments in lowering prescription drug prices and making health insurance premiums more affordable. But the largest benefit is its proposed actions to mitigate climate change—which, the evidence shows, will pay long-term dividends in the form of strong, stable, and broadly shared growth. Key climate provisions include:
A tax credit for low- and middle-income Americans to buy used and new electric vehicles
Various rebates, credits, and grants to make homes more energy efficient
Support for the domestic manufacturing of solar panels, wind turbines, and batteries
An overarching focus on ensuring marginalized communities benefit from the transition to a clean economy
What’s more, the Inflation Reduction Act is fully paid for—and then some—by increased taxes on megacorporations, the wealthy, and tax evaders at the top of the income distribution. Equitable Growth grantees Daniel Reck at the London School of Economics, Max Risch at Carnegie Mellon University, and Gabriel Zucman at the University of California, Berkeley recently documented widespread tax evasion at the tippy top of the income ladder in the United States. They also estimate that more effective tax enforcement of the top 1 percent of income earners could yield an additional $175 billion in previously foregone federal tax revenue per year.
The Inflation Reduction Act would enable the IRS to go after this giant unpaid tax bill of the wealthiest among us to reduce the federal budget deficit and pay for the investments needed to tame inflation and build a more equitable, and thus much stronger, economy. The nonpartisan Congressional Budget Office conservatively estimates that providing these new resources to the IRS would result in $204 billion in gross revenue over 10 years.
The strong evidence base behind both the investment and revenue components of the bill is one reason former governmentofficials, budget experts, and academic economists—including seven Nobel laureates in economics and five John Bates Clark medalists—have all endorsed the proposed bill. And indeed, it’s clear that empirical economic evidence is playing a decisive role in the negotiations around the Inflation Reduction Act. It was economists who pushed back on the faulty logic that raising taxes on the wealthy and corporations or making long-term, high-return investments would exacerbate inflation—none of which is supported by the evidence.
Critics of the proposed legislation point to the American Rescue Plan, which they mischaracterize as the sole cause of rising inflation, to argue that more investments will lead to more inflation. Yet they conveniently fail to note that the American Rescue Plan and its predecessor, the CARES Act, helped to lay the groundwork for a robust recovery from the pandemic-induced recession, with 2021 growth in Gross Domestic Product and job creation both hitting levels not experienced by the United States in decades.
To be sure, pent-up demand soared among U.S. consumers, many of whom were registering the strongest wage gains in decades just as public health measures to fight the pandemic—in the form of the new vaccines and booster shots—enabled them to spend more. But the largest root causes of the latest bout of inflation are constrained global supply chains and soaring global energy prices brought about mostly by Russian President Vladimir Putin’s invasion of Ukraine in February.
Of course, the Inflation Reduction Act is not perfect. It notably leaves out many evidence-based policies that could spur more equitable growth and help combat current price pressures. Perhaps most disappointing is the lack of investment in critical social infrastructure, such as child care, home- and community-based services and supports for older adults and people with disabilities, paid leave, an expanded Child Tax Credit, and universal pre-Kindergarten. The United States is woefully behind the rest of the world on these policies, which is one reason female labor force participation has stalled or even regressed in recent years. (See Figure 2.)
Figure 2
Supporting families and caregivers would also increase the size of the U.S. workforce and the overall output potential of the U.S. economy, helping to address current supply constraints that are driving up prices and hampering growth.
At the end of the day, the Inflation Reduction Act is good for economic growth. But until policymakers in Washington enact paid family and medical leave, paid sick leave, universal pre-Kindergarten, and public child care and elder care, the United States won’t have the kind of equitable economy that powers more sustainable economic growth that U.S. workers and their families deserve.
On August 5, the U.S. Bureau of Labor Statistics released new data on the U.S. labor market during the month of July. Below are five graphs compiled by Equitable Growth staff highlighting important trends in the data.
Total nonfarm employment increased by 528,000 in July, and the employment rate for prime-age workers rose to 80.0 percent.
The unemployment rate decreased to 3.5 percent in July and remains highest for Black workers (6.0 percent), followed by Latino workers (3.9 percent), White workers (3.1 percent), and Asian American workers (2.6 percent).
Private-sector employment continued to rise in July, while public-sector employment has recovered more slowly and remains below pre-pandemic levels.
Involuntary part-time work, which represents part-time workers who would prefer full-time work, increased in July, but remains low relative to the past five years.
Unemployment rates are now 5.9 percent for workers with less than a high school degree and 3.6 percent for high school graduates, and down to 2.8 percent for workers with some college and 2.0 percent for college graduates.
Environmental science finds that so-called heat islands occur when urbanized areas experience much higher temperatures than neighboring outlying areas within major metropolitan areas. In and around U.S. cities, more affluent parts of these metropolises are typically heavily covered with trees and green vegetation, while areas that have a high concentration of office buildings and dense residential areas are usually located in the downtown sections of cities, and are in and around more impoverished communities.
The inequitable consequences of these heat islands in the summer months of the year—and increasingly in the late spring and early autumn, too—are many and are growing due to climate change. Consider that in today’s exceedingly hot summer climate, intercity metropolitan temperatures can differ significantly even between neighborhoods. In many major metropolitan localities, such as Washington, DC, there is, at times, as much as a 17 degree Fahrenheit difference between inner-city temperatures and surrounding urban areas. So, one area of a major U.S. city could be enjoying a warm, 88 F day on the same day and time when another area is contending with temperatures of 105 F.
What are the inequitable consequences associated with what environmental economists refer to as “thermal inequality” due to heat islands? Varying heat levels within cities increase demand on a metropolitan area’s energy grid, often leading to power outages in less wealthy parts of those cities just when demand is highest due to the heat island effect. There are losses in labor productivity among workers in dense and less wealthy urban centers due to high heat levels. There are increased rates of hospitalizations due to seasonal heat islands. And rises in urban crime also are linked to heat islands.
