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 U.S. workers file their tax returns for 2020, new research shows that uncertainty about the amount individual filers may receive in their tax refunds hinders the effectiveness of tax-based redistribution from two refundable tax credits. The Earned Income Tax Credit and the Child Tax Credit comprise a significant portion of income for their respective 25 million and 48 million recipients, but the rules governing access and eligibility for the credits are complex and leave many individuals without an accurate estimate of the size of their refunds. This affects low-income workers in particular, write Sydnee Caldwell, Scott Nelson, and Daniel Waldinger, as well as those with dependents, those who experience large yearly changes in their incomes, and young filers. The co-authors summarize their recent working paper, which finds this uncertainty limits the ability of recipients to plan their finances throughout the year, reducing the value of these important tax credits. In fact, the co-authors find that average recipients would be willing to forgo roughly 10 percent of the total value of the credit they receive to eliminate uncertainty about the refund amount. Policymakers can use these findings as they design and implement stimulus efforts and strive to make tax policy work for filers along the income distribution.
This week, a group of more than 200 economists—including many in Equitable Growth’s network and led by Hilary Hoynes, professor of public policy and economics at the University of California, Berkeley; Trevon Logan, professor of economics at The Ohio State University; Atif Mian, professor of economics, public policy, and finance at Princeton University; and William Spriggs, professor of economics at Howard University—sent a letter to congressional leadership urging them to invest in both physical and care infrastructure, as well as science and technology, as part of President Joe Biden’s infrastructure and jobs plan. The signees argue that the private sector alone cannot address the various structural challenges facing the United States, from climate change to systemic racism to a crumbling care economy. And, they write, the share of U.S. Gross Domestic Product invested in federally funded research and development has declined to just 0.6 percent, resulting in less knowledge creation, fewer good jobs, and added difficulty in boosting employment in new sectors. If passed, these public investments could spur strong, stable, and broadly shared economic growth—and policymakers can take advantage of the current low-interest-rate environment to reassert the United States’ global leadership position and solve the problems of the 21st century.
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 February 2021. Kate Bahn and Carmen Sanchez Cumming put together five graphics highlighting the main trends in the data.
In Brad DeLong’s latest Worthy Reads column, he summarizes and provides his take on recent content from Equitable Growth and across the internet.
Links from around the web
President Joe Biden recently released his plan to shore up the economy and bolster U.S. infrastructure. The $2 trillion plan will be paid for via higher taxes on corporations over 15 years and includes several proposals and areas for improving both physical and care infrastructure. Alicia Parlapiano and Jim Tankersley break down what’s in the legislative proposal in The New York Times’ The Upshot blog. They detail the main areas of the package—transportation, buildings and utilities, jobs and innovation, and in-home care—the cost of each proposal within the areas, and what they hope to achieve. It’s an easy-to-grasp summary of how President Biden hopes to accomplish some of his main goals: revitalizing the nation’s crumbling and outdated buildings, roads, and bridges; reducing U.S. dependence on fossil fuels; and improving jobs in the innovation, tech, and care sectors.
In an in-depth feature, Vox’s Emily Stewart interviews workers across the United States living on the minimum wage, documenting their challenges trying to eke out a living. The federal minimum wage has been set at $7.25 per hour since 2009—at 40 hours per week, this adds up to $15,000 annually—a rate that is not enough to cover basic expenses in any state, particularly for those with dependents. Millions of U.S. workers make that or even less, and many rely on the social safety net and other public assistance to supplement their income in order to get by. Though many of the workers who Stewart interviews expressed some concerns about the implications of a minimum wage hike, including job losses or increased automation, most also lamented the difficulty that they experience with their current salaries in paying their bills or saving, not to mention affording a vacation or covering an emergency expense. Stewart writes that these workers aren’t necessarily looking to live a life of luxury. Rather, they want to be able to afford everyday expenses such as food, health insurance, and rent. In other words, they just want to be able to live. The inability to earn a living, let alone save money, prevents many workers from achieving important wealth- and income-building milestones, such as buying a home or going to college, holding back the overall economy and contributing to widening inequality in the United States.
LinkedIn will soon allow workers to describe their employment status as “stay-at-home parent.” The Lily’s Soo Youn says this may help normalize caregiving as an occupation. Particularly amid and in the aftermath of the coronavirus recession—as 2.5 million women left the labor force, often citing caregiving needs as the reason—this is a welcome change. Though women are slowly starting to close the gender gap in unemployment during this recession, they also often have a harder time returning to work after leaving the labor force than men—though all workers experience penalties for taking time to care for their families. LinkedIn’s new feature aims to reduce this discrimination and stigma, Youn writes, hopefully ensuring those who take time off either voluntarily or otherwise don’t have to settle for lower pay or lesser roles when trying to reenter the job market.
Each tax season, many families in the United States receive additional income through refundable tax credits, among them the Earned Income Tax Credit and Child Tax Credit. These two tax credits can comprise a significant portion of income for the 25 million and 48 million recipients of the EITC and CTC, respectively.
The average EITC recipient, for example, receives a tax refund equal to 12 percent of their annual income. These credits are delivered as one-time payments shortly after individuals file their taxes.
The recently enacted American Rescue Plan both increases the Child Tax Credit and expands eligibility for it as well as the Earned Income Tax Credit. Yet because the rules governing tax credits are often complex, it can be difficult for individuals to figure out how much money they will receive in their refunds. If tax filers do not know how much they will receive, they may then have trouble planning their finances throughout the year. Subjective uncertainty can be economically costly, dampening the overall value of these credits.
In our new working paper, we quantify the uncertainty about annual tax refunds and estimate the costs of subjective uncertainty for tax filers’ well-being. We find that uncertainty about the annual refund can erode a meaningful share of the value of these refunds for recipients, reducing the effectiveness of programs such as the Earned Income Tax Credit and Child Tax Credit.
