The U.S. economy experienced another month of strong employment gains between mid-February and mid-March, adding 431,000 new jobs. According to the most recent Employment Situation Summary released this morning by the U.S. Bureau of Labor Statistics, the overall unemployment rate is now nearly at its pre-pandemic rate of 3.5 percent, falling from 3.8 percent in February to 3.6 percent in March. The share of 25- to 54-year-olds with a job—a statistic known as the “prime-age employment-to-population ratio”—climbed from 79.5 percent to 80 percent, and is now less than a percentage point below its February 2020 level.
These aggregate U.S. labor market statistics reveal that, by some measures, several groups of workers have now fully bounced back from the coronavirus recession in 2020 and are benefiting from a tight labor market. At 5.2 percent, the jobless rate for workers without a high school diploma is well-below its pre-pandemic rate. There also were more than 500,000 more men employed in March 2022 than in February 2020, at the start of the coronavirus-induced recession.
But other workers have yet to recover. With employment still below its pre-pandemic levels, the jobs recovery has been slower for women in general and for Black women in particular. The unadjusted unemployment rate for American Indian and Alaskan Native workers is at 6.8 percent—a statistic we use here because the BLS does not currently publish this group of workers’ jobless rate on a seasonally adjusted basis—while the adjusted rate for Black workers is at 6.3 percent, putting the jobless rates of these groups at about 3.5 percentage points and 3 percentage points above the jobless rate of White workers. (See Figure 1.)
Figure 1
Transportation and warehousing is experiencing the biggest jump in employment
The latest month-over-month job gains were strongest in the leisure and hospitality industry, followed by professional and business services. Over the past two years, however, no sector registered a stronger percentage increase in employment than the transportation and warehousing industry.
While most other major industries continue to employ fewer workers than they did prior to the pandemic, on net the transportation and warehousing sector added more than 600,000 jobs between February 2020 and March 2022. Even though it was not immune to the coronavirus recession’s initial shock to employment, net losses in the sector were relatively small and the bounce-back relatively quick. Indeed, since February 2020 transportation and warehousing industry experienced a 10.5 percent increase in employment. (See Figure 2.)
Figure 2
Within this industrial sector, big and somewhat persistent losses in subsectors such as sightseeing transportation and passenger transportation have been more than offset by massive gains for warehousing and storage as well as couriers and messengers. These two subsectors are now at record-high levels of employment. Overall, the transportation and warehousing industry has grown its share of employment over the past two years, going from representing 3.8 percent of the U.S. workforce in February 2020 to representing 4.2 percent in March 2022. (See Figure 3.)
Figure 3
At least in part, the surge in warehousing and transportation jobs reflects an important pandemic-driven shift in spending. Many consumers stayed home during and after the coronavirus recession and spent more dollars buying goods online. The jump in e-commerce sales for goods such as furniture, electronics, and building materials, in turn, made demand for the services that store, process, ship, and deliver those orders skyrocket.
As a result, throughout the pandemic big employers such as Amazon.com Inc. and Walmart Inc. have hired hundreds of thousands of workers to staff warehouses and distribution centers. And parts of the industry that experienced important disruptions over the past two years, such as commercial airlines, are now expecting this upcoming summer to be the busiest one yet.
Many transportation and warehousing jobs remain poorly paid, unsafe, and precarious
The number of jobs added in the transportation and warehousing sector is a bright spot in the U.S. job market’s recovery, but the industry continues to experience longstanding job-quality concerns that have only become more urgent as pressures on the sector rise. Average pay in the industry—an industry in which men, Black workers, and Latino workers make up a disproportionately high share of the workforce—is currently at $27.79 an hour, almost $4 below the national average.
A 2020 report by Sam Abbott and Alix Gould-Werth at the Washington Center for Equitable Growth shows that in the case of warehouses, pressure to reduce costs and speed-up delivery time led managers to put in place staffing practices that both put a great strain on workers and are built around a business model that relies on irregular work and low-quality schedules.
Domestic outsourcing—a process by which firms subcontract certain roles so that workers are not direct employees—also increased warehouses’ reliance on temporary workers and third-party logistics companies to manage their workforces, further hurting workers’ earnings and opportunities to move up the career ladder. And invasive surveillance and monitoring mechanisms, such as productivity trackers and automated production quotas, led to high rates of workplace injuries and stress, as well as being associated with high turnover rates.
Or take trucking. Drivers often receive low pay, have little access to employer-provided benefits, and work long hours—many of which they are not compensated for. The trucking industry relies heavily on independent contractors, meaning that workers are excluded from many income support programs such as Unemployment Insurance, do not receive employer-provided benefits, and are paid on a per-load basis.
In addition, these employment practices and bad working conditions have ripple effects that have contributed to recent supply chain woes. Steve Viscelli at the University of Pennsylvania argues, for instance, that independent contractor status for port drivers worsen supply-chain bottlenecks. Because drivers are paid by the load rather than by the hour, shipping companies bare no costs when using truckers’ time inefficiently, exacerbating delays when unloading cargo.
Job growth needs to be matched by better job quality for the economic recovery to be sustainable and equitable
As one of the fastest growing industries in the U.S. economy, ensuring economic security and good job-quality for warehousing and transportation workers is essential to achieve broad-based growth and supply-chain resilience. An important first step would be to rein back the misclassification of workers as independent contractors—a practice that is especially pervasive in parts of the industry such as trucking and ground delivery. This misclassification hurts the earnings and economic security of middle- and low-wage workers, and deprives workers of labor rights and protections they are entitled to by law.
Policymakers also need to update laws, regulations, and enforcement approaches to address the ways employers are using technology in these sectors, including workplace monitoring technologies and algorithmic management. One example is a new law that went into effect in California earlier this year requiring that employers’ warehouse production targets or quotas are transparent and don’t prevent workers from taking required breaks.
Yet without adequate enforcement resources, such laws rely on worker complaints for enforcement, which research shows may be least effective for most vulnerable workers. In building these resources, policymakers at both the federal level and in states and localities can support strategic and co-enforcement approaches to strengthen labor standards to protect low-wage workers in high-violation sectors such a transportation and warehousing.
Underlying all of these approaches to boost job quality is the necessity to both raise wage standards and provide institutional support for worker power. Many warehousing and transportation workers want to join or form a union because workers can improve their working conditions and have a say in practices that affect them and their families. This includes the types of policies that strengthen unions and workers’ ability to bargain as well as policies such as just cause job protections that help protect workers from being unfairly fired or retaliated against.
On April 1, the U.S. Bureau of Labor Statistics released new data on the U.S. labor market during the month of March. Below are five graphs compiled by Equitable Growth staff highlighting important trends in the data.
Total nonfarm employment rose by 431,000 in March, and the employment rate for prime-age workersincreased to 80.0 percent.
The unemployment rate fell to 3.6 percent. It remains higher for Black workers (6.2 percent) and Latino workers (4.2 percent) compared to White workers (3.2 percent) and Asian American workers (2.8 percent), but declined for all groups.
The overall employment rate rose in March to 65.8 percent for men and 54.8 percent for women, remaining below pre-pandemic levels for both groups.
Employment in many major industries, such as retail and construction, is now back to or approaching pre-pandemic levels, but employment in leisure and hospitality has yet to recover.
The number of unemployed workers fell by 318,000. One-third (33.7 percent) are unemployed due to job loss, and another third (32.7 percent) re-entered the labor force; 13.0 percent left their jobs, 13.0 percent are on temporary layoff, and 7.6 percent are new entrants.
Earlier this week, the Association for Public Policy Analysis and Management held its 2021 fall conference in Austin, Texas. The event, which was rescheduled late last year due to the coronavirus pandemic, is an annual multidisciplinary conference that brings together researchers and practitioners to present evidence and discuss ways to improve public policy.
APPAM’s theme for the conference this year was “The Power of Inclusion: Incorporating Diverse Voices in Public Policy Analysis and Management.” The goal was to demonstrate how more inclusive practices and added diversity in policy analysis and research add value to both processes and outcomes in these fields—an objective that is shared by Equitable Growth, which works to advance opportunities for scholars from underrepresented backgrounds and increase diversity in the economics field.
The APPAM conference was also an important avenue for Equitable Growth to expand our network of scholars from various disciplines and learn about cutting-edge research on income support programs, structural racism, and gender inequality in the U.S. labor market. We were especially excited to connect with scholars researching the care economy, particularly those focusing on child care and early education, as well as for those employed in this historically undervalued sector—two areas of research and policy that the coronavirus pandemic, recession, and so-called Great Resignation have put into stark relief.
Several of our grantees and other scholars in our network, as well as in-house experts, were featured in more than 12 sessions throughout the course of the APPAM event. Below, we detail their participation, organized by the session in which they took part.
Paid Leave: A Policy to Ensure Inclusion in the Workplace: This panel session, organized by Equitable Growth grantee Meredith Slopen of Columbia University (who also presented fundedresearch), focused on the role of paid leave in an inclusive and equitable economic recovery from the coronavirus pandemic and recession. Another grantee, Julia Goodman of Portland State University, presented her research (co-authored by Harvard University’s Daniel Schneider, also a grantee) on racial/ethnic and gender disparities in paid and unpaid leave-taking, and Equitable Growth’s Director of Family Economic Security Policy Alix Gould-Werth was a discussant.