Another important way that variations in temperatures within metropolitan areas affect economic outcomes relates to how heat islands shape housing demand and, ultimately, housing costs. My own forthcoming research shows the effects of increased levels of heat on rental property prices within metropolitan statistical areas, or MSAs, of the United States. My initial findings reflect that over time, as temperatures continue to increase, two trends are becoming more pronounced.
One trend points to rising rental prices in some metropolitan statistical areas. As localities within some MSAs that are habitually cooler begin to warm, this warming shifts the climate of places with traditionally harsh winters, making them shorter, less severe, and more bearable. This leads to an increase in rental housing demand as individuals begin to migrate to areas of the United States with more temperate climates.
My findings also show the inverse to be true. The other trend I identify is that as the majority of renters in hotter cities continue to experience rising temperatures for longer periods of time, heat will begin to serve more as a dis-amenity, marking the point when households will begin to migrate in search of less severe temperatures and causing rental housing demand in these places to decrease over time.
There is supporting research regarding the effect of high temperatures on home prices for buyers, as opposed to renters, with similar findings. These findings suggest that both renters and buyers in Northern metropolitan areas may be at risk of increased price points as heat levels continue to rise more rapidly and for longer periods of time each year elsewhere around the country.
Affordable housing also is correlated metropolitan localities have high percentages of building density that lowers the available area for green space. This dynamic, combined with the fact that the most affordable housing is often located in the warmest and most congested parts of the city, leaves little room for an improved quality of life. As such, individuals living in these areas are not only subject to heightened levels of heat within their homes, but also to warmer temperatures during their routine commutes to their respective places of employment.
The evidence of the effects of thermal inequality on strong and sustainable economic growth arises largely in research connecting the impact of rising heat in local communities and labor productivity in those communities. Recent research by economists Patrick Behrer at the World Bank, R. Jisung Park at the University of California, Los Angeles, Gernot Wagner at Columbia Business School, and Colleen Golja and David Keith at Harvard University explores the effects of increased heat on labor productivity, work hours, and income in the workplace of poorer communities in the United States. They find that on days when the temperature exceeds 90 degrees Fahrenheit, there is a reduction in average weekly pay of about 2.2 percent. This effect is proportionately lower for wealthier localities, they find, with their results showing a weaker effect of higher temperatures for the upper-90th percentile of the population.
Of course, there are other notable and costly effects of increased heat. High temperatures can induce medical illness, and during summer months in highly dense metropolitan areas, there are often increased reports of cases associated with heat-related illness, such as heat stroke and dehydration. The economic effects involve increased demand for emergency response personnel, supplies, and the increased use of medical facilities. The cost of increased levels of heat are intensified for people of color and in less affluent communities, with heat-related hospitalizations costing, on average, $1,000 more for patients of color, compared to White patients.
Warmer temperatures also increase the cost of energy. As more energy is needed to keep a home at comfortable temperature levels, the demand on the power grid increases. When outside temperatures pass a certain threshold, it is common for individuals with air conditioners to cool down their homes further. This is where thermal inequality sets in—when areas that are less shaded and highly dense begin to hold higher levels of heat than the surrounding suburban living spaces. Homes located in heat islands face higher demand for air conditioning and thus utilize larger levels of energy to cool their homes. Individuals living in heavily shaded and wooded areas are much less likely to experience the same level of heat, thus resulting in less energy use than their neighboring counterparts.
Heat islands are neither inevitable nor unstoppable, despite the relentless impact of climate change on urban U.S. metropolitan areas. It is key for policymakers at city, state, and federal levels to begin to recognize the extended costs associated with thermal inequality. There are a range of thermal models with conflicting forecast predictions about the long-term effects of climate change, but all the models point to a much warmer climate in the immediate-to-near future, which will only exacerbate the economic toll of intercity thermal inequality. That’s why it is imperative to begin offsetting the negative cost of climate change by simultaneously implementing both mitigation efforts and adaptation measures, as suggested by UCLA’s Park, an environmental economist and the Washington Center of Equitable Growth’s new visiting scholar.
Taking steps to mitigate and adapt to heat islands could include proposed polices similar to those included in the Green New Deal legislation introduced in the U.S. House of Representatives in 2021. Policymakers also could work more specifically to suppress and mitigate factors that lead to heat inequality within U.S. cities. This includes increasing green space mandates and upgrading public housing standards to minimize elevated temperature in homes, such as retrofitting existing properties with green-roof technology. A number of U.S. cities are already doing this, among them Chicago, Portland, Oregon, and New York City.
Additionally, policymakers at the federal, state, and local levels should look to offset costs associated with heat, including making energy more affordable for people in low-income neighborhoods so they can cover the costs of air conditioning, as well as increased medical attention for heat-related illnesses. This could be done by closing the so-called Medicaid gap in Obamacare healthcare exchanges, as most of the states that rejected Obamacare’s Medicaid expansion funding are in the South, where already-hot temperatures will only continue to rise. And tax rebates on a carbon tax could be directed toward lower-income housing in big cities.
Importantly, though, many of these policy solutions to address the effects of heat islands should be applied in just the right amounts so as to not tip the scales from greening metropolitan areas to gentrifying them. Perhaps an additional line of policy would be to form protective measures for those currently residing in areas in need of a green revival. By moving to enact more legislation such as the proposals previewed in this column, policymakers could begin to cool the heat of neighborhood inequality one city block at a time to create stronger and more sustainable economic growth.
Every month the U.S. Bureau of Labor Statistics releases data on hiring, firing, and other labor market flows from the Job Openings and Labor Turnover Survey, better known as JOLTS. Today, the BLS released the latest data for June 2022. This report doesn’t get as much attention as the monthly Employment Situation Report, but it contains useful information about the state of the U.S. labor market. Below are a few key graphs using data from the report.
The quits rate remained at 2.8 percent as 4.2 million workers quit their jobs in June 2022.
The vacancy yield remains low but increased to about 0.60 in June from 0.58 in May, as the number of reported job openings declined and hires saw little change.
The ratio of unemployed-workers-to-job-openings increased in June to 0.55 from 0.53 in May.
The Beveridge Curve moved downward in June, reflecting a decline in the job openings rate while unemployment remained unchanged.