Measuring beliefs about tax refunds
We conducted surveys at a Volunteer Income Tax Assistance site in Boston to gauge tax filers’ expectations and degrees of uncertainty about their upcoming tax refunds. Just before individuals filed their taxes, we asked about their “best guess” of the size of their refunds, how “certain” they were about the amount they thought they would receive, and what probabilities they would assign to their refunds falling within each of the six ranges: less than $0 (meaning they would not receive a refund or might have additional tax due); $0 to $500; $500 to $1,000; $1,000 to $2,500; $2,500 to $5,000; and more than $5,000. With respondents’ consent, we then linked the survey to tax data, a panel of filers’ credit reports, and a demographic survey.
By the time we interviewed tax filers, the 2015 tax year was already over, and filers had already earned their total incomes for that year. They also had already gathered all of their tax documents. Nevertheless, tax filers were uncertain about their tax refunds. A quarter of individuals told us they were “not at all certain” that their tax refunds would fall within $1,000 of their best guesses.
As another measure of this uncertainty, we analyzed individuals’ responses to the probabilistic survey questions using standard economic techniques. We find that individuals’ uncertainty about their refunds is 4.5 times larger than recent estimates of U.S. labor income uncertainty—for example, uncertainty related to whether they might lose their jobs.
The upshot: Filers’ uncertainty was “accurate.” The more uncertain individuals were, the worse they were at predicting what their refund would be. The gap between tax filers’ expected refund and the refund received was larger if they were more uncertain.
Who is the most uncertain?
When we compared tax filers’ beliefs with their actual refunds, we find some characteristics that predicted how uncertain a filer would be. Filers tended to be more uncertain if they had a dependent, had large changes in their incomes, or were young. These filers also faced greater tax complexity in the sense that their refunds and marginal tax rates had changed more relative to the prior year.
These patterns are consistent with uncertainty being the result of more complex parts of the tax code, such as the income-based phase-in and phase-out boundaries for the Earned Income Tax Credit and Child Tax Credit or rules for married filers.
Despite high levels of uncertainty, tax filers on average were able to accurately predict their tax refund amounts. This accuracy is not simply due to tax filers remembering what they received the previous year. Rather, we find that filers’ beliefs were strongly correlated with year-over-year changes in their refunds, suggesting that filers updated their refund expectations in response to new information over the year.
Does refund uncertainty matter?
In order to examine whether refund uncertainty affected the day-to-day lives of these tax filers, we used the linked credit report data to analyze the relationship between uncertainty and financial behavior. We find that more uncertain individuals tended to borrow less before receiving their tax refunds. This reduced credit utilization is likely due to these filers wanting to insure against the risk of receiving a lower-than-expected refund. In the language of economics, they engage in “precautionary behavior.”
We then used a simple economic model of consumption, borrowing, and savings decisions to estimate how subjective uncertainty affected how much tax filers valued their refunds. The model suggests that the average filer would give up $93 per year to eliminate tax refund uncertainty, but the average EITC recipient would give up $165 per year. Given that the average EITC filers in our sample receive roughly $1,600 from the EITC alone, this implies that, on average, EITC recipient would give up almost 10 percent of the total value of the EITC in order to remove uncertainty. Figure 1 shows how the compensating variation (economic parlance for the amount a filer would be willing to give up) varies across demographic groups in our sample.
Figure 1
Our findings suggest that low-income tax filers are substantially uncertain about the amount they will receive in their annual tax refund. Specifically, tax filers whose financial status (and actual refund amount) has not changed report being uncertain. Uncertainty was largest among filers with dependents and among filers whose marginal tax rates had changed. This increased uncertainty may be the result of the complexities of qualifying for the Earned Income Tax Credit and Child Tax Credit.
Our research suggests that uncertainty about the amount of these two tax credits can erode a meaningful share of their value for recipients. These findings may help inform policymakers about the design of recent relief and stimulus efforts and of tax policy more broadly. More transparent programs may enhance recipients’ well-being at the same fiscal cost.
—Sydnee Caldwell is an assistant professor of business administration and economics at the University of California, Berkeley. Scott Nelson is an assistant professor of finance at the University of Chicago Booth School of Business. Daniel Waldinger is an assistant professor of economics at New York University.
Every month the U.S. Bureau of Labor Statistics releases data on hiring, firing, and other labor market flows from the Job Openings and Labor Turnover Survey, better known as JOLTS. Today, the BLS released the latest data for February 2021. This report doesn’t get as much attention as the monthly Employment Situation Report, but it contains useful information about the state of the U.S. labor market. Below are a few key graphs using data from the report.
The quits rate remained near it’s pre-pandemic level at 2.3 percent in February.
The vacancy yield for hires per job openings was 0.78 in February as the labor market continued to recover.
The job openings rate continued to increase to 4.9 percent while unemployment continued to decline to 6.2 percent, further decreasing the ratio of unemployed-worker-to-job-opening in February.
The Beveridge Curve moved upwards as job openings increased in February to levels typically seen at lower levels of unemployment.
1. Back in 1993 I remember pleading with my fellow technocrats in the Clinton administration that the principle of the former Aid to Families with Dependent Children program—that raising children was very valuable social work that society needed to find some way to remunerate—was a true and important one, and that whatever “ending welfare as we know it” meant, it should not mean abandoning that principle. But we did. Abandon it, that is. Now I very much hope that it is coming back. Read Liz Hipple, “The child allowance will pay dividends for the entire U.S. Economy far into the future,” in which we write: “One feature of the newly enacted American Rescue Plan that got less attention in the lead up to its passage than the more headline-grabbing $1,400 economic impact payments are the reforms to the Child Tax Credit. The legislation dramatically expands and improves the CTC, making it fully refundable and increasing its value to as much as $300 per child per month. The changes, particularly if they are made permanent, will be some of the most profound changes made to the social safety net in decades, with far-reaching positive effects not only for individual families but also overall economic mobility and growth.”
