Addressing long-term U.S. unemployment requires confronting the stigma against the unemployed amid the coronavirus recession

Posted on by Maria Monroe

Overview

Six months into a pandemic that is keeping many businesses closed across the United States, and with close to 1 million new unemployment claims continuing to be added each week, there should be widespread agreement that unemployed workers are blameless for their condition. Yet stereotypes that find fault with jobless workers are already appearing amid the coronavirus recession and are an obstacle to economic recovery that threatens to leave lasting scars on unemployed individuals.

The stigma of unemployment is an unfounded bias that views the unemployed as lazy, less-productive workers who are personally defective, worthy of contempt, and to blame for being unemployed. Prejudice against the unemployed hampers the effective delivery of benefits to millions of workers out of a job, leads to hiring discrimination against the unemployed, and can cause long-term damage to workers and the economy.

Addressing long-term U.S. unemployment requires confronting the stigma against the unemployed amid the coronavirus recessionDownload

I and my co-authors Geoff Ho at Rogers Communications Inc., Margaret Shih at the University of California, Los Angeles, Daniel Walters at INSEAD, and Todd Pittinsky at Stonybrook University examined the psychological roots of employer discrimination against the unemployed in the aftermath of the Great Recession of 2007–2009.1 We find that the stigma against unemployed workers operates like other psychological prejudices and biases, is unjustifiable on productivity grounds, and occurs nearly instantaneously to workers losing their jobs.

This issue brief examines these findings in light of the importance of preventing unemployment and mitigating the downside impacts of unemployment, as policymakers address the continuing damage in the U.S. labor market caused by the current coronavirus recession. I will first examine current U.S. unemployment trends and then document how unemployed workers are discriminated against in the job market due to the stigma of being unemployed. This issue brief then details how this discrimination scars unemployed workers for the rest of their careers while sapping U.S. economic growth.

I close with some policy recommendations to address the stigma of unemployment, among them:

  • Reforms to the Unemployment Insurance system
  • Automatic stabilizers for unemployment benefits that match the distribution of benefits to the state of the economy
  • Work-share employment policies
  • Direct government jobs programs

In these ways, the stigma of unemployment is overcome by policies that help unemployed workers exit their joblessness as quickly and efficiently as possible to help them and the broader U.S. economy.

U.S. unemployment trends in the coronavirus recession

In July 2020, an unemployed Florida worker who had not received any benefits after 5 months without work said, “Gov. DeSantis, if you hear this, please, please help me get my unemployment. I’m not asking for anything that’s not mine. I’m not a lazy bum. I’ve worked my whole life.”2

This unemployed worker’s plea is emblematic of the stigma associated with being unemployed and the challenges facing a growing number of unemployed workers. Unemployment trends suggest that a lack of work is particularly likely to affect Black workers and women workers. Evidence suggests that rates of job displacement in economic downturns are discriminatory, meaning that Black workers are more likely to be laid off, all else equal, greater than what can be explained by differences in the types of sectors and jobs where Black workers are overrepresented or years of work experience.3 This contributes to the persistent 2-to-1 Black-White unemployment ratio.4

Workers’ time out of work is not only lost income during that time period, but also leads to diminished future earnings. This dynamic is especially evident among women workers who need to take time off for family caretaking.5 The disadvantage is now exacerbated in this recession alongside the public health crisis that has increased family care needs. Research on differences in outcomes by generations of Americans amid the Great Recession shows that often, the groups hit the hardest by unemployment in a downturn will take the longest to recover jobs and their earnings—even once the economy is technically in an expansion.6

Today, the first waves of those unemployed due to the coronavirus recession are about to enter long-term unemployment, defined as being unemployed for more than 26 weeks. Almost 800,000 workers first laid off in March entered long-term unemployment in the month of September. As of September, 4.6 percent of the U.S. labor force, or 58 percent of the unemployed—7.3 million workers—are now unemployed for more than 15 weeks. (See Figure 1.)

Figure 1

Share of the U.S. labor force by duration of unemployment, March 2020–September 2020

For the 2.4 million long-term unemployed workers in September, and for the overall health of the U.S. economy, addressing the stigmatization of unemployment is a major challenge now and will remain so in the years ahead.

The stigma of unemployment

My and my co-authors’ research finds that hiring managers and HR departments often blame unemployed workers for losing their jobs, even when laid off in a severe recession. We presented online and student respondents, as well as real hiring managers and HR professionals, with different reasons for why a fictional job candidate became unemployed, including:

  • Lay offs
  • Quitting
  • Employer bankruptcy
  • No reason given

We find that an unemployed job seeker was a target of discrimination, compared to an employed job candidate. Specifically, we conducted five studies that asked participants to evaluate an otherwise-identical resume of a worker who is either unemployed or employed at the time of applying for a job. The results show that the unemployed are evaluated harshly, and not just in terms of their abilities.

Only by emphasizing in the clearest way that the unemployed person was not at fault for being unemployed—by specifying that the unemployed person was out of job because their former employer went out of business—could we reverse the stigma of unemployment that blames the victim. In addition to being seen as less competent, an unemployed job candidate is seen as less warm, less trustworthy, less well-intentioned, less friendly, and less sincere, compared to employed job candidates. (See Figure 2.)

Figure 2

The effect of unemployment stigma on perceived warmth and competence of a job candidate

In the aftermath of the Great Recession of 2007–2009, long-term unemployment persisted at high levels for more than 5 years. It’s obviously too early to tell whether this same trend will play out after the end of this recession, but stigma against the unemployed can harm job candidates even if they are out of work for a short period of time. In a field study that involved sending real resumes to real job advertisements, our study finds that discrimination occurs even when a resume shows that the unemployed person was employed until the prior month. This suggests that the stigma and discrimination against the unemployed is not justified by the theory that firms discriminate against unemployed workers because of skills lost during long durations of unemployment.

Unemployment is one channel through which an individual can be marked by stigma. Research by sociologist David Pedulla at Harvard University shows that members of disadvantaged demographic groups carry stigma even before the experience of unemployment begins and thus face discrimination in the labor market regardless of an employer’s perceptions of their employment status and reason for job separation. Because Black, Latinx, and women workers already have higher unemployment rates than White males and are already subject to high levels of discrimination, there may not be much room for the level of discrimination they face to increase. Indeed, Pedulla finds that the level of stigma increases most for White males, who do not face prejudice based on their demographic group.78

The consequences of stigma

When workers are unemployed for a long period of time, this can lead to long-lasting damage to the psychological well-being and economic future of individuals.9 Joblessness decreases self-esteem, a sense of being in control of one’s destiny, and confidence. At the same time, it increases alienation, anxiety, and depression.10 Some research shows that joblessness may impact Black workers to a greater extent, due to fewer resources available to recover from the downside effects described here.11 As described above, Black workers are laid off more frequently, have higher unemployment rates, and face greater disparities in the coronavirus recession.

In addition, research demonstrates that long-term unemployment leads to:

  • Lifetime lower wages12
  • A worse quality of life and diminished lifespan13
  • Lower odds of being re-hired14
  • Increased risk of suicide15

Targeting the unemployed for relief is an essential first step to prevent suffering and speed up an economic recovery. Unemployment Insurance benefits help mitigate the damage of unemployment by lessening wage scars, among other benefits.16 But in addition to this program, and precisely because unemployment is so stigmatized and has such long-lasting damage on individuals and the economy, efforts focused on preventing further unemployment and mitigating long-term unemployment should be at the center of recovery plans.

Policies that would prevent more workers from being stigmatized by more swiftly re-employing the unemployed are described in the following section.

Don’t let unemployment stigma get in the way of economic recovery

The Coronavirus Aid, Relief, and Economic Security, or CARES, Act provided $600 in supplemental weekly jobless benefits, which expired at the end of July. The law also extended unemployment benefits from the usual 26 weeks to 39 weeks, with that extension set to expire on December 31, 2020.17 These benefits are expiring far too soon. Economists estimate that the peak of long-term unemployment in the coronavirus recession will involve 2 million workers who will be unemployed for more than 46 weeks by early 2022.18

Already, conservatives opposed to extending these benefits seek to shift the blame to unemployed workers. Conservative commentators Stephen Moore, Art Laffer, and Steve Forbes argue that benefits for the unemployed discourage work. And Republican Sen. Lindsay Graham (SC), summing up the views of many of his conservative colleagues on Capitol Hill, termed expanded unemployment benefits a “perverse incentive.”19 This argument is based on a stigmatized view of unemployment because it assumes that workers prefer leisure to work (are lazy) and blames the victim (believing that a motivated unemployed person could find a job at any time).