Understanding the Decline in Family Child Care Providers across Multiple States: This panel session sought to shed light on the factors contributing to the decline in family child care providers across multiple states in order to inform policy solutions that can better support these providers. Equitable Growth grantee Jonathan Borowsky of Boston University presented his funded research, co-authored by Washington University in St. Louis’ Hyun Soo Suh and Boston University’s Yoonsook Ha. Their paper looks at racial disparities in access to family child care centers through the lens of homeownership rates and racial divides in homeownership in the United States.
The Gender Wage Gap: Factors Driving Its Evolution from Occupation to Policy to Pandemic: This panel session was organized by Equitable Growth grantee Tanya Byker of Middlebury College, who also presented fundedresearch on the utilization of emergency paid sick and family leave amid the pandemic by gender and parenthood status. The session, which generally explored factors driving the evolution of gender pay disparities (including the pandemic), also featured presentations by grantee Marta Murray-Close of the U.S. Census Bureau of her work on estimating pay divides by gender using survey and administrative data, and by University of Utah’s Elena Patel, also a grantee, who discussed her paper the female labor supply effects of health insurance for women following childbirth. Patel and Murray-Close also served as discussants in the session.
How Do Social and Policy Contexts Impact Parental Employment, Economic Circumstances, and Parental Investments?: This panel session considered how changes in employment hours and schedules impact parental involvement in child development, how these changes are influenced by and affect parenthood, and what role social infrastructure programs play in parental employment and child development. It featured a presentation of research done by Equitable Growth grantee Heather D. Hill and her co-author Elizabeth Pelletier, both of the University of Washington, on parental employment trajectories and patterns in the use of social infrastructure programs, such as Unemployment Insurance, around the birth of a child to map the overall prevalence of employment instability for new parents.
“We’re Not Even on the Radar”: Participant Knowledge of Social Policies: This panel session, organized by Equitable Growth grantee Hilary Wething of Pennsylvania State University and chaired by grantee Heather Hill at the University of Washington, focused on the challenges of informing individuals about changes to social policies that affect them. Wething presented research co-authored by Hill on the learning and compliance costs that labor regulations place on workers, looking at the minimum wage in Seattle in particular. Grantee Hana Shepherd at Rutgers University detailed fundedresearch with her colleague and fellow grantee Janice Fine, on city-level labor law enforcement agencies and their outreach practices to inform workers about relevant employment protections. Grantee Julia M. Goodman at Oregon State University also discussed her co-authored research on the impact of paid parental leave policies on women’s health outcomes and disparities by studying access to leave by sector and occupational class in San Francisco.
Bureaucratic Encounters with Public Benefit, Child Care and Tax Programs: Reducing Administrative Burden in the COVID-19 Era: Chaired by Equitable Growth grantee Meredith Slopen, and organized by fellow grantee Julia Henly of the University of Chicago, this panel session sought to address the bureaucracy and administrative burden of eligibility requirements and application processes for government programs. Henly presented her co-authored paper on reducing these burdens amid the COVID-19 era, particularly with regard to child care providers seeking support through pandemic stimulus programs. Fellow Equitable Growth grantee Derek Wu detailed his fundedresearch on the short- and long-term effects of cuts to programs—such as the Supplemental Nutrition Assistance Program, Medicaid, and the Temporary Assistance for Needy Families program—on family well-being during recessions. Grantee Jennifer Romich of the University of Washington also provided discussant remarks.
Addressing Open Questions in the School Spending Literature: Existing Evidence, Diminishing Returns, and Positive Externalities: This panel session examined several aspects of school spending on elementary and secondary public education and its impact on student outcomes, from educational attainment to criminal activity and labor market outcomes later in life. Equitable Growth grantee and Research Advisory Board member Jesse Rothstein of the University of California, Berkeley presented his paper, co-authored with fellow grantee Diane Whitmore Schanzenbach of Northwestern University, on educational attainment and labor market outcomes of students by race and gender in the aftermath of school finance reforms in the early 1990s.
What Has Happened to the American Working Class Since the Great Recession?: This roundtable, organized by grantee Timothy Smeeding of the University of Wisconsin-Madison, discussed how people of color have fared since the Great Recession of 2007–2009. Specifically, the session looked at labor market outcomes, wealth and income status, and material well-being for three distinct groups of U.S. workers: foreign- and U.S.-born Latino workers, Black workers, and American Indian, Alaska Native, Native Hawaiian, and Pacific Islander workers. Grantee Jennifer Romich at the University of Washington was a speaker at the roundtable, among others.
The Midwest Economic Association held its 86th annual meeting this past weekend, featuring six important sessions on labor market monopsony that the Washington Center for Equitable Growth co-organized as part of its ongoing commitment to support new research on inequality and growth, as well as increase diversity in the economics profession by supporting scholars in various phases of their careers and from an array of backgrounds and institutions.
The six sessions on various topics on monopsony featured a wide range of participating scholars, among them Equitable Growth grantees, early career academics, and non-U.S. researchers. The sessions were part of more than 100 total sessions held in person in Minneapolis on March 25–27 to discuss and present research in all areas and specializations of economics.
Leading up the monopsony sessions were Kate Bahn, the director of labor market policy and chief economist at Equitable Growth, and Todd Sorensen, an associate professor of economics at the University of Nevada, Reno. The sessions tackled labor market monopsony as it relates to market concentration in the United States, laws and institutions, policy and power, structural models and theoretical advancements, the role of the minimum wage, and international perspectives. We sum up the highlights below.
U.S. labor market monopsony concentration
This session discussed research examining concentration through different lenses to understand how concentrated power in the U.S. labor market affects employment outcomes. Presenting were:
Hyeri Choi, a Ph.D. candidate at the University of Pennsylvania’s School of Social Policy and Practice. She discussed underemployment—measured by involuntary part-time work—affected by local market concentration as measured by the Herfindahl-Hirschman Index, a common measure of concentration, drawing from her working paper, “The Impact of Labor Market Concentration on Unemployment and Underemployment,” co-authored by her UPenn colleague and Equitable Growth grantee Ioana Marinescu.
Aaron Sojourner, an associate professor at the University of Minnesota’s Carlson School of Management. He examined his new work measuring the prevalence and impact of common ownership by investment firms that partially own public companies that are employers in local labor markets, drawing from his latest working research on common ownership impacting wage outcomes, with Jose Azar at the University of Navarra and Yue Qiu at Temple University.
Monopsony and U.S. laws and institutions
This session examined the role of employee contracts in determining employment relationships, including three papers on noncompete agreements in the United States and an analysis of collective bargaining in South Africa. The presenters in this session demonstrated how the provisions that structure employment relationships determine outcomes, rather than pure market forces. Presenting were:
Peter Norlander, an associate professor of management at Loyola University Chicago’s Quinlan School of Business. He discussed his painstaking efforts to collect data on noncompete agreements among employers who are public-sector contractors through the federal Freedom of Information Act, using software to pull the text of the contracts and creating a database on noncompete agreement clauses, for his latest working paper, “Non-Solicitation Clauses in Public Sector Outsourcing Contracts.”
Michael Lipsitz, at the U.S. Federal Trade Commission’s Bureau of Economics and Mark Tremblay, an assistant professor of economics at Miami University. They presented their working paper, “Noncompete Agreements and the Welfare of Consumers,” finding that ultimately, noncompete agreements risk harms to workers and consumers.
Ihsaan Bassier, an Equitable Growth doctoral grantee and Ph.D. candidate in economics at theUniversity of Massachusetts Amherst. He presented his research on “Collective Bargaining and Spillovers in Local Labor Markets,” which examines how South Africa’s bargaining council agreements impact wage structures in local labor markets when there is strategic interaction between firms.
Alison Pei, a Ph.D. student at Duke University. She presented her research on “The Enforceability of Noncompete Agreements and Innovation: Evidence from State Law Changes,” co-authored with Equitable Growth grantee Matthew Johnson at Duke University, Michael Lipsitz at the FTC, and Kurt Lavetti at The Ohio State University. Their work finds that greater enforceability of noncompete agreements reduces patenting levels within a state but increases the quality of patents as measured by how often those patents are cited in future patenting.
Monopsony and policy and power
This session examined the scope and success of changing the policy environment that shapes labor market competition in the United States and China. Presenting were:
Brianna Alderman, an undergraduate McNair Scholar at the University of Florida’s School of Economics, and Roger Blair, professor and chair of economics at the University of Florida. They presented their latest working paper, “Monopsony, Wage Discrimination, and Public Policy.”
Ida Brzezinska from the University of Oxford in the United Kingdom. She presented her work, co-authored with Jin Jo Kim of Oxford Policy Management, on how removing policies that are labor market barriers—specifically the Hukou system in China—improves outcomes for workers, drawn from their working paper, “The Working Dread? Analysing the Impact of the Hukou Reform on Firms’ Monopsony Power in China.”
Monopsony: Structural models and theoretical advancements
This session featured cutting-edge theoretical work guiding new empirical research on monopsony. Each paper presented an extension of theoretical models of monopsony, then used these models to conduct novel empirical analysis. Presenters were:
Glen Kwende, a Ph.D. candidate in economics at American University and an Equitable Growth grantee. He presented his job market paper, “Endogenous Wage Rigidity in a Search and Matching Model,” which builds a monopsony model of the labor market that is able to explain the pay-productivity gap in the United States.