2. We have, for a long time, had relatively good theories about how wages are set that are much more true than the naive theory that wages are set in a competitive equilibrium process where workers are paid some unambiguous and innate “marginal product.” Efficiency-wage theories tell us that, in the context of the production network, workers are essentially paid their hold-up values—whatever it takes to incentivize them not to “shirk.” Employer-monopsony theories tell us that labor supply curves are almost always substantially elastic, it’s only because the local knowledge of how to manage the boss and which of your fellow workers’ company you would enjoy at lunch is a valuable source of utility and is something that you forgo if you change jobs. And yet elegant theoretical and empirical demonstration of the importance of these factors have had very little effect on how many neoclassical and neoliberal economist think about the labor market. Perhaps it is because sociologists and others tend to phrase these issues in terms of “power.” And, for economists, “power” is a meaningless noise—there are only factors that restrict the choice set, and exercise of choice within those constraints. Don Corleone in “The Godfather” does not exercise power. He merely makes you an offer—one that the constraint set, it is true, makes it one that you cannot refuse. Read Kate Bahn “In Conversation with Jake Rosenfeld,” in which they discuss “the causes of economic inequality in the United States and other postindustrial economies, particularly the determinants of wages and salaries and how these vary across time and place. [Rosenfeld’s] most recent book, You’re Paid What You’re Worth and Other Myths of the Modern Economy (Harvard University Press, 2021), challenges the idea that workers are paid according to individual performance or inherent features of their jobs, and places power and social conflict at the heart of economic analysis … new research surveys show us that much of what we think determines our pay is wrong.”
Worthy reads not from Equitable Growth:
1. Actually, Tyler Cohen, no, I do not believe that any “person operating in good faith can look at the evidence and take either side of the argument” on whether a $15-an-hour minimum wage is likely to reduce employment by more than 1 million. I believe that anyone operating in good faith—who is willing to assess recent statistical studies without strongly motivated reasoning—has to wind up much, much closer to Arindrajit arguments. Read his “No, a $15 minimum wage won’t cost 1.4 million jobs,” in which he writes: “CBO’s report examines only 11 studies … Its sources include the first University of Washington study but not the follow-up that came to a more positive conclusion … changed its formula for summarizing the literature since … 2019 … Then, it looked at the median … This time, it placed more weight on those that found large job losses. The 2019 report was already somewhat out of step with the latest academic research, but the new one is even more so.”
2. If you have not yet read Arindrajit Dube on the minimum wage, you should do so immediately. Read his “Impacts of minimum wages: Review of the international evidence,” in which he writes: “Overall the most up-to-date body of research from US, UK and other developed countries points to a very muted effect of minimum wages on employment, while significantly increasing the earnings of low-paid workers. Importantly, this was found to be the case even for the most recent ambitious policies. Therefore, it concludes that, based on the overall weight of the available evidence, there is room for exploring a more ambitious NLW remit in the UK in the coming years, in the range of 60 percent to two-thirds of median hourly earnings. However, given that the evidence base is still developing, it would also be prudent to accompany more ambitious minimum wages with a clear mandate that the Low Pay Commission can use to implement, evaluate and recalibrate any proposed changes to the NLW, thereby designing in responsiveness to any unforeseen impacts if required.”
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 President Joe Biden unveils his second major legislative proposal, this time focusing on infrastructure and jobs, it will almost certainly be accompanied by fears of inflation and too-high government debt. But these concerns are overblown, writes Shaun Harrison. The latest economic research in fact reveals that the United States has a substantial capacity to make public investments that will power a strong, stable, and broad-based U.S. economic recovery and support long-term growth. Plus, Harrison continues, the government can take advantage of the current low-interest-rate environment to embrace federal deficits. Harrison then summarizes a range of recent research on the role of fiscal policy in spurring economic growth and the implications of low interest rates.
Equitable Growth, since its founding, has promoted the use of research in policy and decision-making, building a bridge between academics and policymakers to ensure lawmakers have the tools they need to enact evidence-backed policies. That’s why, David Mitchellexplains, we are heartened to see so many of the scholars with whom we’ve worked over the years entering into roles in the Biden-Harris administration—highlighting the value of research and evidence in the policymaking process. Mitchell runs through a list of those appointees and their areas of expertise, as well as their new roles and responsibilities in the executive branch. Equitable Growth congratulates these and other new hires across the administration and looks forward to continuing to work with them to promote economic policies that will ensure strong, stable economic growth across the United States.
The U.S. Census Bureau’s Household Pulse Survey provides incredibly valuable data on how the coronavirus recession affects U.S. households, asking workers about their health, employment status, and spending patterns. The results of this survey can guide policymaking around future coronavirus relief and stimulus legislation, as it provides an in-depth look at how families along the income distribution are faring and their access to income-support programs such as Unemployment Insurance and the Supplemental Nutrition Assistance Program. Carmen Sanchez Cumming and Raksha Kopparam put together a series of graphics that detail the data and its implications. They show that low-income families and families of color are more exposed not only to the pandemic and the economic shocks that followed it, but also to structural, longstanding disparities in the U.S. labor market. They urge policymakers to focus on addressing these challenges, without regard to austerity or the national debt, in order to stabilize the U.S. economy and boost growth for all—especially the most vulnerable and hardest hit since the onset of the coronavirus pandemic.
Each month, Equitable Growth highlights a group of scholars within and beyond our network who are at the frontier of social science research. As March is Women’s History Month, this installment of Expert Focus looked at researchers studying women’s impact and role in the U.S. labor market, as well as forces that inhibit their participation. This March also marked 1 year since many coronavirus lockdowns were enacted across the United States, which triggered what has now been dubbed the “shecession” due to the outsized impact of the downturn on women workers. Christian Edlagan, Maria Monroe, and I showcase the work of several scholars at varying points of their careers whose work has been pivotal and will continue to be so as policymakers navigate the recovery from the coronavirus recession and women work to recoup many of the labor market gains that were lost over the past year.