Unfortunately, many unemployed U.S. workers are blocked from accessing any of these unemployment benefits due to a stigmatized Unemployment Insurance system that attempts to screen the worthy from the unworthy and is now failing these workers in their moment of crisis. Barriers to accessing unemployment, including confusing eligibility criteria, lack of awareness, and antiquated information technology systems are characteristics of a stigmatized benefits system. Meanwhile, many unemployed workers are waiting weeks to receive benefits for which they were eligible, and many never received any at all.20

The ineffective administration of unemployment benefits also likely is hampering an economic recovery because jobless workers are unable to spend at a critical moment when spending would speed a recovery. Expanding benefits by resuming the $600 weekly supplemental payment and extending benefits for as long as necessary would help. Reforms to the Unemployment Insurance system to hasten the return to full employment could include:

  • Increasing the federal taxable wage base and indexing it to inflation to ensure adequate funding
  • Designing automatic benefits extensions so that the program can respond quickly to rapid downturns, such as the current recession
  • Implementing a minimum benefit level that would incentivize eligible workers to apply to the program21

To counteract unemployment stigma, counteract unemployment

The best step to prevent the harm of unemployment is to prevent people from becoming unemployed. One way to do so is through direct government hiring and incentives for firms to keep people employed and hire the unemployed. Direct payroll subsidies, as in the Paycheck Protection Program, saved jobs but were too short-lived and not generous enough.

Employers in states with work-sharing programs could reduce hours without laying off workers or reducing incomes if these short-time compensation programs run through state Unemployment Insurance systems had wider participation. But short-time compensation is not adopted by enough states and has not been well-targeted toward low-wage workers in particular, despite benefits associated with maintaining a workforce during downturns. In addition, any federal aid for municipalities and states could prioritize maintaining employment levels to prevent further rounds of mass layoffs.

In future stimulus proposals, direct payroll subsidies or job creation tax credits for hiring long-term unemployed workers could be considered as well.22 Such programs would offer incentives to firms that hire unemployed workers, essentially by offering wage subsidies.

By preventing workers from becoming unemployed and hastening the return of the unemployed to work, the above policies can shorten the time to economic recovery. Such actions can also be far cheaper in the long run than having the unemployed remain idle and can prevent the damaging consequences of unemployment stigma.

— Peter Norlander is an assistant professor of management at Loyola University Chicago.

Equitable Growth’s Household Pulse graphs: September 30–October 12

Posted on by Carmen Sanchezcumming

On October 21, the U.S. Census Bureau released new data on the effects of the coronavirus pandemic on workers and households. Below are five graphs compiled by Equitable Growth staff highlighting important trends in the data.

Food insecurity varies significantly by race and ethnicity. Fourteen percent of Latinx households and 16 percent of Black households report not having had enough food to eat in the prior week, compared to 7 percent of White households and 5 percent of Asian households.

U.S. household food sufficiency in the last 7 days, by race and ethnicity, September 30-October 12

As higher education plans are changed or delayed, those who are delaying education will have fewer options in the U.S. labor market now given high unemployment as well as less opportunity in the future based on credentialism.

Impact of coronavirus pandemic on post-secondary education plans, September–October, 2020

The spread of the coronavirus has impacted the employment of workers with less than a college degree, more of whom report they are not working due to being sick with coronavirus symptoms compared to those with an associate’s degree or greater.

Share of U.S. population 18-years and older not working at time of survey because they were sick with coronavirus symptoms, by educational attainment, September 30-October 12

More than half of all households reported having difficulty affording household expenses over the past month, with more than two-thirds of Latinx and Black households reported having difficulty with expenses.

Difficulty paying for household expenses by race and ethnicity, September-October 2020

More than half of Latinx and Black respondents report experiencing losses to their employment incomes since the start of the coronavirus recession, with more than one-fifth of all respondents saying they expect to lose income over the next four weeks.

U.S. respondents experiencing and expecting loss of employment income since March 13, 2020, by race and ethnicity

The rising number of U.S. households with burdensome student debt calls for a federal response

Posted on by Maria Monroe

Overview

Today, about 43 million adults in the United States collectively hold $1.5 trillion in federal student loan debt and an additional $119 billion in private student loans not backed by the federal government. Student loan debt is an issue for many U.S. households, but it is becoming an especially acute problem for heads of households who are low-income, Black, or Hispanic. The Federal Reserve’s 2019 Survey of Consumer Finances shows that student debt-to-income ratios are rising, saddling millions of U.S. households with a persistent drag on their incomes that could last 20 years.

The new data show that student debt-to-income ratios crept up over the past two decades and now average 0.56 among adults who have any student debt. In this issue brief, we report mean (average) income divided by mean (average) debt to reduce the influence of large outliers and look at people between the ages of 25 and 40 to roughly capture the generation that has been most affected by climbing college costs while excluding those who are just starting out their careers and therefore have especially low incomes. Excluding older households also addresses, in part, known weaknesses of using SCF data to analyze student debt. Although we think this age restriction is a reasonable frame for analyzing the data, removing it or using different age brackets does not substantially change the results we give here.

The rising number of U.S. households with burdensome student debt calls for a federal responseDownload

Our analysis demonstrates that the student debt burden in the United States falls most heavily on those U.S. households in the bottom 50 percent of the income distribution—and even more on Black American households. Measures to alleviate these student debt burdens—via income-based repayment plans and one-time forbearance policies enacted by Congress amid the coronavirus recession—mitigate these burdens only on the margins. We detail these findings from the new 2019 Survey of Consumer Finances and conclude with some analysis of student debt forgiveness programs based in these data.

Student debt burdens are on the rise

Disaggregating households by their income, the data show that adults in the bottom 50 percent of the income distribution with any debt have an average debt-to-income ratio of 1.03—more than double the ratio of 0.5 that same group held in 2001. Debt ratios are also rising for those in the next 40 percent of individuals by income, indicating that student debt is a problem of growing significance for a broad swathe of working- and middle-class households. Notably, these trends are for households that hold student debt and have therefore attended some college, so the trend is not being driven by increased college attendance. (See Figure 1.)

Figure 1

Debt-to-income ratios for U.S. households that hold any student debt, ages 25–40, by level of income

Heightened levels of student debt are often downplayed. Analysts point out that many of the largest balances are accrued by doctors and lawyers who will find high-paying jobs and have no trouble paying down their debt. But there are a large number of workers with relatively low balances on the student debt they owe who are nonetheless struggling to pay because they are stuck in low-income jobs. In fact, about 500,000 U.S. households with heads between the ages of 25 and 40 in the bottom 50 percent of the income distribution have a debt ratio greater than 1, and 2.5 million have a debt-to-income ratio greater than 0.5. Twenty percent of all households in this age group in the bottom half of the income distribution have a debt-to-income ratio of 0.5 or greater, not just those who have any student debt. (See Figure 2.)

Figure 2

Percent of adults aged 25–40 in three income brackets who have student debt-to-income ratios greater than 0.5, 1, and 2

Black borrowers are struggling most

Because the U.S. labor market continues to discriminate against Black Americans, the result is Black student debtholders are likely to have lower-paying jobs than their White peers. Black student loan borrowers also have less family wealth to draw on to pay for college, leaving them with higher debt balances too. The result is that nearly 30 percent of Black Americans between the ages of 25 and 40 have a student debt-to-income ratio exceeding 0.5. Latinx student loan borrowers are less likely to have high debt, although this is in part because they are less likely to have attended college than other groups. (See Figure 3.)

Figure 3

Percent of Black, White, and Latinx adults ages 25–40 who have student debt-to-income ratios greater than 0.5, 1, and 2

A contributing factor to these trends is that more Black Americans are now attending college. But if we confine our analysis to only those who have attended at least some college, the results are very much the same. In 2001, about 5.5 percent of Black Americans who attended at least some college had a debt-to-income ratio greater than 1. In 2019, it was a whopping 24 percent.

Other data points echo our findings here. Analysis by the Institute for College Access and Success based on voluntary reporting by colleges found that Black recent graduates have the highest difficulty (about 40 percent of Black respondents) making federal student loan payments 12 months after graduation. Racial wealth divides between Black and White households mean that Black college graduates may not have a secure financial safety net in the event of financial crises, such as the one our nation is experiencing currently.

Institutional racism and discriminatory financial practices up until the 1970s suppressed the growth of household wealth among non-White families, with long-lasting implications for today’s non-White millennial and zoomer students. Today, without the same financial cushion of generational wealth that is available to average White households, college graduates in Black and Latinx households may run the risk of defaulting on their student debt when the U.S. economy faces shocks, such as amid the current coronavirus recession and future economic downturns.

Policy implications

U.S. policymakers should be concerned by these trends. Income-based repayment plans enable some of these student loan borrowers to manage the repayment burden month to month. And many of these borrowers will be able to get forbearance from the U.S. Department of Education so they can pay $0 during periods where they are unemployed or have suffered serious declines in income. But even modest payment amounts (income-driven repayment plans cap out at 10 percent of discretionary income) are a drag on the ability of these individuals to buy houses, start families, become entrepreneurs, and engage in other activities that previous generations took for granted.

This drag, no matter how modest, was not faced by previous generations of college graduates and their families. Student debt will continue to weigh on the balance sheets of these households for 20 years in most cases. And although the overall ratio of debt payment-to-income has not increased in the way the ratio of debt balances-to-income have, this reflects, in part, the fact that debt has actually become more burdensome, and many students are in forbearance or are more likely to use income-based repayment than in the past.

One-time student debt forgiveness, proposed by both policymakers and academics, is one way to reverse the trends discussed above. As economist Darrick Hamilton at The New School and social scientist Naomi Zewde at the City University of New York’s Hunter College argued earlier this year, full forgiveness of all existing student debt would significantly reduce the Black-White wealth gap, because Black households face higher balances and are far more likely to struggle to pay those balances back. It also has the significant advantage of being relatively simple to carry out, at least relative to proposals that include complicated eligibility requirements. These kinds of requirements have been problematic in the past. The Public Service Loan Forgiveness program, for example, approved only 3,400 out of 200,000 applicants for forgiveness in 2017, because the requirements proved complicated, and borrowers did not fully understand the program.

