Weekend reading: The state of the U.S. economy edition

Posted on by Maria Monroe

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

Equitable Growth round-up

Equitable Growth’s incoming President and CEO Michelle Holder penned a note this week, sharing her thoughts on joining the organization at this critical moment.

Kate Bahn, Alix Gould-Werth, and Carmen Sanchez Cumming write that the current state of the U.S. economy is strong, but as it moves toward recovery, the policy actions taken over the next several months will be vital to ensure growth is sustainable and broadly shared. They explain why investments in social infrastructure and boosting workers’ bargaining power are essential tools in policymakers’ belts to keep the economic and labor market recovery on its current trajectory. They also delve into why current disruptions in the labor market are the prime reason to boost worker power and productivity, ensure the labor market is competitive, and enhance social supports for workers. Some proposals they urge policymakers to act upon are increasing the minimum wage, making it easier for workers to form and join unions, improving and updating income support programs such as Unemployment Insurance and permanently expanding the Child Tax Credit, and implementing paid family and medical leave for all workers in the United States.

Inflation is certainly a hot topic these days among observers of U.S. economic activity and among consumers. This is important because consumer expectations of future inflation can spur behavior that further increases inflationary pressure. Carola Binder writes about average inflation targeting at the Federal Reserve, recent trends in inflation expectations and uncertainty among consumers and investors, and what actions the Fed can take to stabilize those expectations. Binder details her new methodology to estimate consumer uncertainty about inflation both in the short term and long term, and explains how the methodology can help researchers studying these trends. Her study finds that not only has short-run inflation uncertainty grown amid the coronavirus recession, but long-run inflationary expectations have also risen. While this isn’t necessarily cause for panic yet, Binder explains that it could have important implications if long-run uncertainty remains elevated and restricts consumers’ activities, such as taking out mortgages or loans. She then recommends actions the Fed can take to alleviate some of these concerns.

Two congressional hearings this week focusing on market concentration and competition policy featured testimony from Equitable Growth staff. On Tuesday, Director of Markets and Competition Policy Michael Kades testified before the Senate Subcommittee on Competition Policy, Antitrust, and Consumer Rights on anticompetitive behavior in pharmaceutical markets. His statement centered on specific actions that brand-name drug manufacturers take to limit competition from generics and biosimilars, as well as the failures of U.S. antitrust laws to prevent this behavior and how congressional action could increase competition and benefit consumers. And on Wednesday, Director of Labor Market Policy and interim chief economist Kate Bahn testified before the Joint Economic Committee on how rising concentration increases economic inequality and decreases U.S. economic efficiency. Bahn’s statement detailed the causes and impact of monopsony, how it exacerbates economic disparities, and what Congress can include in a robust, procompetitive policy agenda that would reduce corporate power.

The Western Economic Association International held its annual conference virtually this year at the end of June. Equitable Growth organized and participated in sessions for the first time, and our network of scholars was well-represented in the program. Highlights included grantee Emi Nakamura of the University of California, Berkeley giving the keynote address; Director of Academic Programs Korin Davis participating on a panel on best practices for submitting grant proposals; and Macroeconomic Policy Analyst Michael Garvey organizing and chairing a paper session on climate change and the macroeconomy. We look forward to future opportunities for engagement both with WEAI and other regional and economics and social sciences conferences in the future.

Links from around the web

Financial markets are signaling a potential reversal of the current economic narrative, away from inflation and toward potentially slower growth. The New York Times’ Neil Irwin looks at the bond market trends and details what that might mean for economic growth in the coming months. He writes that the new topline numbers are nothing to worry about, but they signal an economy in flux. In fact, Irwin continues, the trends indicate that the U.S. economy has reached peak growth and will likely be more measured going forward. Irwin also writes about the potential positive sides of the bond market adjustments, including making borrowing money cheaper for Americans and relaxing fears of sustained long-term inflation.

Last week, President Joe Biden signed an executive order aimed at promoting competition across the U.S. economy and limiting corporate dominance in markets. The Wall Street Journal’s Brent Kendall and Ryan Tracy explain what is actually included in the order: “a road map that encourages U.S. agencies to adopt policies that push back against corporate consolidation and business practices that might stifle competition and lead to higher prices and fewer product choices.” They detail the implications and potential consequences of the order, what executive agencies will have newfound power to do, and how the order encourages a procompetitive outlook across the federal government. They also credit Tim Wu as the architect of the order, who is currently President Biden’s special assistant for technology and competition policy and who last year co-authored an Equitable Growth report that proposed many of the mandates that are included in the order, including a White House council for competition policy and a whole government approach.

This week, the expanded Child Tax Credit payments started being distributed to families across the United States as part of the American Rescue Plan enacted earlier this year. The expansion makes the tax credit available to the lowest-income families, increases the amount families can receive, and changes the structure of payments from a once-a-year lump sum to monthly deposits. The 19th’s Chabeli Carrazana interviewed several families to see how this funding, which will go out to 88 percent of U.S. families, will affect their lives and well-being. For some families, it will enable access to high-quality child care or extracurricular activities for their kids, or allow them to pay off outstanding loans or bills that accumulated over the pandemic months. For others, it could be what they need to get out of poverty—it’s estimated, Carrazana explains, that the expansion could cut the child poverty rate in the United States almost in half. The impact that these payments will have are life-changing for both mothers and their children, and the stories Carrazana relays are incredibly moving examples of why this program should be expanded permanently rather than allowed to expire next year.

Will the pandemic be the beginning of the end of the 5-day work week in the United States? Vox’s Anna North seeks to answer this question. North first explores how entrenched the 5-day work week is in the U.S. economy and society, and how it first came about as a victory for labor organizers in the early 20th century. She then describes how the pandemic has thrown a wrench in these standards, as salaried workers have increased their hours dramatically with the transition to working from home and hourly workers have noticed an increase in unstable and last-minute scheduling practices by their employers. As workers have quit their jobs and begun demanding better working conditions in recent months, some companies (and even countries, such as Iceland) are testing 4-day work weeks. These experiments have already produced positive results for both companies and workers, with a study showing the same or even increased worker productivity alongside improved well-being and work-life balance. North concludes with the changes that would be necessary in the U.S. labor market and economy to be able to achieve a 4-day work week.

Friday figure

Percent of employment losses relative to peak employment

Figure is from Equitable Growth’s “Policymakers should ensure that the U.S. labor market recovery lasts by boosting workers’ bargaining power and strengthening social infrastructure,” by Kate Bahn, Alix Gould-Werth, and Carmen Sanchez Cumming.

Climate change among many issues discussed at annual Western Economic Association International conference

Posted on by Maria Monroe
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The Western Economic Association International at the end of June held its 96th annual conference, bringing audiences together for more than 280 concurrent sessions to collaborate, share, and learn from each other. From June 27 to July 1, economics professionals at all stages of their careers met virtually to discuss and present research in all areas and specializations of economics.

The conference touched on many topics, from inflation to competition to racial disparities in algorithms and earnings inequality, and featured skills-building and networking opportunities as well. Equitable Growth and its community of scholars and grantees were well-represented in this year’s WEAI programming, including:

  • Equitable Growth grantee Emi Nakamura of the University of California, Berkeley gave the keynote address at the conference. She focused on the state of inflation in the United States. She was introduced by former chair of the White House Council of Economic Advisers Christina Romer.
  • Korin Davis, Equitable Growth’s academic programs director, participated on a professional development panel organized by Kalena Cortes and the Committee on the Status of Minority Groups in the Economics Profession, or CSMGEP. Davis shared her expertise and advice on writing a superb grant application and what applicants should know before submitting their proposals. She was joined by Nancy Lutz and Kwabena Gyimah-Brempong, economic program directors at the National Science Foundation, and John Phillips, chief of the population and social processes branch at the National Institute on Aging.
  • Florida International University’s Adir dos Santos Mancebo Jr. explained his work investigating how earnings inequality and household heterogeneity might affect the macroeconomy and consumption volatility. The session was co-organized by Equitable Growth grantee Trevon Logan of The Ohio State University and the University of Colorado, Boulder’s Francisca Antman, in conjunction with CSMGEP.
  • One of two sessions focused on occupational licensing barriers across racial and ethnic groups was organized by Equitable Growth grantee Morris Kleiner of the University of Minnesota. This subject is a serious component of the Biden administration’s recent executive order on labor market competition and reform.
  • Equitable Growth grantee Will Dobbie of Harvard University presented research on algorithmic decision-making in high-stakes decisions. The co-authored study finds racial disparities in algorithmic recommendations for pretrial release decisions, with White defendants being released before trial at a higher rate than Black defendants with equal risk of pretrial misconduct, even though defendant race and ethnicity are not included in the training data.

Another Equitable Growth highlight at this year’s event was a paper session organized and chaired by Macroeconomic Policy Analyst Michael Garvey. The session focused on better understanding how new avenues for economic modeling and climate change risk analysis can improve policymaking and decision-making around climate change. Among the highlights:

  • The University of California, Los Angeles’ R. Jisung Park presented Equitable Growth-funded research on how increased temperatures due to climate change negatively impact workplace safety and labor market inequality. The research, co-authored with UCLA’s Nora Pankratz and Stanford University’s Patrick Behrer, finds that young working-class men on the lower end of the income distribution face the most risk from traditional heat-related workplace injuries and that significant increases in workplace safety investments lead to a significant reduction in the number of reported injuries.
  • Lint Barrage of the University of California, Santa Barbara presented a macro climate-economy model that demonstrates the significant fiscal impact of climate change on aggregate productivity, capital depreciation, household well-being, and public health costs, among others.
  • Williams College’s Gregory Casey discussed work, co-authored with Stephie Fried of the Federal Reserve Bank of San Francisco, centered on understanding the differential damage from climate change on consumption and investment. Their paper finds that investment-heavy sectors are more vulnerable to climate change than consumption-driven sectors, as climate change disproportionately reduces investment and capital stock.
  • The University of California, Santa Barbara’s Tamma Carleton summarized a series of papers that provide recommendations for updating the U.S. calculation of the social cost of carbon, or the monetized damages of an additional metric ton of carbon dioxide, which is a key tool used to evaluate the costs and benefits of climate policies. Carleton also covered the ongoing work of the Climate Impact Group, a collaborative network of experts from various research institutions, to collect and analyze sector-specific data and update the social cost of carbon in such a way that accounts for all sectors and dimensions of uncertainty, equity, and inter-sector links.

Discussants of these papers—University of Chicago’s Ishan Nath and UC Davis’ Frances Moore—touched on the implications of the findings for policy and for U.S. workers. Nath explained how the estimates of both aggregate and distributional consequences of climate change provided in Barrage and Casey’s work can inform climate policy decisions and adaptation. Moore, discussing Park and Carleton’s remarks, highlighted the lessons to be drawn for implementing workplace climate adaptations, the importance of regulations, and the interaction between inequality, the macroeconomy, and climate change damages.