The overall number of job openings decreased by 605,000 in June (6.6 percent) to 10.7 million, falling in industries such as construction, leisure and hospitality, and trade, transportation, and utilities.
On July 11, the National Bureau of Economic Research kicked off its summer institute, an annual 3-week conference featuring discussions and paper presentations on various topics in economics, including environmental justice and economic mobility, the effects of paid family leave for workers, and racial inequities in the U.S. Unemployment Insurance system. This year’s NBER event was virtual and was livestreamed on YouTube.
We were excited to see Equitable Growth’s grantee network, our Steering Committee, and our Research Advisory Board and their research well-represented throughout the program. Below are abstracts (in no particular order) of some of the papers that caught the attention of Equitable Growth staff during the third week of the conference.
Abstract: “Neighborhoods are an important determinant of economic opportunity in the United States. Less clear is how neighborhoods affect economic opportunity. Here, we provide early evidence on the importance of environmental quality in shaping economic opportunity. Combining 36 years of satellite-derived PM2.5 concentrations measured over roughly 8.6 million grid cells with individual-level administrative data provided by the U.S. Census Bureau and Internal Revenue Service, we first document a new fact: Early-life exposure to particulate matter is one of the top five predictors of upward mobility in the United States. Next, using regulation-induced reductions in prenatal pollution exposure following the 1990 Clean Air Act amendments, we estimate significant increases in adult earnings and upward mobility. Combined with new individual-level measures of pollution disparities at birth, our estimates can account for up to 20 percent of Black-White earnings gaps and 25 percent of the Black-White gap in upward mobility estimated in Chetty and others (2018). Combining our estimates with experiment-induced reductions in pollution exposure from the Moving to Opportunity experiment, we can account for 16 percent of the total neighborhood earnings effect estimated in Chetty and others (2016). Collectively, these findings suggest that environmental injustice may play a meaningful role in explaining observed patterns of racial economic disparities, income inequality, and economic opportunity in the United States.”
“Distinguishing Causes of Neighborhood Racial Change: A Nearest Neighbor Design” Patrick Bayer, Duke University, National Bureau of Economic Research Marcus D. Casey, University of Illinois at Chicago, Equitable Growth grantee William B. McCartney, Purdue University John Orellana-Li, The Graduate Center, City University of New York Calvin S. Zhang, Federal Reserve Bank of Philadelphia
Abstract: “U.S. neighborhoods remain largely stratified by race. The role of racial preferences in driving contemporary neighborhood racial change, however, remains surprisingly controversial. While theories of tipping typically emphasize racial preferences as a principal catalyst for neighborhood change, the emergence of gentrification and related processes in reshaping modern neighborhoods has led some to conclude that race is now of secondary importance. Reconciling these distinct views empirically has proven tough since credibly distinguishing whether households respond directly to the attributes of their neighbors or factors coincidental with the entry of new neighbors is difficult. This paper introduces a novel “nearest neighbor” research design that isolates a component of the household decision to move out of a neighborhood directly attributable to the identities of their neighbors. In particular, we contrast the move rate of homeowners who live immediately nearby a new entrant of a different race to that of homeowners who live farther away on the same block. This within-block comparison helps hold constant many other aspects of the neighborhood and its expected future evolution. Combining detailed data on housing transactions and race in North Carolina between 2005 and 2015, we estimate the causal effect of receiving a different-race neighbor on the likelihood of moving. The results suggest that Black and White homeowners are significantly more likely to move in response to receiving a close neighbor of a different race. However, this effect is heterogeneous across household types: While older White households exhibit the strongest exit responses overall, among Black households, younger households exhibit relatively high move rates. Move reactions among both Black and White households are stronger for homeowners born in the North or Midwest, where residential segregation is especially high, compared to those born in the South.”
“The (Lack of) Dynamic Effects of the Social Safety Net on Human Capital Investment”* Manasi Deshpande, University of Chicago and National Bureau of Economic Research, Equitable Growth grantee Rebecca Dizon-Ross, University of Chicago and National Bureau of Economic Research
Abstract: “How does the expectation of government benefits in adulthood affect human capital investments in childhood? Both economic theory and the experts we surveyed predict that expected future benefits decrease childhood human capital investments through income and incentive effects. We investigate whether this is true by conducting a randomized controlled trial with families of children who receive Supplemental Security Income, or SSI, a cash welfare program for children and adults with disabilities. The vast majority of parents whose children receive SSI overestimate the likelihood that their child will receive SSI benefits in adulthood. We provide randomly selected families with information on the predicted likelihood that their child will receive SSI benefits in adulthood and use this randomized information shock to identify the effect of expectations about future benefits. We find that reducing the expectation that children will receive benefits in adulthood does not increase parental investments in children’s human capital. This zero effect is precisely estimated, and we strongly reject the positive null hypothesis from our expert survey. Reducing the expectation that children will receive benefits in adulthood instead increases parents’ planned labor market effort.” *Note: Email the author for draft, which is under agency review.
Abstract: “Women are vastly underrepresented in leadership positions, but little is known about when and why gender gaps in representation first emerge in the leadership hierarchy. This study uses novel personnel data from a large manufacturing firm to document that gender differences in applications for first-level leadership positions create a key bottleneck in women’s career progression. Women are not less likely to learn about job openings at the firm and do not experience lower hiring likelihoods than male applicants. Instead, gender differences in revealed preferences for leading a team account for women’s lower propensities to apply for first-level leadership positions. Women who rise to the first leadership level are not less likely than men to apply to or to receive subsequent promotions, rejecting the common notion that a glass ceiling at higher-level leadership positions is the key barrier to gender equality.” Note: This research was funded in part by Equitable Growth.