Other proposals have focused on forgiving a flat, across-the-board sum. Sen. Elizabeth Warren (D-MA), in her 2020 presidential campaign, for example, proposed eliminating $50,000 of debt. This would dramatically reduce the number of households with high student debt-to-income ratios. (See Figure 4.)

Figure 4

Percent of U.S. households with student debt-to-income ratios greater than 1 and greater than 2 now and after $50,000 of student debt forgiveness

One-time debt forgiveness of any sort, however, is not a sufficient solution to the broader problem of increasing college costs. To prevent a recurrence of the creeping debt situation happening now, a college education needs to be made affordable for lower- and middle-class households. As demand for college has risen, per-student funding provided by states to public universities has fallen. Whereas tuition once accounted for just a bit more than 20 percent of revenue at public institutions, in 2017, it accounted for almost half of all revenue. Cuts in state budgets as a result of the Great Recession also exacerbated the issue, with some states still funding far less than they did before the crisis. States likely do not have the ability to reverse this trend themselves. To make college affordable, the federal government will have to step in and jointly fund public institutions with states.

As of fiscal year 2017, ending in September 2017, only 2 percent of the federal budget was allocated toward higher education. Since 2007, there has been no growth in federal and state education expenditures. In order to curb rising student loan debt, policymakers at both the state and federal level should invest in affordable and accessible higher education, especially 2- and 4-year programs. Prioritizing need-based student financial aid over merit-based aid benefits students who grow up in communities with poorly funded public Kindergarten through 12th grade education, allowing these students to experience economic mobility without the heavy burden of student loan debt after graduation. The Debt-Free College Act is an example of one bill that would implement some of these recommendations.

Much of the analysis of student loan debt fails to acknowledge that even when the burden of student loans is modest, it is a drag on income that previous generations did not face. The creeping increase in student debt-to-income ratios is evidence that the problem should be tackled now, before the student financial aid system becomes more dysfunctional. Federal support would ensure that no one is unable to get a college education due to their parents’ financial circumstances, and that the nation continues to build a well-educated workforce.

Posted in Uncategorized

Labor in the Boardroom: A Model for the United States?

Posted on by Maria Monroe

Under U.S. law, corporate boards of directors represent the interests of companies’ shareholders. This is reflected in the typical composition of boards, composed almost entirely of people from the business world, with some from the nonprofit sector and other elements of the private sector mixed in. Because boards of directors oversee the management of companies, they have fiduciary responsibilities to look at corporate strategy, hiring, and other decision-making through the lens of how these corporate activities affect the interests of the corporation, which, in recent decades, generally means the shareholders.

One group that boards do not look out for are the workers whose labor creates value for companies. Workers matter to boards only as they affect shareholder interests. That is not to say that boards don’t care at all about the health, safety, and well-being of workers. For one thing, they are obliged to follow the state and federal laws affecting workers. But generally, their interest in workers—how many there are, what they are paid, how they are treated—is confined to how such decisions affect shareholder interests, such as stock prices and fulfilling firms’ legal responsibility for workplace protections and rights.

It does not have to be this way. Building an economy with broadly shared growth can include corporate policy that considers a broader range of interests, including the voices of the workers, who make companies operate day-to-day, in decisions about both short- and long-term priorities. It’s possible that federal law can be changed, as it has been in more than a dozen European countries, to require corporate boards to represent the interests of workers, as well as shareholders.

How would this affect companies and workers? New research on Germany, funded by the Washington Center for Equitable Growth, by grantees Simon Jäger of the Massachusetts Institute of Technology and Benjamin Schoefer of the University of California, Berkeley, along with Jörg Heining of the German Institute for Employment Research, seeks to answer these questions. The co-authors examine how changes to so-called co-determination laws (corporate governance speak for worker participation at the board level) affected employment and earnings. Despite predictions by business interests that giving workers more voice may run contrary to sustainable corporate strategy, the three researchers find that companies with co-determination perform well, do not have any significant changes to wage levels, and are less likely to outsource business functions.

Policies such as co-determination are increasingly relevant to the United States, where wages have remained essentially stagnant for decades, despite a long-term increase in productivity, which suggests that workers are creating value but are not reaping any of its benefits. As the U.S. labor market becomes increasingly fissured, with rising domestic outsourcing over time, workers find fewer opportunities for advancement, and declining unionization rates decrease workers’ voices. Furthermore, wage stagnation was largely resistant to more than a decade of economic recovery and a historic drop in unemployment until the recent coronavirus recession.

As U.S. policymakers consider how to address this problem, serious thought is being given to how corporate structures might be changed to take workers’ interests into greater account—on the assumption that this could help workers get a larger share of the corporate pie. Clean Slate for Worker Power, a project of Harvard Law School’s Labor and Worklife Program, is advancing an agenda of U.S. labor law reforms designed to restore worker power, including requiring worker representation on corporate boards. And legislation is before Congress to establish such a requirement.

To help policymakers understand these proposals, it would be helpful to know what effect such reforms might have on wages and employment, as well as investment and capital stock, corporate profits, and the long-term success of individual businesses. Research by Jäger, Schoefer, and Heining begins to answer these questions.

It might be difficult for people in our nation to think of corporate boards representing anybody but shareholders since this is part of American corporate culture and precedent going back to the 1970s. In fact, boards are very different in some countries. A case in point is Germany, where, for nearly 70 years, the law required workers to be represented on some corporate boards. While that mandate existed in some form going back to 1951, it was abruptly abolished in 1994 for new firms. But the mandate remained, and remains, for firms that existed before that date.

This sudden change in German law created a so-called quasi-experiment that allowed Jäger, Schoefer, and Heining to examine how labor representation in corporate governance affects workers and companies. Operating side-by-side in Germany are companies still under the mandate and companies free of it. This raises numerous questions. How do they compare? Does having workers on the board result in higher wages? Lower capital stock? Reduced profits? More bankruptcies? That is what conventional economic theory might suggest. The researchers’ working paper, “Labor in the Boardroom,” examines these questions, with some very interesting conclusions.

First, some background. Like many other European countries, Germany has a two-tier board system, a supervisory board and an executive board. The executive board is equivalent to the senior management of a U.S. company, with day-to-day operational responsibilities. The supervisory board operates much like U.S. boards of directors, with responsibility for the selection, monitoring, auditing, compensation structuring, and dismissal of the executive board. It is involved in strategic planning, large financial decisions, and other fundamental decisions about the company.

Between 1951 and 1976, Germany passed a series of laws that mandated supervisory boards of companies—other than privately held firms or limited liability corporations—be made up of varying levels of workers’ representatives, depending on the size and type of company. By 1976, the largest corporations and smaller companies in the mining, coal, and steel industries were required to have workers’ representatives comprising one-half of their supervisory board membership. Other companies had one-third worker representation. Workers elected their own representatives, who were always workers, except in the largest companies, where workers were permitted to elect outsiders to supplement workers.

In the United States, one might expect co-determinant boards to be contentious, but in practice, in Germany, when worker and shareholder representatives hold equal or near-equal power, they tend to operate by consensus. One reason might be the existence of works councils, which have extensive consultation, information, and co-determination rights in areas such as work hours, safety, and organizational or staffing changes, and can directly negotiate with the employer. Works councils do not exist in the United States, but they have a purview similar to that of labor unions in the United States, except that they participate in setting principles of wage setting rather than engaging in direct negotiations over wage levels, as U.S. unions do.

Only roughly 9 percent of workplaces in Germany have works councils, but they are overrepresented at larger workplaces. This means they cover 42 percent of employees in the former West Germany and 35 percent in the former East Germany. In part as a result of these structural differences, with works councils present at many larger businesses, there tends to be, in general, greater cooperation between labor and management in Germany.

In 1994, all this changed abruptly. The German federal parliament, the Bundestag, passed legislation exempting all new corporations from the worker representation mandate while maintaining it for existing companies. The rationale for treating old and new companies differently was that existing companies had already become accustomed to shared governance. Researchers Jäger, Schoefer, and Heining, however, say this was a legislative compromise between those who wanted to retain the status quo and those who wanted to abolish the mandate entirely. (The new law made no changes in works councils.)

To understand the effect of this change and to estimate the impact of co-determination on company and worker outcomes, Jäger, Schoefer, and Heining measured a number of metrics for companies incorporated 2 years before and 2 years following the change in law. This creates a sample of companies created under more or less similar economic conditions and average productivity levels, but incorporated under different legal frameworks. Thus, all the firms were incorporated between August 10, 1992 and August 10, 1996. Those incorporated before August 10, 1994 were subject to the mandate; those incorporated after that date were not.

To ensure the robustness of their findings, the researchers tested a number of factors to ensure that nothing about that particular time period distorted the results. So, they also compared these firms with publicly held companies that were subject to the mandate and then released from it in 1994, and with limited liability corporations, which were never subject to the mandate. This helped to ensure that any changes post-1994 were not due to overall changes in the economy or other outside factors affecting business more generally. Jäger, Schoefer, and Heining did additional testing of other potential factors as well to ensure that changes were likely due to the boardroom legislation and not other issues.