This session followed Equitable Growth’s recent effort to increase our focus on research on the impact of climate change on economic inequality and growth. Our 2021 Request for Proposals included a call for studies centered on climate and the macroeconomy, as well as those in other areas that touch upon the effects of climate, for instance, on human capital development. Earlier this year, as part of our monthly series highlighting researchers on the frontier of social science research, we published an installment featuring scholars investigating the economic impacts of climate change. We also published a column by Gernot Wagner covering key takeaways from a 2020 policy workshop addressing the promises and challenges of using carbon pricing to combat climate change. And last year, as part of our Vision 2020 series of essays presenting evidence-based ideas to shape the policy debate, Leah Stokes and Matto Mildenberger published a chapter on implementing equitable climate policy in the United States.

Not only were we able to elevate new, cutting-edge research exploring the economic impacts of climate change, but this year’s WEAI event 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 WEAI and other regional economics and social sciences conferences in the future.

Posted in Uncategorized

Kate Bahn testimony before the Joint Economic Committee on monopsony, workers, and corporate power

Posted on by Maria Monroe

Kate Bahn
Washington Center for Equitable Growth
Testimony before the Joint Economic Committee,
Hearing on “A Second Gilded Age: How Concentrated Corporate Power Undermines Shared Prosperity”

July 14, 2021

Thank you Chair Beyer, Ranking Member Lee, and members of the Joint Economic Committee for inviting me to testify today. My name is Kate Bahn and I am the Director of Labor Market Policy and the interim Chief Economist at the Washington Center for Equitable Growth. We seek to advance evidence-backed ideas and policies that promote strong, stable and broad-based growth. Core to this mission is understanding the ways in which inequality has distorted, subverted and obstructed economic growth in recent decades.

Mounting evidence, which I will review today, demonstrates how the rising concentration of corporate power has increased economic inequality and made the U.S. economy less efficient. Reversing the trends that have led to a “second gilded age” is critical to encouraging a resilient economic recovery following the pandemic-induced economic crisis of 2020 and encouraging a healthy, competitive economy for the future.

Introduction

The United States boasts one of the wealthiest economies in the world, but decades of increasing income inequality, job polarization, and stagnant wages for most Americans has plagued our labor market and demonstrated that a rising tide does not lift all boats. Furthermore, economic evidence demonstrates how inequality results in an inefficient allocation of talent and resources while increasing corporate concentration that enriches the few while holding back the entire economy from its potential. Understanding the causes and consequences of the concentration of corporate power will guide policymaking in order to ensure that the economic recovery in the next phase of the pandemic will be broadly shared and ensure a more resilient economy.

“Monopsony” is a key economic concept to understand in this discussion. Monopsony is the labor market equivalent of the better-known phenomenon of “monopoly,” but instead of having only one producer of a good or service, there is effectively only one buyer of a good or service, such as only one employer hiring people’s labor in a company town. Like in monopoly, this phenomenon is not limited to when a firm is strictly the only buyer of labor. Today I will explain the circumstances and effects of employers having significant monopsony power over the market and over workers.

When employers have outsized power in employment relationships, they are able to set wages for their workers, rather than wages being determined by competitive market forces. Given this monopsony power, employers undercut workers. This means paying them less than the value they contribute to production. One recent survey of all the economic research on monopsony finds that, on average across studies, employers have the power to keep wages over one-third less than they would be in a perfectly competitive market. Put another way, in a theoretical competitive market, if an employer cut wages then all workers would quit. But in reality, these estimates are the equivalent of a firm cutting wages by 5 percent yet only losing 10 percent to 20 percent of their workers, thus growing their profits without significantly impacting their business.

It is not only important for workers to earn a fair share so they can support themselves and their families, but also critical to ensure that our economy rebuilds to be stronger and more resilient. Prior to the current public health crisis and resulting recession, earnings inequality had been growing since at least the 1980s while the labor share of national income has been declining in same period. This is cause for concern as recent evidence suggests that the labor share of income has a positive impact on GDP growth in the long-run.

The unprecedented economic shock caused by the coronavirus pandemic revealed how economic inequality leads to a fragile economy, where those with the least are hit the hardest, amplifying recessions since lower-income workers typically spend more of their income in the economy. But the crisis also demonstrated how economic policy targeted toward workers and families can provide a foundation for growth. This is because workers are the economy, and pushing back against the concentration corporate power by providing resources to workers is the foundation for strong, stable and broadly shared growth.

The Causes of Monopsony

The concept of monopsony was initially developed by the early 20th century economist Joan Robinson, who examined how lack of competition led to unfair and inefficient economic outcomes. The prototypical example of monopsony is a company town, where there is one very dominant employer and workers have no choice but to accept low wages since they have no outside options. This is the most extreme case, but it is important to note that firms have monopsony power in any circumstance where workers aren’t moving between jobs seamlessly in search of the highest wages they can get.

Firms can use monopsony power to lower workers’ wages any time workers:

  • Have few potential employers
  • Face job mobility constraints
  • Can only gather imperfect information about employers and jobs  
  • Have divergent preferences for job attributes
  • Lack the ability to bargain over those offers

I will go through each of these factors in turn and demonstrate how labor markets are unique compared to other markets in dealing with competitive forces.

While concentrated labor markets are not the norm, they are pervasive across the United States, especially within certain sectors or locations. When markets are very concentrated, employers can give workers smaller yearly raises or make working conditions worse, knowing that their workers have nowhere to go to find a better job with better pay. (See Figure 1.)

Figure 1

Labor market concentration based on the share of each employer among job vacancies, calculated using the Herfindahl-Hirschman Index, by commuting zone

A study published in the journal Labour Economics by economists Jose Azar, Ioana Marinescu, and Marshall Steinbaum finds that 60 percent of U.S. local labor markets are highly concentrated as defined by U.S. antitrust authorities’ 2010 horizontal merger guidelines. This accounts for 20 percent of employment in the United States. Research by economists Gregor Schubert, Anna Stansbury, and Bledi Tsaka goes further by estimating workers’ outside options, or the likelihood a worker is able to change into a different occupation or industry. This study finds that even with a more expansive definition of job opportunities more than 10 percent of the U.S. workforce is in local labor markets where pay is being suppressed by employer concentration by at least 2 percent, and a significant proportion of these workers facing few outside options are facing pay suppression of 5 percent or more. As study co-author Anna Stansbury noted, “for a typical full-time workers making $50,000 a year, a 2 percent pay reduction is equivalent to losing $1,000 per year and a 5 percent pay reduction is equivalent to losing $2,500 per year.”

Certain sectors are now very concentrated, such as the healthcare industry. In a paper by the economists Elena Prager and Matt Schmitt, they find that hospital mergers led to negative wage growth among skilled workers such as nurses or pharmacy workers. Consolidation and outsized employer power, alongside other phenomenon such as the fissuring of the workplace, may have broader impacts on the structure of the U.S. labor market when it affects the overall structure of the labor market, including the hollowing out of middle class jobs that have historically been a pathway for upward mobility.

Research by sociologist Rachel Dwyer finds that job polarization in care work sectors such as healthcare, which is heavily concentrated, is a primary cause of overall job polarization in the United States, where there are fewer middle-income jobs and growing employment at the low end and the high end of the labor market. Downward pressure on wages in high-growth industries such as healthcare can impact employment opportunities for all Americans.

But as I noted, concentration is not the only source of monopsony power. Job mobility—the ability to easily move between jobs—also affects labor markets and, in turn, may give employers power to set wages below competitive levels. Job mobility can be limited by anticompetitive conduct, where employers intentionally limit the ability of their employees to find other jobs or employers collude with each other to set pay standards—even when there are technically many employers in a local labor market. Noncompete agreements, where workers sign away their right to go work for a direct competitor of their employer, have become pervasive, including among low-wage workers where there is arguably no justification to limit worker mobility due to the necessity to protect trade secrets.

Research by economists Evan Starr and Michael Lipsitz found that after the Oregon state ban on noncompete agreements in 2008 job mobility increased by 12 percent to 18 percent and wages grew 4.5 percent more in occupations with high noncompete usage compared to those with low noncompete usage. The Executive Order by the Biden Administration released on Friday, July 9, explicitly asked the Federal Trade Commission to ban or limit these agreements.

But other factors influence mobility between jobs, including transportation networks and personal constraints on commute time. The greater importance of a shorter commute time for women workers contributes to the gender wage gap since it limits women’s job searches. Employer-provided healthcare discourages changing jobs, or what economists’ call “job lock.” Research by economists Adriana Kugler and Ammar Farooq found that more generous Medicaid eligibility reduced job lock and increased the likelihood that workers changed jobs into higher paying occupations. A variety of real-life factors affect how workers switch jobs, which in turn can affect how much power employers will have over setting wages.

Asymmetric information between employers and workers also influences how workers sort between jobs and puts downward pressure on wage offers. Workers often know little about the salary range at potential employers or even within their own firms. A “salary taboo” discourages workers from asking their colleagues their salary or disclosing their own. In contrast, employers know what all their employees are paid and often require applicants to disclose their current salaries or competing job offers, giving them much more information to work with.

In scenarios where a new salary transparency regime was instituted, such as one study of public-sector workers in California, workers were more likely to quit their jobs once they knew the pay scales within their workplaces, which, in effect, is a competitive market response to greater information. Likewise, employers may have imperfect information about the ability of job applicants, so wage offers to new employers may not be connected to workers’ abilities.

And finally, heterogeneous worker preferences, where individual preferences for attributes of jobs are unique and varied, also gives employers the power to undercut wages. Workers are not  fully compensated for the tradeoff between their preferences and the job offers employers make. Workers who are more likely to face hostile work environments, among them Black workers in primarily White occupations or women in male-dominated fields, may prefer workplaces that are more inclusive. Or parents who have primary responsibility for caretaking for their children may need more a predictable schedule or autonomy over their schedules. But research on so-called compensating wage differentials finds that workers are not fully compensated for these imperfect tradeoffs the make in their job choices.

How Monopsony Exacerbates Economic Disparities

The concentration of corporate power has dire consequences for workers who are already disadvantaged in the U.S. economy. Regional economic divergence between urban and rural areas is exacerbated when there are few job options for workers in less-populated parts of the country. Workers facing hiring discrimination will have fewer job offers, so they’ll be forced to accept substandard opportunities. Outside life circumstances, such as being the primary caretaker for children in a family as women are more likely to be, may limit the scope of a worker’s job search. And having an unstable fallback position, without personal wealth or adequate income supports, may reduce the ability of a worker to search for a job that is both the best fit and garners the highest possible wages. Employers are able to exploit these conditions by undercutting workers’ wages without risking losing their labor supply, amplifying the negative consequences of rising corporate power.  

The rise of monopsony across the United States has heightened economic challenges in particular in rural areas, depressing wages below what they would otherwise be. Labor markets in rural areas are much more likely to be concentrated, which may partially explain why urban labor markets have higher wages where competition for workers is higher. As researcher Zoe Willingham and economist Olugbenga Ajilore have written, this has amounted to the reemergence of the modern company town in many rural areas. One case in point: Research by economist Justin Wiltshire finds that Walmart Supercenters push down both earnings and employment across the counties where they were opened compared to counties where a Walmart Supercenter was proposed but blocked locally. Walmart is able to do this because in those counties it is the dominant employer of retail workers, giving it the power to set wage rates, compared to areas where there were many different retailers competing for workers.