Jelena Nikolic, an associate professor of humanities and social sciences at the Wentworth Institute of Technology. Niklolic presented a research paper, co-authored with Richard Disney, emeritus professor of economics at the University of Sussex, titled “Monopsony with Heterogeneous Labour: Evidence from Economic Transition,” which examines how the transition from Soviet central planning in Eastern Europe to a market-based system in the 1990s impacted labor market competition for workers.
Mons Chan, an assistant professor of economics at Queen’s University. He presented his work, co-authored with Kory Kroft at University of Toronto and Elena Mattana and Ismael Mourifié at Aarhus University, drawn from their working paper, “An Empirical Framework for Matching with Imperfect Competition.”
The papers presented in this session looked at how the structure of the labor market shapes outcomes when minimum wages are instituted. Three papers looked at how concentration and labor market frictions determine outcomes for Germany’s sectoral minimum wage policies. The fourth paper looks at the mix of wage offers and job quality, given labor market frictions impact outcomes when a corporate minimum wage policy is present. Presenters were:
Iain Bamford, a Ph.D. candidate in economics at Columbia University. He discussed his job market paper, “Monopsony Power, Spatial Equilibrium, and Minimum Wages.” In this model, Bamford finds that a flat minimum wage improves welfare outcomes, compared to a targeted regional minimum wage, and does not reduce employment in locations that experience a greater proportional increase to wages, referred to as the “bite” of the minimum wage increase by economists.
Martin Popp, a postdoctoral scholar and junior researcher at the Institute for Employment Research, or IAB, in Germany. He presented his latest research, “Minimum Wages in Concentrated Labor Markets,” which finds minimum wages have a relatively greater impact in markets with high levels of concentration as measured by the Herfindahl-Hirschman Index.
Gökay Demir, a Ph.D. candidate and researcher at the Leibniz Institute for Economic Research, or RWI, in Germany. He presented his research, “Labor Market Frictions and Spillover Effects from Publicly Announced Sectoral Minimum Wages.” This work finds that nearby firms anticipate a minimum wage increase in Germany’s sectoral minimum wage structure by increasing their own wage offer in response.
Suresh Naidu, a professor of economics and international and public affairs at Columbia University and an Equitable Growth grantee. He presented his latest Equitable Growth funded work, co-authored with Arindrajit Dube at the University of Massachusetts Amherst and Adam Reich at Columbia University, on Walmart Inc.’s $11 hourly corporate minimum wage and the relative presence of local labor market frictions in each labor market in which the stores operate and how that changes the mix of wages and job quality for those workers, drawing from their latest research, “Power and Dignity in Low-Wage Labor Markets: Evidence From Wal-Mart Workers.”
Monopsony: International perspectives
This session covered monopsony across the context of different countries, which demonstrated how the structure of labor markets in different countries and their labor market institutions impact outcomes resulting from labor market frictions. Papers presented in this session were:
“Labor Market Power, Self-Employment, and Development,” by Pamela Medina at the University of Toronto, Francesco Amodio at McGill University, and Monica Morlacco at the University of Southern California, Los Angeles. This paper examines how the high prevalence of an informal self-employed sector in Peru interplays with the labor market power of concentrated firms, with workers flowing between the two sectors.
“Monopsony Power in the Labor Market and Employer Branding,” by Céline Detilleux and Nick Deschacht at KU Leuven in Brussels, Belgium. In a vignette experiment, where the researchers field survey questions on hypothetical labor market trade-offs, they find that employers have a greater ability to undercut wages when they brand themselves as having an attractive workplace culture and values.
“Monopsony Rents and Local Club Goods,” by Peter Brummund at the University of Alabama and Michael Makowsky at Clemson University.
Equitable Growth grantees and network members elsewhere at the Midwest Economic Association annual meeting
Several Equitable Growth grantees and other network members participated or were featured in various other sessions over the course of the annual conference. A few highlights included:
“Doing Inclusion in Economics,” a panel organized by Abigail Wozniak, an Equitable Growth grantee and director of the Opportunity and Inclusive Growth Institute of the Federal Reserve Bank of Minneapolis. She and her panelists discussed the link between people and practice in economics, research in response to pressing inclusion questions, engaging students from a broad range of backgrounds, and improving inclusion in the editorial process. The session featured Monica Garcia-Perez, a professor of economics at St. Cloud State University, a former ASHE president and a guest speaker at Equitable Growth’s Vision 2020 conference. This presentation also included highlights from a recent Minneapolis Fed event on racism in economics.
“The Changing Labor Market and the Future of Work,” a panel chaired by the AFL-CIO Chair professor of labor policy at the Humphrey School of Public Affairs and the University of Minnesota and Equitable Growth grantee Morris Kleiner. This panel featured several papers co-authored or presented by Equitable Growth grantees, including:
“Medicaid-ing Uninsurance? Reducing the Duration of Uninsurance Spells,” by co-author and Equitable Growth grantee Elena Patelat at the University of Utah
“Unemployment Insurance Incentives and Platform Gig Work” and “New Work or Changes in Reporting? A Framework for Measuring Self-Employment Trends in Administrative Data,” both co-authored by Equitable Growth grantee Andrew Garin at the University of Illinois at Urbana-Champaign
“Changing Income Risk Across the U.S. Skill Distribution: Evidence from a Generalized Kalman Filter,” co-authored by Equitable Growth grantee Kyle Herkenhoff at the University of Minnesota
Equitable Growth was able to elevate new, cutting-edge research on monopsony in the labor market at this year’s Midwesterns, but the conference also provided us with an important way to engage with and highlight the work of many of our network members and staff and to introduce our research to this audience for the first time. We look forward to exploring additional engagement and collaboration opportunities with the Midwest Economic Association and other regional economics and social sciences conferences in the future.
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 February 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 rose slightly to 2.9 percent as 4.4 million workers quit their jobs in February.
The vacancy yield increased to 0.59 in February from less than 0.57 in January, as job openings stayed at around 11.3 million and hires increased to 6.7 million.
The ratio of unemployed-worker-per-job-opening declined last month, from 0.58 unemployed workers per job opening in January to 0.56 in February.
The Beveridge Curve continues to be in an atypical range compared to previous business cycles, as the unemployment rate fell to 3.8 percent and the rate of job openings remained at 7.0 percent.
Even with some declines in the number of job openings in sectors such as financial services and manufacturing, job openings remain elevated in many major industries compared with pre-pandemic levels.
But many economists also believe employer monopsony power contributes to labor income inequality. Put simply, monopsony power is the ability of an employer to set wages below the level that would hold if the labor market were competitive, or “free.” This wage-setting power can stem from, among other channels, collusive behavior among employers, excessive costs for workers to access jobs or find new ones, and reduced competition in the labor market resulting from competitive frictions in other markets.
London School of Economics professor Alan Manning has argued that the source of all these tributaries is essentially labor market “thin”-ness or “employer concentration.” Manning andothereconomistsfind that increased local monopsony power reduces wages, especially at the lower end of the income distribution. But there is still debate over the degree to which monopsony power may be responsible for aggregate labor income inequality.
Economist Anna Stansbury at the Massachusetts Institute of Technology’s Sloan School of Management and her co-authors, for example, find that the wages of nearly 12 percent of workers in the United States are substantially suppressed by employer concentration. The majority of workers, however, are not in highly concentrated labor markets.
Similarly, Kevin Rinz at the U.S. Census Bureau concludes that local labor market concentration has not been a major contributor to growth in aggregate labor income inequality because he finds average local labor market concentration has fallen since the mid-1970s. Importantly, however, he estimates sharp increases in both national and average local labor market concentration in the retail trade industry.
Another conclusion is possible. If growing local monopsony power in the retail sector pushed local wage floors downward, with spillovers on workers in other local industries, then the role of monopsony power on aggregate labor income inequality may be substantial.
In my working paper, “Walmart Supercenters and Monopsony Power: How a Large, Low-Wage Employer Impacts Local Labor Markets,” I provide evidence that Walmart Inc.—the largest private-sector employer in the United States—exercised monopsony power in labor markets where the firm opened Supercenter stores, with consequences well beyond the retail sector. Specifically, I demonstrate that local Supercenter entry reduced countywide aggregate employment and earnings while an increase in the minimum wage caused local aggregate and retail employment to increase in counties that had a Supercenter. These results run contrary to what economists would expect if labor markets were competitive.
In this issue brief, I provide some context for thinking about the role that Walmart Supercenters play in local labor markets in the United States before outlining the novel approach I use to estimate their impact on several outcomes of interest. My results provide the backdrop for a discussion of how this retail giant and other large, low-wage employers may gain the ability to exercise monopsony power. These findings have significant implications for potential policy responses when labor markets are not competitive.
I conclude the issue brief with four possible policy responses based on the findings in my working paper. I argue that policymakers should:
Preemptively support collective bargaining and higher local minimum wages in communities where employers may have the opportunity to exercise monopsony power
Prescriptively support collective bargaining and higher local minimum wages in communities where employers are already exercising monopsony power
Examine the wage- and price-setting powers of monopsony employers when considering policy decisions
Examine the monopsony power of employers in local labor markets, especially at the low end of the wage scale, when making policy decisions
Walmart Supercenters and local labor markets
After decades of growth and success selling discounted general merchandise, in 1988, Walmart opened the doors of its first Supercenter. By the end of 2005, nearly 2,000 of these Supercenters had opened in more than 1,200 counties across the United States. This rapid growth continued for another decade, with more than 3,400 Supercenters nationwide opening by the beginning of 2015.