It’s also important to note that the legislative compromise was unanticipated, and that it was implemented literally the day after it was both announced and enacted. So, there was no gap in incorporations just prior to the change in the law, which might have suggested deliberate avoidance of the mandate. And there was no rush to incorporate immediately following it, which might have suggested the same.

Generally, Jäger, Schoefer, and Heining found no significant impact on overall wages or employment. In fact, they found a slight increase in capital assets and significant upward movement in capital share, not labor share, due primarily to an increase in worker productivity. In other words, under shared governance, the same number of workers being paid essentially the same amount produce more value per worker, and that value is accruing to capital, not labor.

There does appear to be a significant reduction in outsourcing as a result of co-determination. Outsourcing is credited with decreasing average labor standards and worker outcomes across an economy. But for firms and their shareholders, the bottom line is that there is a slight increase in capital assets, and neither revenues nor profits appear to be significantly affected.

This also suggests that giving workers a voice in corporate decision-making does not lead to deleterious outcomes, such as bankruptcy, due to workers’ potential differing priorities. Important, too, is that corporate policy doesn’t affect only shareholders’ bottom lines. Companies also employ the workers and provide goods and services to the consumers who are both the bedrock of our economy.

Research like this can only speculate as to the reasons for these results and how they might differ if shared governance on corporate boards were adopted in the United States. Shared governance has existed in Germany for nearly seven decades, so the management and workers of firms that remained under the pre-1994 mandate had essentially known nothing different. Results could be different if new corporate governance rules were enacted for U.S. companies unused to shared governance.

More research could give policymakers, workers, and corporate leaders alike a stronger basis for projecting possible outcomes. But this new research by Jäger, Schoefer, and Heining does suggest that workers being given a greater voice in the workplace does not lead to the negative economic outcomes purported by anti-labor critics, such as unsustainable levels of pay or workers embracing luddite-like resistance to technological change.

Their findings also might reflect the more cooperative labor relations that are prevalent in Germany, although it may be that those cooperative relations are partly a result of shared governance. The consensus nature of supervisory boards in Germany suggests that shared governance—over the long run—can produce good results for workers, companies, and the economy. Here in the United States, researchers could look at the experiences of worker-owned companies or companies with significant employee stock ownership plans (so workers are essentially shareholders) to see whether parallels with the German experience are germane.

Posted in Uncategorized

Brad DeLong: Worthy reads on equitable growth, October 14-19, 2020

Posted on by Maria Monroe

Worthy reads from Equitable Growth:

1. Unless we know where we are, we will be unable to figure out where we need to go. And we do not know where we are. Thus one of our very top priorities should be oversampling minorities to help us figure out exactly how far away we are from equal opportunity. Read Austin Clemens and Michael Garvey, “Structural racism and the coronavirus recession highlight why more andbetter U.S. data need to be widely disaggregated by race and ethnicity,” in which they write: “This issue brief details the steps Congress and executive branch agencies can take to improve our understanding of economic and social outcomes for all communities of color. There are many ways the economic statistical agencies could improve data collection, provide more analysis of racial economic divides, and alter the presentation and publication of statistics to better inform policymakers on the needs of marginalized communities. This issue brief focuses on three concrete policy actions that could be taken now with a focus on oversampling in existing federal surveys.”

2. A guide to five excellent scholars who should definitely be on your reading list. Read Christian Edlagan, Aixa Alemán-Díaz, and Maria Monroe, “Expert Focus: The consequences of economic inequality among Latinx groups in the United States,” in which they write about: “Carlos Fernando Avenancio-León … on how political empowerment through protecting the right to vote had a positive impact on U.S. labor market inequality … Eduardo Bonilla-Silva … on how economics can better adopt a racial equity lens by drawing from outside the discipline … Adriana Kugler… on the benefits of UI extensions to improve the quality of job matches for women, non-White workers, and less-educated … Juliana Londoño-Vélez… on the feasibility of wealth taxation in developing countries … Marie Mora … on the lack of access to capital Latinx groups face.”

3. This is a great paper—and I find the identification completely convincing. It is very hard to argue that enforcement of the Voting Rights Act of 1965 was stronger in places where other factors were already rapidly closing the Black-White wage differential. Yet it was in places where the Voting Rights Act of 1965 was most strongly enforced that saw the greatest relative wage gains for American Blacks. Read Abhay Aneja and Carlos Fernando Avenancio-León, “Voting rights equal economic progress: The Voting Rights Act and U.S. economic inequality,” in which they write: “The Voting Rights Act of 1965, a signature measure of the civil rights era, narrowed the wage gap between Black and White men in the areas where it was most strictly enforced. Specifically, between 1950 and 1980, the gap between the median wages of Black and White workers in the South narrowed by approximately 30 percentage points. And our study, which builds on existing research on the economic benefits of voting rights legislation, shows that the Voting Rights Act was responsible for about one-fifth of that reduction.”

Worthy reads not from Equitable Growth:

1. Once again, the shadow left by Harry Dexter White’s victory at Bretton Woods over John Maynard Keynes, and the consequent insistence that the burden of adjustment lie in such a way as to force deflation, damages us. What the International Monetary Fund should be saying is, echoing Keynes: “What we can do, we can afford.” As long as interest rates remain this low, governments should spend whatever is necessary to employ their people. And if interest rates start rising rapidly? Governments then need to constrain that rise by incentivizing people to hold safe assets so that 2008 does not come again, and so limit the rise in interest rates: Read the IMF’s “Fiscal Monitor: Policies for the Recovery,” in which the international financial institution writes: “Governments’ measures to cushion the blow from the pandemic total a staggering $12 trillion globally. These lifelines and the worldwide recession have pushed global public debt to an all-time high. But governments should not withdraw lifelines too rapidly. Government support should shift gradually from protecting old jobs to getting people back to work and helping viable but still-vulnerable firms safely reopen. The fiscal measures for the recovery are an opportunity to make the economy more inclusive and greener.”

2. The 2007–2008 financial crisis, the Great Recession of 2007–2009, and the subsequent botched economic recovery in the global north was a large element in the global north’s relative decline—it stood still, economically and socially, for half a decade while East Asia grew. Now it is starting to look as though the coronavirus pandemic and subsequent recession will be a similar lost half decade, or more—but this time for pretty much everyone outside of East Asia with its successful (so far) virus-control policies. Read the Financial Times Editorial Board, “the global economic recovery is dramatically uneven,” in which they write: “The IMF said in its World Economic Outlook, which was released on Tuesday, that the global economy will shrink by 4.4 per cent this year—an awful figure … [with] prospects of recovery … are far from even … China, buoyed by strong export sales and a reduction in caseloads that has enabled an economic reopening, is set to grow by 1.9 per cent this year … The US and European economies, meanwhile, are still set to experience sharp contractions as a result of not being able to fully remove restrictions on movement …The US, where the Federal Reserve and the Treasury acted swiftly to shore up financial and labour markets, will perform much better than Europe. Its economy is seen as shrinking by 4.3 per cent, compared with a deeper contraction of 8.3 per cent in the eurozone. The UK economy, meanwhile, is forecast to shrink by 9.8 per cent … Divergences within the major emerging markets are stark, too … India … is expected to see its economy shrink by 10.3 per cent over the course of 2020. In Latin America, the outlook for Mexico remains bleak … Recovery will depend largely on countries’ ability to contain the virus … If the disease lingers and becomes more difficult to contain, the IMF rightly advises countries to spend whatever it takes … The focus for now must be on mitigating the impact of Covid-19 … The IMF’s forecasts suggest the best means … lie in mitigating the spread of the disease through successful track-and-trace policies that will enable economies to reopen more quickly, too. The virus first became widespread in China; the lead set by it and other east Asian countries in controlling it offers the best way out for the global economy.”

3. Looking back at economic history and then the policy mistakes that led to the Great Depression, Doug Irwin calculates that half of the damage from deflation was a result of the misguided policies of the French government. Has orthodoxy, austerity, and deflation ever worked. Read Douglas Irwin, “Did France Cause the Great Depression?,” in which he writes:  “A large body of research has linked the gold standard to the severity of the Great Depression. This column argues that while economic historians have focused on the role of tightened U.S. monetary policy, not enough attention has been given to the role of France, whose share of world gold reserves soared from 7 percent in 1926 to 27 percent in 1932. It suggests that France’s policies directly account for about half of the 30 percent deflation experienced in 1930 and 1931.”

Posted in Uncategorized

Weekend reading: Helping U.S. families stay out of poverty and build wealth 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

The Voting Rights Act of 1965 is probably best known for its role in eliminating barriers to political representation and voting for Americans of color at the height of the civil rights era. But a new working paper by Abhay P. Aneja and Carlos F. Avenancio-León shows that this signature legislation also worked to improve economic circumstances of Black Americans and other Americans of color. The co-authors’ research quantifies the connection between increasing political representation and reducing poverty, finding that between 1950 and 1980, the gap in median wages between Black and White workers in the South narrowed by around 30 percentage points, and that the Voting Rights Act was responsible for approximately one-fifth of that change. Aneja and Avenancio-León explain their study and its results in an issue brief, drawing a clear connection between Black voters’ greater political power and higher wages for Black workers in subsequent years, reducing poverty in the United States. They look at the various mechanisms that could have enabled the legislation to have this effect, and discuss the 2013 Supreme Court decision to weaken the law’s enforcement, which may be reversing the wage gains seen after the law was enacted.