My own research with economist Mark Stelzner examines how external conditions of structural racism and sexism give individual employers the ability to exploit workers along the lines of race, ethnicity, and gender. One such way is that the vast wealth divide between Black, Latinx, and White Americans makes it harder for Black and Latinx workers to search for jobs when taking time out of the labor force exposes them to a much greater financial risk. If Black and Latinx workers don’t have the financial cushion to maintain job search periods without income or adequate income support such as Unemployment Insurance, then they are less likely to quit jobs that offer low wages or poor working conditions.

Women workers also face unique barriers, such as hostile working conditions including sexual harassment. Insufficient legal protections or workplace recourse can leave women neither able to combat the harassment nor leave their jobs without wealth to manage the search for a job with better conditions. The result is employers facing little risk of their workers quitting, giving them the power to undercut wages. And women workers face additional constraints to job mobility imposed by a disproportionate care burden within families. If a woman is the primary caretaker for children or other family members with care needs, then this will reduce the geographic scope of her job search and may limit acceptable job schedules. This results in women being less likely to move around for jobs within their occupation in search of the best pay they can receive.

The aggregate result of these individual family constraints are employers’ ability to offer women lower wages. Research on teachers has found that women teachers are over-represented in lower paying school districts, which may be partially explained by women’s lower ability to search around for the highest paying position. On top of this, within school districts pay differences between women and men are also significant, which demonstrates how lower bargaining power for women persists despite rigid pay structures.

Mainstream economic orthodoxy has argued that wages are set by competitive forces, so proactive policies to raise wages and increase worker power would limit the potential for economic growth that comes from competition. Yet the broad research indicates that the U.S. labor market is anything but competitive, including evidence that monopsonistic labor markets give employers the power to suppress wages by more than one-third. In fact, one insight from the monopsony framework developed by Joan Robinson in the early 20th century is that raising wages and increasing worker power actually encourages the outcomes that would exist in a competitive labor market, with greater earnings alongside higher employment levels.

How to Push Back on Corporate Power Through a Robust, Pro-Competition Policy Agenda

Reversing the trends that caused this “Second Gilded Age” starts with ensuring that the U.S. economy is competitive. Robust antitrust enforcement of existing laws against concentration and anticompetitive conduct is the first step toward ensuring that economic progress is shared between workers and employers. The Biden Administration is also starting to strengthen enforcement against anticompetitive conduct, including excessive use of non-compete agreements. But this can go further, including new laws that would codify, clarify, and strengthen antitrust law for labor markets. Without significant legal precedent for antitrust protections in labor markets, enforcers have little recourse to protect workers, but legislation can pave the way.

But antitrust actions alone are not sufficient when the sources of monopsony power also come from inherent, unique features of the U.S. labor market compared to other markets such as commodities. For this reason, another important way to address the concentration of corporate power is to build countervailing power for workers. In practice, proposed policies—such as the Protecting the Right to Organize Act that would expand the ability of unions to organize workers alongside institutions, including a more effective National Labor Relations Board, which upholds current U.S. labor organizing laws, with modern enforcement capabilities—would limit employers’ ability to exploit workers along multiple axes. The need for more pro-labor policies is increasingly evident as employers’ monopsony power mounts, given the inverse relationship between decreasing worker power as measured by union density and rising income inequality,  partially due to an anti-labor policy and institutional environment since the 1970s, and as racial and gender wage disparities remain persistent and are likely to worsen due to differences in unemployment amid the coronavirus pandemic.

One feature of a monopsonistic labor market is that wages are artificially suppressed, so there is room to raise the floor with tools such as increasing the minimum wage and exploring the possibility of wage boards. Minimum wages have been shown to be a critical tool for reducing the wage divide between Black and White workers, and the falling real value of the minimum wage has exacerbated pay disparities. Increasing the statutory minimum wage would limit the ability of employers to exploit the conditions of structural racism. Going beyond this could include wage boards, which would raise wages within occupations or industries, such as has been done in Arizona, Colorado, California, New Jersey, and New York. In a monopsonistic labor market, raising wages with these tools replicates the labor market outcomes that would exist in a hypothetical perfectly competitive market.

Finally, giving workers universal protections and the social infrastructure policies discussed in my testimony would provide a stable foundation for workers to search for quality jobs where they can be as productive as possible and earn the value they contribute to the economy and society. This includes effective anti-discrimination enforcement and workplace safety standards to ensure workers receive job offers and equitable pay and are not stuck working in hostile environments. This includes family economic security policies that help families manage care needs and engage in the labor market, such as paid family and medical leave, paid sick time, accessible and affordable childcare, and scheduling stability, giving workers more space to find the best fit for their employment. And this includes income supports that give workers an outside option so they can find better jobs. Unemployment insurance expansions and Medicaid expansions have both been shown to increase the likelihood that workers will match into higher paying jobs. Building the foundation of security for workers not only directly impacts their wellbeing but also provides the foundation for productivity growth through better job matches and stronger economic growth through increased incomes. Boosting workers’ economic security is an effective tool for pushing back against the tide of concentrating corporate power.

Posted in Uncategorized

A Canary in the Coal Mine for the Failure of U.S. Competition Law: Competition Problems in Prescription Drug Market

Posted on by Maria Monroe

Michael Kades
Director, Markets and Competition Policy, Washington Center for Equitable Growth
Subcommittee on Competition Policy, Antitrust, and Consumer Rights:
Prescription for Change: Cracking Down on Anticompetitive Conduct in Prescription Drug Markets

July 13, 2021

Thank you, Chairwoman Klobuchar and Ranking Member Lee, for the opportunity to testify about the critical issues of competition and prescription drug markets. Antitrust is, to quote Sen. Klobuchar, “cool again.” The president’s executive order signed last Friday and his accompanying remarks are testament that we are in an antitrust moment as dramatic as any since 1914, when Congress passed the Clayton Act and created the Federal Trade Commission.

All too often in the press or on social media, competition and monopoly are synonymous with digital platforms. Without doubt, those markets raise important competition issues and deserve the attention that they are receiving. Market power and its abuse, however, extends across the U.S. economy.1 This subcommittee should be commended for its investigation into market problems throughout the economy. The substantial antitrust reform proposals offered by both Chairwoman Klobuchar and Ranking Member Lee, respectively, reflect a judgment that the antitrust laws, as currently interpreted and enforced, are failing to protect competition.

The subcommittee is correct to examine competition in prescription drug markets. Prescription drugs cost nearly $370 billion a year, forcing too many Americans to choose between their health and other necessities. Further, the impact is often borne by those least able to bear it: lower-income Americans and those from historically disadvantaged groups.

It is an important industry, and one that is rife with anticompetitive conduct. Although not the sole cause of high prescription drug costs, abusive practices that distort competition contribute to the problem. Too many companies exclude competition through a variety of anticompetitive tactics, including rebate traps, product hopping, sham litigation, citizen petition abuse, and pay-for-delay patent settlements.

Anticompetitive activity is prevalent for two related reasons. First, the economic dynamics of prescription drug markets make anticompetitive conduct both uniquely effective and profitable. Second, the courts have increasingly stripped the antitrust laws of their potency. As a result, too often, anticompetitive conduct escapes condemnation. Rather than deterring anticompetitive conduct, the antitrust laws, as currently interpreted by the courts, almost invite it.

It would be wrong, however, to think anticompetitive conduct and market power are uniquely a prescription drug market phenomenon. Rather, prescriptions drug markets, where these problems have existed for decades, were the canary in the coal mine. We are seeing similar problems across the economy, including in agricultural markets, digital markets, and labor markets. Although the competitive dynamics and potential anticompetitive conduct differs across industries, one common thread exists. The antitrust laws, as enforced and interpreted, do not sufficiently deter anticompetitive conduct. As the letter to the House Judiciary Committee that I signed with 11 other economists and lawyers explains: “current antitrust doctrines are too limited to protect competition adequately, making it needlessly difficult to stop anticompetitive conduct in digital markets.”2 The same judgment applies to prescription drug markets and many others.

As Equitable Growth’s antitrust transition report explains, “Without new legislation, the agencies can still address these issues, but the task will be more challenging and take far longer.”3 The courts have made it clear that they believe the antitrust laws have, at most, a limited role in protecting competition because the market can fix itself. And, therefore, do no harm is the prevailing approach. Unless Congress takes a different view by passing legislation, dominant firms will have little concern about the antitrust laws limiting their conduct.

For prescription drug markets, there are two broad types of reform. Congress can restore the vitality of antitrust laws generally, which will, when combined with vigorous enforcement, deter much of the anticompetitive conduct occurring in prescription drug markets and in other industries. Current economic research strongly supports such reforms. The Competition and Antitrust Law Enforcement Reform Act would address most of these problems.

Second, certain problems that are unique to pharmaceutical markets may require specific legislation, as the CREATES Act effectively eliminated two specific anticompetitive strategies that delayed lower-cost, generic competition.4 Existing legislation—such as the Preserve Access to Affordable Generics and Biosimilars Act, which addresses pay-for-delay patent settlements; the Stop STALLING Act, which addresses abuse of the Food and Drug Administration’s citizen petition process, and the Affordable Prescriptions for Patients through Promoting Competition Act, which would address product hopping and patent thickets—are examples of this approach.

Stopping anticompetitive conduct has the additional advantage that it is unlikely to deter innovation. As Competition itself drives innovation. In contrast, anticompetitive conduct often spurs rent-seeking activity. In pharmaceutical markets, weak antitrust enforcement may encourage companies to engage in minor product development as a tool to exclude competition.5 Although policy makers should  consider the trade-off that can occur between lower costs and promoting innovation, effective antitrust laws should avoid that choice and lead to lower costs and increased innovation.

The remainder of statement discusses why prescription drug costs matter, the nature of competition in these markets, the prevalence of anticompetitive conduct, the failure of antitrust to deter such conduct, and proposals for address these problems.

  1. Why prescription drug costs matter
    2.

    In 2019, the United States spent almost $370 billion on prescription drugs, accounting for roughly $1 out of every $10 spent on healthcare.6 Prescription drug costs are not just a pocketbook issue.7 When prescription drugs are unaffordable, it affects the patient, not just her pocketbook. Twenty-nine percent of people report not taking their medicines as prescribed at some point in the past year because of the cost, which rises to 35 percent of people with household incomes of less than $40,000. Across the country, people are making choices about which medicines they can afford or are choosing between life-saving dugs and necessities such as food or rent.8

    The burden of prescription drug costs disproportionately affects lower-income Americans and historically disadvantaged groups. Prior to the pandemic, 25 percent of White Americans said they do not take prescriptions due to costs, compared to 30 percent of Black Americans.9 In a 2019 AARP survey, 48 percent of Hispanic/Latinx respondents said they did not fill prescriptions provided by their doctor, the main reason being cost. Twenty-seven percent of Latinx respondents said that they cut back on necessities such as food, fuel, and electricity to be able to afford a prescription drug.10

  2. The nature of competition in pharmaceutical markets creates incentives to delay and prevent competition
    3.

    Prescription drugs fall into two broad categories. The more traditional and common ones are called small molecule drugs (ibuprofen, antibiotics, etc.). A newer but growing category is biologics, which are protein-based and derived from living matter or manufactured in living cells using recombinant DNA biotechnologies (Humira).11 Critically, price competition, whether for small molecule drugs or biologics, comes from a limited set of potential competitors. And the incentives to prevent that competition are large.