Between two and four times the square-footage of the firm’s older, discount store format, which had largely sold general merchandise, the new Supercenters offered many services outside the retail archetype of the day, such as photo processing, tire and lube sales and service, and financial services, as well as an expansive selection of general merchandise and full-service grocery options at substantially lower prices worth 3 percent of average annual household income. Many stayed open 24 hours per day.
A typical Supercenter employed between 350 and 475 people—a very large share of whom were women. Moreover, with firmwide annual employee turnover around 70 percent—almost certainly concentrated among the firm’s sales staff—most Supercenter workers needed to be replaced each year. According to data that Walmart was compelled to submit to a court in 2002, the company had nearly 4 million unique U.S. employee records from January 1996 through March 2002. During this period, Walmart’s U.S. employment increased from around 620,000 employees to around 1.1 million.
In other words. Walmart had to hire nearly 4 million workers over that 6-year period alone to help increase the size of its workforce by 1 million employees between 1990 and 2005. And despite the high employee turnover, Walmart was able to keep average wages and benefits very low, even for the retail sector. This, in turn, helped to boost real annual profits by more than 500 percent over the same time period.
Walmart currently guarantees its workers a minimum starting wage of $12 per hour. In contrast, rival big retailers Amazon.com Inc. and Target Corp. guarantee their workers a minimum of $15 per hour, while Costco Wholesale Corp. pays new workers at least $16 per hour. But Walmart can reduce the local wage standard. In 2003, for example, in anticipation of the impending rollout of Walmart Supercenters across California, incumbent California grocery chains cited Walmart’s low labor costs as a factor behind their attempt to cut employee benefits and wages for new hires, resulting in a months-long strike of nearly 70,000 grocery workers.
How to estimate the local U.S. labor market impact of Walmart Supercenters
Because of Walmart’s apparent downward pressure on local retail-sector compensation amid its rapid expansion over the past four decades, many observers have made a lot of (mostly negative) claims about Walmart’s localimpact. The U.S. House Representatives’ Education and Labor Committee even issued a report on Walmart’s cost to taxpayers. Yet from a research perspective, it is very difficult to actually identify whether Walmart caused these local outcomes or whether they could be the result of another simultaneous phenomenon in the local economies where a Walmart opened.
In an economist’s ideal research environment, we would study two identical universes where everything was the exact same until we interfered—much as in an ideal scientific experiment, where we could perfectly control everything that was different between them. We could pick one universe at random in which we would “treat” communities by opening Walmart Supercenters in them, and we would then compare the outcomes in the treated places to those in their otherwise-identical “control” communities in the other universe. The difference in outcomes in any treated-control community pair would be the “treatment effect” in that community.
Sadly for economists—but in a win for everyone else—we do not wield this sort of power over the multiverse. The best we might hope for is a randomized control trial in which we could randomly assign some places in our universe to get a Walmart Supercenter and others in the same universe to not get a Supercenter. We would observe and control for any remaining arbitrary differences between the places. And then, we would compare outcomes of interest, such as employment and earnings, to estimate the treatment effects of entry.
The real world where Walmart operates is much messier. It is extremely difficult to estimate any unbiased causal treatment effects of Supercenter entry into a community even if economists observe outcomes of interest in treated communities for several years before and after Walmart opened Supercenters, even if we observe the same in several control communities where Walmart didn’t open these stores, and even if we also observe what we think are important control variables in all these communities.
This is because any estimated effects may still be contaminated by bias from what economists call “endogenous entry”—that is, from “endogeneity bias,” meaning there may have been some unknown reason or reasons correlated with outcomes we’re interested in, such as employment or earnings, which motivated Walmart to choose to open Supercenters in some communities at the times that it did, but not in those places it didn’t.
The upshot: Our outcomes of interest were already going to evolve differently in the two types of communities even after controlling for observable differences. In the absence of any further efforts, we can’t differentiate the impact of Supercenter entry on any outcome of interest from those changes that stem from unobserved differences among the two types of communities. Any resulting estimate of the treatment effects of entry could be really wrong or biased.
Severalduelingpapersthat investigate Walmart’s local impact on employment or earnings make efforts to try to deal with this endogenous entry concern using a statistical technique called “instrumental variables estimation.” The validity of this approach essentially boils down to finding a new variable that is correlated with a Walmart entry but which otherwise is uncorrelated with the outcome after controlling for observables. The instrumental variables that these authors came up with are clever but, as they point out about each other’s instruments, may be invalid because they probably fail to meet this full test of validity. As a result, their estimates may still be contaminated by endogeneity bias—which may explain why they ended up with very different results.
To address this potentially serious endogeneity issue, I take a different approach in my recent working paper. I begin by collecting observations over the period 1990–2005 on 39 counties where Walmart tried to build a first Supercenter but where local efforts prevented them from successfully doing so. To do this, I collected anecdotal observations of frustrated efforts to open Supercenters from the anti-development Sprawl-Busters Newsflash Blog, which posts thousands of rumors and reports of possible local Supercenter entries from citizens in communities all over the United States.
I then culled this list to the counties where, using local news reports and council minutes, I could confirm that Walmart did demonstrate a significant interest in building a Supercenter, and I cross-referenced these with data on counties and dates of Supercenter entry to ensure that no Supercenter was built in these control counties before the final months of 2005. Selecting the “donor pool” of control counties in this way means that they are much more likely than other untreated counties to share those unobserved features and trends that Walmart used to select counties where it successfully opened a Supercenter. Why? Because Walmart wanted to enter these donor pool counties, too.
I show that selecting the donor pool counties in this way makes them highly similar to the treated counties on those variables that I can observe and which might have influenced Walmart’s entry decisions. The treated counties that Walmart did enter are much more similar to these donor pool counties than they are to the remaining untreated counties, where Walmart did not try to build a Supercenter and are not in the donor pool.
Armed with these data and annual county-level observations of labor market outcomes from several sources—including county-by-industry observations from the Quarterly Census of Employment and Wages compiled by the U.S. Bureau of Labor Statistics, fed by data from state Unemployment Insurance reporting systems—I then estimate a “synthetic control” for each treated county that got its first Walmart Supercenter and was observed for at least 5 years before and after entry during this period. This synthetic control estimator selects weights to best match the pre-treatment characteristics of each treated county to the untreated donor pool counties.
The result for each treated county is a “synthetic” version of itself that is a weighted average of a subset of the donor pool counties. Intuitively, a synthetic control that matches its treated equivalent very well in the pre-treatment period is a good approximation of that treated county in a parallel universe where it was never treated but is otherwise identical. The difference in the outcome between each treated county and its synthetic control is the estimate of the treatment effect from that ideal multiverse thought experiment.
With dynamic treatment effects estimated for each treated unit, I then “stack” these estimated effects in event time and average them. I also adopt several approaches to test whether the resulting estimates of the average treatment effects on the treated counties are larger than what we expect from random noise in the data. My findings are telling.
How Walmart Supercenters impact local labor markets
Use this estimation strategy, I find that the entry of Walmart Supercenters caused large declines in aggregate local employment, earnings, and labor force participation 5 years after entry. My results suggest that the median treated county had more than 600 fewer employed workers 5 years after Supercenter entry into a community, with many of these workers leaving the local labor force altogether.
Among those fewer workers who were employed 5 years after entry, their average annual earnings in the median treated county were about $750 less than before the entry of the Walmart Supercenter. Unsurprisingly, given the shock to local labor demand that the arrival of a Supercenter represents, I find that local retail employment and earnings jumped sharply in the year of entry as the Supercenters staffed up, but, by the fifth year after entry, both outcomes had largely regressed to their pre-entry values.
As would be expected, given these results, I find that Supercenter entry was responsible for a large increase in the low-wage retail sector’s share of local employment, alongside a sharp increase in employment concentration among local retail-sector firms, as seen in the monopsony literature described earlier. All of these results are most consistent with the conclusion that after the immediate positive shock to local labor demand that accompanied the opening of a Supercenter, Walmart quickly began displacing labor demand from incumbent retailers with whom it also competed for local market share.
As those incumbent retail employers began shedding workers, resulting in Supercenters capturing an increasing share of local low-wage job openings as Walmart replaced the 70 percent of workers it lost to attrition each year, the firm increasingly gained the ability to lower the wage rate it needed to offer in order to attract enough workers to staff their stores. This dynamic would have lowered the wage floor faced by local nonretail employers—even those with no wage-setting monopsony power—essentially lowering the prevailing wage that those employers would have to offer to attract new workers to low-wage positions.
If local nonretail employers were able to hire new workers at lower wages, and if retail employment didn’t fall below pre-entry levels, then why didn’t aggregate local employment increase instead of decreasing? To investigate this, I look separately at goods-producing and service-providing industries. I find that the same pattern of Supercenters causing sharp declines in employment and earnings in the aggregate is even more apparent when disaggregated in this way. But why would Supercenter entry negatively impact employment and earnings outside the retail sector? The explanation likely has to do with Walmart’s supply chains.
Walmart is well-known for pressing its suppliers to cut costs, which often results in consolidation that reduces wages and employment among their own workforces. A string of products and their suppliers caught in this vice include Coca Cola bottlers, Vlasic Pickles, Nabisco cookies and crackers, Dean Food products, Hoover and Maytag appliances, Huffy bikes, Dial soap, Levi Strauss apparel, Master Lock, and Eastman Kodak products and services.