Homeownership in the United States for a long time helped White middle-class families build up their wealth, providing many of these families with opportunities to accumulate, over their working years, the financial cushion they need to support themselves upon retirement. Yet the Federal Reserve’s 2019 Survey of Consumer Finances suggests that this wealth-building opportunity is under threat for all U.S. households today. Austin Clemens and John Sabelhaus review the data, which show that the Great Recession of 2007–2009 and the sluggish recovery that followed it have pushed homeownership rates lower than they were for older generations at similar ages and phases in the lifecycle. Clemens and Sabelhaus look specifically at data for families with middle-aged heads of households because this group of people will be urgently in need of the financial security homeownership can provide in short order. They also examine the inequities in housing among this group along race and income lines, showing that White and wealthy families have higher rates of homeownership than their Black, Latinx, and less well-off peers. Clemens and Sabelhaus then propose several actions policymakers can take to protect these vulnerable families on the brink of retirement to ensure they are able to begin building wealth before exiting the labor force.

Equitable Growth is committed to building a network of scholars studying how inequality affects economic growth and stability. As such, every month, we highlight a group of scholars in various fields doing cutting-edge work in the social sciences. This month, Christian Edlagan, Aixa Alemán-Díaz, and Maria Monroe write about five scholars whose research looks at the diverse lived experiences of Latinx populations in the United States and how these experiences are often compared to those of Black Americans, who face similar barriers to economic and social equity.

Check out Brad DeLong’s latest Worthy Reads, in which he summarizes and analyzes recent content from Equitable Growth and around the web.

Links from around the web

Since the end of July, when emergency coronavirus aid relief provided in the Coronavirus Aid, Relief, and Economic Security, or CARES Act expired, up to 8 million Americans have slipped into poverty. Two new studies show how the aid worked to prop up many vulnerable families and how those families have fared since the money ran out—namely, that the poverty rate is now higher than it was before the onset of the pandemic, The New York Times’ Jason DeParle reports. The researchers found that the CARES Act relief kept more than 18 million people out of poverty, but that number has dropped now that it has expired. Despite what appears to be an improving job market, the studies show that poverty has continued to rise, indicating that the recovery is too sluggish to offset the negative effects of not renewing aid. Coupled with a recent uptick in Unemployment Insurance claims and rising cases of the virus across the United States, the economy is poised to falter again—and, DeParle writes, Congress is no closer to passing another, desperately needed stimulus package to support those most in need.

The connection between climate change and economic inequality is becoming more obvious with every passing day and is one of the biggest, most daunting challenges we face, writes The Atlantic’s Vann R. Newkirk II. Rising temperatures are more likely to affect poorer regions of the world, while wealthier areas—which contribute more to climate change via higher emissions—are mostly spared the worst effects of this warming or are easily able to avoid them. Sweltering heat levels also hit lower-income workers, such as farm and field hands, factory workers, and those in construction, harder than their more economically and geographically mobile peers, expanding wealth disparities even further, killing some people and not others, and fomenting conflict within many, and even between some, countries. Rising temperatures also exacerbate racial wealth and health divides, reinforcing structural racism and discrimination, and impacts Black and Latinx communities in the United States more than White areas. In short, Newkirk writes, in the long, hot century ahead, “the heat gap will be a defining manifestation of inequality.”

In the wake of lockdowns, quarantines, and stay-at-home orders earlier this year that most affected restaurants and the service industry in the United States, many small businesses have had to change their operations and business models to stay afloat. Even as some states and cities are now scaling back their restrictions on public gatherings, many people won’t return to their pre-coronavirus habits until they feel safe going out, meaning many of these businesses will continue struggling for months to come. One lifeline for many of them has been online crowdfunding websites, writes Vox’s Rebecca Jennings. But, Jennings continues, the fact that small businesses—the backbone of many U.S. cities, both small and large—have had to use these methods is clear evidence of the lack of public safety net protections for employers and employees alike. Though the Paycheck Protection Program, for instance, was intended to help those companies in this exact situation, many small businesses were excluded from the program for various reasons, and access was further limited for entrepreneurs of color, who faced significant barriers to entry. Crowdfunding and haphazard innovative solutions to coronavirus restrictions, such as makeshift outdoor dining patios and curbside pickup, will only work for so long, Jennings concludes, especially with winter around the corner. Policymakers must act to support the restaurant industry so that no more of these vital local businesses have to shutter permanently.

Friday figure

Percent of families in each group who own a house, 2007 versus 2019

Figure is from Equitable Growth’s “Can policymakers reverse the unequal decline in middle-age U.S. homeownership rates?” by Austin Clemens and John Sabelhaus.

Voting rights equal economic progress: The Voting Rights Act and U.S. economic inequality

Posted on by Maria Monroe
People line up on the first day of early voting in Arlington, VA. to vote in the 2020 presidential election.

Overview

The civil rights movement, from its mid-20th century growth and successes to its current manifestations, has had a dual focus of eliminating political and social discrimination and bettering the economic lot of Black Americans, as well as that of other people of color in the United States. From the beginning, leaders of the movement and their political allies recognized the intrinsic connection between these goals. They understood that equality under the law meant little without addressing the rampant poverty in Black communities across the country.

Our new research quantifies that direct connection, showing that the Voting Rights Act of 1965, a signature measure of the civil rights era, narrowed the wage gap between Black and White men in the areas where it was most strictly enforced. Specifically, between 1950 and 1980, the gap between the median wages of Black and White workers in the South narrowed by approximately 30 percentage points. And our study, which builds on existing research on the economic benefits of voting rights legislation, shows that the Voting Rights Act was responsible for about one-fifth of that reduction.

Voting rights equal economic progress: The Voting Rights Act and U.S. economic inequalityDownload

This issue brief first details why the Voting Rights Act delivered greater political power to Black voters. We then show that this resulted in higher wages to Black workers and narrowed the Black-White wage gap. We examine some ways the Voting Rights Act could have had this wage effect, specifically developments in public- and private-sector employment and greater enforcement of measures barring discrimination in the workplace. We close with a brief look at how the U.S. Supreme Court decision in 2013 to dramatically weaken enforcement of voting rights may be starting to reverse the wage gains we document after the enactment of the Voting Right Act.

The Voting Rights Act

No civil right was considered more important by civil rights proponents than the right to vote, which had been systematically denied to Black people for decades, primarily in the South. Following the Civil War, the ratification of the 15th Amendment to the Constitution in 1870 enshrined voting rights for American men regardless of race. And during Reconstruction, Black Americans generally prospered economically. But beginning near the end of the 19th century, Jim Crow laws in the South gradually and systematically deprived Black Americans of the right to vote in many areas. By 1910, there was very limited Black suffrage in the South, and that remained the case for more than half a century.

The Voting Rights Act of 1965 changed that. It not only outlawed the standard practices used to deny Black Americans the right to vote, such as the poll tax and literacy tests, but also contained very tough enforcement measures. The new law gave the federal government extraordinary oversight powers to protect the voting rights of people of color in specific counties through much of the South. Any changes in electoral procedures needed to be cleared with the U.S. Department of Justice or the U.S. District Court for the District of Columbia before going into effect, and the Justice Department was authorized to appoint federal examiners to oversee the electoral process in covered jurisdictions to ensure that roadblocks were not placed in the way of Black voters.

The results were dramatic. The size of the Black electorate increased almost overnight. Within 2 years, more Black Americans had registered to vote than at any point since the ratification of the 15th Amendment.

To calculate the effect of the Voting Rights Act on wages, we were able to compare counties that were covered by the stricter Voting Rights Act provisions to those that were not. Only 41 of 100 counties in North Carolina, for example, were covered by the stricter provisions, so neighbor counties can be compared. All of Mississippi was covered, but Arkansas next door was not. In addition, subsequent amendments to the Voting Rights Act added more counties in the South and Southwest, providing additional opportunities for comparisons, not only with newly adjacent uncovered counties but also with the counties that had been covered 5 and 10 years earlier.

How the Voting Rights Act changed politics

In order for the Voting Rights Act to improve the well-being of Black Americans, it had to make government more accountable to Black voters. If improvements were a response to their greater electoral strength, then the first question was how the law affected the demographic makeup of the electorate. So, we first examined voter turnout between 1948 and 1980, and found increases in overall eligible voter turnout for all voters of anywhere from around 6 percent to 10 percent, consistent with existing research in this area.

Moreover, there also was increased White voter registration during the period, but the statute produced much larger increases in Black voter registration. Finally, our research builds on existing research by showing specifically that in jurisdictions where federal examiners monitored the voting process, political participation showed the greatest increases.

As might be expected, elected officials began responding to the increased Black vote. Using data on the behavior of members of Congress from the covered jurisdictions, we found that these elected officials increasingly supported the preferred policies of their Black constituents, specifically on issues directly related to race and civil rights. This finding is consistent with research from political science on the Voting Rights Act.