The U.S. Bureau of Labor Statistics released data today on the state of the labor market during the month of March, finding, among other things, that 916,000 jobs were added and the unemployment rate dropped to 6 percent. Kate Bahn and Carmen Sanchez Cumming put together five graphics on the major trends in the data. They also wrote a column on the data release, which explains that while the numbers are encouraging and a sign of positive growth in the U.S. economy, they also reveal that racial disparities continue to plague the recovery and long-term unemployment remains a serious challenge.
Links from around the web
March 24 marked Equal Pay Day, or the date into 2021 that U.S. women have to work, from the start of 2020, to make the same salary that men did in 2020 alone. In other words, full-time, year-round employed women earn 82 cents for every dollar that full-time, year-round employed men earn. Axios’ Ivana Saric reports that it will take women in North American around 61.5 years to reach economic parity with men, according to the World Economic Forum. The same report finds that women in South Asia may have to wait as long as 195.4 years, while women in Western Europe will reach parity in 52.1 years. the coronavirus pandemic only worsened gender disparities, Saric continues, with women in the United States and elsewhere exiting the labor force at higher rates than men.
Perhaps some of that gap can be attributed to the lack of a paid parental leave guarantee and penalties that working parents experience in the United States. Most of those U.S. workers who receive paid parental leave—about one-fifth of the workforce—are generally employed full time by big companies, while the majority of those who do not fit those descriptions, and even some who do, are left to fend for themselves if and when they decide to become parents. Claire Suddath explains for Bloomberg readers why all new parents should have access to this vital support, not only those who are “lucky” to get it from an employer. The Families First Coronavirus Response Act passed in March 2020 did include some temporary paid leave for parents whose children’s schools or day care had closed due to the pandemic, but this did not cover new parents. Suddath urges Congress and the Biden administration to address this emergency with a permanent fix. A paid leave policy would not only benefit the U.S. economy by allowing parents to be more productive workers, but also improve other important markers of a healthy society, from infant and maternal health to gender equality in parenting.
The coronavirus health and economic crises largely cemented the influence and power of billionaires in the United States—particularly tech billionaires, whose companies, from Amazon.com Inc. to Facebook Inc., have experienced skyrocketing profits since the pandemic began, further widening the gap between the richest and the rest of U.S. society. Recode’s Theodore Schleifer dives into why we can’t stop talking about these billionaires and how their rising wealth demonstrates how unequal the pandemic and its effects are today. Schleifer details how these uber rich Americans have been able to capitalize on the pandemic to grow their wealth and how their philanthropic giving has changed in the past year. He also looks at how this growing wealth translates—or maybe not so much—into political power and the implications this has on inequality in the United States, as well as public opinion and policy solutions to address these gaps.
According to the latest Employment Situation Summary by the U.S. Bureau of Labor Statistics, the U.S. economy added 916,000 jobs in March, the biggest month-to-month jump since August of last year. Other measures on the health of the U.S. labor market also point to a recovering economy as the public health crisis begins to abate and Congress proactively enacted continued economic relief.
The latest Jobs Day report shows that share of U.S. workers in their prime working years at ages 25 to 54 who currently have a job —also known as the prime-age employment-to-population ratio—climbed from 76.5 percent in February to 76.8 percent in March, and the national unemployment rate fell from 6.2 percent to 6.0 percent. The Jobs report also shows that last month’s gains were not as strong for all groups of workers.
The jobless rate for Asian American workers was the only one to increase last month, climbing from 5.1 percent in February to 6 percent in March. The unemployment rate for Black workers fell from 9.9 percent in February to 9.6 percent in March, but it remained higher than its January level of 9.2 percent and it continues to be the highest among the major racial and ethnic groups. For Latinx workers, the jobless rate stands at 7.9 percent and for White workers at 5.4 percent. (See Figure 1.)
Figure 1
In addition to these uneven gains, the latest Jobs Day report points to another warning sign in the U.S. labor market. Even as the overall jobless rate has declined consistently since reaching a post-Great Depression high of 14.8 percent in April of last year, an increasing number of workers are experiencing long-term unemployment.
In March, the share of jobless workers reporting being out of work for 27 weeks or more reached 43.4 percent, a 1.9 percentage point increase from the previous month and a massive 26.9 percentage point increase with respect to March 2020. In total, 4.2 million workers have been jobless for more than 6 months, the largest number since August 2013. (See Figure 2.)
Figure 2
Long spells of unemployment not only hurt workers’ present earnings but also have economic, social and health effects that can ripple for decades. Research shows that being jobless for long stretches of time is associated with poorer physical and mental health outcomes, leads to a decline in workers’ chances of finding another job, and lower earnings even after re-employment.
In addition, higher unemployment rates for Black and Latinx workers can mean that the prevalence of long-term unemployment can entrench existing racial inequities in the U.S. labor market. Research from the Great Recession of 2007–2009 shows that Black and Latinx workers were overrepresented among those unemployed for 6 months or more between 2008 and 2011.
What is driving these negative effects? Research shows that unemployment itself reduces workers’ likelihood of finding another job, with those who are unemployed for longer periods of time experiencing lower job-finding rates and earnings than otherwise similar workers. One possible explanation behind this phenomenon is that joblessness carries stigma that makes it more difficult for workers to be hired, since employers are harsher when evaluating candidates who involuntary lost their jobs due to no fault of their own when the economy contracts in a recession.
Another theory is that long spells of unemployment can erode workers’ job-market skills or so-called “human capital.” Yet, this framework is limited because, among other methodological issues with this research, losses of human capital specific to an employer or industry occur at the point of job loss and are not likely increase significantly over-time to the degree that would explain the magnitude of the downside effects of long-term unemployment. Research also shows that employers vary posted skill requirements and credentials needed for job vacancies based on how tight the labor market is and, in a tight labor market, employers have stronger incentives to invest in worker-training themselves, to the benefit of both the business and the worker.
Whatever the case, long-term unemployment not only harms the workers who experience it but also affects the entire U.S. economy. It leads to a lack of income for critical consumers who would otherwise foster economic growth by maintaining aggregate demand for goods and services and there is evidence that it suppresses wage growth for both already disadvantaged workers and the overall workforce. Pervasive long-term joblessness also carries negative social consequences by driving worse mental and physical health outcomes.