To the extent that Supercenters source from local firms, these cost-squeezing practices would have contributed to my results and increased Walmart’s ability to set local wages. But Supercenters are largely supplied through Walmart’s network of distribution centers, which are often located counties or even states away and which themselves often source from a small number of factories located states away or even internationally.
A consequence of these supply chain dynamics is that, as Supercenters captured local retail market share, Walmart’s suppliers displaced the local producers who supplied incumbent local retailers, reducing the labor demand of these local producers and contributing to aggregate employment losses. This, again, would have made Supercenters responsible for an even larger share of local demand for less-skilled labor and further reinforced their ability to set wages, while also exacerbating any negative impact on local multiplier effects.
The findings in my working paper are not conclusive evidence that all of these dynamics were at play, yet the set of results for the separate industrial agglomerations certainly supports this explanation. Local goods-producing industries did experience sharp contractions in employment and earnings. Moreover, so did service-providing industries—suggesting that local service-providing suppliers of these incumbent local firms may have been further casualties in a cascading chain of effects.
This set of estimated effects of the entry of Supercenters into local U.S. labor markets is broadly consistent with these Supercenters gradually gaining and exercising monopsony power, with negative consequences for workers. Few, if any, other explanations fit the pattern of results.
Still, more evidence is always better. That’s why, in my working paper, I also test whether the monopsony power explanation is supported by the evidence when the treatment is different and should reduce the local impact of monopsony power. Specifically, and again using the synthetic control estimation strategy described earlier, I look at the local impact of the 1996–1997 federal minimum wage increase—plausibly exogenous to local economic conditions—in counties that already had a Supercenter. To do this, I restrict my treated and donor pool counties to those in states which tracked the federal minimum wage over this period. I find that the minimum wage increase sharply increased aggregate and retail employment in counties that had a Supercenter, while also increasing retail-sector earnings.
If local labor markets in those counties had been competitive, then a binding minimum wage increase should have had negative employment effects, if anything. These minimum wage results alone are highly indicative that Supercenters were exercising some degree of local monopsony power, with the minimum wage increase reducing Supercenters’ ability to set wages low, while increasing the number of local workers willing to work at the prevailing wage, helping to boost employment.
Taking my estimates of the effects of Supercenter entry together with my minimum wage results, the evidence strongly suggests that Walmart Supercenters exercised local monopsony power—at least over my period of study—with large spillovers even beyond the retail sector and with large, negative impacts on workers.
Certainly, the estimated effects of both treatments—along with the implication that Supercenters exercise a degree of monopsony power—are average results. Treatment effects are heterogeneous across counties, though not across cohorts. Restricting the treated and donor pool samples to only nonurban counties—where labor markets are thinner and monopsony power is more likely—generally yields even larger average effects. Still, the average effects, which are primarily from urban counties, are broadly significant and robust to several specifications and sample restrictions.
Implications and possible policy responses
What might these results imply for policymakers and researchers? And what policy responses might be appropriate and effective? I suggest four policy responses targeted at undermining firms’ ability to exercise monopsony power, with the goal of making affected labor markets more competitive. Policymakers should:
Preemptively support collective bargaining and higher local minimum wages in communities where employers may have the opportunity to exercise monopsony power
Prescriptively support collective bargaining and higher local minimum wages in communities where employers are already exercising monopsony power
Examine the wage- and price-setting powers of monopsony employers when considering policy decisions
Examine the monopsony power of employers in local labor markets, especially at the low end of the wage scale, when making policy decisions
Let’s consider each of these policy responses briefly in turn.
Preemptively support collective bargaining and higher local minimum wages
The estimates in my working paper are specific to Walmart Supercenters, yet the results are likely to hold more generally for large employers with low-wage business models that are active in thinner labor markets. Numerous such employers have operated in the United States in the past 40 years, and many are operating today.
This suggests that policymakers would do well to consider whether a local labor market is thick enough to absorb a new low-wage employer without it being able to exercise much monopsony power to the detriment of local workers. If not, then policies that support collective bargaining or set higher local minimum wages for employers of a certain size might be highly effective at preventing such employers from negatively impacting local labor markets.
Prescriptively support collective bargaining and higher local minimum wages
The results of my analysis of the impact of the 1996–1997 federal minimum wage increase in counties with a Supercenter suggest that in local labor markets that are already likely subject to monopsony power, a targeted minimum wage increase may help to counteract the negative effects and boost employment.
These findings also suggest that the discordant estimates of the employment effects of minimum wage increases that are found in the economic literature might be at least partially reconciled by accounting for local monopsony power. Note that my results do not imply that less-targeted minimum wage increases would be employment-boosting.
Examine the wage- and price-setting powers of monopsony employers when considering policy decisions
Economists and policymakers alike should not be quick to dismiss the consequences and costs of Supercenter monopsony power simply because consumers benefit from Walmart’s lower prices. Those lower prices are estimatedelsewhere to be worth 3 percent of annual average family income for a household that buys all its groceries at Walmart, but I estimate total countywide earnings were more than 5 percent lower by the fifth year after Supercenter entry. This is an unfavorable comparison for Walmart’s prices even without considering that many families do not buy all, or even most, of their groceries from a Supercenter.
What’s more, in results not discussed above, I find that Supercenter entry was also responsible for substantial increases in local Earned Income Tax Credit receipts, which I estimate to have cost U.S. taxpayers more than $6.3 billion (in 2017 U.S. dollars) between 1995 and 2005 alone—despite the associated lower rates of labor force participation, earnings, and employment. Given this context, the increased EITC receipts seem likely to have been the result of workers becoming eligible for the EITC due to reduced earnings following the local entry of a Walmart Supercenter and may even have facilitated Supercenter monopsony power by partially “topping up” low wages. In the light of these results, Walmart’s lower prices seem underwhelming.
Examine the monopsony power of employers in local labor markets, especially at the low end of the wage scale, when making policy decisions
Given the ubiquity of Supercenters across the United States by the end of my study period in 2005 and the continued growth in their numbers through 2015, it is highly likely that a substantial and growing number of low-wage workers in the country were exposed to some degree of monopsony power exercised by a Supercenter during that period—even if many labor markets where Supercenters operated were thick enough to preclude much wage-setting ability. This rapid spread of Walmart Supercenters likely left very large numbers of low-wage workers earning wages well below what their employers may have been willing to pay them in competitive labor markets.
This may help explain why, despite wages growing so much more quickly at the bottom of the pay distribution than they did for everyone else between 2015 and 2020, bottom-quartile wages have had room to grow that much more quickly again during the past year. At the beginning of 2021, record numbers of workers began quitting their jobs—especially in the retail trade and leisure and hospitality sectors that have long offered by far the lowest average earnings of all nonfarm industries. The number of monthly job openings in these two sectors consequently shot up, which soon led employers to raise wages in an effort to attract new staff. As a result, between December 2019 and December 2021, average hourly earnings grew more quickly in these two lowest-wage sectors than in any other U.S. sector, despite no obvious increase in labor productivity.
If average wages in these two industries had been even close to the levels that would have prevailed if low-wage labor markets had been broadly competitive, then we should not see job openings remaining near record highs alongside such disproportionately high average wage growth even as employment levels recover. The strong implication is that many low-wage workers were long subjected to less-than-competitive wages due to monopsony power that has only been counteracted by incredibly tight labor markets.
Given all of this, it is not unlikely that monopsony power exercised by Supercenters played some role in growing labor income inequality through 2015. While my paper does not attempt to estimate any distributional effects of Supercenters, this is a promising area for further research that could be highly complementary to the existing inequality literature and could help inform policymakers in their policy choices to corral the monopsony power of employers in local labor markets.
There is substantial evidence that Walmart Inc., the largest private-sector employer in the United States, exercises monopsony power. This has had large, negative consequences well beyond its stores’ walls, causing substantial decreases in local employment, earnings, and labor force participation, as well as higher public spending. The labor market effects were large and widespread enough that they may also have contributed to growing labor income inequality over the past four decades—though this is less clear.
The evidence also suggests that these consequences can be at least partially mitigated, and local employment boosted, by increasing minimum wages in local labor markets affected by monopsony power—though this should not be taken to suggest that more broadly applied minimum wage increases will similarly boost employment in places that are not clearly affected by monopsony power. To the extent possible, however, policymakers might do better by preventing new large, low-wage employers from being able to exercise monopsony power in the first place, through policies that support collective bargaining or set higher local minimum wages for larger employers.
Common-sense use of policies such as these can help undermine the ability of large, low-wage firms to exercise monopsony power and can move affected labor markets closer to what they might look like if they were truly free and competitive.
— Justin C. Wiltshire is a Ph.D. candidate in economics at the University of California, Davis. Beginning in September 2022, he will be a postdoctoral scholar at the Institute for Research on Labor and Employment at the University of California, Berkeley. Beginning in 2023, he will be a lecturer (assistant professor) in economics at the University of Queensland. His research explores how regional economies evolve and how less-advantaged workers fare, with an eye on the interplay between local labor market power, institutions, and local prices.
Equitable Growth is committed to building a community of scholars working to understand how inequality affects broadly shared growth and stability. To that end, we have created the monthly series, “Expert Focus.” This series highlights scholars in the Equitable Growth network and beyond who are at the frontier of social science research. We encourage you to learn more about both the researchers featured below and our broader network of experts.