Impact of the Voting Rights Act on racial earnings inequality

Eliminating U.S. labor market discrimination was by far the most important political issue for Black Americans before the enactment of the civil rights legislation of the 1960s. It should be no surprise, then, that once Black Americans gained greater political power, it would be directed like a laser beam toward that issue. (See Figure 1.)

Figure 1

Political and economic issues that motivated Black voters, 19963

In our new working paper, we analyzed U.S. Census Bureau data in adjacent jurisdictions, as noted above, to estimate the specific impact of the Voting Rights Act on the gap in earnings between Black and White men. The results were clear: a 5.5 percentage point increase in Black Americans’ wages between 1950 and 1980, relative to White workers with the same characteristics and within the same geographic area.

Between 1950 and 1980, the ratio of wages for Black workers to wages for White workers increased from 55 percent to just more than 80 percent. Since the main impact of the Voting Rights Act in narrowing the Black-White wage gap 5.5 percent took place in the 5 years following its enactment, between 1965 and 1970, the measure is responsible for about one-fifth of the total convergence between Black and White wages.

We also found that the narrowing of this divide was driven primarily by a substantial increase in earnings among Black workers. Yet there was no loss of employment for Black or White workers. Employers did not hire fewer workers because wages rose, perhaps due to the favorable economic conditions of the time.

If the Voting Rights Act is responsible for one-fifth of this phenomenon, what makes up the rest? Other researchers have quantified several other factors, including the migration of Black workers to the North during the period of the Great Migration, improvements in school quality for Black American schoolchildren, and the effect of President Lyndon Johnson’s Great Society programs on U.S. labor force participation, caused, in part, by the increased bargaining power the support provided to Black workers.

A third source of the increase in wages among Black workers was detailed recently by economists Ellora Derenoncourt and Claire Montialoux at the University of California, Berkeley. They find that the 1966 National Labor Relations Act reforms that broadened the federal minimum wage to cover previously exempt industries, including nursing homes, hotels, and agriculture, explains more than 20 percent of the earnings gap reduction. Of course, people of color’s political power may have complemented any of these channels by strengthening enforcement of these laws.

We examined a number of factors that could have made interpretation of our analysis challenging. We tracked Black migration from one county or state to another, the integration of labor markets across county or state borders, and workers commuting from one jurisdiction to another. Using these additional data, we were able to essentially rule out that any of these factors had a significant effect on our research.

What were the means by which the Voting Rights Act affected earnings?

Now that we know that the Voting Rights Act narrowed the Black-White wage gap, the natural question is, how? What are the channels by which this landmark measure effected economic progress for Black workers in the decade-and-a-half following its enactment? We looked at a few possible channels, including:

  • Increased Black employment in the public sector
  • Anti-discrimination and affirmative action policies implemented at all levels of government
  • Changes in human capital, such as improved education and health, leading to workers more capable of earning higher wages

Let’s examine each of these in turn.

Public-sector employment

Previous research suggests that greater diversity among government workers is one effect of increased political power for people of color. We calculate that of the approximately 5 percent narrowing of the racial wage divide in Voting Rights Act jurisdictions between 1950 and 1980, at least one-tenth of that convergence was achieved as a result of greater public employment, including its spillover effect on the private sector. (See Figure 2.)

Figure 2

The growth of public-sector employment, by race, 1962–1983

Public employment provided a premium, especially to Black workers, over private employment. Wages in the public sector were higher in general, and there was greater discrimination in terms of hiring, pay, and position in the private sector. Black workers had greater opportunities in the public sector than in private employment to move to higher-paying, white-collar positions.

In addition, this increase was made easier by the concurrent growth of government employment occurring in much of the country. That overall growth meant that the growth of Black employment, which occurred at a higher rate in the jurisdictions covered by the Voting Rights Act, could be achieved without displacing current White workers. We also find, though, that Black workers’ improved circumstances in the public sector had a spillover effect, contributing to the narrowing of the racial wage gap in the private sector. Faced with the higher wages paid by government agencies, private employers likely had to offer more competitive pay to attract workers.

Direct government actions

During the 1960s and beyond, a number of federal, state, and local measures were adopted to improve the economic well-being of Black Americans and other people of color. Two of the most important at the federal level were Title VII of the Civil Rights Act of 1964, which prohibited employment discrimination based on “race, color, religion, sex, or national origin,” and a series of executive actions through several administrations requiring affirmative action to prevent employment discrimination or specifically encourage hiring workers of color. There also was a nationwide increase in the minimum wage. In addition, some local governments took their own actions to encourage hiring and contracting people of color.

Government reporting requirements under Title VII applied only to firms above a set number of employees. Localities thus varied in the fraction of workers employed in establishments subject to these oversight requirements. We found that the Voting Rights Act’s effect on relative earnings was (differentially) more in places where a greater fraction of the private-sector workforce was likely to be subject to these reporting requirements. We believe this may suggest that another mechanism through which political power mattered was through improved Title VII enforcement.

Changes in human capital

Finally, there is no question that expanding the franchise in the United States led to increases in spending on education and health, adding to workers’ human capital. But it turns out these improvements in human capital did not play a significant role in the wage-gap narrowing that we are discussing. Among other reasons, the impact of increased spending was felt later than the narrowing of the wage gap we are discussing.

Unlike the other channels above, the data here do not help us draw a line from the Voting Rights Act to changes in human capital to the narrowing of the Black-White earnings gap. Rather, the clear improvements in school quality for Black children fostered by the Voting Rights Act seem to have occurred in tandem with the improvements in adult outcomes that we document in our paper.

Conclusion

Unfortunately, stringent federal enforcement of voting rights for people of color in the South and other areas covered by the Voting Rights Act is a historical relic. In 2013, the U.S. Supreme Court, in Shelby County v. Holder, invalidated the provision of the Voting Rights Act that authorized the Justice Department to send enforcers to those counties that had a strong history of discrimination against Black voters and other voters of color. While Chief Justice John Roberts claimed that voting equality had been achieved, Justice Ruth Bader Ginsberg argued that if voting equality existed in 2013, it may have been precisely because of the “prophylactic measures to prevent purposeful race discrimination” taken under the Voting Rights Act.

The impact of Shelby County v. Holder on the voting rights of Americans of color is about as controversial a political issue as there is right now in the South and Southwest. And in separate research, we find that the removal of these protections has had a negative economic impact on Black workers, though modest so far, yet consistent with the economic improvements in the 20th century that were attributable to Voting Rights Act enforcement. That impact has been felt largely due to reversals in the same channel where improvements took place half a century ago: public-sector employment, with spillovers into the private sector.

The Voting Rights Act, now hobbled, turned 55 in August 2020. The economic effects of Shelby County v. Holder, which are undoubtedly related to the successful efforts by some governors and state legislatures to reduce voter registration and turnout among people of color, suggest that a revitalized Voting Rights Act, including its stringent enforcement measures, may still be vital to establishing full economic equality for Black voters and other voters of color. As the nation continues to struggle with how to achieve economic justice, voting rights, as in the 1960s, are still front and center.

—Abhay P. Aneja is an assistant professor of law at the University of California, Berkeley, and Carlos Fernando Avenancio-León is an assistant professor of finance at the Kelley School of Business, Indiana University Bloomington.

Posted in Uncategorized

Expert Focus: The consequences of economic inequality among Latinx groups in the United States

Posted on by Maria Monroe
""

Equitable Growth is committed to building a community of scholars working to understand whether and 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.

October 15 marks the end of Latinx Heritage Month. In this installment, we explore the work of five scholars whose research helps us understand the economic aspects of the diverse Latinx experience, including in the workplace, the broader U.S. labor market, and barriers to equitable access to opportunities in the U.S. economy and society. These experiences are often compared to the experiences of Black people in the United States, who tend to face similar barriers to economic equity—comparisons examined by several of the academics whose research we highlight here.

Carlos Fernando Avenancio-León 

Indiana University Bloomington 

Carlos Fernando Avenancio-León is an assistant professor of finance in the Kelley School of Business and an affiliate of the Center for Research on Race and Ethnicity in Society at Indiana University Bloomington. His work focuses on equitable finance, or the role of finance in economic redistribution, and its effects on disadvantaged communities and inequality. A 2018 Equitable Growth grantee, he and colleague Troup Howard from the University of California, Berkeley published a recent working paper showing that property taxes place an inequitable burden on Latinx and Black homeowners. Their work on systemic racism in taxes highlights the barriers that Latinx and Black homeowners face even after overcoming the U.S. homeownership divide. In other research, featured in this Econimate video, he and his colleague Abhay Aneja, also an Equitable Growth grantee, document how political empowerment through protecting the right to vote had a positive impact on U.S. labor market inequality for Black workers in the South following the passage of the Voting Rights Act of 1965.