Furthermore, prejudices against the unemployed are often used as a rhetorical mechanism to underinvest in the Unemployment Insurance system and cut the dollar amount of benefits available for workers, exacerbating these negative consequences. And research shows that high levels of long-term unemployment are persistent and can last well after a recession is over because employers tend to hire workers who have experienced long spells of joblessness last.
All of these research findings point to the need for policymakers to be proactive in sustaining lost income during the current recession and into the eventual economic recovery and to help workers get back to quality employment that puts to use their best skills and talents within or outside of their previous job positions.
On April 2, the U.S. Bureau of Labor Statistics released new data on the U.S. labor market during the month of March. Below are five graphs compiled by Equitable Growth staff highlighting important trends in the data.
As the U.S. labor market added 916,000 jobs, the prime-age employment-to-population ratio increased 0.3 percentage points in March.
With the recovery continuing in sectors where Latinx employment is high, the Latinx unemployment rate decreased to 7.9 percent in March from 8.5 percent in February.
Employment growth in March was led by leisure and hospitality and education services as in-person activity was able to resume alongside a notable increase in construction.
Top-line unemployment, also known as U-3, and a broader measure of labor underutilization, known as U-6, fell in tandem in March.
As unemployment declined in March, fewer unemployed workers were temporarily laid off and more were reentering the labor force to look for work.
The U.S. Census Bureau’s new Household Pulse Survey is an invaluable and near real-time source of information for understanding how the coronavirus recession is affecting U.S. workers, families, and communities. By asking U.S. households since April 23, 2020 about their health, employment status, and spending patterns, the survey sheds light on how they are experiencing the downturn.
The results are alarming. The Household Pulse Survey data show that over the course of the pandemic, millions of workers stopped working due to slack business conditions or because they were doing unpaid care work. As many as 30 million households experienced food insecurity. And close to 90 million households struggled to afford typical household expenses and make rent or mortgage payments on time.
The survey also gathers information on access to and use of economic relief and income-support programs such as the Supplemental Nutrition Assistance Program and Unemployment Insurance. Even though access to jobless benefits has been unequal, these benefits nevertheless allowed millions of households—and especially those hit hardest—to meet their spending needs. And as the money from Economic Impact Payments reached the hands of many workers and families in need of a lifeline, relief dollars were injected back into the economy, helping the United States get on track toward a recovery.
Here is what the Household Pulse Survey tells us about this recession almost 1 year after the Census Bureau first published the results of this new survey.
The shock to the U.S. labor market falls heaviest on already-vulnerable workers and families
Between mid-February and early March 2021, almost half of U.S. adults reported that they themselves or someone in their household lost employment income since March 2020, but lower-income workers, workers of color, and workers without a college degree were especially likely to experience losses. For those facing multiple disadvantages in the labor market, that number can be much higher.
Case in point: More than 6 in 10 Black adults with a 2019 household income of less than $35,000 report losing labor income since the recession hit. As such, the Household Pulse data reflect what is a defining feature of this crisis: The workers most exposed to job losses and wage cuts are some of the same workers least likely to have a buffer of savings to weather an income shortfall. This trend is not only deepening longstanding disparities in the labor market but also risks holding back the economic recovery. (See Figure 1.)
Figure 1
Many U.S. workers stopped working, but reasons why vary among groups
As the recession hit the U.S. economy, more than 20 million workers lost their jobs between February and April 2020. As the Household Pulse Survey published its first estimates for the last week of April and the first week of May 2020, 1 in 5 working-age adults reported being out of work due to a layoff or because the coronavirus pandemic affected their employers’ businesses.
Disaggregating the data by gender shows that while slack business conditions affected women and men in roughly the same way, the share of adults not working for pay because they are caring for someone with coronavirus symptoms, an elderly person, or a child not in school or daycare hovered at around 6 percent for women and around 2 percent for men throughout most of the recession. (See Figure 2.)
Figure 2
By early March 2021, more than 7 million working-age women were not working for pay due to these caregiving responsibilities. Research shows that women—and especially women of color and women with children—are experiencing particularly tough labor market outcomes during this recession as they assume the lion’s share of the unpaid work of caring for their households and communities. For instance, another survey finds that of the 11 percent of women with young children who reported quitting their jobs due to the pandemic, half pointed to the closure of school or daycare as one of the reasons why.
Because women are disproportionately hit by the coronavirus recession, the gender gaps in employment outcomes could widen further, dampening the economic growth resulting from women’s greater attachment to the labor market.
Millions of U.S. households, especially low-income households and households of color, struggled to pay their bills
Overall, the share of working age-adults between 18 and 64 years of age reporting they did not work during the previous week declined from 39 percent in early May 2020 to 34 percent in early March 2021. Alarmingly, however, the improvement in the U.S. labor market did not prevent many households from having a hard time buying essential goods or keeping up with their bills.
In late December 2020, 12 percent of U.S adults—almost 30 million people—lived in a household that either sometimes or often did not have enough to eat. As many households struggle to put food on the table, some states and localities reported big spikes in applications for Supplemental Nutrition Assistance Program benefits, highlighting the role of the program in both protecting families’ economic security and as a mechanism to stabilize the entire economy by helping cash-strapped households keep up their spending. (See Figure 3.)
Figure 3
A report by the U.S. Federal Reserve shows that in October 2019—just a few months before the recession hit—28 percent of U.S. adults did not expect to pay their bills in full or would not be able to do so if faced with an unexpected $400 expense. And indeed, when the COVID-19 crisis ripped through the U.S. economy, more than 32 percent of adults reported having a very difficult or somewhat difficult time paying for typical expenses such as food, rent or mortgage payments, student loans, and medical bills.