Feminist economics is a field of study that pushes for a fuller exploration of economic life. Feminist economists call attention to the social constructions of traditional economics and argue that its models and methods are biased by an exclusive attention to masculine-associated topics, assumptions, and methods. As such, they tend to focus on issues that have long been overlooked or snubbed by the largely male-dominated field, such as unpaid care work, unequal power relations between women and men, and labor market outcomes for women of color.
As March is Women’s History Month, this month’s Expert Focus highlights six feminist economists studying women’s roles and contributions to the U.S. economy, the differences in outcomes between men and women in the U.S. labor force, and a multitude of other feminist economics topics. The scholars featured here range in background and are in various stages of their careers, though many of them were part of the original generation of feminist economists who founded IAFFEand launched Feminist Economics. Other prominent feminist economists and pioneers of the field—including Nina Banks, Nancy Folbre, and our President and CEO Michelle Holder—have been featured in previous editions of Expert Focus.
Randy Albelda
University of Massachusetts Boston
Randy Albelda is a professor emerita at the University of Massachusetts Boston as well as a senior research fellow at the university’s Center for Social Policy. Her research focuses on economic policies affecting low-income women and families. She has written extensively on poverty, wage inequality, and precarious work. Her book, Economics and Feminism, studies the history of feminism and economics, and examines why economics had been relatively impervious to feminism. She also recently contributed a chapter to The Routledge Handbook of Feminist Economics on the fragmented state of work-family policies in the United States and its impact on families and low-income women. In 2018, Albelda received an Equitable Growth grant to study the long-run effects of Temporary Disability Insurance on labor market outcomes, such as earnings stability and labor force participation.
Radhika Balakrishnan
Rutgers University
Radhika Balakrishnan is a professor in the Department of Women’s, Gender, and Sexuality Studies at Rutgers University. Her research focuses on gender and its relationship to development, the global economy, and human rights, in particular economic and social rights. Throughout her career, Balakrishnan has sought to change the lens through which macroeconomic policy is interpreted by applying international human rights norms to the assessment of the macroeconomy. She is the outgoing president and conference chair of the International Association for Feminist Economics, where she worked to connect economic policy and feminist activism, while continuing her longstanding work on human rights. Balakrishnan was also a commissioner for New York City’s Commission for Gender Equity, which seeks to address inequity and discrimination along gender lines in the most populous city in the United States.
Joyce Jacobsen
Hobart and William Smith Colleges; Wesleyan University
Joyce P. Jacobsen is the president of Hobart and William Smith Colleges and an economics professor there as well as the Andrews professor of economics emerita at Wesleyan University. Her research focus lies in labor economics, particularly the economics of gender, sex segregation, migration, and the effects of labor force disruptions on women’s earnings. Jacobsen has spent her career furthering the status of women in the economics profession—an achievement for which she received the 2021 Carolyn Shaw Bell Award, named after the first chair of the American Economic Association Committee on the Status of Women in the Economics Profession, or CSWEP. She has authored several textbooks, including The Economics of Gender and most recently, in 2020, Advanced Introduction to Feminist Economics. This textbook is the first of its kind to provide an overview of feminist economics and examine its relation to several economics subtopics, such as economic development, environmental economics, and international trade and finance.
Julianne Malveaux
Cal State LA
Julianne Malveaux is the dean of the College of Ethnic Studies at Cal State LA, a college that focuses on interdisciplinary analysis of histories, cultures, and social experiences of people of color. She is also the president emerita of Bennett College, the country’s oldest historically Black college for women located in Greensboro North Carolina. Malveaux has written extensively on Black Americans’ impact on the U.S. economy and on issues related to gender and women in the workforce, intersectionality, and public policy. She is a frequent commentator in media outlets and podcasts on issues from the economy and the labor force to racial and gender pay discrimination and the wealth gap. Her columns and blog posts frequently touch on economic instability and inequality as it relates to Black women and communities of color in the United States.
Katherine Moos
University of Massachusetts Amherst
Katherine Moos is an assistant professor of economics at the University of Massachusetts Amherst and an economist at the Political Economy Research Institute. Her research focus is feminist political economy and the welfare state, social reproduction, unpaid household labor and care work, and time-use and working-hours legislation. Many of Moos’ recent publications utilize a feminist lens to examine various political and economic processes, from measuring the cost of social reproduction (which refers to the process of maintaining the labor force on a daily and intergenerational basis) to state regulation of the economy and labor market. In 2021, Moos published a study looking at U.S. fiscal policy in response to the coronavirus pandemic and recession from a feminist perspective, arguing that the federal aid did improve the livelihood of some groups but left others—including low-wage workers, women, and people of color—in vulnerable positions.
Diana Strassmann
Rice University
Diana Strassmann is the Carolyn and Fred McManis distinguished professor in the practice of humanities in Rice University’s Center for Women, Gender, and Sexuality Studies. She is a leading scholar in feminist economics, a co-founder of the International Association for Feminist Economics and the founding editor of Feminist Economics. Her work bringing feminist perspectives into more mainstream thinking and her research on the economy and the labor force has changed the field of economics not only in terms of what is studied but also how it is studied and who studies it.
Equitable Growth is building a network of experts across disciplines and at various stages in their career who can exchange ideas and ensure that research on inequality and broadly shared growth is relevant, accessible, and informative to both the policymaking process and future research agendas. Explore the ways you can connect with our network or take advantage of the support we offer here.
The conventional wisdom is that the nation’s system of retirement tax incentives, built around 401(k)s and Individual Retirement Accounts, is geared at helping the middle class build a small nest egg for their golden years—just enough to supplement Social Security and sustain a modest standard of living after a lifetime of hard work. But as a result of taxpayer abuse and policymaker missteps over decades, tax-advantaged retirement accounts have been hijacked by the rich and their armies of lawyers and accountants. Today, wealthy Americans use tax-advantaged retirement accounts to invest huge sums tax free for themselves and their heirs.
This subversion of retirement tax policy starves the federal government of the resources it needs to make critical investments in physical and social infrastructure that could deliver strong, stable, and broad-based economic growth. In this sudden new era of rising violent authoritarianism abroad and challenges to our own democracy here at home, policymakers need to end these federal tax incentives for the wealthy to demonstrate that the most well-off in our society cannot capture our federal tax system to the detriment of those for whom these retirement savings plans were originally designed.
This issue brief, which was the subject of a panel at the National Institute of Retirement Security’s annual conference earlier this month, presents the evidence for how the growing misuse of the federal tax code by wealthy Americans was engineered and why it matters to average retirement savers and our overall economic health and wellbeing. The brief then concludes with a set of promising policy remedies to help ensure these tax incentives are used by those who need them to save for retirement, not so the wealthy can avoid paying their fair share of taxes when our nation’s needs are high and rising.
The rise of mega retirement accounts for the wealthy
The history of tax preferences for retirement savings, also known as retirement tax expenditures, is long and complex, but the stated desire for these policies has always been to help middle class taxpayers save for retirement. Yet most of these incentives today disproportionately benefit high-income, White Americans. Tyler Bond, the research manager at the National Institute of Retirement Security, shared Figures 1 and 2 below—courtesy of Tax Policy Center Senior Fellow Steven Rosenthal—to make this point at the NIRS conference.
Figure 1
The richest Americans accumulate the largest retirement account balances and corresponding tax benefits
Mean balances for defined contribution retirement accounts, by percentile of net worth, 1989–2019
Figure 2
White Americans accumulate more retirement assets, and receive larger corresponding tax benefits, than Black or Hispanic savers
Mean balances for defined contribution retirement accounts, by race and ethnicity, 1989–2019
This racial divide is the result of systemic discrimination, reflecting decades of policies and practices that denied Black, Latino, and Indigenous Americans access to the best neighborhoods and highest-paying occupations. It is also important to note that the figures above only capture those roughly 60 percent of Americans who have any retirement savings accounts at all—a divergence that itself breaks down along income and racial lines. And, as American University Kogod School of Business professor Caroline Bruckner explained at the NIRS panel, women and gig workers are also likely to have low savings and reduced access to plans, though more and better data are still needed.
For those who do have access, the accounts are increasingly being used as mini hedge funds and tools for intergenerational transfers—one of manyrich-friendlycarve-outs in the U.S. tax code—by wealthy Americans to avoid taxation and pass on appreciated assets to their heirs tax-free. How do we know this? Thanks to a recent leak of tax records and subsequent reporting by ProPublica, we now know, for example, that the co-founder of PayPal Holdings Inc., Peter Thiel, has a Roth IRA worth roughly $5 billion. Roth IRAs are investment savings plans funded with after-tax money, with all investment gains and withdrawals (after the saver reaches 59.5 years of age) being tax-free.
In contrast, traditional IRAs are funded with pretax money and investments appreciate tax-free, but withdrawals are taxed at ordinary income tax rates. Contributions to both types of accounts are capped. The annual contribution limit in 2021 was $6,000, but the number is adjusted for inflation each year and is reduced for high-income taxpayers. The limits are higher for employer-based defined-contribution plans such as 401(k)s and 403(b)s—$19,500 for employee contributions and $58,000 for total contributions, including employer contributions, in 2021—which can then be “rolled over” into traditional IRAs and Roth IRAs.
Defined-benefit plans also have limits, which tend to be even higher, and most of these plans also can be rolled over into IRAs. The catch with both employer-sponsored defined-contribution plans and defined-benefit plans, though, is that they are highly regulated and are supposed to be provided to all employees at a firm, or at least a large swath of them. IRAs do not face similar constraints.