Abstract: “How do administrative burdens influence enrollment in different welfare programs? Who is screened out at a given stage? This paper studies the impacts of increased administrative burdens associated with the automation of welfare services, leveraging a unique natural experiment in Indiana in which the IBM Corporation remotely processed applications for two-thirds of all counties. Using linked administrative records covering nearly 3 million program recipients, the results show that Supplemental Nutrition Assistance Program, Temporary Assistance for Needy Families, and Medicaid enrollments fall by 15 percent, 24 percent, and 4 percent, respectively, one year after automation, with these heterogeneous declines largely attributable to cross-program differences in recertification costs. Earlier-treated and higher-poverty counties experience larger declines in welfare receipt. More-needy individuals are screened out at exit while less-needy individuals are screened out at entry, a novel distinction that would be missed by typical measures of targeting that focus on average changes overall. The decline in Medicaid enrollment exhibits considerable permanence after IBM’s automated system was disbanded, suggesting potential long-term consequences of increased administrative burdens.”
Abstract: “The U.S. Unemployment Insurance, or UI, system operates as a federal-state partnership, where states have considerable autonomy to decide on specific UI rules. This has allowed for systematically stricter rules in states with a larger Black population. We study how these differences in state rules create a gap in the Unemployment Insurance that Black and White unemployed workers receive. Using administrative data from random audits on UI claims in all states, we first document a large racial gap in the UI benfits that unemployed workers receive after filing a new claim. Black claimants receive an 18 percent lower replacement rate (i.e., benefits relative to prior wage, including denials) than White claimants. In principle, the replacement rate of each claimant mechanically depends on the rules prevailing in her state and on her work history (e.g., the earnings before job loss and the reason for separation from prior employer). Since we observe claimants’ UI-relevant work history and state, we are in a unique position to identify the role of each factor. After accounting for Black-White differences in work history, differences in rules across states create an 8 percent Black-White gap in replacement rate (i.e., slightly less than half of the overall gap). Using a standard welfare calculation, we show that states with the largest shares of Black workers would gain the most from having more generous UI rules. Altogether, our results highlight that disparate state rules in the UI institution create racial inequality without maximizing overall welfare.”
Abstract: “This paper analyzes the impact of paid family leave, or PFL, policies in California, New Jersey, and New York on the labor market and mental health outcomes of individuals whose spouses or children experience health shocks. We use data from the restricted-use version of the Medical Expenditure Panel Survey over the years 1996–2019, which allows us to observe individuals’ states of residence, employment status, and the precise timing of their spouses’ and children’s hospitalizations and surgeries (our health shock measures). We use difference-in-difference and event-study models to compare the differences in post-health-shock labor market and mental health outcomes between spouses and parents surveyed before and after PFL implementation, relative to the analogous differences among those in states that did not implement PFL over our analysis time period. We find that the (healthy) wives of individuals with medical conditions or limitations who experience a hospitalization or a surgery are 7 percentage points less likely to report “leaving a job to care for home or family” in the post-health-shock rounds of the data. These women also experience improved mental health, measured based on both self-reports and the use of mental health-related prescription drugs. We find no consistent impacts on the outcomes of men whose spouses have health shocks or on parents of children with health shocks.”
Abstract: “We examine the geographic incidence of local labor market growth across locations of childhood residence. We ask when wages grow in a given U.S. labor market, do the benefits flow to individuals growing up in nearby or distant locations? We begin by constructing new statistics on migration rates across labor markets between childhood and young adulthood. This migration matrix shows 80 percent of young adults migrate less than 100 miles from where they grew up. Ninety percent migrate less than 500 miles. Migration distances are shorter for Black and Hispanic individuals and for those from low-income families. These migration patterns provide information on the first-order geographic incidence of local wage growth. Next, we explore the responsiveness of location choices to economic shocks. Using geographic variation induced by the recovery from the Great Recession, we estimate the elasticity of migration with respect to increases in local labor market wage growth. We develop and implement a novel test for validating whether our identifying wage variation is driven by changes in labor market opportunities rather than changes in worker composition due to sorting. We find that higher wages lead to increased in-migration, decreased out-migration, and a partial capitalization of wage increases into local prices. Our results imply that for a 2 rank point increase in annual wages (approximately $1,600) in a given commuting zone, or CZ, approximately 99 percent of wage gains flow to those who would have resided in the CZ in the absence of the wage change. The geographically concentrated nature of most migration and the small magnitude of these migration elasticities suggest that the incidence of labor market conditions across childhood residences is highly local. For many individuals, the “radius of economic opportunity” is quite narrow.”
Abstract: “We use field experiments to study market-level and firm-level labor supply. Market-level elasticities govern how labor supply responds to temporary productivity shocks. Firm substitution elasticities determine wage markdowns in frictional markets. We find that women are twice as elastic to the market as men. This is true even among high-hours individuals. We find no evidence that women are less likely to switch between firms when relative wages change. Our results suggest that in environments without differences in firm location or amenities, firms with market power have little incentive to pay equally productive women less.”
Abstract: “Why aren’t workplaces better designed for women? We show that changing the priorities of those who set workplace policies creates female-friendly jobs. Starting in 2015, Brazil’s largest trade union made women central to its bargaining agenda. Neither establishments nor workers choose their union, permitting a difference-in-differences design to study causal effects. We find that “bargaining for women” increases female-centric amenities in collective bargaining agreements and in practice (more female managers, longer maternity leaves, higher job protection after maternity). These gains do not come at the expense of women’s or men’s wages or employment, or of firm profits (proxied by exit). They cause women to queue for jobs at treated establishments and quit them less; both men and women revealed preference measures of firm value, but men do not quit more. Prioritizing women in collective bargaining thus lowers within-firm gender inequality through more efficient bargaining, adding amenities highly valued by women without removing those highly valued by men.”
Taxing the rich is one of the central policy debates in this time of rising inequality. Elite taxation can change the distribution of income in society, support equitable growth, and finance public goods and services that improve the quality of life for everyone. None of these goals are well served, however, if taxes lead to high levels of tax flight among U.S. millionaires. Progressive taxation, especially at the state level, ultimately depends on the embeddedness of the tax base. In other words, are the rich “mobile millionaires,” readily drawn to places with lower tax rates? Or are they “embedded elites,” who are reluctant to migrate away from places where they have been highly successful?