Quote from Carlos Avenancio-Leon and co-author on minorities and higher tax burdens

Eduardo Bonilla-Silva

Duke University 

Eduardo Bonilla-Silva, the James B. Duke distinguished professor of sociology at Duke University, is a longstanding influential voice on understanding the personal, collective, and structural dimensions of racism. His work, from his first publication, titled “Rethinking Racism: Toward a Structural Interpretation” in the American Sociological Review in 1997, to his most recent book, Racism Without Racists: Color-Blind Racism and the Persistence of Racial Inequality in the United States, is critically relevant in the context of the coronavirus pandemic and recession, and the social unrest against systemic racism and police brutality. Furthermore, he recently engaged in conversations on how economics can better adopt a racial equity lens by drawing from outside the discipline. At this moment, he is writing on how the actions of White people are central to the maintenance of systemic racism, lecturing across the nation on the subject “What Makes Systemic Racism Systemic?” and finishing the sixth edition of Racism Without Racists. 

Quote from Eduardo Bonilla-Silva on residential segregation

Adriana Kugler

Georgetown University 

Adriana Kugler is a full professor at the McCourt School of Public Policy at Georgetown University and was the chief economist at the U.S. Department of Labor during the Obama administration. She currently serves on the Science, Technology and Economic Policy committee of the National Academies of Science and Engineering and is the Chair of the Business and Economics Statistics Section of the American Statistical Association. A 2016 Equitable Growth grantee, her current research is on the impact of Unemployment Insurance on the labor market during recessions. During the coronavirus pandemic and subsequent recession, the effect of Unemployment Insurance benefits, partly as a lesson learned from the Great Recession, has remained a vital topic for economic growth and the well-being of families and individuals who may have lost their jobs. Kugler and her co-authors Ammar Farooq and Umberto Muratori, the latter of whom is a former dissertation scholar at Equitable Growth, released a recent working paper showing the benefits of UI extensions to improve the quality of job matches for women, non-White workers, and less-educated workers—an understudied but important subject. Beyond Unemployment Insurance, Kugler’s research looks at labor markets and policy evaluation in developed and developing countries, as well as the role of public policies such as payroll taxes, employment protections, occupational licensing, and immigration.

Quote from Adriana Kugler on immigration policies

Juliana Londoño-Vélez 

University of California, Los Angeles 

Juliana Londoño-Vélez is an assistant professor of economics at the University of California, Los Angeles, a faculty research fellow at the National Bureau of Economic Research, and a 2018 Equitable Growth grantee. Londoño-Vélez’s research focuses on inequality and redistributive tax and transfer policies, including research on developing countries such as Colombia. In her Equitable Growth-funded research, Londoño-Vélez investigates the feasibility of wealth taxation in developing countries. 

Quote from Juliana Londono-Velez on tax enforcement

Marie Mora

University of Missouri-St. Louis 

Marie Mora is the provost & executive vice chancellor for academic affairs and professor of economics at the University of Missouri-St. Louis. As a labor economist for 25 years, Mora is a leading voice on education and employment outcomes within/among the Latinx population in the United States. As briefly presented by the Institute for New Economic Thinking, poverty and migration can drive lower outcomes in education and labor opportunities among Latinx groups, including U.S. born individuals. She has also given talks on the lack of access to capital Latinx groups face, which is increasingly evident in today’s recession. In August 2020, Mora obtained the national Presidential Award from the White House Office of Science & Technology Policy and administered by the National Science Foundation for her excellence in mentoring. She continues to play a major role in supporting graduate students and faculty from diverse backgrounds—as evidenced by her leadership of the American Economic Association Mentoring program, as well as long-standing commitment to the Diversity Initiative for Tenure in Economics Program and the NSF ADVANCE Program.

Quote from Marie Mora on disaggregating Hispanics

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. 

Can policymakers reverse the unequal decline in middle-age U.S. homeownership rates?

Posted on by Maria Monroe
Housing is often an important source of wealth accumulation for low- and middle-income families.

Overview

Homeownership in the United States has long functioned as a wealth equalizer, allowing middle-class families to build wealth while they pay for their housing costs. Because houses have generally appreciated at rates that exceed inflation, housing is often an important source of wealth accumulation for low- and middle-income families, which are generally not invested in stocks or other financial investments. In fact, for the middle class (defined here as the middle quintile by income), home equity represents an average of 42 percent of all wealth held by the average family.

The ability of middle-class families to build equity through homeownership historically allowed these families to somewhat keep pace with the growing value of financial investments held by those at the top of the income distribution. Middle-class families generally enter homeownership following key lifecycle events such as getting married and having children. And as they pay off their mortgages and their houses appreciate in value, they steadily accumulate the housing wealth they will need to help support themselves in retirement.

Can policymakers reverse the unequal decline in middle-age U.S. homeownership rates?Download

But this pillar of middle-class wealth creation is under threat. The Great Recession of 2007–2009 and the long, tepid recovery that followed it interrupted the standard lifecycle progression of rising homeownership by age for younger generations. The result is that current rates of homeownership are now lower than they were for older generations at comparable ages.

In addition, total housing wealth in the United States continues to be depressed relative to the period prior to the Great Recession. Last week’s release of the Federal Reserve’s 2019 Survey of Consumer Finances shows that inflation-adjusted housing wealth declined 13 percent between 2007 and 2019.

In this issue brief, we focus on families with middle-aged heads of households. These families have suffered a persistent decline in homeownership just as they are preparing for retirement, when owning a house provides an important source of financial security. These families are at risk, and policymakers should act to make homeownership more accessible to them and all Americans. Restructuring mortgages to take account of macroeconomic shocks and changing tax incentives for homeownership are two ways we can tackle the problem.

Why focus on families with middle-aged heads of households?

Economic narratives often focus on declining homeownership for the youngest generations entering the workforce. This is because buying a house is seen as a foundational step toward financial security. The drop in homeownership at young ages is concerning, and economic forces such as reduced earnings prospects and higher student debt burdens may be limiting homeownership for millennials.

Yet some of the long-run decline in homeownership among the youngest families is the result of delayed entry into homeownership because of demographic factors such as declining marriage rates and fewer children. Indeed, 2019 SCF data show a small uptick in homeownership among young families between 2016 and 2019—defined here to include those younger than 45—that would be consistent with delaying rather than completely foregoing homeownership. Still, homeownership rates for the young remain below 2007 levels.

The slight improvement in homeownership for the young between 2016 and 2019 does not extend to the middle-age group. The decline in homeownership among middle-aged (ages 45 to 64) families since the Great Recession has been relatively larger and more persistent. In 2007, 79 percent of U.S. families in the middle-age group owned their homes, and in 2019, that fraction was only 72 percent. (See Figure 1.)

Figure 1

Percent of families who own a home in the United States, by age group and year

The consequences of this dramatic shift in homeownership for middle-aged families are serious. Just as these families are nearing retirement and should be actively preparing for it, many have lost their most important financial asset or find themselves unable to invest in a house for the first time. The upshot: Typical lifecycle wealth accumulation patterns are no longer working in their favor.

The overall decline in homeownership among the middle-age group is 7 percentage points since prior to the Great Recession, meaning nearly 1 in 10 families who would have owned their home going into retirement prior to the Great Recession are now likely to enter retirement as renters. These families will now have to worry about rental-housing costs in addition to the other costs of supporting themselves when they retire and their income declines—and without any home equity to fall back on.

Inequities in middle-aged homeownership

The Fed’s 2019 SCF data release also makes it possible to better understand which families within the middle-age group have experienced declining homeownership since the Great Recession. Unsurprisingly, the decline is greatest for Black and Hispanic families and for those in lower income brackets. In contrast, the top 10 percent of middle-aged families, ranked by income, saw an increase in homeownership between 2007 and 2019. (See Figure 2.)

Figure 2

Percent of families in each group who own a house, 2007 versus 2019

Homeownership among Black middle-aged families declined a staggering 14 percentage points between 2007 and 2019, while Hispanic middle-aged families experienced an alarming 12 percentage point drop. There was a decline among White non-Hispanic middle-aged families as well, but it was a much more modest 4 percentage point decline and relative to a much larger 2007 base. In 2019, nearly 80 percent of middle-aged White non-Hispanic families owned their homes, while the corresponding values for Black and Hispanic middle-aged families were only 50 percent and 60 percent, respectively.

Differences by income also paint a picture of stark and unequal homeownership rates. The bottom 50 percent of families by income saw an 11 percentage point decline in homeownership between 2007 and 2019, while those in the next 40 percent by income saw a more modest 4 percentage point drop. The top 10 percent of families by income saw an increase in homeownership of 2 percentage points between 2007 and 2019.

On net, the homeownership gap between the top 10 percent and bottom 50 percent of families by income jumped from 29 percentage points in 2007 to 42 percentage points in 2019. Fully 97 percent of middle-aged families in the top 10 percent by income owned their home in 2019, while only 55 percent of middle-aged families in the bottom half of the income distribution were homeowners.

The widening homeownership gap understates the severity of the problem. This is because the amount of equity that families have in their homes also declined. Overall, home equity is down 11 percent, and this decline is inequitably distributed, just as the decline in homeownership is. White families experienced declines in their home equity of about 10 percent, while Black families suffered a staggering 35 percent drop and Hispanic families a 29 percent decline, compared to before the housing crisis in 2007.

As with homeownership, the only place on the income ladder where families are building up their home equity is in the top 10 percent of families by income, where equity is up 13 percent. In the bottom 50 percent of families by income, equity is down 24 percent. (See Table 1.)