Thiel’s $5 billion in tax-free retirement savings via a Roth IRA may be an exceptional case, but he is not entirely alone. During his campaign for the presidency in 2012, now-Sen. Mitt Romney (R-UT) disclosed a traditional IRA worth between $20 million and $102 million. The Joint Committee on Taxation estimates that there are roughly 500 taxpayers with IRAs worth $25 million or more, averaging $154 million each.
These 500 exceedingly wealthy individuals—a number of whom were featured in the ProPublica report—are clearly in a league of their own. Yet there are 28,000 more taxpayers with IRAs worth $5 million or more. These so-called mega IRAs add up to roughly $280 billion in total savings.
Providing a tax break for savings well above any reasonable need for consumption in retirement when federal taxes on the wealthy are needed for key investments in the nation makes no sense. Consider this: A $25 million nest egg could guarantee, through a joint-and-survivor annuity, $107,250 of income per month for the rest of a 65-year-old couple’s lives, according to the U.S. Department of Labor’s “Lifetime Income Calculator.”
Instead of actually preparing for retirement, wealthy savers use retirement accounts to shield the sale of appreciated assets from capital gains taxes. Thiel, for example, sold most of his PayPal stock in 2002, and then used the tax-free proceeds to invest in Facebook (now Meta Platforms Inc.). Now, he is able to use his Roth IRA as essentially a tax-free hedge fund to pass on accumulated assets tax-free. Roth IRAs are especially powerful for this type of tax dodge since there are no required minimum distributions during the life of the original account holder, and, until only recently, heirs were able to “stretch” the tax-free build-up of wealth inside the accounts long after the original account holder died.
Mega IRAs, as well as 401(k)s and other workplace plans that have not yet been rolled over to an IRA, cost the U.S. Treasury Department hundreds of billions of dollars in foregone revenue each year. If these accumulated assets were held in normal, post-tax brokerage accounts, they would face capital gains taxes when sold. Given the current top rate on long-term capital gains of 23.8 percent, Thiel’s tax maneuver alone likely cost the U.S. Treasury more than $1 billion.
To put that revenue loss in perspective, consider that the federal government provides a bit more than $1 billion per year in the Saver’s Credit, the only retirement tax incentive targeted exclusively at low- and moderate-income Americans. (See Table 1, by the Tax Policy Center.)
Table 1
Retirement tax incentives cost U.S. Treasury hundreds of billions of dollars each year
Estimates of foregone revenue as a result of various retirement tax exclusions, deferrals, and credits, in billions of dollars, 2020–2024
This foregone tax revenue, which has been increasing in constant dollars over the past decade (see Figure 3), could instead pay for critical public investments in physical and social infrastructure that spur equitable economic growth.
Figure 3
(Like Table 1 above, Figure 3 uses Joint Committee on Taxation estimates, but for smoothing purposes Figure 3 uses a 5-year moving average. That is why the $379 billion data point for 2020 in Figure 3 is higher than the $294 billion number in Table 1.)
Tax evasion and other retirement savings policy mistakes
So, how did we reach this highly unfair and inefficient point? How have some savers even been able to build these astronomical balances given the contribution limits referenced above? How have the rich hijacked these accounts that were originally designed for the middle class?
Part of the story is that, like so many other tax evasion schemes, the use of IRAs is underenforced by an underresourced Internal Revenue Service. In Thiel’s case, ProPublica alleges that he used dubious accounting practices to “stuff” a Roth IRA he opened in 1999 with Paypal “founder’s stock,” early equity in the still-private company. He paid one-tenth of one-cent for each share and then watched as the $1,700 account ballooned to 10 figures—all tax-free. ProPublica argues that closer scrutiny of these pricing techniques probably would not have passed muster at the IRS because assets injected into IRAs must be priced at their fair market value.
As for Sen. Romney’s multimillion-dollar IRA, The Atlantic reported that his position at private equity firm Bain Capital before he entered politics enabled him to gain special access to cheap stock in firms before they went public and probably invested his carried interest in certain buyout deals into the IRA. Some of these bets likely did not pay off, but some—such as Domino’s Pizza—did, reported Investment News.
Because these were private companies at the time of the initial investment, it is hard for anybody, including the IRS, to know if the assets were being valued correctly; early financing for speculative ventures will naturally come with somediscount to compensate for the high risk of failure. But because the vast majority of Americans do not have access to these “unconventional assets,” it demonstrates that these accounts, which were designed for middle-income taxpayers, are now bestowing unearned and unjustified benefits onto the rich.
Another part of the story, though, is a series of systematic policy missteps made over a number of years. The most fundamental mistake was building a retirement tax system that gives the largest incentives to high-income individuals already inclined to save a large portion of their income. By letting retirement savers exclude contributions from current taxable income—rather than, say, provide a refundable credit that matches savings dollar-for-dollar—those in higher marginal tax brackets will always receive larger benefits.
Though there is some debate as to how much newsavings the tax incentives actually encourage, the upside-down, regressive nature of the current system—giving the biggest benefits to those with the highest income—is indefensible. (See Figure 4.)
Figure 4
As Michael Dolan at the University of Virginia School of Law explains, Congress compounded this design flaw by slowly increasing contribution limits over the past 25 years, part of the deregulatory fervor that took hold across economic policymaking during the neoliberal era. In 1996, for example, Congress repealed the rule that limited the combined amount that employees could save through defined-contribution plans and defined-benefit plans offered by the same employer. This—paired with the rise of cash-balance plans, which are defined-benefit pensions that resemble defined-contribution plans and are increasingly easy for employers to set up for their high-income workers—proved to be an especially costly and regressive policy mistake.
All the while, the nation’s public retirement program, Social Security, saw no major benefit increases as the value of the minimum benefit for low-wage workers—currently $886 per month—declined relative to average wages. Since it is only high-income taxpayers who are ever at risk of hitting up against private retirement contribution limits, increasing the limits is always unduly beneficial to the rich. (See Figure 5.)
Figure 5
Federal legislators have also quietly loosened rules around required minimum distributions from tax-preferred retirement accounts over the years. And, again, these tax policy changes overwhelmingly benefit the well-to-do.
Another damaging set of policy changes by Congress provided taxpayers the chance to “Rothify” their retirement savings. When given this option, many savers will opt to pay taxes now (or during a year when they have low taxable income and are thus in a low marginal tax bracket) in order to avoid paying them later—the distinguishing feature of a Roth IRA. Members of Congress are drawn to this seemingly arcane reform because when taxpayers choose this option, it raises revenue within the 10-year “budget window” that determines how the fiscal effect of a bill is “scored” by budget analysts.
This budget gimmick, which increases revenue on the front-end but is simply traded for reduced revenue on the back-end, was used in 2005 and went into effect in 2010 to create a major loophole that the wealthy’s accountants and lawyers have been all too happy to exploit. They devised ways to make “backdoor” Roth conversions that circumvent rules that are supposed to bar high-income taxpayers from making contributions to a Roth IRA, and even “mega backdoor” Roth conversions, taking advantage of a little-known feature in some 401(k) plans that allow for after-tax contributions well beyond the normal $19,500 limit.
Altogether, these policy changes allow high-income workers to legally game the system. Though they would still be hard-pressed to accumulate Theil-, or even Romney-level, sums in their retirement savings accounts, it has become very possible, as Rosenthal and University of Chicago law professor Daniel Hemel show, for those at the top of the income spectrum, such as lawyers, doctors, and financiers, to shelter multiple millions of dollars over the course of their careers.
Overall, the growth and abuse of retirement tax incentives is a case study in how complexity in the federal tax code built up over many years accrues to the benefit of the rich and well-connected at the expense of everyone else.
Promising developments to return retirement savings incentives to their original purpose
There are a number of members of Congress who recognize these past mistakes and are pushing to reverse course. Here is a rundown of the most promising developments.
Crack down on stretch IRAs
One step in the right direction, as mentioned above, is that heirs to IRAs, until very recently, could use various tactics to keep accounts’ tax benefits flowing indefinitely. In 2019, however, Congress tightened the rules as part of the Setting Every Community Up for Retirement Enhancement, or SECURE, Act, requiring that all inherited IRAs, even Roth-style accounts that are not subject to required minimum distributions, be closed within 10 years.
This reform limits the ability to continually accumulate assets in these accounts tax-free, thus curtailing some of the bequeath-planning benefits of IRAs. (Unfortunately, the SECURE Act also loosened required minimum distribution rules, which cuts in the opposite direction.)
Target the most abusive practices
Policymakers could prohibit the type of IRA stuffing that Thiel and Romney engaged in by simply requiring that IRAs and other tax-advantaged retirement accounts only be used to purchase publicly traded—and thus clearly and fairly priced—securities. This would make no difference to the vast majority of retirement savers who are not rich and connected enough to get access to private equity funds and pre-IPO stocks that turbocharge the IRAs of the uber-wealthy.
Democrats proposed prohibiting these exotic investments from being held in IRAs in an early draft of the Build Back Better Act. But that provision was dropped from the bill before the House passed it, perhaps due to “fierce lobbying resistance.”
Limit Roth IRA conversions
The House-passed Build Back Better Act includes provisions that would prohibit high-income taxpayers from converting a traditional IRA or employer-sponsored plan into a Roth IRA, thus closing down one common way for the rich to shelter investment gains. It would also completely ban the “mega backdoor IRA” that currently allows after-tax contributions to employer-sponsored accounts to be transferred to Roth IRAs.