Supply-side economics has long argued that taxes on the rich cause avoidance behavior and reduce the incentive to work, invest, and innovate. Amid the growing red state/blue state rivalry in the United States, tax incentives for migration have become a new focus of debate. Why would rich people continue to live in New York, New Jersey, or California when they could save large sums in taxes by moving to places such as Florida, Texas, or Nevada? Of course, taxes also fund public goods that the rich consume—not even the richest city dweller can get to work without public infrastructure—but top earners have greater ability to opt out of many public services such as schools and social services. From this view, the rich seem motivated and mobile—sensitive to taxation and readily capable of exit.
Yet there are myriad social dimensions that rich households face when migrating to avoid taxes. Top earners are often the “working rich,” with many roots in the places where they built their careers. Others are business owners with complex ties between customers, suppliers, and workers that are not easily relocated. Top earners are often married, have school-aged children, and have lived in their state for many years—social factors that tie people to places. These ties represent place-specific social capital, a form of embeddedness that makes migration costly.
Our new working paper, “Taxing the Rich: How Incentives and Embeddedness Shape Millionaire Tax Flight,” examines the joint effect of incentives and embeddedness on the mobility of the rich in the United States. Drawing on administrative tax data from IRS tax returns of top income earners, we study two large-scale “natural experiments,” which are contrasting real-life situations that social scientists investigate to determine cause-and-effect relationships. The first is the federal Tax Cuts and Jobs Act of 2017, which changed tax incentives to favor low-tax states. The second is the COVID-19 pandemic, which began in early 2020 in the United States and which deeply disrupted people’s socioeconomic attachments to places.
The 2017 federal tax bill championed by then-President Donald Trump cut the top income tax rate but also raised taxes on some top earners by capping a deduction used most heavily in so-called blue states: the state and local tax deduction. This made the tax reform highly polarizing, actually raising taxes on millionaires in many blue states, such as New York and California, while cutting taxes in red states, such as Florida and Texas. Many predicted dramatic migration flows of top earners from high-tax to low-tax states. President Trump himself soon moved his permanent residence from New York to Florida.
To study the 2017 tax reform, we used administrative data from IRS tax returns, drawing on more than 12 million observations. We employed so-called difference-in-differences models, which compare the changes in outcomes over time between a population affected by the tax cuts and the pandemic (the treatment group) and a population not affected (the comparison group). Tax-induced migration can occur along two different margins: the decision of whether to move at all and, conditional on moving, what destination to select. We examine each margin in detail.
In a typical year, a small number of millionaires circulate between states: Roughly 2.7 percent of the millionaire population moves across state lines, exchanging one state for another. How much did the 2017 tax reform influence this migration? In our working paper, we examined migration rates for every income group, starting from those with the lowest incomes to those making $5 million a year or more. We also examined migration rates for those living in low-tax states, who were incentivized to stay, and high-tax states, who were incentivized to move. Migration patterns before and after the tax reform law passed were essentially identical. (See Figure 1.)
Figure 1
In a 2018 opinion piece published in The Wall Street Journal, “So Long, California. Sayonara, New York,” economists Arthur Laffer and Stephen Moore predicted that “based on the historical relationship between tax rates and migration patterns, both California and New York will lose on net about 800,000 residents over the next three years—roughly twice the number that left from 2014-16.” Then-New York Gov. Andrew Cuomo (D) likewise feared that his state’s millionaires would flee to a better tax environment. Yet our estimate of this migration, as shown in Figure 1, is zero.
Indeed, millionaires generally have low rates of migration—lower than that of the poor—because they are rooted in place by socioeconomic ties, such as employment, marriage, children at home, and business ownership. There is a subset of millionaires with high migration rates and who fit the image of the mobile millionaire. They are relatively young, unmarried, childless, and earn their money from capital rather than work. We term these individuals the “anomic elite,” who are unencumbered by place-based attachments. They move more frequently but are a small minority of the millionaire population.
After the decision to move, a second element of tax migration is the choice of destinations that movers select. To analyze this, we focus only on those millionaires who actually move. Among movers, did lower-tax states become more attractive after federal tax reform?
It is perhaps surprisingly common to see millionaires move into states that charge them higher tax rates. Basketball star LeBron James, for example, made a series of moves from Florida (no income tax) to Ohio (5 percent top rate) to California (13 percent top rate). Many millionaire moves are also between states that have roughly the same tax rate. There are many idiosyncratic and personal reasons why millionaires move, and most migrations do not come with a net tax advantage. Nevertheless, there is a systematic pattern in which low-tax states are favored as migration destinations. The effect is modest, but millionaire migration tends to flow from high-tax to low-tax states.
In our database on cross-border migration flows, the elasticity of the millionaire population with respect to the top tax rate is 0.14. For the average state, if top tax rates rise by 1 percent, this causes roughly 13 more out-migrations and 12 fewer in-migrations, from a base population of more than 9,000 millionaires—amounting to a population loss among millionaires of one-third of 1 percent.
We also see that when the tax reform changed the relative tax rates between states, low-tax states increased their share of millionaire destinations while high-tax states lost shares. For California, the Tax Cuts and Jobs Act produced a loss of roughly 380 millionaires from a base population of 81,000, or 0.5 percent of the millionaire population. Similarly, we calculate that Texas gained 140 millionaires due to the 2017 tax law, a 0.4 percent increase on its base population of 39,000 millionaires.
In summary, the tax reform did not cause greater numbers of millionaires to migrate. But for those already moving anyway, tax reform played a role in where they moved. In other words, taxes do not affect the decision to move, but, conditional on moving, they do influence the choice of destination—making low-tax states incrementally more attractive.
Given this level of tax migration, how should state governments respond? Do some states have tax rates on the rich that are too high? Would states be better off if they cut taxes? To address this question, we incorporate our estimates of millionaire tax migration into a model of optimal tax rates, which calculates the tax rate on top earners that maximizes revenue. We find that the revenue-maximizing tax rate on the rich, combining federal, state, and local income tax rates, is 66 percent. This is much higher than current tax rates in any state. This means that if states cut taxes in an effort to attract millionaires, the revenue losses would far exceed the gains.
