The consequences of job displacement for U.S. workers

Posted on by Emilie Openchowski
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Overview

More than a year into the coronavirus recession, unemployment in the United States remains high, and there are 8.4 million fewer jobs than prior to the pandemic. As the U.S. economy begins to recover from the recession caused by this historic public health crisis, some of those who lost their jobs are experiencing what economists refer to as job displacement, where their prior positions no longer exist even as the economy recovers. These workers face unique circumstances when seeking to rejoin the labor force and to reestablish economic security for themselves and their families.

The consequences of job displacement for U.S. workersDownload

Job displacement is generally understood as a form of job loss that stems from shifting economic and business conditions. For instance, workers can be displaced from their jobs due to a plant closure, a corporate downsizing, insufficient work, or the outsourcing of positions. Job displacement is generally outside of the control of individual workers, but it nonetheless can break down career ladders, dissolve valuable worker-employer relationships, and widen existing racial disparities in labor market outcomes because the research shows that workers of color, and especially Black workers, are most often first in line when job displacement occurs.

All of these consequences of job displacement lead to deep and persistent harmful effects for those who experience it and cause damage to the entire U.S. economy. This issue brief reviews the academic literature on job displacement and offers labor market policies that could help mitigate the negative effects of job displacement. We examine each of the following:

  • The long-lasting effects of job displacement
  • The especially severe labor market outcomes for workers who are displaced during recessions
  • The higher likelihood of severe job displacement for workers of color, and particularly for Black workers
  • The effects of job displacement rippling through the entire economy

We then close with several policy ideas that could prevent and mitigate the negative consequences of job displacement. Among these policies are ramping up Short-Time Compensation for workers who work for firms that reduce their hours without displacing them, extending Unemployment Insurance to enable displaced workers to find better job matches, and making it easier for workers to organize and join unions.

The consequences of job displacement are long-lasting

Since the early 1990s, researchers have used administrative data to track displaced workers’ job market trajectories through time, finding that post-displacement earnings losses are substantial, experienced across a variety of economic sectors, and persist even after reemployment. Using Social Security records, for example, a team of economists analyzed the earnings and employment trajectories of men who were separated from their jobs as their employers underwent mass layoff events in the early 1980s. They find that those displaced workers experienced initial earnings losses of 30 percent, relative to workers who remained attached to their jobs in the same firms. After 15 to 20 years, the displaced workers continued to have earnings 20 percent below those of their nondisplaced counterparts.

Then, there is the more recent research by Marta Lachowska of the W.E. Upjohn Institute for Employment Research, Alexandre Mas of Princeton University, and Stephen Woodbury of Michigan State University. They use linked employee-employer data from administrative records to examine how displacement between 2008 and 2010 affected workers’ short- and long-term earnings. They find that in the first few months after the loss of long-tenure jobs, workers’ earnings were nearly half of what they were prior to displacement. After 5 years, workers’ earnings were, on average, still 15 percent below their pre-displacement earnings.

What is driving these earnings losses after job displacement? The team of economists finds that most of the decline in earnings can be attributed to the dissolution of valuable worker-employer relationships. For those displaced from a long-tenure position, the disintegration of good job-worker matches explains a greater chunk of the long-term earnings decline than other factors, such as lost seniority, the erosion of their so-called human capital, or the possibility of transitioning to a lower-paying employer.

In addition, the consequences of this form of involuntary job loss go beyond the loss of earnings. Evidence shows that workers who experience displacement go on to hold jobs with less occupational status, diminished job authority, and fewer employer-provided benefits than otherwise-similar workers who were not displaced.

Workers who are displaced during recessions face especially tough labor market outcomes

Recessions are especially bad times to lose a job. During economic downturns, employers tend to hire fewer workers, offer lower wages, and increase posted requirements for a given position. When unemployment rates are high, job-seekers have to compete with more workers, employment is harder to find, and workers are more likely to go through long spells of unemployment.

Consequently, researchers find that the negative consequences of job displacement are even more severe when experienced amid an economic slump. For instance, Steven Davis at the University of Chicago’s Booth School of Business and Till von Wachter at the University of California, Los Angeles find that men who were displaced when the U.S. unemployment rate was higher than 8 percent experienced earnings losses twice as large as those who were displaced when the overall unemployment rate was lower than 6 percent.

Deeper economic contractions can therefore lead to even worse labor market outcomes for U.S. workers. When studying the Great Recession, for example, Henry Farber of Princeton University finds that the rate of job loss, the difficulty of finding new employment, and the probability of finding only part-time work were all higher in the 2007–2009 crisis than in the economic contractions of the 1980s, 1990s, and early 2000s. The labor market consequences of job loss, Farber finds, were unusually severe and long-lasting.

Workers of color, and Black workers in particular, are especially likely to experience displacement

Research stretching back decades demonstrates that workers of color are more likely to experience job displacement than their White counterparts. There is evidence, for instance, that Black workers are the first to be fired as the U.S. economy contracts—a finding that holds even when accounting for characteristics such as education, occupation, and industry. This evidence underscores the importance of strengthening the enforcement of workplace anti-discrimination laws during economic downturns.

Alarmingly, the Black-White job displacement divide is more severe today than it was in the 1990s. Using data from the Displaced Worker Survey of the Current Population Survey, Elizabeth Wrigley-Field of the University of Minnesota and Nathan Seltzer of the University of Wisconsin-Madison analyze racial disparities in job displacement between 1981 and 2017. They find not only that Black workers were nearly always more likely to be displaced than their White counterparts, but also that sectors in which Black workers are overrepresented and which used to provide a higher degree of job security—especially jobs in the public sector—no longer do. The authors also find that these disparities exist when controlling for education level, meaning that being White reduces the likelihood of displacement as much as having a college degree.

The effects of job displacement and mass layoffs can ripple through the entire U.S. economy

Job displacement hurts not only those who experience it, but could also harm the entire U.S. economy by causing recessions to last longer and be more severe. As noted above, workers who experience a displacement tend to have lower job-finding rates and are more likely to be unemployed for longer periods of time. Research shows, in turn, that high levels of long-term joblessness can suppress overall wage growth and lead to lower economywide employment levels.  

In addition, the income volatility associated with job loss threatens the economic security of key consumers in the U.S. economy. The spending of workers who are historically more exposed to job displacement—workers of color, younger workers, and workers without a college degree—is also particularly sensitive to income shocks. As a result, the unequal exposure to displacement and income loss more generally can trigger a feedback loop where important consumers have to cut back their spending dramatically, reducing demand for goods and services and leading to further job losses.

Policies to prevent and mitigate the negative consequences of displacement  

Job displacement is a hugely disruptive labor market outcome for U.S. workers. To protect them from negative consequences associated with displacement, policymakers should consider ramping up Short-Time Compensation—a program within the broader Unemployment Insurance system that helps workers avoid displacement by allowing employers to temporarily cut labor costs while keeping workers attached to their jobs. Under Short-Time Compensation, employers can reduce the number of hours of work for a group of workers who, in turn, receive prorated jobless benefits that replace a portion of their lost wages, allowing both workers and employers to withstand a temporary drop in business. 

When job displacement happens, income-support programs, such as extended Unemployment Insurance, can give workers the time and economic security they need to find employment that is a good match for their skills and interests. Research by Adriana Kugler and Umberto Muratori at Georgetown University and Ammar Farooq at Uber Technologies Inc. shows that during the Great Recession of 2007–2009, workers who had access to Unemployment Insurance benefits for a greater number of weeks were more likely to experience upward occupational mobility and earn higher reemployment wages. These findings thus point to the need to make jobless benefits accessible for longer and to tie the duration of the Extended Benefits program to improved automatic triggers.

Expanding workers’ abilities to organize and join unions may also help reduce some of the harms of job displacement. So-called reduction in force clauses in collective bargaining agreements can help mediate the level of job displacement, as well as provide other supports for workers when job loss is unavoidable, such as requiring employers to rehire the laid-off workers if and when business conditions improve. Proposals to enable wider unionization across the U.S. labor market will help workers on many fronts, including when they may be at risk for losing their jobs.

The central factor across these and other policies to mitigate the harms of job displacement is maintaining employees’ attachments to their jobs when at all possible and supporting workers’ incomes when job loss is unavoidable to improve their long-term earnings outcomes. Long-term restructuring of the U.S. economy is inevitable and ultimately fosters a robust economy, and ensuring workers are supported through these shifts is essential for ensuring broadly shared growth.