    1. Generic competition for small molecule drugs

    The impact of the Hatch-Waxman Act on competition for small molecule drugs cannot be overstated. Prior to its passage, few generics were available. Today, generic competition has a dramatic impact. A generic product, on average, captures 90 percent of the market within a year of entering the market,12 and the branded company’s profits plummet.

    Simply delaying generic competition can be very profitable. Generic competition leads to substantial price decreases. Eventually those prices fall to roughly 15 percent of the branded price.13 While generic companies earn profits, the big winners are consumers, who end up receiving the same therapeutic benefit at a far lower cost. Conversely delaying or preenting that competition is profitable for the branded company.

    1. Biosimilar competition for biologics

    Biologics drugs such as Humira represent an increasingly large portion of prescription drug costs. Currently, the biologic market is more than $210 billion.14 They offer great promise in combating debilitating and rare diseases.15 But they tend to be very expensive, costing patients tens, or even hundreds, of thousands of dollars per year.

    In biologic markets, price competition to a branded product comes from a biosimilar product. Like generic small molecule products, biosimilars have no clinically meaningful difference from the corresponding biologic drug.16 Biosimilar drugs, however, are more expensive to develop than generic small molecule products, and they require more testing. Experts expect that biosimilar production would be priced at less of a discount and achieve a lower level of market penetration than generic small molecule drugs.17 With many biologics having high prices and large revenues—in 2020, Humira sales exceeded $16 billion18 and Keytruda (an oncology treatment) exceeded $14 billion19—biosimilar competition can save hundreds of millions of dollars per year per drug even if the biosimilar product is priced at a modest discount (25 percent) and gains only a modest share (30 percent).

    That competitive dynamic for biosimilars is more complicated than for small molecule generic drugs because there are many decision-makers and overlapping legal and regulatory structures. Successful competition means the product has obtained approval from the Food and Drug Administration, the product has a preferred status on the insurer’s formulary, and a doctor, who has little or no financial incentive, has prescribed it. If competition breaks down at any point in that chain, prescription drug costs increase.

  3. Anticompetitive conduct in prescription drug markets is both prevalent and persistent
    4.

    Anticompetitive conduct in prescription drug markets is both prevalent and persistent. Even in areas where antitrust enforcement has had moderate success, such as with pay-for-delay settlements, it has taken more than a decade, the success is fragile, and it requires substantial resources. In other areas, antitrust enforcement has been less successful at stopping anticompetitive conduct at all.

    The list of anticompetitive conduct is large; here, I discuss three types of common practices.

    1. Rebate traps

    A rebate trap can effectively deter competition or limit its impact in pharmaceutical markets, particular biologic ones.Pharmaceutical companies give pharmacy benefit managers (companies that manage drug benefits for insurers) rebates for a preferred status on the formulary. It might seem like a larger rebate means lower prices. Sometimes it does, but not always. Facing biosimilar competition, the incumbent company can raise its list price, increase its rebate, and make it dependent on market share (say, 95 percent). If the share of the incumbent biologic falls below that, the PBM receives no rebate and must reimburse the incumbent based on the list price for all units. Alternatively, the incumbent can offer a bundled discount across a range of products, which the new entrant cannot match.

    The strategy can harm competition in at least three ways. First, there can be a large installed base. For example, 80 percent of patients are unwilling to switch to a new product because they are on a long-term regime. In principle, a new product should be able to compete for the other 20 percent of the market. Even if the new product is less expensive, however, the PBM may be worse off because it loses the rebate for the 80 percent of the market that will not shift. More generally, particularly with biosimilar products, it may take time for doctors and patients to become comfortable with a new product. Finally, the incumbent could be sharing its monopoly rents with the PBM. The economic theory is well-accepted.20

    Questionable rebates are common in prescription drug markets. According to a Senate staff report, rebating “appears to be contributing to both increasing insulin WAC prices and limited uptake of lower-priced products.”21 Mylan Pharmaceuticals used rebating to combat lower-prices competition to its Epipen product, which treats severe allergic reactions. Rebates may also explain why significantly less-expensive biosimilar versions of Remicade had difficulty gaining traction in the market.22

    Notably, courts have struggled with this rebate trap. In the Epipen antitrust case, for example, the District Court granted the defendant’s summary judgment motion and dismissed the antitrust case. It did so, even though it agreed that the plaintiff could prove the following at trial: Epipen had a monopoly. Mylan Pharmaceuticals, the manufacturer of Epipen, and Sanofi, the manufacturer of the competing product, both expected Sanofi’s product to gain 30 percent or more of the market within 3 years. Instead, Mylan, through a rebate trap, prevented Sanofi’s success while increasing both Epipen’s net price and profits.23 If proven, those facts are the very definition of exclusionary conduct.

    1. Product hopping

    Product hopping is another anticompetitive tactic used to prevent or delay competition. A brandedcompany makes a small change to its product shortly before a generic competitor enters. For example, the new product might be a different form of the medication (switching from tablet to capsule), different dose, or a once-a-day version of the product. It then takes a range of actions to move the franchise from the old product to the new, tweaked product. At the most aggressive, it can withdraw the original product from the market. Less draconian tactics can be just as effective. The company could increase the price of the original product well above the price of the new product. It could tell doctors the original product is not safe or has worse side effects.

    Why would a company disparage and disadvantage its own product? The answer lies in the dynamics of pharmaceutical competition. A pharmacist can fill a prescription for a branded product with a bioequivalent generic. That is why a branded product loses share so quickly to its generic alternative. But the generic of the original product is not bioequivalent to the new version. Therefore, there is no substitution, and the branded company maintains its sales. According to one study, product hopping on just five products increased prescription drug costs by $4.7 billion a year.24

    In an industry that prides itself on taking risks to develop life-saving drugs, product hopping is the opposite. The modifications are minor and involve little risk of value, but they provide little value to the patients. One need look no further than Asacol, a product used to treat ulcerative colitis, a chronic disease of the colon. As part of a product hop, Allergan, the manufacturer, put an Asacol tablet inside of a capsule and obtained approval for a new product, Delzicol. That is not innovation; it is just anticompetitive gaming of the system.

    1. Pay-for-delay patent settlements

    Even when antitrust enforcement has had success, it is incomplete. A pay-for-delay patent settlement occurs when a branded company pays the generic or biosimilar company to delay launching its competitive product. The settlement eliminates the potential for competition. Both the branded and generic company profit at the expense of consumers.

    The antitrust battle over these settlements has raged for roughly two decades. In a series of decisions that began in 2003, various courts concluded that this practice was acceptable.25 In these courts’ view, the fact that the branded company’s patent might exclude the generic meant that the branded company could pay the generic not to compete for any period of time until the patent expired.

    These rulings had a devastating impact on generic competition. The number of potential pay-for-delay deals with significant payments increased from zero in fiscal year 2004 to a high of 33 in fiscal year 2012.26 The deals increased prescription drug costs by $63 billion.27

    In 2013, in the Androgel case (FTC v. Actavis), the Supreme Court rejected the lenient view that patent holders could simply pay potential infringers to stay off the market. According to the Supreme Court, an agreement in which the branded and generic companies eliminate potential competition and share the resulting monopoly profits likely violates the antitrust laws, absent some justification.28 The Supreme Court’s decision has limited pay-for-delay deals. In fiscal year 2017, the most recent year of reported data, the number of potential pay-for-delay deals with significant payments fell to three.29

    That success has been incomplete, and it overlooks the cost of enforcement. The Supreme Court approach requires a case-by-case analysis of a practice that virtually always is anticompetitive. That allows companies to find new ways to hide compensation or offer a plethora of alternative justifications for their conduct. Based on the past mistakes and some open hostility to the Supreme Court’s decision, courts could accept one of these defenses and create a costly loophole.

    Further, the approach is resource intensive. Indeed, the FTC resolved the Androgel case itself almost 6 years after the Supreme Court decision allowing the case to go forward and more than a decade after the case was filed. The FTC continues to litigate multiple cases against the same parties over the same product.30

  4. Failure of antitrust law
    5.

    Anticompetitive conduct in prescription drug markets has been occurring for decades and has flourished despite the Federal Trade Commission having devoted substantial resources to trying to stop the conduct. It regularly litigates to judgment to stop egregious anticompetitive conduct with only limited success. The obstacles to successful enforcement are likely to increase because the Supreme Court has taken away the FTC’s ability to seek monetary remedies.

    We are in this situation because “antitrust enforcement faces a serious deterrence problem, if not a crisis.”31 Judicial decisions have contributed to this problem. They “have thrown up inappropriate hurdles that limit the practical scope of the antitrust laws’ application to anticompetitive exclusionary conduct, including monopolization, and to anticompetitive mergers.”32 These developments make it less, not more, likely that antitrust law will condemn harmful conduct.

    1. Hostility to direct evidence of market power

    In most antitrust cases, the plaintiff must prove that the defendant had market or monopoly power. A plaintiff can infer it by proving the relevant market and establishing that the defendant has a high market share. The alternative is to prove the actual anticompetitive effect of the conduct—such as higher prices, lower quality, and lower output.33 As the Supreme Court explains, “proof of actual detrimental effects, such as a reduction of output can obviate the need for an inquiry into market power, which is but a surrogate for detrimental effects.”34

    Courts, however, increasingly shy away from direct effects evidence, making plaintiffs go through the often pedantic process of defining markets, particularly in pharmaceutical cases. Invariably, the impact of delaying or limiting competition is obvious. Delaying a generic or biosimilar competitor prevents prices from falling. That should end the market power inquiry. Courts, however, reject the obvious direct evidence for the less reliable market definition evidence.

    In Mylan Pharms. Inc. v. Warner Chilcott, the court ignored the substantial impact generic competition would have on pricing. Instead, it relied on its own assessment of the qualitative similarities between the product at issue and other branded products. It defined the relevant market to include many products and found that the defendant’s market share was too small to establish market power.35 Even hen the court reaches the right result using the wrong methodology, it unnecessarily complicates the case and increases the cost of litigation.36

    1. Leniency toward dominant firms

    In various ways, courts over the past four decades have limited the role of antitrust law in regulating conduct by dominant firms. A series of policy judgments have driven this development. Courts too often believe that monopolies spur innovation and discount the value of potential competition. Judicial doctrine reflects these policy choices. Courts are highly skeptical of refusals to deal and predatory pricing, even though modern economics establishes that such conduct can be successful in limiting competition and profitable.37 Exacerbating this tendency, courts often focus on the wrong facts.

    These developments help explain why antitrust enforcement has struggled to stop anticompetitive conduct in prescription drug cases. In loyalty rebate cases, courts focus on issues such as whether the rebates increased and whether the practice eliminated competition completely, not whether the rebates allow the defendant to maintain its monopoly power by limiting competition. In product hopping cases, too often courts accept any proffered justification to dismiss the case, ignoring the obvious anticompetitive incentive and impact.38 In the pay-for-delay context, the fact that the eliminated competition was potential or uncertain led many courts to discount the harm.

    One doctrine, refusals to deal, or when a firm refuses to deal with its competitor, deserves special mention. According to some courts, a refusal to deal can violate the antitrust laws only if the defendant has terminated an existing relationship. Under that standard, it is at least questionable whether the government would have been successful in breaking-up AT&T’s phone monopoly in the 1980s.39 This development should shock anyone who supports free markets and competition.