For further insight into the role of embeddedness in tax migration, we examine the impact of the COVID-19 pandemic. Arriving shortly on the heels of major tax reform, the pandemic disrupted almost every socioeconomic factor that ties people to places. Offices and schools closed their doors and moved online. Urban amenities were shuttered. And face-to-face contact became a public health problem. Many homes and apartments felt too small for shelter-in-place orders. The pandemic was an occasion to rethink the geography of work and life, especially for top earners, who could work remotely from anywhere. We test whether this disruption to embeddedness ushered in a new wave of millionaire migration away from high-tax places.
The timing of the tax return data offers a unique way to understand the effects of the COVID-19 pandemic on tax migration. There are two kinds of IRS records that show taxpayer residency: W2 forms that report earnings and other information and 1040 tax returns that households file. These forms are sent to the IRS at different times, offering a before-after analysis of the onset of the pandemic.
In 2020, W2 forms were sent about 6 weeks before the United States declared COVID-19 a national emergency on March 13, 2020. The deadline for filing 1040 returns, in contrast, was delayed until mid-July of that year, and with no-penalty extensions, most millionaires actually filed their returns in August. This means that migration measured by the W2 forms captures mobility occurring entirely before the pandemic, while migration using the 1040 returns includes moves during the early months of the pandemic. We find a clear rise in migration out of high-tax states, especially among higher-income earners, a very modest pandemic migration effect among middle-tax states, and no change in migration rates among low-tax states during the pandemic. (See Figure 2.)
Figure 2
In short, the pandemic upended many people’s ties to places, providing new opportunities to decouple from where they live and from where they work, especially for high-income earners who were able to work from home. We find that once pandemic restrictions arrived, households began questioning the value of living in expensive, high-tax states. In this sense, diminished embeddedness raised the tax-flight cost of taxing the rich.
Conclusion
Taxes on the rich at the state and local level are not costless, but places have considerable fiscal capacity to set their own policies. Tax flight is a product of both incentives and embeddedness, and elite embeddedness dampens financial incentives for migration. When economic action is embedded in ongoing social relations that shape and constrain market behavior, embeddedness gives a layer of insulation from market incentives and pressures.
In the language of economics, greater embeddedness leads to smaller elasticities. When social ties are strong, fiscal and financial incentives have a smaller playing field and less influence on individual behavior. To counteract millionaire migration, states could cut taxes on the rich, attempting to lure back missing millionaires, but we estimate that cutting state and local taxes on the rich leads to severe revenue losses. Thus, while the 2017 tax cuts indeed benefited red states at the expense of blue states, progressive taxes still generate large revenues for blue state expenditure programs. Embeddedness allows states to experiment with new fiscal policies without risking elite exodus or a deep loss of their tax base.
Nevertheless, a challenge for places with progressive taxes is that embeddedness is weakened due to COVID-19, while tax migration incentives have grown due to the 2017 tax law. There was no state fiscal crisis in high-tax states, but the continuing pandemic and its effects on embeddedness raise important questions. Are work-from-home policies here to stay, or will elite offices return to something of their pre-pandemic concentrations in major cities? Will remote technologies make place-specific social capital less important in the future?
Further research is needed to answer these and other questions to shed valuable light on the future of high-tax, high-amenity places in the United States and on the enduring importance of embeddedness among the wealthy.
At its most basic, monopsony refers to a market where there is a single buyer of a good or service. Economist Joan Robinson first introduced the term in the early 1930s and used it to describe how imperfect competition in the market for labor can shift the bargaining power away from workers and toward employers—a dynamic that drags down wages and suppresses employment, just as a monopoly for a seller raises prices and lowers the amount sold. Unlike the perfectly competitive model taught in introductory economics classes, Robinson’s monopsony model captures how outsized employer power can give firms the ability to underpay workers, exacerbate income inequality, and hold back economic growth.
As interest in the relationship between employers’ labor market power and economic inequality has grown in recent decades, there is a growing boom in academic research about monopsony. Scholars studying how labor markets work under imperfect competition have found empirical evidence that challenges Econ 101 assumptions about the relationship between minimum wage increases and employment levels. And as new methods and data sources allow researchers to get a better understanding of employer concentration, a number of economists are proposing novel ways in which antitrust law can be leveraged to promote competition in labor markets.
This primer describes how monopsony offers an alternative model to the perfectly competitive model of the labor market, discusses some of the recent research studying monopsony in the U.S. economy, and tracks how employers’ ability to set wages exacerbates inequality. It then describes how discrimination, longstanding social norms, and demographic characteristics make some groups of workers especially vulnerable to wage suppression. It concludes with a series of public policy measures that, in promoting competition and boosting workers’ bargaining bower, would help mitigate employers’ ability to set wages, address inequities in U.S. labor market outcomes, and support broadly shared economic growth.
Monopsony offers an alternative framework through which to understand the labor market
According to the hypothetical perfectly competitive model of the labor market referenced in introductory economics textbooks, a business that cuts wages will eventually lose all of its workforce. The reason is that under perfect competition, workers have complete freedom to move from job to job in search of higher wages, and when the market is in equilibrium, they are able to find an employment opportunity that pays a wage equal to the value of what they produce, or equal to what economists call the marginal product of labor.
All of these barriers can dampen competition in the labor market and may keep workers from moving on to other employers, even if their current pay is not commensurate with their productivity. And by giving employers an upper hand when determining compensation, monopsony not only dampens wage growth but also drags down employment, since the pay for existing employees is not enough to attract other workers.
The perfectly competitive and monopsonistic models of the labor market
Let’s first take a deeper look at the perfectly competitive model of the labor market. A firm operating in this hypothetical labor market is a price-taker, meaning that it has no option but to pay the market wage—the wage that is determined by the forces of labor demand and labor supply. In economic parlance, this model of perfect competition posits that individual firms face a so-called horizontal labor supply curve, meaning that they can hire all the workers they want as long as they pay a competitive wage, or the “market wage rate.”