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Brad DeLong: Worthy reads on equitable growth, April 27-May 3, 2021

Posted on by Maria Monroe

Worthy reads from Equitable Growth:

1. If you read one thing about why the Biden administration is trying to do what it is trying to do, read David Mitchell,” The evidence behind Biden’s big plans for rebuilding infrastructure, reducing poverty, and combating inequality,” in which he writes: “The American Jobs Plan and the American Families Plan … [are] designed to complement the temporary economic boosters included in the American Rescue Plan … Many of the big ideas included in the two new plans are backed by extensive academic evidence, much of which has been funded and featured by the Washington Center for Equitable Growth.”

2. Robert Manduca provides powerful documentation of a large-scale societal failures in the United States relative to the yardstick provided by other global-north societies. Read his “The American Dream is less of a reality today in the United States, compared to other peer nations,” in which he writes: “The hope that children will grow up to have higher standards of living than their parents is widespread around the world. In the United States, this concept is considered by many to be a core component of the American Dream … [yet] more than 90 percent of U.S. children born in 1940 had higher real incomes at age 30 than their parents did, but only about 50 percent of children born in 1980 can say the same. This raises the question: Was this decline part of a global trend, or is the United States alone in its low rates of upward mobility? In short, does the American Dream live on, but in other countries? … Contrary to the self-conception that the United States is the “land of opportunity,” relative social mobility—the likelihood of a child born to low-income parents climbing to the top of the income distribution as an adult—is low in the United States, compared to many European countries.”

Worthy reads not from Equitable Growth:

1. Yes, the United States has been underinvesting in science since president Roland Reagan took an axe to the federal discretionary budget decades ago. Any more questions? Read Jonathan Gruber and Simon Johnson, “Infrastructure for the Next American Century,” in which they write: “America’s post-World War II prosperity was based on more than good roads and bridges; it drew on a much broader push to generate shared scientific knowledge and put it to work productively…. By the mid–1960s, the U.S. government was spending nearly 2 percent of GDP on public science investments—and the returns were extraordinary … And yet the United States has since retreated from its commitment to public funding of basic science. Federal science spending has fallen toward 0.6 percent of GDP, placing it 12th in the world … China now spends roughly 1.3 percent of GDP on government-supported science.”

2. Tracking the U.S. recovery. There is going to be inflation—you cannot merge onto the superhighway without leaving skid marks. But that is a very different thing than the stagflationary problems of the 1970s. Read Neil Irwin, “The Economy Is (Almost) Back. It Is Looking Different Than It Used To,” in which he writes: “Americans’ spending on durable goods—cars and furniture and other goods meant to last a long time—rose at a stunning 41.4 percent annual rate in the first three months of the year. Enjoy your Pelotons and Big Green Eggs, everybody … The economy is recovering rapidly, and is on track to reach the levels of overall G.D.P. that would have been expected before anyone had heard of Covid–19. But that masks some extreme shifts in composition…. The United States is on track to surge above that 2019 trend in the second quarter currently underway. But … spending on cars and trucks is 15.1 percent higher than it would have been on the 2019 trajectory; spending on furnishings and durable household equipment is 16.6 percent higher; and spending on recreational goods is a whopping 26 percent higher. Altogether, durable goods spending is running $348.5 billion higher annually … The housing sector is experiencing nearly as big a surge. Residential investment was 14.4 percent above its prepandemic trend … Spending on transportation services remains 23 percent below its prepandemic trend, recreation services 31 percent, and restaurants and hotels 19 percent. Those three sectors alone represent $430 billion in “missing” economic activity—largely equivalent … to the combined shift of economic activity toward durable goods and residential real estate … Less widely understood is a steep pullback in the energy sector … Consumer spending on gasoline and other energy goods is down 11 percent from its prepandemic trend line. And business spending on structures is down 19 percent.”

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Weekend reading: We’ve got the evidence for those big plans 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

As David Mitchell writes, the American Jobs Plan and the American Families Plan, described this week by President Joe Biden in his address to Congress, would make large-scale, and in some cases permanent, investments in the nation’s physical and human infrastructure. These measures would combat racial, income, and wealth inequality, and they would restructure large parts of the U.S. economy to strengthen and broaden economic growth, combat climate change, and build a lasting and effective care infrastructure. Mitchell summarizes the research that has helped to lay the foundation for the size, the scope, and many of the specifics, of Biden’s policy and programmatic proposals. Our hope, he writes, “is that policymakers follow the compilation of academic evidence that Equitable Growth and others have assembled and capitalize on this opportunity to make structural economic change that spurs strong, stable, and broad-based growth.”

As Congress debates whether those plans, along with the major COVID-19 relief plan enacted in March, are too big, too small, or just right, a new Equitable Growth factsheet addresses an important question: Could these measures, designed to bring about a strong recovery now and lay a foundation for strong and broadly shared long-term growth, send the economy into overdrive, leading to destructive inflation and high interest rates? The title of the factsheet provides the answer: “Overheating is not a concern for the U.S. economy.” The most salient evidence, the factsheet points out, is that the U.S. economy still has 10 million fewer jobs today than it likely would absent the coronavirus pandemic and resulting recession. While it does not rule out the possibility of overheating at some point, the factsheet suggests that it is unlikely in the near term, and that overheating can be addressed if and when it occurs. It concludes that the “general macroeconomic benefits—such as long-term employment gains and fully recovered labor force participation among women and workers of color—significantly outweigh any concern for possible overheating.”

The United States is rare among developed countries in its lack of federally mandated access to child care and early childhood programs and paid family and medical leave, and its weaknesses in long-term and elder care are also well-known. For these reasons, our nation’s care infrastructure is central to the current debate over the size and role of the federal government. The U.S. care economy is the topic of April’s Expert Focus, a monthly feature in which Equitable Growth highlights scholars, both in and beyond our network, who are at the frontier of social science research. The researchers about whom Christian Edlagan, Maria Monroe, and Emilie Openchowski write this month are examining care infrastructure and policies and their impacts on workers, their families, and their communities. The evidence points to longstanding challenges and deficiencies that predate the coronavirus pandemic, which has, our authors write, “only served to deepen these cracks in care infrastructure, particularly along gender and racial lines.”

The American Dream of intergenerational mobility—the hope that one’s children will have a better life than one’s own—is more alive in many other countries than in the United States. More than 90 percent of U.S. children born in 1940 had higher real incomes at age 30 than their parents did, but only about 50 percent of children born in 1980 can say the same, writes Robert Manduca of the University of Michigan. Manduca describes a new working paper he wrote with 13 U.S. and European co-authors that examines the question: Was this decline in upward mobility part of a global trend or unique to the United States? The answer, clearly illustrated below in this week’s Friday figure, is that several of the European countries the group studied have maintained high levels of intergenerational mobility, while the United States, along with Canada and Denmark, has declined. He attributes this to the fact that incomes for young adults in these three countries have fallen behind overall economic growth and, in this country, “shifts in the U.S. labor market that advantage employers at the expense of workers are a fundamental cause.”

Equitable Growth’s academic program awards research grants to scholars, mainly at U.S. universities and colleges, seeking evidence on issues related to the intersections between economic inequality and economic growth and stability. Since the organization’s founding in 2013, it has invested more than $6 million in the work of more than 200 grantees. In its second annual comprehensive academic research report, Equitable Growth describes the impact of its funded research, updating what we’ve learned and the questions we seek to answer. It’s an indispensable tool for understanding the organization’s mission and the extraordinary research that has provided evidence that underlies many of the groundbreaking proposals that have become central to the national policy debate.

Links from around the web

Lower-skilled workers suffered the most in the coronavirus recession. And Heather Long reports in The Washington Post that they are the slowest to regain employment as the economy recovers. Hiring has rebounded quickly for those with college educations, including two-year degrees, she writes, but for those with high school degrees or less, jobs are hard to come by, even as the economy begins to reopen and some employers say they are unable to find workers. She said the current economy looks like a “two-track recovery,” with some similarities to the recovery from the Great Recession a decade ago, when workers without college degrees struggled to find employment.