The Household Pulse Survey points to disparities across demographic groups. It shows that Black and Latinx respondents face the most difficulties paying their bills, with half of Black women reporting a very difficult or somewhat difficult time paying for essentials. This dynamic mirrors trends in the labor market, as it was precisely Black women who suffered the deepest employment losses in the first year of the recession. (See Figure 4.)
Figure 4
Economic relief is a lifeline to millions of workers and families, but disparities remain
In their initial response to the economic and health crises, U.S. policymakers in March 2020 ramped up and expanded eligibility for Unemployment Insurance—one of the country’s most important income-support programs. Amid this recession, jobless benefits not only protected millions of workers from a deep income shortfall but also helped stabilized the broader U.S. economy by allowing jobless workers to spend and contribute to maintaining demand for goods and services.
The recession, however, also exposed longstanding disparities embedded in the Unemployment Insurance system. For instance, access to jobless benefits is unequal along the lines of race and ethnicity, with analyses showing that states with a greater share of Black workers replace a smaller portion of workers’ lost wages. The Household Pulse data also show that among those who applied for Unemployment Insurance, Black and Latinx workers were least likely to actually receive benefits. For instance, of the 3.3 million Black men who applied for the program, almost 1 million—29 percent—did not receive jobless benefits. (See Figure 5.)
Figure 5
In addition to jobless benefits, the U.S. government provided most U.S. households the first Economic Impact Payment of $1,200 as a key provision in the Coronavirus Aid, Relief, and Economic Security, or CARES, Act, with research showing that consumer spending picked up immediately after the payments arrived. A greater share of Black and Latinx households—between 83 percent and 81 percent, respectively—spent their first stimulus check on expenses such as food, household supplies, and utilities, compared to Asian American (74 percent) and White (67 percent) households.
Eight months after the CARES Act was enacted, a second $600 Economic Impact Payment was sent to most U.S. households. By this time, multiple waves of coronavirus cases damaged employment opportunities and the general livelihood of many U.S. workers and their families. One of the results was more debt: Approximately 30 percent of adults reported having increased credit card debt, taking out loans, or asking for financial help from friends and family between June and December 2020.
When the $600 stimulus payments arrived, households across all races and income groups—but especially Black, Latinx, and low-income households—used this money to begin paying off the debt they had accumulated rather than spending it on household expenses. The disparities in use of the two stimulus payments highlight the importance of providing timely relief to the most economically vulnerable households in order to drive a faster and more equitable recovery. (See Figure 6.)
Figure 6
Conclusion
More than a year after the onset of the coronavirus recession, many low-income families and families of color remain more exposed not only to the continuing health crisis and economic shocks but also to entrenched and longstanding disparities in the U.S. labor market. These intertwined risks can hold back an overall U.S. economic recovery. When suffering earnings losses, workers and households with fewer savings and liquid assets cut back on their spending more than those who have more robust financial cushions.
The coronavirus recession continues to hit workers whose consumption is especially sensitive to income shocks, triggering a vicious cycle where demand for goods and services declines, hurting businesses and putting other jobs at risk. Yet empirical evidence also shows economic relief works as a buffer and helps stabilize the entire economy. Fiscal policy proposals that mistakenly champion austerity measures and concerns about the national debt should not be the priority. Rather, U.S. policymakers should focus on eliminating the disparities embedded in the U.S. labor market and social insurance programs, allowing the entire economy to recover more swiftly and be better prepared the next time a downturn hits.
A growing number of economists are reconsidering long-held views about the appropriate level of public borrowing and the consequences of federal budget deficits and debt on U.S. economic growth and well-being. Their cutting-edge research suggests that previous concerns about deficits and debt, such as increases in inflation and interest rates that affect U.S. Treasury bonds, are overblown.
Instead, the available evidence indicates that the United States boasts substantial fiscal capacity to make needed public investments that could power a more broad-based and sustained economic recovery and support more equitable long-term growth. And the current low-interest-rate environment is one in which federal budget deficits should be embraced as an appropriate and necessary tool to support a faster and more equitable recovery.
This issue brief highlights select studies in this line of new economic research. I first examine the role of fiscal policy in promoting economic recovery. I then review studies that examine the implications of low interest rates on deficit spending.
Alan Auerbach and Yuriy Gorodnichenko examine the effects of changes in government spending, such as fiscal stimulus, on public debt and overall fiscal sustainability. They find that expansionary fiscal stimulus are not followed by persistent increases in debt-to-GDP ratios or borrowing costs, especially in a weak economy. Instead, fiscal stimulus in a weak economy can improve fiscal sustainability and the ability to respond to future recessions.
Josh Bivens argues that the U.S. economy during the coronavirus recession is constrained by limited demand and not by limited supply. An economy is constrained by limited demand when there are people who are willing to work but are unemployed because firms do not expect enough paying customers to justify putting more resources into hiring. Conversely, an economy is constrained by limited supply when there is full employment, and any increase in demand does not result in greater output because all potential workers are already hired. Instead, an increase in demand will lead to an increase in prices. In a demand-constrained economy, higher debt does not reduce growth because there are not enough increases in inflation and interest rates as a result of that debt to hamper growth. Instead, higher deficits are a useful tool for providing fiscal relief during recessions and promoting economic recoveries.
J.W. Mason argues that the U.S. economy’s central problem is weak demand—that is, there is not enough spending in the economy. Signs of weak demand include falling wages, slow productivity growth, and declining labor force participation. Public spending initiatives are a necessary tool to address this problem because they lead to more jobs and more growth, which, in turn, lead to more consumer spending and more business investment. All of this boosts demand.
In his view, the tepid economic recovery after the Great Recession of 2007–2009 demonstrates that limiting government spending during a crisis causes lasting harmful effects on the U.S. economy. Instead, robust government spending delivers significant macroeconomic benefits, including boosting demand, spurring private investment, and reducing inequality. Mason argues that concerns about the federal budget deficit—including potential increases in inflation and interest rates crowding out private investment—and runaway debt increases are not applicable to the current economic situation in the United States.