    It also helps explain the rise of an anticompetitive strategy in prescription drugs. Some branded companies would prevent their potential generic competitors from obtaining samples of the branded product. Without those branded samples, the generic company could not conduct the tests necessary for approval. Members of the Senate Judiciary Committee identified the problem and introduced legislation, the CREATES Act, to solve the problem, which it did.40 If the courts had not whittled away the restrictions on monopolists’ refusing to deal with competitors, however, the practice may have never arisen.

    1. Weaker deterrence

    Federal government antitrust enforcers have limited options to address the harm caused by anticompetitive activity, which is particularly problematic in prescription drug markets. The rewards are large. Delaying competition by a single year can generate hundreds of millions (and potentially billions) of dollars in additional revenue. If the government’s only remedy is an order forbidding the defendant from repeating the conduct, violating the law has little downside.

    A recent Supreme Court decision exacerbated this dynamic. The Court determined that the Federal Trade Commission lacks the authority to seek monetary remedies for violations of the law. The FTC can not seek to compensate victims or deprive companies of the profits they earned by violating the law.41 This development will simply encourage pharmaceutical companies to adopt profitable, anticompetitive tactics that will further increase prescription drug costs.

  5. Proposals to restore effective antitrust enforcement
    6.

    The courts have made antitrust enforcement too difficult, although not impossible, and prescription drug markets are a prime example. The question for this committee and Congress is whether to accept the approach the courts have taken. Congress can correct these errors, restore the vitality of the antitrust laws, and deter anticompetitive conduct, which would inject competition into prescription drug markets. Two types of reforms exist: general antitrust proposals and laws tailored specifically to prescription drug markets.

    1. General antitrust reforms      

    There are broad principles Congress should enshrine to improve antitrust enforcement. First, direct evidence of anticompetitive effect should be sufficient for an antitrust case. Second, Congress can correct courts’ willingness to defer to dominant firms’ conduct by changing legal standards to stress that the risk of eliminating potential competition can violate the antitrust law. Congress should establish legal rules that, in appropriate cases and based on sound economics, require defendants to prove their conduct does not harm competition, and new legislation should nullify existing precedents that inappropriately limit antitrust law, such as precedents on refusal to deal and predation. Finally, Congress should restore the FTC’s authority to seek monetary remedies and give the government the ability to obtain civil fines for antitrust violations.42

    Existing legislative proposals would address these issues. The Competition and Antitrust Law Enforcement Reform Act takes precisely this approach and would dramatically improve competition in prescription drug markets in particular, and throughout the economy generally.43 Although more limited, the Tougher Enforcement Against Monopolists Act would increase penalties, limit courts’ ability to rely on speculative justifications, and would require courts to find a violation where there is direct evidence of intent to harm competition.44

    1. Pharmaceutical-specific reforms

    As the CREATES Act establishes, targeted solutions can be effective. A number legislative proposals are pending. Although the current Supreme Court rule on pay-for-delay settlements protects competition better than the lower courts had, it still has required the FTC to spend substantial resources to prevent clearly anticompetitive conduct. Congress should pass legislation that creates a strong presumption against pay-for-delay deals such as the Preserve Access to Affordable Generics Act. Not only would such legislation stop the practice, but it would also free up resources so that the FTC could investigate and challenge other anticompetitive activity in the pharmaceutical industry. Other specific legislation could address patent thickets, where a company accumulates substantial patents for the purposes of blocking entry, citizen petition abuse, and product hoping.

Conclusion

Anticompetitive conduct in pharmaceutical markets is a serious problem that increases costs and undermines healthcare, particularly for the most vulnerable in society. The competition problems in these markets flow, in substantial part, from four decades of judicial decisions that have enfeebled the antitrust laws. Prescription drug markets were one of the first areas to feel the effects of this development, but more industries are exhibiting similar problems. Congress needs to stem the tide of anticompetitive conduct by restoring the vitality of the antitrust laws.

Thank you for the opportunity to testify about this important question, and I am happy to answer any questions.

Posted in Uncategorized

Fiscal austerity intensifies the increase in inequality after pandemics

Posted on by Maria Monroe
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(This column is reprinted with the permission of the authors. It was first published by voxeu.org on June 3, 2021)

In the aftermath of past pandemics, fiscal policy played an important role in reducing or amplifying income inequality. This column predicts the likely distributional effects of Covid-19 by analysing evidence from five previous outbreaks (SARS, H1N1, MERS, Ebola, and Zika). It finds that severe austerity measures were associated with inequality increases three times greater than expansive fiscal policy following a pandemic. Premature austerity is self-defeating from both a macro and an equity standpoint.

In the early months of COVID-19, there was an expectation that the pandemic might actually lessen inequality, as some low-income frontline workers received hefty pay rises (Hannon 2020). Evidence from previous centuries, such as from the 14th-century Black Death, show big increases in the labour share, as labour became more scarce relative to capital in the outbreak’s wake (Scheidel 2017, Jorda et al. 2020). As Alfani (2020) notes, however, the historical evidence is not uniform: 17th century plagues did not lead to more egalitarian outcomes, as the rich took steps to protect their wealth. Recurrent plagues in the 19th century caused by the spread of cholera had devastating effects on the poor, as they lived in unhealthy and crowded conditions. Dosi et al. (2020) conjectured that COVID-19 would amplify existing inequalities, through channels ranging from inequities in risk of infection to access to hospitalisation, ability to work remotely, and the threat of longer-term job loss. 

Twenty-first century pandemics, inequality and austerity

In our recent work (Furceri et al. 2021a, 2021b), we provide evidence about the likely distributional effects of COVID-19 by analysing the impacts of five major epidemics since 2000: SARS (2003), H1N1 (2009), MERS (2012), Ebola (2014) and Zika (2016). For convenience, we refer to these major epidemics as pandemics. H1N1 (Swine Flu Influenza) was the most widespread, with over 6½ million cases across 148 countries. The other four events affected fewer countries and were largely confined to specific regions: SARS and MERS in Asia, Ebola in Africa, and Zika in the Americas. 

As in Ma et al. (2020), we construct a (0,1) dummy variable – the ‘pandemic event’ – which takes the value one for countries declared by the WHO to be affected by a particular pandemic. This gives us a total of 225 pandemic events. Our results are similar if we measure the intensity of pandemics based on cases per population. We use the net Gini coefficient (Gini net of taxes and transfers) as our measure of inequality; results are similar for the market Gini. 

We trace the impact of pandemic events on the Gini by estimating impulse response functions directly from local projections (Jordà 2005). The left-hand panel of Figure 1 shows that the Gini measure increases by about 0.35 points after five years; the response is both statistically and economically significant given that Gini coefficients change slowly over time. 

Figure 1 Fiscal policy and the impact of pandemics on inequality

Note: Impulse response functions are estimated using a sample of 177 countries over the period 1960–2019. The graph shows the response and one standard deviation confidence bands. The y-axis shows the change in the net Gini; the x-axis shows years after pandemic events; t = 0 is the year of the pandemic event.

The fiscal response varies considerably across pandemic events. We measure the stance of fiscal policy by shocks to the general government balance not correlated with changes in economic activity (see Fatas and Mihov 2003); results are similar using health expenditures or the extent of redistribution to reflect the fiscal stance. We exploit the variation across countries in fiscal balances after the onset of pandemics to see whether the impact on inequality is different in episodes characterised by high austerity (fiscal surpluses greater than 4% of GDP) compared with episodes of highly supportive fiscal policy (fiscal deficits greater than 4% of GDP). 

The results from conditioning on the fiscal response are shown in the middle and right-hand panels of Figure 1. The key finding is that austerity intensifies the extent of the rise in inequality in the aftermath of pandemics. As shown in the middle panel, episodes of high austerity lead to an increase in the Gini by about 0.55 points, considerably larger than the average impact shown in the left-hand panel. By contrast, expansionary fiscal policy considerably dampens the rise in inequality, as shown in the right-hand panel: The increase in the Gini is under 0.2 points and is not statistically significant. 

Distributional effects of COVID-19

Early evidence points to adverse distributional impacts from COVID-19 (Blundell et al. 2020, Hacioglu et al. 2020, IMF 2021) occurring through a number of channels. The poor have been more prone to getting infected – in part because they are less likely to have the option of working from home – and to die if infected due to lack of access to quality healthcare. For instance, Brown and Ravallion (2020) found that infection rates were higher in US counties with a higher share of African Americans and Hispanics. There are also indirect and longer-lasting effects from job loss and other shocks to income, particularly for workers in informal employment with limited access to health services and social protection. 

However, our results suggest that a long-lasting increase in inequality need not be a foregone conclusion and is contingent on the fiscal policies adopted by governments. The COVID-19 pandemic has led to a worldwide fiscal response estimated at nearly $12 trillion, or about 12% of global GDP, though the fiscal response in low-income developing countries has been restricted by tighter financing constraints. A number of observers have cautioned against premature withdrawal of fiscal support despite the resulting build-up in debt levels (IMF 2020, Stiglitz 2020, Sandbu 2020). 

While country circumstances of course differ considerably, a case can be made that there is still room for fiscal support in many economies. The likelihood that low long-term interest rates will persist can moderate debt-service burdens and allow governments to continue extending the maturity of government bonds, though caution is warranted where fiscal buffers have been eroded (Chamon and Ostry 2021). In low-income developing countries, these policy options are much less readily available, and the alleviation of financing constraints could require greater assistance from private sector creditors and additional concessional financing from the official sector. 

The experience following the Global Crisis offers a cautionary tale of the dangers of premature fiscal consolidation. In 2010, buoyed by what turned out to be mistaken signs of a strong recovery, many advanced economies signalled a U-turn in their fiscal stance, a policy choice that many regard as partly responsible for the tepid recovery that followed and the consequent failure to bring about reductions in debt-to-GDP ratios (Stiglitz 2012, IEO 2014). The turn to austerity also led to cutbacks in governments’ health expenditures in the run-up to the COVID-19 pandemic (OECD 2016, Soener 2020). Instead of a premature return to austerity, countries would do better by anchoring their fiscal plans in a credible medium-term framework and orienting public expenditures over the coming years toward productive investments in digital and green infrastructure (Gaspar 2020, Estefania Flores et al. 2021). By building market confidence in fiscal sustainability and boosting growth, respectively, these two steps can bring down the debt-to-GDP ratio over time in a more durable way than sharp fiscal consolidations.

References

Alfani, G (2020), “Pandemics and inequality: A historical overview”, VoxEU.org, 15 October.

Blundell, R, M Costa Dias, R Joyce and X Xu (2020), “COVID‐19 and Inequalities”, Fiscal Studies 41(2): 291–319.

Brown, C and M Ravallion (2020), “Inequality and the coronavirus: Socioeconomic covariates of behavioral responses and viral outcomes across US counties”, NBER Working Paper 27549.

Chamon, M and J D Ostry (2021), “A Future with High Public Debt: Low-for-Long Is Not Low Forever”, IMF Blog, 20 April.

Dosi, G, L Fanti and M Virgillito (2020), “Unequal societies in usual times, unjust societies in pandemic ones”, LEM Working Paper Series, No. 2020/14, Scuola Superiore Sant’Anna, Laboratory of Economics and Management, Pisa. 