The economic narrative—our common understanding about what makes the economy grow and what it means to be a thriving nation—is fundamentally changing. So writes Chris Hughes, co-chair of the Economic Security Project, in Time. The economic ideology that has underpinned much of the nation’s economic policy since the 1980’s, based on the “myth … that markets, unfettered and free, are the best way to create economic growth,” was discredited during the Great Recession over a decade ago and has “collapsed” in the wake of the coronavirus pandemic and recession. What is replacing that narrative for Americans across the political divide, Hughes writes, is a “managed market paradigm.” As he describes it, “There are three key pillars to a new, managed market approach: effective regulation, sizable public investment, and careful macroeconomic supervision. A managed market requires centralized, accountable institutions embracing their power to create stable and competitive markets where innovation can flourish and labor shares in the wealth.”

As the country begins to come to grips with the fact that communities of color are far more exposed to environmental threats than White communities, a new study, conducted at five universities, shows that even a significant U.S. policy success of recent decades has had considerably less positive impact on Black, Latinx, and Asian American communities. As Juliet Eilperin and Darryl Fears report in The Washington Post, while the country has made great progress in reducing air pollution from fine-particle matter, such as soot, that comes from cars, trucks, factories, and elsewhere, nearly every source of “the nation’s most pervasive and deadly air pollutant still disproportionately affects Americans of color, regardless of their state or income level … The analysis … shows how decisions made decades ago about where to build highways and industrial plants continue to harm the health of Black, Latino and Asian Americans today.”

Friday figure

Estimates of upward absolute income mobility-the fraction of children who grow up to earn more than their parents, after adjusting for inflation-by select counties and birth cohorts, 1960-1987

Figure is from Equitable Growth’s The American Dream is less of a reality today in the United States, compared to other peer nations.

The evidence behind Biden’s big plans for rebuilding infrastructure, reducing poverty, and combating inequality

Posted on by Maria Monroe
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During his first 100 days in office, President Joe Biden turned core elements of his Build Back Better campaign plan into concrete policy proposals for congressional consideration. Dubbed the American Jobs Plan and the American Families Plan, his two most recent proposals are designed to complement the temporary economic boosters included in the American Rescue Plan—legislation, passed by Congress and signed by the president in March, focused on addressing the coronavirus recession.

The American Jobs Plan and the American Families Plan, though, would go further than the American Rescue Plan. President Biden’s two new plans would make large-scale, and in some cases permanent, investments in the nation’s physical and human infrastructure, combating racial, income, and wealth inequality and restructuring large parts of the U.S. economy. As 225 leading economists explained in a letter to Congress earlier this month, these proposals, if designed correctly, could promote strong, stable, and broad-based economic growth. And indeed many of the big ideas included in the two new plans are backed by extensive academic evidence, much of which has been funded and featured by the Washington Center for Equitable Growth.

Let’s walk through the major elements of the administration’s new plans, which were outlined by the president in a joint address to Congress last night, alongside the underlying academic evidence, in turn.

American Jobs Plan

In total, this plan includes $2.3 trillion in public investments in physical and human infrastructure, science research and technological development, and climate change mitigation and environmental justice. It would begin to reverse the decades-long downward trend in government investment. (See Figure 1.)

Figure 1

U.S. gross government investment, federal and state, as a share of GDP, 1947–2018

We know from academic research that the decline in public investments has weakened growth and increased inequality. Specific policies in this plan to address these weaknesses include:

  • Nearly $1 trillion for upgraded transportation infrastructure, including roads, rail, and bridges; improved water systems; expanded broadband; and enhanced electricity grids. Black, Latinx, and Indigenous communities suffer disproportionately from long commute times, unsafe drinking water, and unreliable broadband access, so these investments will begin to address our country’s insidious racial inequities.
  • A $450 billion investment in long-term care services and supports through Medicaid. As nearly 200 social scientists wrote in a recent letter to Congress, this investment will improve care for our aging population and invest in long-term care workers, who are today largely underpaid women of color. Improving job quality for care workers helps the workers themselves, prevents patient deaths by improving the quality of care, and is good for the U.S. economy. In fact, this type of investment in “care infrastructure” boasts the potential to create twice as many new jobs as investments in physical infrastructure alone. (See Figure 2.)

Figure 2

Estimated new jobs in the United States, by education level, per $1 million of spending
  • The Protecting the Right to Organize, or PRO, Act, which would modernize decades-old labor laws to address the growing power imbalance between workers and businesses. It would make it easier for workers to organize and collectively bargain, thus ensuring that the millions of jobs created by the American Jobs Plan are high-quality positions that include fair pay, predictable schedules, and good benefits, among the other advantages of unionization.
  • The American Jobs Plan also calls on large, profitable firms to pay more in corporate tax to help finance these investments. Though the federal government has the fiscal capacity needed to deficit-finance the growth-enhancing investments included in the American Jobs Plan—and research shows that previous concerns about deficits and debt are overblown—many U.S. corporations have prospered throughout the coronavirus recession and received large and economically wasteful tax cuts in 2017, so raising revenue from them is both fair and consistent with strong, stable, and broadly shared growth.

American Families Plan

The American Families Plan, released by the White House yesterday, is all about human capital investments and enhancing the nation’s social infrastructure so that children are not raised in poverty, have access to high-quality pre-Kindergarten and child care, and families can better balance caregiving and work obligations. Specific policies in this $1.8 trillion plan include:

  • Guaranteeing all workers access to paid family, medical, and sick leave. Today, only 20 percent of private-sector workers access paid family leave through their employers, and 44 percent of U.S. workers do not even qualify for unpaid leave through the Family and Medical Leave Act. This leaves many workers with the impossible choice of caring for loved ones or keeping their jobs. And caregiving responsibilities are a significant driver of women’s exit from the labor force, which helps explain why the U.S. women’s labor force participation rate was 56.1 percent in March 2021, a 33-year low. Women of color have been hit the hardest by the collision between caregiving responsibilities and the coronavirus pandemic.
  • Expanding access to high-quality child care options through a $225 billion investment and a permanent extension of the enhanced Child and Dependent Care Tax Credit. Research shows that parents’ labor force participation increases when child care is more affordable and accessible. In one study, a $100 increase in the price of child care is associated with a 3.7 percentage point decrease in that neighborhood’s labor force participation rate among women. Meanwhile, high-quality early care and education can lead to long-term improvements in a child’s human capital. Children in high-quality programs demonstrate better education, economic, health, and social outcomes and fewer negative outcomes—such as deleterious involvement in the criminal justice system. These high-quality programs can help pay for themselves, generating up to a 13 percent return on investment per-child, per-year.
  • $200 billion of investments in universal pre-kindergarten. Academic research finds that pre-K programs can spur growth, create jobs, and ultimately pay for themselves. (See Figure 3.)

Figure 3

Dollars of present value GDP realized for each one dollar investment in different educational programs
  • A four-year extension of the enhanced Child Tax Credit that was included in the American Rescue Plan enacted in March. Sometimes described as a “child allowance,” the evidence shows that this policy would pay dividends not just for low- and middle-income families, but the economy as a whole.
  • The use of automatic triggers, based on economic conditions, to extend the length and amount of Unemployment Insurance benefits, some of which are currently scheduled to expire in September. The plan does not outline a vision for revamping the Unemployment Insurance program writ large, but ensuring that program enhancements turn on and off based on objective economic indicators rather than arbitrary and politically-negotiated dates is a major step in the right direction.
  • The United States has the fiscal space to finance these investments with deficits, but President Biden proposes to finance this package with taxes on the income and wealth of the richest Americans. The top 1 percent of income earners now enjoy the fruits of a historically outsized share of the nation’s economic growth. The American Families Plan envisions raising the top income tax rate from 37 percent to 39.6 percent for individuals making more than $400,000 a year, equal to the top marginal rate in 1997 (and for much of the 1990s and between 2013 and 2017).
    In the United States, wealth is even more inequitably distributed than income, so the American Families Plan wisely proposes to raise revenue by taxing the investment income from capital gains of Americans making more than $1 million per year. This would equalize the rates paid by people who earn income through work and those who earn it from investments. Raising revenue from the rich in this way could raise even more revenue than traditional estimates assume, especially because it proposes to end a loophole called “stepped-up basis,” which allows some capital gains to never be taxed at all.
    The proposal also includes new enforcement resources for the IRS, which will allow the federal agency to target tax evaders in the top 1 percent of income earners, who research shows hide 20 percent of their income from tax collectors.

Conclusion

The top fiscal policy priority for U.S. policymakers should be to make long-overdue public investments in physical and human infrastructure, which evidence shows will pay long-term dividends in the form of strong, stable, and broadly shared economic growth. These investments should be focused on the areas that are most holding back the U.S. economy—and that were so exposed by the coronavirus pandemic—namely combating racial discrimination and injustice, mitigating the effects of climate change, empowering workers, and expanding social insurance protections. The key elements of the American Jobs Plan and American Families Plan, as described by President Biden in his joint address to Congress last night, would represent a huge step toward those goals.