In an essay adapted from her new book, titled The Sum of Us: What Racism Costs Everyone and How We Can Prosper Together, Heather McGhee examines the role of racism in fiscal policy. She demonstrates that White support for government spending was drastically reduced with the advent of the Civil Rights movement. This was a moment in which White Americans saw Black activists demanding the same economic guarantees afforded to White Americans. White racial resentment against Black people continues to fuel a disapproval of government spending today. White people who exhibit low racial resentment against Black people are 60 percentage points more likely to support increased government spending than are those with high racial resentment. McGhee argues that the ideological backdrop for this dynamic is a zero-sum narrative between “makers and takers” or “taxpayers and freeloaders.” She concludes that policymakers can help overturn this harmful narrative by directly addressing the roots of systemic racism and encouraging investments that improve the lives of all people in the United States.
Kyle Moore (now at the Economic Policy Institute), Teresa Ghilarducci, and Anthony Webb investigate the racially disparate consequences of the policy proposal to push the Social Security full retirement age to 70 years old and beyond. The authors find that doing so would present a harmful choice to workers: retire as planned or work longer. In the first choice, to retire as planned, monthly benefits would be cut because workers would no longer meet the age requirement for full benefits. This would penalize Black people and low-wage earners disproportionately because overall, Black people and low-wage earners rely more heavily on Social Security for post-retirement income than non-Black people and high-wage earners. The second choice, to work longer, is inequitable because Black people and low-wage earners generally have a higher-than-average mortality rate due to disparities in health care and other structural factors. Fiscal policy choices that address the deficit simply through spending cuts instead of pathways for raising revenue will further structural racial inequities. The authors instead propose strengthening Social Security to increase the benefits of low lifetime earners and expanding retirement plan coverage to supplement Social Security.
Olivier Blanchard documents that most interest rate forecasts project that benchmark rates will remain below growth rates for a long time, and historically, this has been the rule rather than the exception. On average, since 1950, nominal interest rates have been lower than nominal growth rates—an economic relationship that implies the federal government can consistently run and repay a budget deficit without increasing the debt-to-GDP ratio or risking a fiscal crisis.
Interest rates were consistently below the growth rate until the disinflation of the early 1980s. During this period, the Federal Reserve raised interest rates substantially to counteract high levels of inflation, which had the secondary effect of slowing economic growth. Since then, both nominal interest rates and nominal growth rates have declined, with interest rates declining faster than growth, even before the 2007 financial crisis. Blanchard argues that this empirical regularity suggests that the fiscal and welfare costs of debt may be small and, importantly, are smaller than has generally been assumed in public debates about fiscal policy.
“The Federal Fisc” By Karen Dynan and Douglas Elmendorf Harvard Kennedy School
Karen Dynan and Douglas Elmendorf explain that reducing the federal budget deficit is not as urgent as was previously thought because of low interest rates. The lower interest rates prevalent today mean that debt will compound more slowly than it would have in the past. Low interest rates also suggest that investors are not concerned about the possibility that the debt will not be honored. And they argue that it is unlikely investors might try to sell their holdings in large quantities. Overall, the danger of high interest rates is not great because they could rise considerably from current levels and still remain below long-term averages.
Douglas Elmendorf and Louise Sheiner examine the roles of an aging U.S population and low interest rates in setting appropriate U.S. budget policy. They argue that an aging population suggests higher national savings would be desirable, while consistently low interest rates suggest higher deficits and debt would be desirable. An aging population can drive up federal health costs while simultaneously reducing the number of workers and therefore per capita Gross Domestic Product. This dynamic is projected to raise the federal budget deficit significantly, yet persistently low interest rates indicate that debt will accumulate more slowly.
Over time, however, Elmendorf and Sheiner argue that increasing the federal deficit would consequently have the effect of eventually raising interest rates. An increase in interest rates would then allow the Federal Reserve to the cut rates during a future recession. They conclude that while deficit-reducing policy changes will eventually be appropriate, policymakers do not need to implement them immediately. Over the next decade, policymakers should aim to increase federal investment while enacting changes that reduce the deficit in later years.
Jason Furman and Lawrence Summers document a secular, long-term decline in real interest rates despite large buildups of government debt. They note, for example, that U.S. 10-year indexed bond yields declined by more than 4 percentage points between 2000 and early 2020, even as projected debt levels sharply increased. They argue that this decline in real interest rates reflects changes in economic fundamentals—such as increased inequality—and should motivate a reconsideration of fiscal policy.
Furman and Summers identify three implications of this decline in interest rates. First, fiscal policy will need to play a more important role in addressing economic downturns because there will be less room for interest rate reductions. This includes automatic recession insurance—for example automatic stabilizers such as Unemployment Insurance benefits, nutritional assistance, and across-the-board cash transfers that trigger on when a recession hits—in order to quickly provide assistance and hasten recovery efforts. Second, they argue that past concerns about federal budget deficits crowding out private investment no longer apply with the same force, and traditional measures of fiscal sustainability have less relevance. Finally, they argue policymakers should consider how fiscal investments are being put to use in the U.S. economy when deciding whether to make debt-financed investments, since those investments can pay for themselves in certain circumstances.
Marokey Sawo addresses four common arguments made by critics of deficit spending. First, critics argue that higher deficits lead to inflation. Consistent with other research literature, she finds inflation has been low and trending downward for the past 40 years regardless of the size of the deficit. Second, critics argue that higher deficits crowd-out private investment by pushing up interest rates. Sawo shows that the deficit and interest rates have no long-term relationship with each other, and there is therefore little reason to believe deficits will increase interest rates to the point of decreasing private-sector investment. Third, critics argue higher deficits increase the risk of a fiscal crisis because investors will supposedly become unwilling to hold public debt and require higher interest rates to compensate for the “additional risk” of solvency. Regarding this point, there is also a lack of empirical evidence for these concerns because interest rates have been on a downward trend even as debt has increased. Finally, critics argue higher deficits reduce economic growth. Sawo demonstrates that previous claims about increased deficits constraining economic growth have been thoroughly debunked by economists on methodological and theoretical grounds. As a concrete example, she notes that economic expansion failed to materialize in European countries that adopted austerity policies. In sum, the four arguments made by critics of deficit spending lack empirical support.