Table 1

Real average home equity in 2007 and 2019, middle-aged (25 to 64 years old) families in 2019 dollars

These drops mean that vulnerable families are less able to take equity out of their homes as a guard against hard times. Given the parlous state of retirement savings in the United States among low- and middle-income families, declining home equity is another kick in the teeth for many families.

Policy prescriptions

These dire trends in homeownership for middle-aged families are both stark and foreboding. Accumulating wealth through homeownership does not happen overnight. Housing appreciation and mortgage repayment is a slow and steady process, and there are generally ups and downs in the housing market along the way. As we contemplate the prospects for changes in U.S. homeownership policy, it is important to delve into the systematic problems that bring us to this point and address those problems directly.

Historically, the focus of U.S. policy toward homeownership allowed tax deductions for mortgage interest. The benefits of those policies are very skewed toward higher-income families, and it’s not clear they even really impact homeownership rates more broadly.

Despite recent legislative changes in the deduction for mortgage interest, the tax benefit of mortgage interest deductibility still cost U.S taxpayers $36.9 billion in Fiscal Year 2020 ending September 30, 2020. That number is just $10 billion less than what the administration requested to fund all of the U.S. Department of Housing and Urban Development for fiscal year 2021.

How might government resources be better-allocated to address inequities in homeownership? One possibility is to directly expand the supply of affordable housing and assist those currently shut out from access to homeownership so they can start investing their rental payments in their own wealth accumulation. Such a policy might be accompanied by redirecting other forms of housing assistance into owning homes rather than renting them. One way could be through repurposing Department of Housing and Urban Development Section 8 vouchers, which provide rent support to low-income households.

Taking an even broader perspective, however, it may be time to recognize that the mortgages predominantly used in U.S. housing finance—and explicitly promoted by the federal government—place an undue amount of risk on families who own their homes. The question is not whether lower-income and disadvantaged families have the resources during normal times to pay monthly housing costs—most of those families do pay those costs, just in the form of rent. The question is what happens to their ability to pay for housing when they experience a large macroeconomic shock.

It is well-known that macroeconomic shocks such as the Great Recession of 2007–2009 and the current coronavirus recession cause disproportionate job and income losses among lower-income and non-White families. The higher income volatility these families face makes it more difficult for them to qualify for a mortgage, especially under the tighter standards in place since the Great Recession. And even if a family manages to enter homeownership prior to the next macroeconomic shock, they are more likely to fall behind on payments and lose their home when the next shock occurs.

This reinforcing dynamic of higher vulnerability to macroeconomic shocks leading to lower homeownership and wealth accumulation should be the starting point for new policies to address rising inequities in homeownership among middle-aged families. The existing U.S. regulatory environment focuses on whether a family can be expected to have the steady income stream needed to keep up with mortgage payments should another macroeconomic shock occur. But that approach is backwards.

Instead, policymakers should develop new approaches to managing employment and income risk so that prospective homeowners among families who currently face barriers to homeownership can safely buy homes. Policymakers should enable the most vulnerable to become homeowners rather than simply accepting unequal employment and income risk and using that to justify stringent mortgage requirements.

Recognizing that macroeconomic shocks are more likely to harm families financially—particularly those historically excluded from homeownership—should be the basis for new policies that directly address the dynamic of steady employment and wealth accumulation. Policies can and should tie mortgage payment obligations to macroeconomic shocks, so that banks and prospective homeowners can enter mortgage contracts with confidence, knowing that the terms of those contracts are explicitly tied to economic realities.

The CARES Act passed in March 2020 provided the option of forebearance to homeowners experiencing pandemic-related economic hardship, but many families are still needlessly delinquent. This underscores the need to automatically connect government policy to macroeconomic reality, and homeowner relief is an important addition to the list of automatic stabilizers that should be in place to help prevent economic shocks from becoming worse.

Although the overall financial situation of homeowners is less perilous than before the financial crisis, some of that improvement is because the families facing the most uncertain finances have been excluded from homeownership. Even so, many families continue to face the risk of losing their homes, and there is still more to be done, for example, by streamlining refinancing and providing immediate payment relief.

But even more important is implementing policy changes focused on the group of middle-aged, would-be homeowners—the additional 7 percent of middle-aged families who would have owned homes in 2007 but are renting in 2019. Tying effective homeowner relief policies to macroeconomic reality means that potential buyers and lenders can enter into mortgage contracts with confidence, and policymakers can focus on raising rates of homeownership without creating unmanageable risk. 

Failure to improve homeownership policy means accepting that many middle-aged families will continue to be shut out of the housing market as they draw closer and closer to retirement. Unless policymakers act soon, the U.S. economy can expect many more struggling retirees in the years and decades ahead.

Posted in Uncategorized

Brad DeLong: Worthy reads on equitable growth, October 6-13, 2020

Posted on by Maria Monroe

Worthy reads from Equitable Growth:

1. I was going to note this a while ago, but it vanished into THE PILE, and I have only now managed to dig it out. Read Heather Boushey and Somin Park, “The coronavirus recession and economic inequality: A roadmap to recovery and long-term structural change,” in which they write: “The coronavirus pandemic presents a new and unprecedented challenge to the United States. First and foremost, it is a public health crisis that makes it impossible for our society and our economy to function as usual due to the necessary social distancing required for the health of us all. Because the federal government neither acted early enough to contain the deadly coronavirus nor swiftly enough to forestall mass layoffs, our nation is now facing a health crisis and economic recession simultaneously. What’s more, the underlying problems of U.S. economic inequality today will only prolong and deepen this coronavirus recession … Only a decade has passed since the end of the previous global financial crisis … Decades of failed economic policies, based on ideology instead of evidence, and a blind adherence to the idea that markets can solve every problem, have made our economy and our society more vulnerable…. Broad policy principles to help guide policymakers … [are to] recognize that markets cannot perform the work of government. Address fragilities in our markets themselves. Keep income flowing to all the unemployed workers and small businesses now and in future crises. Ensure those who are still employed can stay employed. Produce headline economic statistics that represent the well-being of all Americans …To have any chance of emerging on a stronger footing as a nation with less economic inequality and more sustainable economic growth, policymakers need to enact a robust set of protections that will ensure high-end inequality is contained, build counterweights to concentrated power, and provide economic security for all now and going forward.”

2. The de-unionization of the United States has had an enormous number of bad consequences that we are still digging through. Here is one more, courtesy of Alexander Hertel-Fernandez and Alix Gould-Werth. Read “Labor organizations and Unemployment Insurance: A virtuous circle supporting U.S. workers’ voices and reducing disparities,” in which they write: “We identify descriptive evidence that: Labor organizations facilitate the use of unemployment benefits and, in the process, help close troubling racial and educational gaps in access to Unemployment Insurance. Greater access to Unemployment Insurance amid the ongoing coronavirus recession leads workers to feel more comfortable engaging in workplace collective action to demand better safety and health standards. Together, labor organizations and Unemployment Insurance form a “virtuous circle,” in which greater access supports workplace collective action, including forming labor unions, which, in turn, support greater access to unemployment benefits. These findings suggest[:]… U.S. labor law and Unemployment Insurance policies should complement one another. Federal and state governments should support unions and worker organizations in connecting workers with the Unemployment Insurance system … A European model, in which unions or worker organizations directly administer unemployment benefits on behalf of the government … should [be] consider[ed] … given the strong level of public support for such a model.”

Worthy reads not from Equitable Growth:

1. I’m starting a DeLongToday weekly half-hour video series. On Wednesday October 7, I did the U.S. economic outlook. It is not good: Watch me at “DeLongToday.” The next broadcast begins at 10:00 a.m. EDT on Wednesday, October 14, and stay for a 30 minute “BRADCHAT” Q&A.

2. Kleptocracy comes to the United States, big time, naked, and proud. Read Ben Thompson, “The TikTok Deal, The Wrong Danger, TikTok Takeaways,” in which he writes: “I don’t put a whole lot of stock in Oracle’s overview: First, there was no indication that Oracle has any sort of legal responsibility for the TikTok algorithm. Apparently they will check it because they promise to? Second, I don’t have much faith that Oracle has the capabilities to truly check the algorithm, both because it is machine learning derived (and thus constantly evolving, even as it is individual tuned to subscribers), and also because all of the documentation is in Chinese. Third, the fact that ByteDance can deliver a code dump to Oracle has precious little to do with whatever it is that TikTok is actually doing in real time, both in terms of censorship and propaganda. Indeed, this entire bit seems so impractical to me that it is hard to interpret it as anything other than a sop to people like me who actually think this is a real issue. In short, this deal is the worst possible outcome: First, there is at best a marginal gain in U.S. data security, which probably wasn’t a concern in the first place. Second, there are only fig leaf improvements to the question of the recommendation algorithm, which will have zero impact on very real concerns around the Chinese Communist Party’s ability to censor and push propaganda to U.S. consumers. Third, the very concept of the rule of law is in shambles, as the only real change from the original Microsoft deal is to ensure that ByteDance keeps the company while Trump donors get a cloud deal. This last point can’t be made enough: this deal is significantly worse than the original Microsoft deal that Trump squashed, but unfortunately for Satya Nadella, he wasn’t a big Trump donor. I hate to be cynical, but it’s honestly hard to see what else mattered.”

Posted in Uncategorized