Attention now turns to Congress, which must work with the administration to fill in the details and craft legislation that can pass both chambers. Some concerns raised by some members of Congress, such as those around deficits and economic “overheating,” are not well-founded and should not stand in the way of action. But there remain legitimate questions about which elements of the president’s plans should be included or excised, and which policies that were left  out by the president—such as instituting mark-to-market capital gains taxation, cancelling student loan debt, and improving the way we measure the economy—should be added back in by Congress.

In answering these questions, our hope is that policymakers follow the compilation of academic evidence that Equitable Growth and others have assembled and capitalize on this opportunity to make structural economic change that spurs strong, stable, and broad-based growth.

The American Dream is less of a reality today in the United States, compared to other peer nations

Posted on by Maria Monroe
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The hope that children will grow up to have higher standards of living than their parents is widespread around the world. In the United States, this concept is considered by many to be a core component of the American Dream—the idea of a “better life for your children” is a major part of what has drawn immigrants to this country for generations.

Recent research, however, shows that in the United States, the rate of upward absolute income mobility—the fraction of children who grow up to earn more than their parents, after adjusting for inflation—declined substantially over the past 50 years. More than 90 percent of U.S. children born in 1940 had higher real incomes at age 30 than their parents did, but only about 50 percent of children born in 1980 can say the same. This raises the question: Was this decline part of a global trend, or is the United States alone in its low rates of upward mobility?

In short, does the American Dream live on, but in other countries?

There are reasons to expect this may be the case. Many features of the U.S. economic system are unusual among high-income countries. Levels of economic inequality—a key driver of declining absolute mobility in the United States—are higher in the United States than in virtually any other country of its income level.

Contrary to the self-conception that the United States is the “land of opportunity,” relative social mobility—the likelihood of a child born to low-income parents climbing to the top of the income distribution as an adult—is low in the United States, compared to many European countries. The United States also has a distinctive welfare state, with less social insurance and lower labor union penetration than most other high-income countries. Instead, the United States relies on consumer credit for many expenses that other countries cover through social insurance programs.

In our new working paper, I and my 13 co-authors (listed in the tagline at the end of this column) compare rates of absolute income mobility in the United States to seven other high-income countries in North America and Europe: Canada, Denmark, Finland, the Netherlands, Norway, Sweden, and the United Kingdom. As Figure 1 shows, the variation in upward mobility rates among these countries is striking. (See Figure 1.)

Figure 1

Estimates of upward absolute income mobility-the fraction of children who grow up to earn more than their parents, after adjusting for inflation-by select counties and birth cohorts, 1960-1987

Figure 1 shows that more than 75 percent of Norwegian children in recent birth cohorts grew up to earn more than their parents, compared to around 55 percent of children in the United States and Canada. Children born in the 1970s in the Netherlands had even higher rates of upward mobility—almost 80 percent—before seeing a sharp decline for cohorts who turned 30 after the global financial crisis of 2008. Between 65 percent and 75 percent of children in Finland, Sweden, and the United Kingdom experienced upward mobility in absolute terms.

Among the European countries in our sample, only Denmark has seen upward mobility rates lower than the United States and Canada, following a steep decline after the global financial crisis, which hit Denmark especially hard. But the Danish welfare state had the effect of blunting the impact of the crisis. The country’s pretax upward mobility for the 1982 cohort was just 46  percent, yet upward mobility after taxes and social transfers was 67 percent, as shown in Figure 2.  

Figure 2

Rates of absolute mobility before and after taxes and social transfers

In contrast, upward mobility in post-tax disposable income for the 1982 cohort in the United States was just 7 percentage points higher than in pretax income, and the gap has narrowed further for more recent cohorts. The Danish exposure to macroeconomic headwinds was buffered by its tax system and welfare state, in line with its longstanding policy of “flexicurity” in its labor market, which combines relatively low barriers to hiring and firing with substantial social insurance protections.

What explains the variation in upward absolute mobility rates across countries? There are at least three main possibilities. It could be that the level of absolute mobility is shaped by the level of relative mobility—the likelihood that a child born to parents who are poorer than their peers might grow up to be rich relative to her own cohort. Alternately, it could be that faster economic growth is the main driver of upward mobility in absolute terms. Finally, higher rates of absolute mobility might result from lower levels of inequality, which means that a given amount of economic growth translates into higher living standards for more people.  

To determine the importance of each of these possible contributors, we conducted a simulation exercise comparing the three lowest-mobility countries—Canada, Denmark (in pretax income only), and the United States—with Norway, which had the highest rates of upward mobility among the most recent cohorts. (See Figure 3.)

Figure 3

Decomposition of differences between high-mobility Norway and three low-mobility countries into cross-national differences in relative mobility, Gross Domestic Product growth, within-cohort inequality, and between-cohort inequality

Interestingly, we find that the amount of relative income mobility has little impact on rates of absolute mobility. Compared to children in the United States, children in Norway are about 25 percent more likely to occupy a substantially higher or lower rung of the income distribution than their parents. But because relative mobility is zero sum—for every child who moves up in income rank, some other children move down—its impact on mobility in dollar terms is minimal.

Both economic growth and economic inequality shape absolute mobility. As Figure 3 shows, slower economic growth accounts for around 25 percent of the difference in mobility with Norway for Canada and Denmark. Both of these countries saw slower Gross Domestic Product growth than Norway did during the period between 1983 and 2013, in part due to greater exposure to the global financial crisis. The United States, in contrast, saw overall growth rates similar to those of Norway, so economic growth alone cannot account for the mobility difference.

We distinguish between two types of economic inequality in our analysis. First is within-cohort inequality: among 30-year-olds, how evenly are earnings spread? As Figure 2 shows, this is a major driver of the lower mobility rates for the United States: The richest 30-year-olds take a larger share of the cohort’s total income in the United States than in Norway. If inequality among 30-year-olds were as low in the United States as in Norway, about 50 percent of the mobility gap between the countries would be closed. In Canada, within-cohort inequality accounts for about 25 percent of the gap, while in Denmark, it hardly contributes at all.

working paper

Trends in Absolute Income Mobility in North America and Europe

By Robert Manduca,

April 28, 2021

post

The fading American dream: trends in absolute income mobility since 1940

By Raj Chetty, David Grusky, Jimmy Narang, Maximilian Hell, Nathaniel Hendren, Robert Manduca,

December 8, 2016

Vision 2020

Addressing the U.S. racial economic mobility and inequality divides

By Equitable Growth,

August 18, 2020

The second type of inequality we examine is cross-cohort inequality. This measures the extent to which incomes for 30-year-olds as a whole kept up with GDP during our sample period. In all three low-mobility countries, cross-cohort inequality is by far the largest driver of low mobility rates. Incomes for young adults in these countries, as a whole, are not keeping up with economic growth. Incomes for our sample of U.S. 30-year-olds born in 1983 grew only 71 percent as quickly as GDP did over the 30 years to 2013. In Norway, incomes for 30-year-olds grew 95 percent as fast as GDP.

Cross-cohort inequality accounts for the bulk of the difference between each of the three low-mobility countries and Norway—and the same is true if we compare to Finland and Sweden instead. The primary reason that upward mobility rates have fallen in the United States, Canada, and Denmark, but stayed high in much of Scandinavia, is that incomes for young adults in the low-mobility countries have not kept up with overall economic growth.

In the United States, recent scholarship and policy debates highlight how millennials (those born between 1981 and 1996) are not seeing the same early economic gains that previous generations enjoyed. Many factors contribute to this generational difference, but shifts in the U.S. labor market that advantage employers at the expense of workers are a fundamental cause. Young adults are doubly affected by this: They are less likely to be employers themselves, and they don’t have the protections of seniority that some older workers have achieved.

The goal of a better life for one’s children is aspired to around the world. As our working paper demonstrates, maintaining high rates of upward absolute income mobility is not a given and requires economic institutions capable of both generating economic growth and translating that growth into higher living standards for society as a whole. As U.S. policymakers ponder how to restructure our institutions to make the American Dream a reality once more, they can take inspiration from the countries around the world where mass upward mobility is still a reality.