Limit the total amount of savings that can be held in tax-favored retirement accounts
The House-passed Build Back Better Act also includes a provision that would limit the total amount that could be accumulated in IRAs, 401(k)s, and other defined-contribution employer-sponsored accounts at $10 million for those with incomes of more than $400,000 a year. Those with more than $10 million in those accounts when the provision goes into effect would have to quickly distribute the excess but would not pay tax penalties on forced pre-retirement withdrawals.
This proposal would be simple to administer, though the approach is weaker than what was proposed by the Obama administration, which would have capped combined retirement assets, including defined-benefit plans, at roughly $4 million, or the amount that could deliver a $230,000 per year annuity, which is the current limit for defined-benefit plans. The exact cap under the Obama administration’s proposal would have been different for savers of different ages and also would have taken into account current interest rates, since those factors determine how much savings are needed to purchase a $230,000 per year annuity—a dollar figure that is itself adjusted for inflation each year.
Harmonizing limits across all types of tax-advantaged retirement plans is critical to avoid easy evasion.
Fix and expand the Saver’s Credit
As previously mentioned, the Saver’s Credit is the only retirement tax incentive targeted exclusively at low- and moderate-income families. But it is deeply flawed and, as a result, is extremely underutilized. The credit is also small and limited to a narrow sliver of taxpayers.
Legislators have, for years, proposed expanding the Saver’s Credit and making it refundable. And last year, the idea won bipartisan support as part of a larger retirement policy proposal that also included additional rich-friendly provisions and was included in an early draft of the Build Back Better Act before being stripped out before House passage. Under the latest proposals, the credit would be directly deposited into a taxpayer’s retirement account, giving it the look and feel of a savings “match” rather than a tax refund, perhaps boosting the impact of the incentive.
The most important fix, however, would be to make the credit refundable so that those with no income tax liability still get the benefit. (See Figure 6, from the Tax Policy Center.)
Figure 6
Replacing retirement tax deductions with an expanded Saver’s Credit would improve the system’s distributional fairness
Change in tax liability as share of U.S. pre-tax income, by income level, for calendar year 2020
Of course, even if the Saver’s Credit is expanded, low-income taxpayers would still need to know about the credit, find money to save, and, in many cases, open a retirement account on their own—hurdles that are unlikely to be easily overcome.
The most exciting development in recent years is the establishment of state-based auto-IRA programs and renewed interest, including from former Trump administration economic adviser (and now vice president of The Lindsey Group and Hoover Institution distinguished visiting fellow) Kevin Hassett, in the idea of opening up federal employees’ Thrift Savings Plan to all workers whose employers don’t already offer a plan. Like the Saver’s Credit, a national auto-IRA plan was included in an early draft of the Build Back Better Act but was taken out before House passage.
Use money from reduced tax incentives to expand Social Security
The most effective way to increase retirement security for lower- and middle-income Americans is not a tax deferral or even a revamped tax credit, but rather an expansion of the proven Social Security program. Even with the explosion of tax-preferred retirement savings at the top of the wealth and income ladders documented above, most Americans still rely on Social Security for the vast majority of their retirement income. (See Figure 7.)
Figure 7
There are several ways to shore up and expand Social Security, almost all of which could be funded by reducing the billions of dollars we spend each year on unjustified and wasteful retirement tax incentives.
Conclusion
While there is some reason to be optimistic about the eventual enactment of some combination of these reforms, policymakers have been down this road before. Government watchdogs, consumer-minded advocates, and academic researchers have long identified retirement tax incentives as inefficient and unfair. But getting rid of them has proven extremely difficult.
Standing in the way is the retirement industry, which includes asset managers, plan administrators, and tax planners, all of whom stand to lose if these retirement system tax breaks go away. And while the wealthy are the biggest winners from these tax subsidies, upper-middle-class savers—a politically powerful constituency in their own right—are heavy users and beneficiaries of the current system. As we’ve seen with 529 college savings accounts and high-value employer-sponsored health insurance plans, taking away tax benefits from this group is politically arduous.
Yet policymakers should feel urgency to enact these reforms. Every year that goes by without action means billions more dollars are socked away in tax shelters or transferred tax-free to heirs rather than invested in critically needed high-return and pro-growth public projects.
—David Mitchell is the director of government and external relations at the Washington Center for Equitable Growth and previously associate director for policy and market solutions at the Aspen Institute Financial Security Program.
When the coronavirus pandemic began to spread across the United States in March 2020 its impact was immediate and severe. The U.S. unemployment rate skyrocketed from a 50-year low of 3.5 percent in February 2020 to a post-Great Depression high of 14.7 percent in April of that same year. Over the same period, the U.S. labor market shrank by more than 20 million jobs. Industrial production plummeted. And the U.S. economy contracted by 3.4 percent in 2020—the worst economic downturn since 1946.
In the two years that followed, the U.S. government enacted major pieces of legislation to respond to dual health and economic crises. Today marks the one year anniversary of one of those measures, the American Rescue Plan, which provided $1.9 trillion in critical public health investments to fight COVID-19, support struggling families, and grant aid to states, localities, tribes, and territories.
This much-needed legislation helped to lay the groundwork for a robust recovery from the pandemic-induced recession. Specific investments included:
Nearly $100 billion to combat the public health crisis, including funding for vaccine development and distribution
More than $100 billion to expand and improve the Child Tax Credit and Earned Income Tax Credit, which bolstered family economic security for low- and middle-income families, reduced poverty for millions of children and improved the ability of their parents to invest in their children’s critical human capital development
Up to $1,400 for individuals in direct Economic Impact Payments, also known as stimulus checks, to cope with the continuing economic fallout from the pandemic
An extension of $300 per week supplemental Unemployment Insurance payments
An extension of voluntary employer tax credits for paid time off due to COVID-19
$350 billion in funding for state and local governments to save jobs and sustain aggregate demand in the face of budget shortfalls, which at that point left 1 in 20 state and local workers unemployed
$12 billion for nutritional assistance, including the Supplemental Nutrition Assistance Program, which research shows pays health and economic dividends far into the future for both direct recipients and the economy at large
As my colleagues Carmen Sanchez Cumming, Raksha Kopparam, and Maryam Janani-Flores detailed in their “economic state of the union” piece last week, the unprecedented speed and size of the American Rescue Plan and previous policy responses, such as the Coronavirus Aid, Relief, and Economic Security, or CARES Act, helped millions of workers and households withstand the economic pain brought on by the coronavirus pandemic.
The bounce back in Gross Domestic Product, for example, was much quicker in the United States than in most other high-income countries. The aggregate unemployment rate is now close to its pre-pandemic level. And workers in the bottom of the wage distribution have been experiencing real wage growth. Indeed, the recovery in overall employment has been extraordinarily quick compared to previous U.S. economic downturns. (See Figure 1.)
Figure 1
Elsewhere, Mike Konczal and Emily DiVito at the Roosevelt Institute, Elise Gould and Heidi Shierholz of the Economic Policy Institute, and staff at the Center on Budget and Policy Priorities have all highlighted the important ways in which the American Rescue Plan significantly improved the lives of working families and achieved an historic economic recovery. And yet, each of these analyses also remind us that we cannot stop here.
Two years after the onset of the coronavirus recession, disparities remain stark, with many workers, families, and communities still hurting. Throughout the pandemic, Black women and Latinas have faced the greatest difficulties paying for their regular expenses. Additionally, the interaction between gender and racial wage divides—or what I’ve coined “the double gap”—are enduring amid the pandemic, as data shows Black women earn less than White men within the same frontline essential occupations. Moreover, our current bout with inflation poses a serious threat to the economic recovery.
Fortunately, the American Rescue Plan strengthened the ability of U.S. families to cope with rising prices—a global problem now exacerbated by Vladimir Putin’s invasion of Ukraine—by improving the U.S. labor market and spurring faster economic growth than the rest of the world. What’s more, the 2021 legislation helped reduce racial and gender disparities. Direct cash payments and the expanded Child Tax Credit, for example, reduced Black child poverty by more than 33 percent by some estimates. The American Rescue Plan provided $39 billion to help child care providers stay open and compensate early childhood educators.
Expanding and extending policies such as these will be paramount in addressing racial and gender inequities in our society going forward, and will help promote a stronger, more resilient U.S. economy. Even with the historic enactment of the American Rescue Plan and its largely successful implementation, there is an ongoing need to address the structural fragilities in our economy that make us so vulnerable to economic shocks in the first place.
Decisive government investments in our nation’s social infrastructure remain key to overcoming the endemic economic divides across race, gender, and income. With U.S. economic growth currently strong, now is the time to make these investments so that the ongoing recovery is not just strong but also more enduring because it is more equitable.
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 January 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 fell to 2.8 percent as 4.3 million workers quit their jobs in January, down 151,000 from the previous month.
With job openings (11.3 million) and hires (6.5 million) remaining relatively steady, the vacancy yield stayed at 0.57 in January.
There were 0.57 unemployed workers for every job opening in January, a ratio that was little changed from the previous month.
The Beveridge Curve remained in an elevated range in January, reflecting a high job openings rate of 7.0 percent.
Quits rose for some industries in January, including financial activities, education and health, and manufacturing. Meanwhile, quits declined in construction and in leisure & hospitality.
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