Estefania Flores, J, D Furceri, S Kothari and J D Ostry (2021), “Worse Than You Think: Public Debt Forecast Errors in Advanced and Developing Economies”, CEPR Discussion Paper 16108.

Fatás, A and I Mihov (2003), “The case for restricting fiscal policy discretion”, The Quarterly Journal of Economics 118(4): 1419–1447.

Furceri, D, P Loungani, J D Ostry and P Pizzuto (2021a), “Will COVID-19 Have Long-Lasting Effects on Inequality? Evidence from Past Pandemics”, CEPR Discussion Paper 16122.

Furceri, D, P Loungani, J D Ostry and P Pizzuto (2021b), “The Rise in Inequality after Pandemics: Can Fiscal Support Play a Mitigating Role?”, IMF Working Paper 21/120.

Gaspar, V (2020), “Fiscal Policies to Contain the Damage from COVID-19”, IMF Blog, 15 April.

Hacioglu, S, D Känzig and P Surico (2020), “The distributional impact of the pandemic”, CEPR Discussion Paper 15101.

Hannon, P (2020), “How the Coronavirus Might Reduce Income Inequality”, The Wall Street Journal, 19 April. 

IEO (2014), “Response to the Financial and Economic Crisis”, International Monetary Fund.

IMF (2020), Fiscal Monitor, October.

IMF (2021), Fiscal Monitor, April.

Jordà, O (2005), “Estimation and inference of impulse responses by local projections”, American Economic Review 95: 161–182.

Jordà, O, S Singh and A Taylor (2020), “Pandemics: Long-Run Effects”, Covid Economics 1: 1–15.

Ma, C, J Rogers and S Zhou (2020), “Global economic and financial effects of 21st century pandemics and epidemics”, Covid Economics 5: 56–78.

Sandbu, M (2020), “There is no fiscal emergency”, Financial Times, 26 November.

Scheidel, W (2017), The Great Leveler: Violence and the History of Inequality from the Stone Age to the Twenty-First Century, Princeton: Princeton University Press.

Soener, M (2020), “How Austerity is Worsening Coronavirus”, Books & Ideas, College de France, 4 June.

Stiglitz, J (2012), “After Austerity”, Project Syndicate, 7 May. 

Stiglitz, J (2020), “Conquering the Great Divide”, Finance & Development, Fall. 

Surico, P, D Känzig and S Hacioglu (2020), “Consumption in the time of COVID-19: Evidence from UK transaction data”, CEPR Discussion Paper 14733.

Average inflation targeting by the Federal Reserve and U.S. consumer expectations

Posted on by Emilie Openchowski
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In August 2020, the Federal Open Market Committee published an amended version of its “Statement on Longer-Run Goals and Monetary Policy Strategy.” In this revised statement, the FOMC reaffirmed its 2 percent target for inflation, as first announced in January 2012, and adopted a new approach, known as average inflation targeting:

The Committee judges that longer-term inflation expectations that are well anchored at 2 percent foster price stability and moderate long-term interest rates and enhance the Committee’s ability to promote maximum employment in the face of significant economic disturbances. In order to anchor longer-term inflation expectations at this level, the Committee seeks to achieve inflation that averages 2 percent over time, and therefore judges that, following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.

From this description, it is clear that the Federal Reserve adopted average inflation targeting explicitly with the goal of “anchoring” inflationary expectations. When policymakers refer to anchored expectations, they usually mean that people and financial markets are confident that future inflation will be close to target in the long run, regardless of developments in the short run. That is, when people observe a boost in inflation, they can be very sure it will be short-lived and that the Fed will keep inflation near target in the long run.

This is important. If consumers or investors believe inflation will be more permanent, then they may behave in ways that spur further inflation. Strongly anchored expectations indicate that the U.S. central bank is credible. And as the revised statement notes, the Fed believes that well-anchored expectations can help promote maximum employment.

This column provides background on the Fed’s average inflation target, details recent trends in U.S. consumers’ inflation expectations and uncertainty, and explains how the Fed could better anchor those expectations to ensure a stable U.S. economy over the course of business cycles.

Average inflation targeting at the Fed

Average inflation targeting is called a makeup strategy because it doesn’t “let bygones be bygones.” That is, monetary policymakers take past inflation into account, not only current economic conditions and outlook. A Federal Reserve Board working paper, presented to the Federal Open Market Committee as background before the adoption of this target, outlines three main benefits of makeup strategies:

First, makeup strategies naturally imply a desire to commit to a “lower for longer” path for the policy rate [the federal funds rate] in episodes when the ELB [effective lower bound, sometimes called the zero lower bound, which refers to the inability of central banks to set policy interest rates much lower than zero] significantly impairs the conduct of monetary policy and may cause extended periods of below-target inflation. Commitments to a lower-for-longer path provide more accommodative financial conditions, boosting aggregate demand and reducing deviations of inflation from its target even while the ELB binds. Second, (credible) makeup strategies foster expectations of more stable inflation, on average, thus reducing the sensitivity of inflation to transient developments. Third, the systematic materialization of stable inflation rates under makeup strategies may better anchor longer-term inflation expectations, inducing a virtuous circle.

The “lower for longer” point has received the most attention. Since inflation did run persistently below 2 percent for many years, the new average inflation targeting strategy should allow a longer period for the U.S. labor market to recover before the Fed begins to tighten monetary policy, even as inflation rises above the 2 percent target. The second and third points are again explicitly about anchoring inflation expectations. We can be sure that Fed officials will carefully monitor inflation expectations as they decide just how much “lower for longer” they are willing to go.

Fed officials are doing just that. Federal Reserve Governor Randal Quarles, for example, attributed recent above-target inflation to three factors: “the surge in demand as more services come back on line while goods spending remains robust, the emergence of bottlenecks in some supply chains, and the very low inflation readings recorded last spring dropping out of the calculation of 12-month inflation.” Quarles interpreted these factors as transitory and argued that the Fed needs to remain patient “so long as inflation expectations continue to fluctuate around levels that are consistent with our longer-run inflation goal.”

Similarly, Vice Chair Richard Clarida noted in November 2020 that “the goal of the new framework is to keep inflation expectations well anchored at 2 percent, and, for this reason, I myself plan to focus more on indicators of inflation expectations themselves—especially survey-based measures—than I will on the calculation of an average rate of inflation over any particular window of time.”

U.S. consumers’ inflation expectations and uncertainty

Fed policymakers monitor a variety of measures of inflation expectations, derived from financial markets and surveys. The Michigan Survey of Consumers, a long-running monthly survey of adults in the United States, is frequently used to gauge the expectations and sentiment of the general public (as opposed to professional forecasters or financial market participants). I developed a new method for estimating consumer uncertainty about inflation based on the forecasts in the Michigan Survey of Consumers. In particular, I show that respondents tend to provide forecasts that are round numbers—say, 5 percent, 10 percent, or 15 percent—when they are highly uncertain about their forecasts.

This methodology allows researchers to quantify the uncertainty associated with this rounding behavior, to create a consumer inflation uncertainty index about short-run (1 year ahead) and long-run (5–10 years ahead) inflation. The inflation uncertainty index is the estimated percent of respondents who are highly uncertain about inflation. My methodology is useful for estimating uncertainty when density forecasts are not available and has been used by an array of economists. (See Figure 1.)

Figure 1

Short- and long-term horizons for inflation uncertainty among U.S. consumers, 1978-2021

Since the disinflation engineered by then-Fed Chair Paul Volcker in the early1980s, long-run uncertainty has typically been lower than short-run uncertainty, consistent with well-anchored expectations. Even when people are uncertain about what will happen with prices over the next year, they are more certain about what will happen in the long run. Figure 1 shows that at the start of the coronavirus pandemic, short-run uncertainty spiked from 25.7 in February 2020 to 57.2 in April 2020, peaked in May 2020, and has since been declining.

The recent behavior of long-run uncertainty is much different. Long-run uncertainty barely changed at the start of the pandemic but began to rise later, indicating that the pandemic itself is not likely the cause of the recent rise in long-run uncertainty; neither the presidential election nor President Joe Biden’s inauguration were associated with notable changes in uncertainty at either horizon. The rise in this trend is especially noteworthy because it reverses a years-long trend of declining long-run uncertainty.

Long-run uncertainty declined following the 2012 average inflation targeting announcement, from an average of 25.7 in 2011 to 14.1 in 2019. In March 2021, long-run uncertainty rose to 26—the highest it has been since February 2013. It remains similarly high as of May 2021, the most recent month for which data are available. (See Figure 2.)

Figure 2

Long-run inflation uncertainty index from 2011 through May 2021

Another useful feature of my methodology is that it allows me to compute the mean (average) inflation expectations each month for the “less uncertain” and the “highly uncertain” consumers. Since the expectations of the highly uncertain consumers tend to be very noisy and high—because these consumers give round number forecasts such as 5 percent, 10 percent, and even 25 percent—focusing on the less uncertain consumers gives a clearer signal of how expectations are evolving.

As of May 2021, short-run and long-run inflationary expectations for these consumers are 3.6 percent and 2.9 percent, respectively, or about two standard deviations higher than they have been over the past decade. (If I had not separated the two types of consumers, then we would observe expectations of 5.7 percent for the short horizon and 3.5 percent for the long horizon.) (See Figure 3.)

Figure 3

Inflation expectations by U.S. consumer type, 2011-2021

The rise in short-run inflation expectations makes a lot of sense because consumers have noticed rising prices and reasonably expect higher inflation over the next year. The rise in long-run inflationary expectations implies that they (also reasonably) think that at least some of the new inflationary pressures are nontransitory.

Addressing long-run inflationary uncertainty

This rise in U.S. households’ long-run inflation expectations is not necessarily a problem at this point—after all, one point of average inflation targeting is to boost long-run inflation expectations so they don’t fall below target after years of too-low inflation. Moreover, the Michigan Survey of Consumers does not specify that respondents should provide expectations of personal consumption expenditures, or PCE inflation, which the Fed targets. Indeed, the respondents to the Michigan survey may be reporting expectations for something more like Consumer Price Index inflation, which tends to be around half a percentage point higher. So, the increase to 2.9 percent could be a move from “too low” to “just right,” rather than from “just right” to “too high.”

But the rise in long-run inflationary uncertainty is more clearly problematic. Uncertainty about long-run inflation makes it more difficult for households to plan for the future. They need to know, for example, how much to save for education or retirement, or to make good decisions about things like taking out a mortgage. These decision can be inherently stressful. This stress hits lower-income households hardest.

Inflation uncertainty is consistently two to three times higher for respondents in the bottom 30 percent of the income distribution, compared to the top 30 percent. Inflation uncertainty also is higher for women and for people without a college degree.

The trends of rising long-run inflationary expectations and rising long-run inflationary uncertainty, especially if these trends continue, should prompt U.S. monetary policymakers to further refine their approach to their average inflation target. Indeed, Fed Chair Jerome Powell, in a speech following his average inflation target announcement in 2020, explained that “we are not tying ourselves to a particular mathematical formula that defines the average.” What’s more, the Fed has not announced the time horizon over which they will compute average inflation. This gives the Fed a great deal of flexibility and discretion but comes at the cost of greater uncertainty.