—Robert Manduca is an assistant professor of sociology at the University of Michigan. He is a co-author of the Equitable Growth working paper “Trends in Absolute Income Mobility in North America and Europe,” along with: Maximilian Hell, Department of Sociology, Stanford University; Adrian Adermon, Institute for Evaluation of Labor Market and Education Policy, Uppsala, Sweden; Jo Blanden, Department of Economics, University of Surrey; Espen Bratberg, Department of Economics, University of Bergen; Anne C. Gielen, Erasmus School of Economics, Rotterdam, the Netherlands; Hans van Kippersluis, Erasmus School of Economics, Rotterdam, the Netherlands; Keun Bok Lee, California Center for Population Research, University of California, Los Angeles; Stephen Machin, Department of Economics, London School of Economics; Martin D. Munk, Department of Educational Sociology, Danish School of Education, Aarhus University; Martin Nybom, Institute for Evaluation of Labor Market and Education Policy, Uppsala, Sweden; Yuri Ostrovsky, Statistics Canada; Sumaiya Rahman, Frontier Economics; and Outi Sirniö, Department of Sociology, University of Turku.

Posted in Uncategorized

Expert Focus: Examining and strengthening U.S. care infrastructure

Posted on by Maria Monroe
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Equitable Growth is committed to building a community of scholars working to understand how inequality affects broadly shared growth and stability. To that end, we have created the monthly series, “Expert Focus.” This series highlights scholars in the Equitable Growth network and beyond who are at the frontier of social science research. We encourage you to learn more about both the researchers featured below and our broader network of experts.

The care economy in the United States provides support to many workers across the economy, be it in the form of child care and early childhood programs, paid family and medical leave, or long-term and elder care. At the same time, the lack of federally mandated access to these programs in the United States leaves millions more workers struggling to manage their care needs and responsibilities, leading to lower productivity, wage penalties, and work-life conflicts that are incredibly difficult to navigate.

The care industry is rife with longstanding challenges and deficiencies that existed long before the onset of the coronavirus pandemic, which has only served to deepen these cracks in care infrastructure, particularly along gender and racial lines. As President Joe Biden pushes for Congress to pass his infrastructure and jobs plan to boost the economy and jumpstart the recovery from the coronavirus recession, it is vital that policymakers address not only physical infrastructure but also care infrastructure needs.

In this installment of Expert Focus, we highlight scholars investigating the U.S. care economy. These researchers are examining care infrastructure and policies, and looking at the economic, social, and health impacts of these programs on workers, their families, and their communities. Their findings can guide policymakers who are keen to make much-needed public investments that support workers and the overall economy alike at this pivotal moment for our economic recovery.

Eric Chyn

Dartmouth College

Eric Chyn is an assistant professor in the Department of Economics at Dartmouth College and a faculty research fellow at the National Bureau of Economic Research. He is a labor and public economist, and his recent research looks at the effects of government programs and policies on children and child well-being, and the importance of a child’s environment. He also studies the short- and long-run impacts of additional medical care for children with low birth weights, looking at their health and educational outcomes as well as their future use of income-support and safety net programs. His findings have been covered in outlets such as The Atlantic, Harvard Business Review, and The New York Times. In 2017, Chyn and Justine Hastings, a professor of economics and international and public affairs at Brown University, received an Equitable Growth grant to study the impact of paid maternity leave on mothers and their children in Rhode Island.

Quote from Eric Chin and co-authors on medical care for children

Maya Rossin-Slater

Stanford University

Maya Rossin-Slater is an economist and an associate professor of medicine at Stanford University’s School of Medicine. Her research focuses on health, public, and labor economics, and specifically on maternal and child well-being, family structure and behavior, and policies targeting disadvantaged populations. Rossin-Slater is well known for her contributions to the literature on paid family and medical leave in the United States, including from research funded by two Equitable Growth grants (in 2016 and in 2019). She also co-authored a chapter of Equitable Growth’s Vision 2020: Evidence for a stronger economy project, urging policymakers to enact paid leave programs across the United States and providing evidence of the economic benefits such a guarantee would bring. Rossin-Slater has written on a number of other issues related to care infrastructure, including the impact of fathers’ leave-taking in the months following childbirth on mothers’ physical and mental health, as well as other topics, such as the effects of school shootings on adolescents’ mental health and future economic outcomes.

Quote from Maya Rossin-Slater and co-author on paid family leave

Bweikia Steen

George Mason University

Bweikia Steen is an associate professor of education in the Early Childhood Education Program at George Mason University. Her research interests include promoting social-emotional and academic excellence among children of color and children who have experienced poverty during the early years of their education, and she is a researcher and advocate of effective strategies for best meeting the needs of families of color. She also focuses on promoting healthy transitions for children entering Kindergarten, addressing the literacy achievement gap starting in preschool, and adapting early childhood education classrooms to be more inclusive for transgender youth. During the coronavirus pandemic, she has written about navigating virtual schooling for young children and creating an inclusive and equitable climate in early childhood and elementary school settings.

Quote from Bweikia Steen and co-author on inclusive and equitable early childhood schools

Jane Waldfogel

Columbia University

Jane Waldfogel is a professor of social work and public affairs at Columbia University, co-director of the Columbia Population Research Center, and a visiting professor at the Centre for Analysis of Social Exclusion at the London School of Economics. She is a leading authority on the impact of public policies, including paid family and medical leave, universal preschool, and child allowances, on child and family well-being. Waldfogel—who has received three Equitable Growth grants, including one in 2020 to study access to and use of paid leave during the coronavirus pandemic in New York City—is the author of six books on a range of social mobility topics, from child poverty to inequality’s impact on test scores and the achievement gap. She has spoken and been cited extensively since President Biden’s American Rescue Plan passed earlier this year with an extension of the Child Tax Credit, which is expected to cut U.S. child poverty in half. Recently, she released an NBER working paper with findings from a 2016 Equitable Growth grant on the impact of paid family leave on employers in New York state.

Quote from Jane Waldfogel and co-author on paid family care leave

Nicolas R. Ziebarth

Cornell University

Nicolas Ziebarth is a tenured associate professor in the Department for Policy Analysis and Management at Cornell University and the associate director of the Cornell Institute for Healthy Futures. He studies the interaction of social insurance systems with labor markets and population health, covering such topics as health insurance, the interaction between the environment and health, health inequality and measurement, and spending on health care. He is an international expert on the economics of sick leave, and his research in this area is cited as a reason that the Families First Coronavirus Response Act, passed by Congress in early 2020 in response to the pandemic, included emergency sick leave. A study he co-authored in October 2020 shows that these sick leave provisions successfully flattened the curve of coronavirus infections in the United States. Ziebarth received funding last year from Equitable Growth to study the impact of state- and city-level paid leave mandates on employer-provided leave.

Quote from Nicolas Ziebarth and co-authors on paid sick leave

Equitable Growth is building a network of experts across disciplines and at various stages in their career who can exchange ideas and ensure that research on inequality and broadly shared growth is relevant, accessible, and informative to both the policymaking process and future research agendas. Explore the ways you can connect with our network or take advantage of the support we offer here. 

Brad DeLong: Worthy reads on equitable growth, April 20-26, 2021

Posted on by Maria Monroe

Worthy reads from Equitable Growth:

1. Greatly looking forward to listening to the most thoughtful and incisive analyst of U.S. supply chains and worker productivity and compensation patterns by Sue Helper. Register for Equitable Growth’s “Webinar: Transforming U.S. supply chains to create good jobs” on May 3, 2021, 1:30 p.m. to 2:30 p.m., when she will discuss: “One reason U.S. workers’ wages are stagnating is that large firms shifted … to buying goods and services from a complex web … Firms outsource so they can offload production onto firms with weak bargaining power and thus little ability to compete except by aggressively holding down wages. This “low-road” model … [leads to] the erosion of U.S. workers’ standard of living … High-road outsourcing … requires overcoming both market and network failures … [and] greater collaboration between management and workers.”

2. The amount of potential talent we are—still—failing to make use of is horrifyingly large. Read Lisa Cook, “Addressing gender and racial disparities in the U.S. labor market to boost wages and power innovation,” in which she writes: “Women and African Americans continue to participate at each stage of the innovation process at lower rates than their counterparts … four policies to close these race and gender innovation divides … [are] Improve mentoring … Facilitate early education exposure to invention opportunities … Engage in blind patent reviews [and] … Address the climate in high-tech workplaces … where invention and innovation happen.”