In this perfectly competitive model, then, a firm will decide to hire workers up to the point where the marginal revenue product of labor, or the change in revenue the firm will get by hiring one additional worker, intersects with the market wage. So, theoretically, firms operating in a perfectly competitive labor market will be able to hire all the workers they want as long as they pay the market wage. If firms pay less than the market wage or cut wages, then all of their workers will choose to go to other firms that offer higher market wages.
If a labor market is functioning in a more monopsonistic way, however, firms will be price-setters rather than price-takers. The idea is that unlike a firm operating in the perfectly competitive labor market, a monopsonist firm that faces no competition when hiring workers faces an upward-sloping, instead of a horizontal, labor supply curve. As such, if the monopsonist slashes its wages, then it will lose some, but not all, of its workforce. But while these firms will be able to hire workers even if they do not pay competitive wages, they will have to increase pay for all workers every time they want to attract an additional worker. As a result, monopsonist firms will hire fewer workers at lower wages. (See Figure 1.)
Figure 1
Of course, labor markets rarely have a single firm competing for workers. But the monopsonic model nonetheless offers important insights into the relationship between imperfect competition, wages, and employment.
Further, recent research has focused on what scholars call modern or dynamic monopsony—a framework in which a single firm does not have to be the only employer in a given labor market to be able to exercise monopsony power as long as the dynamics of the labor market reflect significant frictions in switching jobs that lend wage-setting power to employers. Indeed, a large and growing body of empirical research is finding evidence that U.S. employers often have the power to set wages.
What recent research says about the presence of monopsony power in the U.S. labor market
As interest in the causes and consequences of imperfect competition grow and new empirical methods and data become more available, there has been an explosion of research about and around monopsony. To study employers’ wage-setting power, economists and other social scientists can measure how likely workers are to quit in response to a decrease in wages, capture the degree of employer concentration in any given labor market or industry, or study the barriers that limit workers’ ability to move from job to job.
In addition, researchers can examine how discrimination, longstanding social norms, and demographic characteristics make some groups of workers especially vulnerable to wage suppression because of these dynamic factors. Next, we review recent studies in each of four buckets of research.
Markdowns and workers’ sensitivity to wage changes
A common way to measure employers’ monopsony power is through what economists call elasticity of labor supply to the firm, a concept that captures how sensitive workers are to wage changes. In the hypothetical perfectly competitive labor market, the elasticity of labor supply facing the firm is infinite, meaning that a 1 percent reduction in pay would be enough for a business to lose all of its workers, at least in the long run.
Research shows, however, that workers are much less sensitive to changes in pay than the perfectly competitive model would predict, allowing firms to pay wages that are not proportionate to workers’ productivity. In the monopsony literature, calculating the elasticity of labor supply to the firm allows economists to estimate the potential wage markdown, or the gap between the value workers generate for the firm and their actual wages.
There are a number of studies that show the existence of markdowns in labor markets. Recent research on the U.S. manufacturing industry, for example, finds that manufacturing workers employed at an average plant earn only $0.65 for every $1 of value they create, suggesting that the majority of manufacturing plants in the country operate with some degree of monopsony power.
Another approach to study monopsony is to measure labor market concentration, a phenomenon in which only a few employers are competing to hire workers. To study this phenomenon, one team of economists used online job vacancy data to analyze the degree of employer concentration across occupations and commuting zones in the United States. The authors show that about 16 percent of workers in the country are employed in highly concentrated labor markets—labor markets in which few firms are recruiting, and workers are less likely to receive an employment offer.
Consistent with previous evidence, the authors also find that wages tend to be lower in labor markets with fewer recruiting employers. And employer concentration is especially prevalent in less-densely populated labor markets, a dynamic that might help explain why wages are lower in rural areas than in urban areas. (See Figure 2.)
Figure 2
There is also evidence that some labor markets and occupations have substantial employer concentration, thereby reducing wages. Take healthcare services, for instance. In one study of the labor market for nurses, researchers find that the supply of labor to hospitals is fairly inelastic, giving large healthcare employers, such as the U.S. Department of Veterans Affairs, the power to influence pay across the entire sector.
There is also evidence that the entrance of large, dominant employers to local labor markets, particularly those in rural communities, can have wide-ranging effects on the outcomes of workers in those labor markets. A study by Justin Wiltshire of the Institute for Research on Labor and Employment at the University of California, Berkeley finds, for example, that the entrance of Walmart Supercenters in local labor markets leads to overall reductions in both wages and employment in the following 5 years. Another paper finds that workers with guest worker visas are employed in more concentrated labor markets than U.S. workers in general.
Job mobility
Scholars interested in monopsony power also study the barriers that make it difficult for workers to move on to other employers. For instance, contracts, credentials, and certain occupations can keep workers locked in their jobs or places of residence, giving employers the ability to exercise monopsony power. Noncompete agreements—contracts that prohibit workers from joining or creating a competing business—have been shown to depress wages, stop workers from moving on to a better job, and hurt entrepreneurship. And a number of studies show that because they have very specific skills and have made important investments in trainings and licenses, healthcare workers often have low occupational mobility.
Indeed, researchers find that the negative relationship between employer concentration and wages is also shaped by occupational mobility, since some workers may be able to switch occupations out of concentrated industries more easily than others. In a recent paper, Gregor Schubert at the University of California, Los Angeles, Anna Stansbury at the Massachusetts Institute of Technology, and Bledi Taska at the employment data firm Lightcast (formerly Emsi Burning Glass) examine the extent to which workers’ pay reacts to changes in employer concentration within their industry of employment, as well as to their outside job options. Using econometric methods that allow the three researchers to examine variations in local employer concentration that are not the result of local economic conditions—therefore reducing the likelihood that their results are driven by anything other than the degree of competition for workers—the co-authors find that for more than 10 percent of the U.S. workforce, pay is suppressed by 2 percent or more because of employer concentration.
In addition, slack economic conditions can exacerbate employers’ market power, in part because downturns reduce workers’ alternative job opportunities. Research by Gordon Dahl at the University of California, San Diego and Matthew Knepper at the University of Georgia finds, for example, that higher rates of unemployment are likely associated with greater underreporting of sexual harassment at work—evidence that employers are more likely to exploit workers when those workers have fewer outside options and the prospect of losing a job is more costly.