Conclusion

By making its approach to average inflation targeting more explicit and transparent, the Fed could alleviate at least some of the recently growing uncertainty and keep expectations better anchored as inflation begins to rise. This would enable the Fed to facilitate a stronger U.S. labor market recovery before beginning to tighten.

Greater transparency about average inflation targeting would also make it easier for the U.S. public to hold the Fed accountable, which could improve the Fed’s credibility and democratic legitimacy. And if monetary policymakers have a little less discretion, that should put more impetus on elected officials to pursue sound and equitable economic policies, such as automatic stabilizers, rather than relying too heavily on the Fed to ensure a stable and sustainable U.S. economy over the course of business cycles.

—Carola Conces Binder is an associate professor of economics at Haverford College.

A note from incoming Equitable Growth President and CEO Michelle Holder

Posted on by Maria Monroe
""

I’ve admired the Washington Center for Equitable Growth since its inception in 2013, so I am thrilled to become its next leader.

Equitable Growth’s mission—to accelerate research on how inequality affects economic growth and stability—hits home for me. My research examines why some groups in the U.S. workforce hold a more favorable status, while other groups hold a less favorable one. I also look at the consequences of this stratification and how it contributes to marginalization and disempowerment in the United States.

Examining how inequality inhibits growth, and promoting effective and actionable policies, is absolutely critical if we want to improve our economy and society more broadly. As a second-generation immigrant, first-generation college graduate, and working mom, my lived experience lies at the nexus of characteristics associated with marginalization and cuts right to the heart of many topics Equitable Growth studies—family economic security, economic mobility, and labor, just to name a few.

The present moment is charged with opportunities for a wider and deeper dialogue about economic inequities that pose barriers to broadly shared growth. I could not be more excited to lead the Washington Center for Equitable Growth through this next chapter.

Sincerely,

""

Michelle Holder
Incoming President and CEO
Washington Center for Equitable Growth

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Brad DeLong: Worthy reads on equitable growth, July 7-12, 2021

Posted on by Maria Monroe

Worthy reads from Equitable Growth:

1. A very nice and very fair discussion of what the risks of a medium-run inflationary spiral of any serious magnitude actually are in the United States. Read Francesco D’Acunto and Michael Weber, “A temporary increase in inflation is not a long-run threat to U.S. economic growth and prosperity,” in which they write: “After a decade of below-target rates of inflation … the incipient economic recovery in the United States from the coronavirus recession is suddenly turning the tables on the debate. … In May 2021, the Consumer Price Index registered inflation running at 5 percent, the highest reading in a decade for this broad measure of prices—so high that some observers worry about strong and sustained inflation and reference the stagflationary period of the 1970s. At the same time, the Federal Reserve is largely downplaying these concerns, so much so that in late June, Fed Chair Jerome Powell argued before Congress that ‘it is very, very unlikely’ that the United States will face strong inflationary pressures going forward. Prolonged periods of high inflation do have direct and immediate effects on the macroeconomy and also the potential for more subtle effects of further increasing economic inequality and crimping more sustainable and more equitable growth. … What should policymakers really expect to happen to inflation over the next 2 to 5 years? The answer is important, as the Biden administration and the U.S. Congress debate the merits of the proposed infrastructure packages to address fragilities in the U.S. economy and move it toward more stable and sustainable economic growth. … We need to stress that the recent 5 percent inflation rate appears much less concerning once we account for … the base rate effect. … Policymakers should expect more moderate Consumer Price Index inflation readings going forward. But there still remain four very relevant potential drivers of inflation over the next 2 years: Demand pressures. Supply chain disruptions. Labor market pressures. Inflation expectations. We’ll examine in this column the extent to which these four factors might or might not be relevant.”

2. Antitrust reform is on the table in the United States. It is not clear to me what a “whole government” approach is, exactly. And it is not clear what serious impact agencies other than the Antitrust Division of the U.S. Department of Justice and the Federal Trade Commission can have. So I am anxious to learn more, and to watch this to see how it evolves. Read Bill Baer, Jonathan B. Baker, Michael Kades, Fiona M. Scott Morton, Nancy L. Rose, Carl Shapiro, and Tim WU, “Restoring Competition in the United States,” in which they write: “The incoming administration and the 117th Congress present an important opportunity to rethink fundamental questions surrounding U.S. antitrust laws and their enforcement. Growing market power across the United States disrupts the operation of free and fair markets, and harms consumers, businesses, and workers. Market power indirectly exacerbates inequality and compounds the harms of structural racism. Addressing this problem requires action across the federal government. This report calls for the next administration to seek new antitrust legislation, revitalize antitrust enforcement with a focus on strengthening deterrence, and commit to a ‘whole government’ approach to competition policy.”

Worthy reads not from Equitable Growth:

1. When there is only one institution that is even semi-competent and semi-functional, people tend to load all kinds of tasks onto it. Read Adam Tooz,” Climate crisis offers way out of monetary orthodoxy,” in which he writes: “On July 8th the European Central Bank announced the results of the Monetary Policy Strategy Review initiated by its president, Christine Lagarde. … Lagarde shepherded the ECB’s General Council into unanimous agreement on a terse statement about the bank’s policy regime. … It is 18 years since the bank last conducted a strategic review. … All over the world central bankers have been forced to become crisis-fighters. They face deflationary headwinds which invert the terms of the economic-policy debate that in the 1980s spawned the model of independent central banks. Whether in the advanced economies or emerging markets, central banks now engage in policies, such as large-scale asset purchases, once considered anathema. On top of that, over the last ten years social inequality and climate change have been thrust to the forefront of central-bank policy. Against this backdrop, in the United States the Federal Reserve launched a policy review which concluded in August 2020, leading to a redefinition of its inflation target. This spring the Bank of England was told to focus on climate change. In 2018 the Reserve Bank of New Zealand, once the paradigm of the single-minded, inflation-targeting central bank, had full employment added to its objectives; in February 2021 house-price stability was also inserted. In March 2020 the Reserve Bank of Australia decided to follow the Bank of Japan in adopting ‘yield-curve control’, capping the growth of medium-term borrowing costs. We are in a period of unprecedented experimentation in central-bank policy.”

2. Cutting corporate taxes did not boost investment in the United States. Thus there is no reason to think that raising them will retard investment in the United States. Read Daniel N. Shaviro, “Taxing Multinational Corporations,” in which he writes: “Proponents of the 2017 Tax Cut and Jobs Act (TCJA) argued at the time of its enactment that cutting the United States corporate tax rate from 35 percent to 21 percent would spur investment in the United States, particularly by multinational corporations. … There is an emerging consensus that the reduction of the corporate tax rate from 35 percent to 21 percent in the 2017 Tax Cut and Jobs Act fell well short of raising investment to the extent the law’s proponents had advocated. In addition, the TCJA appears to have resulted in a substantial reduction in government revenue. The disappointing investment and revenue response to the TCJA reflects some important features of the current tax and economic environment; among these is companies’ ability to earn high profits in a country through valuable intellectual property (IP) that need not be generated in that country. … The Biden Administration’s 2021 tax proposals offer two main responses to the concern that increasing taxation of the foreign source income of multinational corporations based in the United States will lead to a reduction in their investments. First, the Biden Administration plan aims to strengthen the existing anti-inversion rules. … Second, it aims, by multiple means … to reduce tax competition between countries and increase the extent to which they instead cooperate towards ensuring that highly profitable multinational companies will pay significant taxes somewhere.”

Posted in Uncategorized

Policymakers should ensure that the U.S. labor market recovery lasts by boosting workers’ bargaining power and strengthening social infrastructure

Posted on by Maria Monroe
""

Many U.S. labor market indicators suggest that the United States is on its way toward a strong recovery. Over the past few months, hopeful signs are starting to emerge that workers in general, and low-wage workers in particular, are now in a better position to bargain for higher pay and better working conditions. But to ensure that a strong labor market recovery translates into sustained wage gains and broadly shared economic growth, workers need not only access to jobs but also access to good jobs.

U.S. workers also need government investments and support for social infrastructure to ensure strong, healthy, and broadly shared economic growth. These types of policies fall into three major categories. The first is labor market protections, such as raising the federal minimum wage. The second is enhancing our system of income supports, such as reforming Unemployment Insurance so that enhanced benefits trigger on and off automatically, enacting a federal paid leave program, and permanently expanding the Earned Income Tax Credit and Child Tax Credit. And the third is strengthening our care infrastructure by providing supports to workers with caregiving responsibilities, including child care and community-based services and supports for older adults and people with disabilities. All of these social infrastructure investments ultimately boost U.S. economic productivity.

These investments in basic social infrastructure are a long time coming. The coronavirus recession hit already vulnerable workers and families first and hardest, exposing longstanding disparities that were present in the U.S. economy well before the onset of the crisis. Now, amid overblown fears about inflation and so-called labor shortages, it’s time for policymakers to invest in social infrastructure to ensure a more equitable and resilient post-pandemic economy. After all, a truly competitive U.S. labor market is not a policy failure, but rather a sign of a healthy, well-functioning economy.

Many labor market indicators suggest the U.S. economy is on track to a strong recovery

By many metrics, the U.S. labor market seems to be experiencing an exceptionally strong bounce back. As of June, the U.S. economy had recovered about 70 percent of the more than 22 million jobs lost between February and April 2020 as the coronavirus spread swiftly across the nation. This rapid recovery is in contrast to the aftermath of the Great Recession of 2007­–2009, when it took until early 2013 for the economy to recover the same share of lost employment. (See Figure 1.)  

 Figure 1

Percent of employment losses relative to peak employment

As states, cities, and localities continue to lift coronavirus-related restrictions and increase access to vaccines, sectors such as education, healthcare, and leisure and hospitality—the industries that grappled with the greatest employment losses during the first months of the pandemic—are seeing customers come back and are recovering jobs. In addition, in April of this year, both the number of workers quitting their jobs and job openings hit their highest rates since the U.S. Bureau of Labor Statistics began publishing these measures two decades ago. In May, the most recent month for which data are available, the job openings rate remained unchanged. While the quits rate declined, it remains well above its pre-pandemic level. These two dynamics suggest that many workers are feeling confident about their job prospects as demand for labor surges.

Indeed, there is now about one unemployed worker for every job opening, slightly above the 0.8 jobless workers per job opening of the tight labor market of late 2019. (See Figure 2.)

Figure 2

U.S. unemployed workers per total nonfarm job opening, 2001-2020. Recessions are shaded.

Wage growth might also be picking up, although the data are ambiguous at this stage. Adjusting for composition effects—shifts in the mix of workers employed—data from the U.S. Bureau of Labor Statistics show that wages and salaries rose 1 percent over the 3-month period ending in March 2021, compared to 0.8 percent in the previous quarter. And over the past few months, wage gains have been especially strong for nonsupervisory workers in lower-paying sectors such as leisure and hospitality, transportation and warehousing, and retail.

Yet the Federal Reserve Bank of Atlanta’s wage growth tracker, which follows the same workers year over year, slowed down from 3.4 percent in March to 3 percent in May. More time and data are needed to observe the wage effects of the recovery at this point.