3. Here we have a very useful and very informative deep dive into how racial discrimination spreads its effects into places in the economy that I had thought were relatively immune to it. Read Shaun Harrison, “How inequities in U.S. taxation can perpetuate systemic racism,” in which he writes: “In his in 1901 study, “The Negro Landholder of Georgia,” scholar W.E.B. Du Bois noted that “in most cases there are no tax assessors, but a county tax receiver, who receives the sworn statements of property holders as to their estates. This gives rise to wholesale undervaluation, especially in the case of the rich” … Property tax systems still place a heavier burden on Black and Latinx property owners … Carlos Fernando Avenancio-León … and Troup Howard … [find that] homeowners of color end up paying a 10 percent to 13 percent higher tax rate … [and] High degrees of residential racial segregation in the United States …[enable] White residents … to live in neighborhoods where amenities push market prices up … [but] These amenities are not properly taken into account for property tax assessments.”

Worthy reads not from Equitable Growth:

1. It now looks like the long-run effect of the coronavirus plague year will be to move 10 percent of the U.S. workforce into telecommuting—10 percent of which would otherwise have spent their days in the office. The gains in terms of reduced commute-time wasted and increased life flexibility will be substantial. These gains will remain largely uncaptured in our standard statistics. I cannot yet figure out what the further ramified consequences of this rapid rough doubling in the number of telecommuters will be. But they will be very substantial. Read Adam Ozimek, “Future Workforce,” in which he writes: “Companies continue to be remote … 41.8 percent of the American workforce … Companies say remote work is getting easier, not harder … Managers believe that 26.7 percent of the workforce will be fully remote in one year … The number of remote workers in the next five years is expected to be nearly double what it was before COVID–19: By 2025, 36.2 million Americans … Increased productivity and flexibility continue to be key benefits … reduction of non-essential meetings, increased schedule flexibility, and no commute … have worked better than expected.” 

2. This is an old but an absolute classic think through of how economies can and should be managed. It is essential reading as we try to think through how we are going to try to control global warming, given that we seem to be in a world in which it looks as though we are not going to pursue the economic-technocratic first-best regulatory strategy of carbon taxes. Read Martin Weitzman, “Prices vs. Quantities,” in which he writes: “If tastes happen to be kinked at certain critical points … it doesn’t pay to “fool around” with prices in such situations … There is, it seems to me, a rather fundamental reason to believe that quantities are better signals for situations demanding a high degree of coordination … [For] General Motors Corporation or the Soviet industrial sector as a whole, the need for balancing the output of any intermediate commodity whose production is relatively specialized to this organization and which cannot be effortlessly and instantaneously imported from or exported to a perfectly competitive outside world puts a kink in the benefit function. If it turns out that production of ball bearings of a certain specialized kind (plus reserves) falls short of anticipated internal consumption, far more than the value of the unproduced bearings can be lost.” 

3. Building communities of engineering practice is a sound goal for industrial-trade policy. Protecting rust-belt blue-collar jobs is not. Read Adam Posen, “The Price of Nostalgia: America’s Self-Defeating Economic Retreat,” in which he writes: “Populist anger is the result not of economic anxiety but of perceived declines in relative status. The U.S. government has not been pursuing openness and integration over the last two decades. To the contrary, it has increasingly insulated the economy from foreign competition, while the rest of the world has continued to open up and integrate. Protecting manufacturing jobs benefits only a small percentage of the workforce, while imposing substantial costs on the rest. Nor will there be any political payoff from trying to do so: after all, even as the United States has stepped back from global commerce, anger and extremism have mounted.”


Posted in Uncategorized

Overheating is not a concern for the U.S. economy

Posted on by Maria Monroe
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Critics of President Joe Biden’s $1.9 trillion American Rescue Plan and further public investments financed through a combination of tax increases and deficit spending—such as his administration’s proposed American Jobs Plan, at roughly $2 trillion, and the forthcoming American Families Plan—often argue that the U.S. economy will “overheat” if policymakers pump too much support into the U.S. economy too quickly.

Overheating is not a concern for the U.S. economyDownload

Yet plans for further public investments should be judged primarily on the merits of those investments. Arguments that the U.S. economy will overheat ignore the need for additional investments in the economy and rely on the possibility of future policy errors to argue against needed investments today.

This factsheet explains how economists and policymakers colloquially use the term overheating, why it’s not really a concern, and why it distracts from the more important debate about the kind of investments required to create a more equitable and sustainable economic recovery coming out of the coronavirus recession.

What is overheating?

The term overheating refers to an economy in which the actual level of goods or services produced, or the Gross Domestic Product, exceeds potential GDP.

What is potential GDP?

Potential GDP is a theoretical quantity. It is the estimated amount of output that would be produced assuming full utilization of inputs. In this situation, unemployment is low and reflects only transitions between jobs or new entrants to the labor force.

Importantly, potential GDP is a theoretical quantity that cannot be directly observed. Economists can estimate potential GDP, but they will never know with certainty what it is. As a result, policymakers never know for sure whether GDP is above or below potential. One part of the debate about whether the Biden administration’s policies could cause overheating is a debate about what potential GDP is.

Why is potential GDP important?

The Congressional Budget Office’s estimates of potential GDP are highly influential, but critics argue, with substantial justification, that CBO analysts have been unduly pessimistic about the capacity of the economy in recent years, and thus overstate the risk of overheating.

As economists Adam Hersh at the University of Massachusetts Amherst’s Political Economy Research Institute and Mark Paul at the new College of Florida point out, these estimates also include assumptions that embed racial disparities into their forecasts of the “natural rate of unemployment,” which is an estimate of the level of unemployment where potential GDP is reached. The Congressional Budget Office, for example, estimates that the “natural rate” of unemployment for Black workers, at 10 percent, is more than double that of White workers (4.4 percent), and the “natural rate” of unemployment for Latinx workers (6 percent) is more than one-third higher than that of White workers.

Can potential GDP be misleading?

The implications of the Congressional Budget Office’s assumptions about potential GDP and the natural rate of unemployment can be misleading. These assumptions would mean that the Black unemployment rate—which reached a record low of 5.5 percent in August 2019 without any inflationary consequences—would never be expected to fall below the overall peak unemployment rate during the Great Recession, at 10 percent. Moreover, these assumptions would also mean that the Latinx unemployment rate—which reached a record low of 4 percent in September 2019, again without any inflationary consequences—would never be expected to fall below 6 percent.

Notably, the CBO’s baseline deficit projections assume that current law is unchanged, just as CBO’s estimates of potential GDP assume current law and regulation. But changes in law and regulation can change potential GDP. This is particularly important when evaluating policies that aim to invest in the productive capacity of the economy in the future, including investments in people or physical infrastructure.

Equitable Recovery

The latest economic research demonstrates why concerns about federal budget deficits and U.S. debt levels are overblown

By Shaun Harrison,

April 1, 2021

Equitable Recovery

Investing in an equitable future

By Equitable Growth,

April 14, 2021

Equitable Recovery

Factsheet: What does the research say about care infrastructure?

By Equitable Growth,

April 15, 2021

What is the likelihood of overheating?

The U.S. economy has 10 million fewer jobs today than it likely would absent the coronavirus pandemic and resulting recession. This is why now is not the time for concern about overheating. The prominence of the concern, in fact, reflects the scale of the policy response to the pandemic and the recession, especially the recently enacted $1.9 trillion American Rescue Plan.

Even so, it is difficult to state with confidence how the actual level of GDP will compare to potential GDP in the near future. Wendy Edelberg and Louise Sheiner of The Brookings Institution estimate that legislation of approximately the scale of the American Rescue Plan would restore actual GDP to potential GDP after the third quarter of 2021, cause GDP to exceed potential GDP temporarily by a modest 1 percent in the fourth quarter of 2021, and then allow GDP to roughly match its potential path in the middle of 2022.

If potential GDP is higher than Edelberg and Sheiner estimate or the American Rescue Plan causes less spending than they project, then the U.S. economy will be less likely to overheat. If potential GDP is lower or the American Rescue Plan causes more spending, the economy would be more likely to overheat.

Then, there are the two forthcoming public investment packages from the Biden administration. The president’s American Families Plan will be unveiled later this week, but there are enough details about his American Jobs Plan for some early analysis. A projection by Mark Zandi and Bernard Yaros of Moody’s Analytics implies the American Jobs Plan may set the real GDP (after accounting for inflation) on a path that modestly exceeds the Congressional Budget Office’s pre-pandemic projections for potential GDP. Yet the general macroeconomic benefits—such as long-term employment gains and fully recovered labor force participation among women and workers of color—significantly outweigh any concern for possible overheating.