The Washington Center for Equitable Growth was founded in 2013 to promote the use of research in policy and decision-making. Our strategy—to ensure that lawmakers and advocates are armed with rigorous evidence as they craft the policies that shape the U.S. economy and society—drives our work to this day. Equitable Growth’s growing network of scholars, grantees, and academics continues to inform and define our understanding of the origins and consequences of inequality and how to achieve strong, stable, and broad-based economic growth.
Our mission has never been so important as we deal with the ongoing effects of the coronavirus pandemic and resulting recession—and elevate our academic research and policy analysis to drive a more equitable economic recovery. That’s why we are heartened to see so many of the scholars with whom we’ve worked over the years either stepping into public service for the first time or returning to it, to bring evidence-backed policy into the executive branch.
Over the past few weeks, the Senate has worked to confirm a number of President Joe Biden’s appointees before adjourning for recess on March 29. One of the highest-profile appointments to President Biden’s cabinet is U.S. Secretary of the Treasury Janet Yellen. Secretary Yellen is the president’s chief economic advisor—an especially significant role given the continuing coronavirus recession and the importance of a speedier, more equitable recovery than happened after the Great Recession of 2007–2009, as well as the oversight that will be required to effectively execute the American Rescue Plan and future economic policy.
Equitable Growth was extremely fortunate to have Secretary Yellen as a member of our Steering Committee from 2018 through her nomination. During her tenure with us, she helped shape the organization’s research agenda by informing our annual request for proposals, and, along with other committee members, reviewed and approved our grantmaking for 3 years running—helping Equitable Growth zero in on a range of cutting-edge academic research projects that will help lawmakers advance policies to create more equitable economic growth. In addition, she advised on programming to increase diversity in the economics profession and ways to encourage economists to take more seriously research questions on race and structural racism.
Many other executive branch appointees are not Senate-confirmed but will be key to future economic policymaking. Perhaps most emblematic of the Biden-Harris administration’s incorporation of proponents of evidence-backed policy in government is our very own former President and CEO Heather Boushey, who is now a member of President Biden’s Council of Economic Advisers. Boushey co-founded Equitable Growth and spent years highlighting the value of connecting academia with policymaking to ensure that policies that were proven to be effective at combating inequality in the United States were put forward and prioritized by lawmakers. Last year, when the coronavirus pandemic began wreaking havoc on the U.S. economy and society, Boushey wrote and testified before Congress on policy proposals to both combat the recession and address structural barriers to economic equality, and brought these ideas with her to the administration.
Similarly bringing evidence-backed economic policy expertise, specifically in the tax area, to the administration are Kim Clausing, who joins the Treasury Department as the deputy assistant secretary leading the Office of Tax Analysis, and David Kamin, the deputy director of the National Economic Council. Kamin, whose career and scholarship has focused on budget and tax policy, worked with Equitable Growth in the past, helping shape the organization’s position on taxing capital in ways that encourage widespread economic growth.
Clausing, who will be in charge of examining tax proposals to help decide which policies the Biden-Harris administration will pursue and how they will impact the overall economy, was involved in Equitable Growth’s early efforts to understand how the tax system could support a more equitable distribution of growth. She also received funding from Equitable Growth for her research on the corporate tax system, and has written for Equitable Growth on international trade and the coronavirus pandemic.
In her new role, Clausing will work closely with Lily Batchelder, who, upon confirmation by the Senate, will become the assistant secretary for tax policy within the Treasury Department. Batchelder is known for her research on inheritance and wealth transfer taxation, business tax reform, and social insurance.
Joining the Treasury Department in the area of macroeconomic policy is Neil Mehrotra, the department’s deputy assistant secretary of macroeconomic analysis. Mehrotra has been funded by and written for Equitable Growth on topics from secular stagnation and inequality to fiscal policy stabilization. His background in macroeconomics and previous position as an economist for the Federal Reserve Bank of New York further highlight his preparedness to analyze macroeconomic policy for the administration and guide decision-making to reduce overall inequality and bolster economic growth for all Americans.
Moving to another area of the executive branch, Janelle Jones is the chief economist at the U.S. Department of Labor. Jones, who received an Equitable Growth grant in 2015 to study racial disparities in intergenerational wealth transfers, will now be the top economist advising Labor Secretary Marty Walsh, analyzing the labor market to guide policy decisions. Jones is best-known for her intersectional work on racial inequality, unemployment, and unions, and spent a decade studying the U.S. labor market before entering the Biden-Harris administration.
Leading economic policy for the White House Office of Management and Budget is Danny Yagan, who received Equitable Growth grants in 2014, 2015, and 2018, and presented at our 2018 grantee conference. His 2017 working paper, looking at the Great Recession’s effect on income inequality and employment in the years after the downturn, could have important implications as the coronavirus recession continues and President Biden works to tackle the resulting high unemployment. As OMB’s associate director for economic policy, Yagan is the top decision-maker on the economy in the budget office that sits within the Executive Office of the President, helping guide President Biden’s policy and spending priorities and reviewing federal regulations before they take effect.
All of these appointments, alongside many others, show how much emphasis the Biden-Harris administration is putting on research to guide its policymaking. This will have a direct impact on how those currently in power across the federal government consider and execute economic decisions, evaluate government programs and priorities, report data and statistics to the public, and more. Ideas that used to have currency primarily or only in academia about how to foster more equitable growth to power more sustained and broad-based economic well-being now have gained footholds in many corners of the new administration, in part because of Equitable Growth’s work over the past 7-plus years to fund and promote this research.
We congratulate the many new appointees to the Biden-Harris administration and look forward to continuing to advance evidence-backed ideas that ensure U.S. economic growth is strong, stable, and broad-based.