Then, there are some economic indicators that paint a less optimistic picture. First, there could be more slack in the labor market than the headline unemployment rate suggests, so there is room for growth in labor demand, employment, and wages. The labor force participation rate, which captures the share of U.S. adults either employed or actively looking for work, has remained at roughly the same level since it fell to its lowest point in a generation last summer. And the caregiving crisis in this country is not over: The U.S. Census Household Pulse survey documents that the number of adults pointing to caregiving as the main reason for not engaging in paid work climbed from 9 million in late March to more than 11.5 million in mid-June.

This means the record-breaking quits rate and unusually low transitions from unemployment to employment are capturing not only workers’ confidence in the labor market but also shifting work and caregiving responsibilities as the pandemic subsides, workers’ reassessment of their career path, and concerns about safety amid the ongoing pandemic and disparate vaccination rates across the country.

Secondly, structural inequities that were present in the U.S. economy well before the onset of the coronavirus recession—and then entrenched by it—mean that some of the labor market gains are not being experienced evenly across the lines of age, race, ethnicity, and gender. For instance, between the onset of the pandemic and June 2021, Black women’s employment has shrunk 7.2 percent—a deeper fall than for any other race-gender group. 

Worker power and social infrastructure investments can power the U.S. economy toward economic growth that is strong, stable, and broadly shared

All in all, the path of the U.S. economic recovery is difficult to predict, not least because the coronavirus itself continues to mutate, and vaccine access and uptake varies markedly across states and counties. But as both employers and workers adjust in the aftermath of last year’s massive economic shock, robust wage growth in some sectors and a tightening labor market represent hopeful signs that after decades of declining worker voice, deliberate policy choices can continue to help increase worker bargaining power.

A tight U.S. labor market is a necessary condition for wage growth and good job matches. But without structural policies that promote worker power, today’s temporary gains will not translate into sustainable and broadly shared growth. Workers’ gains are the foundation of a strong recovery, so worker power helps build a robust U.S. economy.

While there is a lack of evidence that rising inflation and labor shortages are a true challenge for the U.S economy, these arguments nonetheless are being used for winding down policies that help achieve a more competitive labor market and for holding back much-needed investments in the U.S. social insurance infrastructure. Yet it is these very policies—investments in the Unemployment Insurance system, in high-quality child and elder care, and in paid sick and parental leave, for example—that are a foundation for sustainable economic growth.

Winding down current investments in social infrastructure prematurely or preventing their wider deployment amounts to a giveaway to low-road employers who would otherwise be unable to compete for workers. Employers need to meet the challenge of competing for workers instead of being handed options to take advantage of them. 

Perhaps most immediately, reports that some employers are having trouble finding and hiring workers are driving states’ decision to opt-out of pandemic-induced and federally funded Unemployment Insurance expansions prior to their official expiration in September. The premature withdrawal from these programs, however, both hurts already-vulnerable workers and is unlikely to have any discernible effect on employment. 

A recent survey by Indeed Inc., a popular job search platform, finds that among unemployed workers not urgently looking for jobs, fear about the ongoing coronavirus pandemic, security that stems from a spouse being employed or a financial cushion, and care responsibilities are much more commonly cited reasons for not engaging in an urgent job search than UI payments. In Missouri, officials say there has not been an increase in job applications since the state announced it would cancel the extra $300 in weekly benefits, which ended on June 12.

And arguments that quickly rising wages are both a symptom and a consequence of higher Unemployment Insurance benefits overlook important trends in the U.S. labor market. Indeed, relative to the previous two recessions, wage growth so far this year is not unusually strong. Particularly fast wage growth in the leisure and hospitality industry could, in part, reflect a return to the pre-pandemic trend or, an analysis by the Economic Policy Institute finds, the return of tipping. 

More broadly, fears over so-called work disincentives ignore the evidence that worker power and social infrastructure programs promote economic efficiency. Economists Sandra Black at Columbia University and Jesse Rothstein at the University of California, Berkeley, for instance, propose that when workers cannot access healthcare or Unemployment Insurance benefits, the threat of financial hardship means they are more likely to remain in jobs that might not be a good match for them—a dynamic that can depress productivity and overall wage growth. During the COVID-19 crisis, income support from Unemployment Insurance sustained consumption. And analysis from the New York Federal Reserve Bank suggests that direct payments boosted the U.S. economy as well. 

Disruptions to the U.S. labor market are an opportunity to achieve sustained worker power and economic growth

To ensure the U.S. labor market is competitive and the economy grows, the U.S. economy needs policies that ensure robust labor market protections, strengthen our system of income supports, invest in care infrastructure, and institutionalize worker power. Lifting the federal minimum wage, which has been stuck at $7.25 per hour since 2009, would boost pay for workers at the bottom of the income ladder and likely benefit workers of color and women of color in particular.

Similarly, for there to be a real restoration of workers’ bargaining power, it should also be easier for workers to join and form unions. There should be stronger protections for pro-union workers, and the right to organize and bargain collectively should be expanded to those who are currently excluded from many labor protections, such as independent contractors and agricultural and domestic workers. Reports that President Joe Biden plans to sign an executive order to ban or limit noncompete agreements—contracts that limit workers’ ability to switch to better, higher-paying jobs—would certainly be an important step toward a more dynamic labor market.     

During the COVID-19 crisis, we relied on Band-Aid fixes to our nation’s income support programs, which helped prop up the economy during an unprecedented economic shock but do not address the shortcomings which prevent these programs from achieving their full potential to support the economy. Exclusionary eligibility requirements, application processes that are purposefully difficult to navigate, and insufficient benefits in programs such as Unemployment Insurance, the Earned Income Tax Credit, and the Supplemental Nutrition Assistance Program both hurt individuals and constrain economic growth and stability. Research shows that these shortcomings disproportionately affect Black workers. For instance, states where a larger share of the population is Black tend to have lower levels of benefits under the Temporary Assistance to Needy Families than those where a smaller share of the population is Black.

Finally, to ensure that people with caregiving responsibilities can fully participate in the labor market, we need adequate care infrastructure. This means introducing a new federal income support program—paid family and medical leave—which research indicates would increase labor force participation of the current generation of workers and strengthen the human capital of the next. It also means investing in a child care system that meets the needs of all working people with children and strengthening the provision of community-based services and supports for older adults and people with disabilities.

Far from being a threat to the current economic recovery, stronger labor market protections, improved income support programs, more robust care infrastructure, and greater worker power would help ensure that economic growth in the post-pandemic economy is strong, stable, and broadly shared. Rather than repeating the policy mistakes made during the aftermath of the Great Recession—when insufficient stimulus and austerity politics based on ideology instead of evidence translated into a slow jobs recovery and years of stagnant incomes for low- and middle-income families—U.S. policymakers should strengthen the social insurance and income support programs that protect the entire economy, power greater worker productivity, and set up workers for success now and into the future when another recession inevitably arrives. 

Weekend reading: Inflation update edition

Posted on by Maria Monroe

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

Equitable Growth round-up

Earlier this year, the U.S. Consumer Price Index registered inflation at 5 percent, leading some observers to panic about prolonged inflation and stagflation. Yet, write Francesco D’Acunto and Michael Weber, while long periods of inflation do have direct and immediate impacts on the economy and can exacerbate inequality, policymakers must assess whether the threat of inflation is real or if this is a short-term adjustment that will recalibrate as the economy begins to reopen. D’Acunto and Weber discuss four potential drivers of inflation in the medium to long term: demand pressures, supply chain disruptions, labor market pressures, and inflationary expectations. They detail what each of these drivers is, how it can affect inflation, and how it is relevant to the particular situation in which the U.S. economy currently finds itself. They conclude that while these factors may influence short-term inflation, they do not appear to imply that there will be sustained inflationary pressure in the coming 2–5 years. This means, they explain, that the Federal Reserve probably does not need to take any action to address inflation and that the Biden administration should continue to pursue its current policy agenda.

There has long been a gap in political participation along income lines in the United States, with wealthier Americans turning out to vote in higher numbers than their middle- and low-income peers. But in 2020, many states enacted new voting laws to ease access to the polls amid the coronavirus pandemic, such as expanding vote by mail and increasing the number of ballot drop boxes available, and new data released by the U.S. Census Bureau reveals the impact these laws had on election turnout. In a follow-up column to their February 2021 report on the relationship between voter suppression and economic inequality, Austin Clemens, Shanteal Lake, and David Mitchell analyze the new Census data to determine whether the income divide in voter turnout narrowed law year. They find that in states that made it easier to vote by mail, turnout was higher in the 2020 election across income groups, but that the effect was larger for lower-income individuals. The co-authors explain why the rash of new state laws restricting voting access, as well as the recent U.S. Supreme Court ruling that further defangs the Voting Rights Act, will have a disproportionate impact on low-income voters and voters of color—and what that means for U.S. economic policy. They conclude by urging the federal government to intervene with legislation that protects the right to vote and access to the polls for all Americans.

This week, the U.S. Bureau of Labor Statistics released data on hiring, firing, and other labor market flows from the Job Openings and Labor Turnover Survey, better known as JOLTS, for the month of May 2021. This report contains useful information about the state of the U.S. labor market, such as the rate at which workers are quitting their jobs and the ratio of unemployed workers-to-job openings. Kathryn Zickuhr and Clemens put together a series of graphics highlighting the trends in the data.

Check out Brad DeLong’s latest Worthy Reads column, where he provides summaries and his analysis of recent must-read content from Equitable Growth and around the web.

Links from around the web

Wondering what inflation means for you and how it is impacting the broader U.S. economy? Vox’s Rani Molla and Emily Stewart explain the inflation debate in the United States, what the recent increase in prices means, and the industries most affected right now and why. They detail the impact the coronavirus pandemic and the resulting recession have had on global supply chains and look at some specific examples of goods and services that have become more expensive as a result. Molla and Stewart then provide an update on what is happening in the lumber industry after perhaps the most talked-about price surge in the U.S. economy in the past year. They conclude by discussing how experts are evaluating these higher prices and what to look for in terms of how long this will last.

Last week’s Employment Situation Report from the U.S. Bureau of Labor statistics shows a healthy 850,000 jobs were added in June. Julia Coronado compiles seven charts that explain what is going on with the U.S. economy and recovery in The New York Times. She looks at how the “go early and go big” policy response to the coronavirus recession made a huge impact on the speed with which the economy is recovering. She also examines the impact of this recession and the responding policy on wealth in the United States, consumer confidence and loan delinquency, labor market trends such as job openings, the racial unemployment divide, and inflationary pressures both now and in the future. She concludes that while the policies enacted to counteract the coronavirus recession were not perfect, the bold action is paying off and will allow us to emerge from this downturn into a stronger, healthier economy.

As the West Coast prepares for another heat wave this weekend, Robinson Meyer explains in The Atlantic how unprepared U.S. infrastructure is to handle extreme weather. He details the rise in climate change-related weather events, including heat waves, and how the Biden administration’s plans to include climate policy in its infrastructure plan will bolster U.S. preparedness for the increasing prevalence of these events. Meyer also writes that engineering standards and new physical infrastructure construction have not incorporated the changing climate quickly enough to be innovative and well-equipped to handle the future—and that making these big shifts in resilience standards is more challenging and time-consuming than it may seem.

Friday figure

U.S. total nonfarm hires per total nonfarm job openings, 2001-2021. Recessions are shaded.

Figure is from Equitable Growth’s “JOLTS Day Graphs: May 2021 Edition,” by Kathryn Zickuhr and Austin Clemens.