What happens if the economy overheats?

From many perspectives, an overheated economy is a strong economy. Unemployment is very low, and it becomes much easier for workers to find jobs, and especially better-paying jobs. It is harder for employers to discriminate and may have disproportional positive effects on traditionally excluded workers such as Black Americans. Low unemployment may also create wage pressures, especially for low-wage workers who generally face much greater competition for jobs.

Concerns about an overheated economy typically focus on a set of potential consequences that could arise if it remains overheated for a long time. If an economy remains overheated for many years, then that could lead to higher inflation. If the Federal Reserve, in response to that inflation, pushes the U.S. economy into recession by pushing up interest rates, then that could cause widespread harm.

Yet this concern is less about overheating specifically, and more about extended overheating followed by a bad policy response. There is no obvious reason to believe that a short period during which GDP exceeds potential GDP will lead to this set of outcomes. This is the case because concerns about overheating often rely on analyses of what has happened in prior periods of U.S. economy history, such as the inflationary years of the 1970s, which were followed by the disinflation and recessions engineered by then-Fed Chair Paul Volcker. But there are important ways in which the economy has changed since then.

Indeed, the rise of economic inequality over the past six decades makes the experience of the 1970s less relevant for forecasting the future. There also is no compelling reason to view narrowing the scope of policy ambition now as a superior approach to avoiding these theoretically adverse outcomes before they might possibly happen. A better approach is for the Fed to change the nature of its response down the road or for Congress to change its fiscal policy response if inflation were to emerge.

Should policymakers be focused on overheating?

Concerns about overheating are offered as a reason to scale back the scope of forthcoming economic recovery legislation, specifically the Biden administration’s approximately $2 trillion American Jobs Plan and forthcoming American Families Plan. These concerns, however, are more about the scale of the tax increases on higher-income families and corporations needed to pay for these investments, as well as the smaller amount of deficit financing envisioned in these two legislative packages, compared to the recently enacted American Jobs Plan.

In fact, this factsheet details why overheating is of relatively little direct concern. Much of the actual concerns about overheating could be better addressed down the road should the symptoms of possibly arise.

Conclusion

The entire conversation about overheating distracts attention from where economic policymakers should be focused. They instead should be focused on the investments in the two forthcoming legislative packages—whether the proposed investments are a good idea, regardless of how they are financed. The primary case against investments is that they may be unwise or perhaps unmerited, not that they are financed by higher taxes and more deficit spending.

The primary case for these large public investments is that they are valuable and important. Debates about investments should focus more on that question and focus less on overheating.

Weekend reading: Inequities in U.S. taxation and homeownership 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

Shaun Harrison delves into the many ways the nation’s local, state, and federal tax systems discriminate on the basis of race and exacerbate racial income and wealth disparities. Economists Carlos Fernando Avenancio-León at Indiana University Bloomington, an Equitable Growth grantee, and Troup Howard at the University of California, Berkeley find that for homes of equal market value, homeowners of color pay an average 10 percent to 13 percent higher tax rate, within the same local property tax jurisdiction, than White homeowners. Homeowners of color who sell their homes receive lower prices due to such factors as reduced neighborhood school quality, but they pay the same property taxes because these factors are not incorporated into tax assessments. Black and Hispanic homeowners also face discrimination in assessment appeals. The Institute on Taxation and Economic Policy explains the regressivity of state sales and excise taxes. Low-income households, which are disproportionately households of color, must spend a larger share of earnings to make ends meet, thus subjecting that larger share of income to consumption taxes. Fundamental elements of income tax systems benefit well-off, mainly White, taxpayers. Tax deductions, for example, save them more money than they do lower-income taxpayers. Finally, the relative lack of wealth taxation, due to various tax preferences, further entrenches racial inequity because U.S. wealth is disproportionately owned by White families.

Aixa Alemán-Díaz and Austin Clemens summarize a new report released by UnidosUS that highlights one of the reasons for the wealth divide between Hispanic households and other households in the United States—low homeownership rates among single Latina women, compared to single White women. Although Hispanics are the fastest growing segment of the U.S. population, this group tends to face structural and systemic barriers to accessing homeownership, including structural racism, low incomes, and a lack of financial resources upon which to draw. As a result, Hispanics are less able to tap significant home-buying subsidies worth tens of billions of dollars annually. UnidosUS’s report uses data from a number of government surveys and other sources, but it notes that the existing data are insufficient: “The limitations of the sample sizes and data collection methods in federal surveys restrict disaggregated or detailed analysis of important racial and ethnic inequities at the national level.” The inadequacy of data prevents policymakers from understanding gaps in economic outcomes. To begin to address the persistent and disproportionate negative effects of economic inequality on Latinos across generations, the federal government must disaggregate economic indicators and report on disparities that marginalized populations face. 

Because the United States stands as the only advanced economy that does not guarantee paid family and medical leave to its entire workforce, millions of workers, families, and employers often lack the support they need during a family transition or health shock, including the arrival of a new child, an aging parent, a diagnosis of an illness, and personal injuries. Only 10 states and localities have implemented or begun to implement programs for their residents, so the coronavirus pandemic and recession exacerbated this national failing, creating excruciating caregiving and work-life conflicts for millions of U.S. workers. This is a critical reason that U.S. women’s labor force participation rate stood at a 33-year low in March 2021, with women of color hit the hardest. Policymakers preparing for the post-pandemic economy are proposing investments in U.S. physical and caregiving infrastructure—including paid family and medical leave, child care, and home-based health services. To assist their efforts, Equitable Growth staff have compiled a factsheet that reviews current research on—and lessons from—existing state-provided paid family and medical leave programs in the United States. Building on the evidence of the effects these programs are having on workers, families, and businesses would address one of the most pressing deficiencies in the nation’s caregiving infrastructure.

Links from around the web

“Housing segregation by race and class is a fountainhead of inequality in America,” writes Richard Kahlenberg of The Century Foundation. In a New York Times op-ed, he expresses support for national measures to bring about the reform of local zoning laws that reinforce racial and class housing segregation, noting, “Single-family exclusive zoning, which was adopted by communities shortly after the Supreme Court struck down explicit racial zoning in 1917, is what activists call the ‘new redlining.’ Racial discrimination has created an enormous wealth gap between White and Black people, and single-family-only zoning perpetuates that inequality.” While Kahlenberg endorses President Joe Biden’s proposal for federal grants to localities to end zoning measures that establish minimum lot sizes or bar multi-family housing, he urges policymakers to go further by requiring localities to begin dismantling segregation and creating a private right of action “to allow victims of economically discriminatory government zoning policies” to sue in federal court.

Facing such critical policy and enforcement questions as who is an employee and who is an employer, the U.S. Department of Labor’s Wage and Hour Division is at the center of a raging national debate and policy battlefield. Bloomberg’s Ben Penn reviews the key issues facing the agency, based on an interview with principal deputy administrator Jessica Looman, who is the agency’s acting head in the absence of a Senate-confirmed permanent administrator. The agency has already moved to repeal two rules from the previous administration that have not yet gone into effect. One would have made it easier to classify workers as independent contractors; the other would have exempted major franchisors, such as fast-food companies, from liability for wage violations committed by their franchisees. In addition, the new leadership seeks to recover from a 25-percent reduction in the agencies investigative staff to pursue employers who violate wage-hour and family-leave laws.

In an essay for Boston Review that will appear in a new book, Redesigning AI, economist Daron Acemoglu of the Massachusetts Institute of Technology calls for a rethinking of how artificial intelligence is being implemented in the workplace and society. On its current path, he writes, if AI technology continues to develop along its current path, it is likely to create social upheaval, in part for its effect on the future of jobs. AI technologies may excessively automate work, displacing workers and failing to create new opportunities to enhance productivity. It may also undermine democracy and individual freedoms. “Shared prosperity and democratic political participation do not just critically reinforce each other: they are the two backbones of our modern society,” Acemoglu writes. “Worse still, the weakening of democracy makes formulating solutions to the adverse labor market and distributional effects of AI much more difficult.” But these developments are not preordained. He suggests a number of prescriptions for redirecting AI research toward a more productive path, adjusting government funding of AI research, influencing the norms and priorities of AI researchers, and strengthening societal oversight of technologies and their applications.

Friday figure

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Figure is from Equitable Growth’s Measuring what matters: Zeroing in on Latina women to address persistent low Hispanic homeownership rates in the United States.