Similarly, research by Janice Fine, Jenn Round, and Hana Shepherd of Rutgers University and Daniel Galvin of Northwestern University finds that during the Great Recession of 2007–2009, higher joblessness hurt low-wage workers’ labor market power. Specifically, the team of researchers shows that there was an important rise in minimum wage violations during that recession, disproportionately hurting women, non-U.S. citizens, and Black and Latino workers.
Discrimination, longstanding social norms, and demographic characteristics can make some workers especially vulnerable to employers’ monopsony power
Characteristics such as race, ethnicity, gender, level of formal education, and geographic location can all play a role in the ability of workers to move from job to job, rendering some groups of workers especially vulnerable to employers’ wage-setting power. For instance, Kate Bahn at the Washington Center for Equitable Growth and Mark Stelzner at Connecticut College, put forth a new theoretical model that shows how greater care responsibilities and lower levels of household wealth disproportionately expose Black and Latina women to wage suppression. The reason, Bahn and Stelzner find, is that care obligations and lack of access to resources constrain workers’ employment options and job search process. And because employers are often aware of these disparities, they can exploit the constraints faced by Black and Latina women workers in the form of lower wages.
Indeed, there are a number of ways in which disparities in wealth and care responsibilities can affect workers’ job-search processes and employment prospects. A worker caring for an elderly parent, for instance, will be less likely to move to an employment opportunity in another state. And a worker without a financial cushion will be much less able to take the time they need to find a job that is a good match for their interests and skills—a type of pressure that disproportionately affects workers of color. According to a 2019 survey by the U.S. Federal Reserve, White families’ median wealth ($188,200) is more than 7 times greater than Black families’ median wealth ($24,100) and more than 5 times greater than Latino families’ median wealth ($36,00).
Other studies show that monopsonistic forces affect mothers and fathers in different ways, helping explain why having children widens the wage gap between men and women. And persistent features of the U.S. labor market, such as hiring discrimination against Black job-seekers, help explain why workers of historically marginalized groups face greater costs when a worker separates from a job.
Public policies that boost competition and workers’ bargaining power can counter employers’ monopsony power
As the mirror to the term “monopoly,” which describes a market where there is just one buyer, monopsony refers to a market where there is just one seller. And like monopolies, monopsonies create a number of economic inefficiencies that hurt workers and hold back growth.
Effective public policy and strong labor market institutions, however, can temper employers’ wage-setting power. For example, a paper by Marcel Steffen Eckhardt and Michael Neugart of Technical University of Darmstadt finds that competition policy, such as antitrust regulation, and boosting worker power, including institutional support for collective action, reinforce each other, leading to a greater overall improvement in the functioning of the labor market than the sum of either policy area alone.
Let’s briefly examine some of these policies to deal with monopsony power.
Competition and antitrust policy
One important way to push back against employers’ monopsony power is through competition and antitrust policy. Suresh Naidu at Columbia University, Eric Posner at the University of Chicago, and E. Glen Weyl at Yale University propose, for instance, that current antitrust policy largely fails to evaluate and address how employer concentration affects workers and labor markets. To mitigate employers’ monopsony power, antitrust regulation could therefore be updated to consider possible harms to labor market competition when evaluating the effects of mergers and acquisitions.
Another way to boost competition in the market for labor is to ban noncompete agreements, especially for low-wage workers. Currently, almost 1 in 5 U.S. workers are bound by noncompetes, and while they are more prevalent in higher-paying jobs, about 13 percent of workers earning less than $40,000 per year are currently subject to one. Banning noncompetes for low-wage workers would therefore eliminate one important barrier that constrains job mobility by keeping workers from moving on to better employment opportunities.
Promote worker voice and bargaining power
The second public policy area involves measures that boost workers’ bargaining power. In 2021, more than 1 million workers in the United States were paid the federal minimum wage or less. After more than a decade of remaining frozen at $7.25 an hour, increasing the federal minimum wage would limit employers’ ability to pay workers a wage that was well below the value they create. In labor markets where employers have monopsony power, a higher minimum wage would not only lead to an earnings increase for the lowest-paid workers and a decline in economic inequality, but also would likely boost employment.
Further, in a national labor market characterized by prevalent monopsony, research suggests that the federal minimum wage is a useful tool for mitigating regional wage inequality and improving overall labor market outcomes.
Other public policies that would boost workers’ bargaining power include investments in a more robust income-support system and better enforcement of labor protections. Research by Ammar Farooq at Uber Technologies Inc. and Adriana Kugler and Umberto Muratori at Georgetown University shows, for instance, that access to adequate Unemployment Insurance benefits gives workers time to find a job that is a good match for their skills, leading to better-functioning labor markets. In the case of the UI system, necessary reforms include increasing benefit amounts, broadening eligibility requirements so that more workers can access them, and investing in the systems and offices charged with disbursing benefits.
Perhaps most importantly, it is important to make it easier for workers to form and join a union, as well as support effective collective bargaining so that workers can negotiate for better pay. In 2021, only about 10 percent of U.S. wage-and-salary workers were members of a union, down from about 30 percent between the mid-1940s and mid-1960s. While unions were an important equalizing force during the decades when they represented a large share of the country’s workforce, judicial and business hostility toward organized labor limits unions’ ability to deliver better working conditions for workers.
Policymakers can boost the power of organized labor by expanding the right to organize to self-employed workers and independent contractors, strengthening the right to strike, and holding employers accountable for unfair and illegal practices against organizing efforts. Future improvements to worker power could also include bold proposals to introduce sectoral bargaining—where workers across an entire sector of the economy bargain together through a union—to the United States.
Conclusion
Workers in the United States have experienced decades of wage suppression and not sharing the gains of economic growth. Monopsony suggests that these outcomes are the result of broad and common market failures, holding back both wages and employment and resulting in deadweight loss to the entire U.S. economy. Increasing worker power and enhancing competition work together to ensure the economy functions both efficiently and fairly for workers and for employers.