Factsheet: What does the research say about the economics of paid leave?

Posted on by Maria Monroe
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The United States is the only advanced economy in the Organisation for Economic Co-operation and Development that does not guarantee any paid family and medical leave to its entire workforce. Though 10 U.S. states and localities have currently implemented or have begun to implement programs for their residents, there is no nationwide paid family and medical leave plan that covers all workers across the country regardless of where they live or work.

As a result of this policy choice, U.S. workers, their families, and their employers often lack the resources and support they need during a family transition or health shock, including the arrival of a new child, an aging parent, a diagnosis of an illness, and personal injuries. When paid leave from work to deal with and adjust to these moments is needed but not available, workers are forced to choose between their responsibilities at home and earning a paycheck, which can have far-reaching implications for families, employers, and the broader economy.

Factsheet: What does the research say about paid family and medical leave policies?Download

The coronavirus pandemic and recession exacerbated these longstanding caregiving and work-life conflicts for U.S. workers. As the nation emerges from the greatest health, economic, and caregiving crises in a generation, though, policymakers preparing for the post-pandemic economy are proposing investments in U.S. physical and caregiving infrastructure—including paid family and medical leave, child care, and home-based health services. Inequities in the recovery from the coronavirus recession point to the importance of these investments. In March 2021, for instance, U.S. women’s labor force participation rate was 56.1 percent, a 33-year low, and women of color have been hit the hardest.

Meanwhile, emerging research confirms what many families already knew: Caregiving responsibilities are a significant driver of women’s exit from the labor force. Investing in U.S. care infrastructure will help ensure women can reenter, stay, and thrive in workplaces; that work and caregiving responsibilities are more equitably distributed; and that the country is equipped to handle both national crises, such as a new pandemic, and the personal crises that too often leave workers and their families in economic peril.

This factsheet looks at research on—and lessons learned from—state-provided paid family and medical leave programs in the United States. Building on this evidence and these lessons in establishing a national paid leave guarantee would address one of the most pressing deficiencies in the nation’s caregiving infrastructure.

Paid leave programs increase labor force participation, particularly among women

  • Evidence indicates that under California’s paid leave law, new mothers are estimated to be 18 percentage points more likely to be working a year after the birth of their child. During the second year of their children’s lives, mothers’ work hours increase by 18 percent, and their weeks at work increase by 11 percent, relative to their peers prior to the implementation of the state’s paid parental leave policy.1
  • Recent research corroborates these findings, indicating that in California, mothers with access to paid leave demonstrate an approximately 20 percent increase in the probability of labor force participation during the year of their child’s birth. This increase remains significant up to 5 years later.2
  • Research using administrative data in California and New Jersey finds that paid parental leave in both of these states is associated with increased labor force participation for women around the time of birth, and this finding is driven nearly exclusively by the increased labor force attachment of less-educated women.3
  • Research analyzing women’s labor force participation for different cohorts also suggests those on paid leave have higher employment rates after pregnancy, compared to those who do not have paid leave. Those on paid leave have a participation rate of 82 percent after 10 years—considerably higher than those who quit their job during pregnancy, who have a 64 percent participation rate after 10 years.4
  • Though much of the public conversation has focused on paid leave to care for a new child, paid leave to care for one’s own serious medical condition and paid leave to care for a noninfant family member with a serious medical condition are also important components of the program. Specifically:
    • A synthesis of related research suggests that paid medical leave could reduce household income volatility, facilitate reemployment, improve business productivity by reducing presenteeism—that is, the act of attending work while sick—and increase labor supply.5
    • Research from California finds that following the introduction of California’s paid leave law, the labor force participation of unpaid caregivers increased from 66 percent to 73 percent, in comparison to a smaller increase (68 percent to 70 percent) in other states. Additionally, while the percentage of unpaid caregivers engaged in part-time work fellover this time period in other states, it nearly doubled in California, rising from 10 percent to 19 percent.6

Paid leave to care for a child improves child well-being and strengthens the human capital of the next generation

  • In studying the mental and physical health outcomes of elementary school students exposed to paid leave in California, researchers find lower rates of attention deficit/hyperactivity disorder, obesity, ear infections, and hearing problems. These benefits are most apparent in children from families with lower socioeconomic status, which is consistent with the theory that paid leave provides additional benefits for those families that previously could not take leave due to access or affordability concerns.7
  • Following the implementation of paid leave in California, researchers saw a significant reduction in hospital admissions for pediatric abusive head trauma, indicating that paid leave decreases rates of child abuse and maltreatment.8
  • Paid leave also may allow for more bonding between parents and their child. In fact, state paid leave policies are shown to increase rates of breastfeeding, a parenting activity with a strong, evidence-based link to long- and short-term health benefits for babies.9
  • Recent work finds that paid family leave also increases the amount of time mothers spend in child care activities, including reading, talking, homework help, and other activities that are important for children’s human capital development.10
  • One study that examined paid leave in California finds that mothers earn less and are less likely to work under the program, though there are questions about the study’s generalizability. Still, the researchers also find that first-time mothers who took up paid leave in response to the policy change spent more time reading to their children, taking them on outings, and eating breakfast as a family, compared to similar mothers not exposed to the paid leave policy change. If this finding holds, it complements the larger body of work on the human capital benefits of paid leave to care for a new child, and suggests that paid leave should be coupled with additional care infrastructure, such as an effective and affordable child care system, to allow families to both parent intensively and prosper financially.11

Paid leave programs protect workers from health and economic shocks

  • Family incomes generally dip substantially around the birth of a new child,12 but research shows that the introduction of California’s paid leave program was tied to a 10.2 percent decrease in the risk of families with new children dipping below the poverty threshold.13
  • Time off to deal with one’s own serious medical condition is associated with better health outcomes. Having access to paid sick leave is associated with a significantly lower risk of mortality across a wide range of conditions, including heart disease and unintentional injuries.14
  • Administrative data from California and Rhode Island show that state paid leave programs were responsive to the onset of the COVID-19 pandemic, with rates of claims between February 2020 and March 2020 increasing 43 percent in California and 300 percent in Rhode Island.15

Paid leave is an important support for small businesses

  • While some might argue that guaranteed paid leave for workers creates burdens for businesses, analysis of California administrative data finds no evidence that employee turnover at firms increases or that wage costs rise when paid leave-taking occurs.16
  • Research on employers in Rhode Island similarly finds limited effects of the state paid leave policy on businesses, with employers noting few significant impacts on business productivity and related metrics.17
  • Survey research finds that 63 percent of small- to medium-sized employers in New Jersey and New York report that they support or strongly support paid family and medical leave programs.18
  • In a 2010 survey of 253 California employers on the state’s paid family and medical leave program, a large majority said the law has “no noticeable effect” or a “positive effect” on productivity (88.5 percent), profitability (91 percent), turnover (92.8 percent), and morale (98.6 percent).19
  • New research shows that the introduction of paid leave in New York both improved employer’s reports of how easy it was to accommodate employee absences and increased rates of leave-taking among employees. In the 3 years following implementation of the program, a majority of businesses support the program, while a small minority—less than 10 percent—say they are opposed.20

Paid leave boosts macroeconomic growth

  • In concert with other care infrastructure policies, paid leave could help raise the labor force participation rate of U.S. women to be comparable with the rate for women in peer nations, which could increase Gross Domestic Product by as much as 5 percent.21
  • McKinsey analysts estimate that implementing policies such as paid leave that advance gender equality prior to the pandemic’s end could add $2.4 trillion to U.S. GDP and create near gender parity in the U.S. labor force by 2030.22

Paid leave is a sustainable investment in the vibrancy of our economy

  • While some critics argue that a federal paid leave program is too expensive, a recent policy analysis concludes that the Biden administration and Congress could enact a new self-financed paid leave program without increasing overall average taxes for workers earning less than $400,000 a year.23
  • By allowing family members to provide care, paid leave may also result in budgetary savings for government programs. One study finds that California’s paid leave program is associated with an 11 percent decline in nursing home usage among older adults, which is associated with substantial decreases in Medicare and Medicaid spending.24

Conclusion

This factsheet presents some of the research and evidence on paid family and medical leave as it relates to families’ economic security, human capital development, employer experiences, and U.S. economic growth. For more information on specific paid leave provisions or other aspects of the care economy, see Equitable Growth’s other factsheets on paid caregiving leave, paid medical leave, paid leave policy design, and our most recent factsheet on care infrastructure investments more broadly.