Unemployment rates in the United States are currently higher than they were at height of the Great Recession, standing at 11.1 percent in June after declining from a record high of 14.7 percent in April, compared 10.6 percent at the height of the previous recession in January 2010. Amid the deepening coronavirus recession, Unemployment Insurance is critical to keeping families afloat and bolstering our economy, just as the program has been throughout economic downturns since its federal inception in the Social Security Act of 1935.
Then and now, however, there is a common public narrative that purports generous and lengthy access to Unemployment Insurance is a disincentive to work, with people choosing to stay home and receive benefits rather than return to work. New cutting-edge research examining unemployment benefits and unemployment rates during and after the Great Recession demonstrates that was not the case then—with key implications today as Congress and the Trump administration negotiate whether and how to extend the Pandemic Unemployment Compensation program beyond the end of this month.
Forthcoming in the American Economic Journal: Economic Policy, the paper is titled “Unemployment Insurance Generosity and Aggregate Unemployment,” by Christopher Boone of Cornell University, Arindrajit Dube of University of Massachusetts Amherst, Lucas Goodman of the U.S. Treasury Department, and Ethan Kaplan of the University of Maryland, College Park. Their new research reveals that emergency Unemployment Insurance and extended benefits during and after the Great Recession did not increase unemployment rates between counties with longer access to those benefits, compared to those with shorter access. The four researchers find that overall bad economic conditions, such as those which occurred more than a decade ago and are evident again today, determine U.S. labor market outcomes more than generous access to unemployment benefits.
Prior to the steep downturn this year, the Great Recession was one of the biggest economic crises in a lifetime. Policymakers responded by instituting large increases in the duration of Unemployment Insurance, from 26 weeks to 99 weeks, but there were variations across states in both magnitude and timing. These changes were executed through the Emergency Unemployment Compensation program enacted by Congress on June 30, 2008 and modified seven times subsequently, as well as through the already-existing Extended Benefits program that provided 13 weeks or 20 additional weeks of Unemployment Insurance triggered by the level or pace of increase of a state’s unemployment rate.
Those triggers for Extended Benefits, however, are optional for states to take up, so many states opted out of providing more generous benefits in the Great Recession, resulting in variation between states in the duration of benefits available to unemployed workers. Both changes in policy over time through the Emergency Unemployment Compensation program and changes between states through the Extended Benefits program allow for what economists call a natural experiment to examine the impact of greater generosity in unemployment benefits on aggregate employment.
Boone, Dube, Goodman, and Kaplan implement what’s known as a cross-border-pair methodology—which examines differences in policy outcomes in similar regions of the economy and was pioneered by economists David Card and Alan Krueger—alongside an event study design, both with the Quarterly Census of Employment Dynamics, to test whether the long duration of unemployment benefits increased aggregate unemployment in states with more generous Unemployment Insurance. The four researchers find that the longer duration of benefits and the greater the increases to benefits result in a very small, positive impact on employment rates within those counties, with their results not statistically different than zero. While the overall employment-to-population ratio declined by 3 percentage points during the Great Recession, counties with more generous benefits may have offset this somewhat, or at least did not have worse employment outcomes.
Their paper directly challenges previous research that finds negative impacts on county employment rates as a result of longer Unemployment Insurance benefits, particularly work by Marcus Hagedorn of the University of Oslo, Iourii Manovskii of the University of Pennsylvania, and Kurt Mitman of Stockholm University. They followed a similar methodology. Boone, Dube, Goodman, and Kaplan rectify these discrepancies by noting that their paper makes use of superior administrative data in the Quarterly Census of Employment and Wages. The four researchers also critique the methodology of the previous research for using a “quasi-forward differencing” as a dependent variable based on anticipation of policy changes rather than the actual policy changes, and for examining a shorter time horizon.
Boone, Dube, Goodman, and Kaplan also address other critiques of the cross-border-pair methodology by dropping counties where employment was correlated with state levels of employment and by including county fixed effects. Their results did not change when dropping potentially spurious counties. Boone, Dube, Goodman, and Kaplan also note that their findings align with additional research using alternative methodologies that find similar insignificant impacts of duration generosity.
This cutting-edge research from the previous economic downturn demonstrates that benefit generosity in an economic crisis does not negatively impact employment levels, prolonging the labor market downturn. As the policy debate over extending more generous unemployment benefits will surely continue throughout the current recession, this new research supports the proposals included in Equitable Growth and the Hamilton Project’s Recession Ready essay compilation that calls for increased generosity in Unemployment Insurance, as well as triggers that extend the duration of benefits based on state-level unemployment rates.
The United Artists Theatres in Berkeley, CA., is one of the many venues that was forced to close at the onset of the coronavirus pandemic.
Under the Coronavirus Aid, Relief, and Economic Security, or CARES, Act,the Pandemic Unemployment Compensation program added a $600 weekly boost to Unemployment Insurance payments. Despite being one of the most effective policy responses to the coronavirus recession yet, the enhanced payments are set to expire at the end of July. The idea that Unemployment Insurance creates incentives for workers to remain unemployed has emerged as the main argument against extending the additional weekly $600, with critics arguing that generous benefits are “undermining the economic recovery.”
As this factsheet points out, current labor market indicators show jobless benefits have a negligible effect on unemployment levels. But the enhancements to Unemployment Insurance have a big impact on the economy and have set in motion a virtuous cycle that helps workers weather an economic crisis while keeping demand for goods and services from plummeting. Here are the facts.
The coronavirus health crisis—not enhanced unemployment benefits—are behind the spike in unemployment
Even after strong employment gains in May and June, the U.S. economy has lost 15 million jobs since February, and new unemployment claims have stood above their Great Recession high for 15 straight weeks. The absence of safe working conditions, a sharp drop in consumer spending, and lack of support for parents and caregivers are preventing millions from working.
More specifically:
Using real-time data from small businesses, a team of economists find that the states where benefits replace a greater portion of workers’ wages experienced the smallest drop in hours of work in March and, as of early June, the strongest recovery. Another analysis finds that receiving jobless benefits had no effect on workers’ likelihood of finding a job.
The U.S. vacancy yield, which measures the ratio of hired workers for every job opening, shows that employers are now filling open positions faster than at any point since February 2012. Lack of opportunities to work, not a disincentive to work, are keeping unemployment elevated. (See Figure 1.)
Data from Indeed.com—a widely used job-search website—show that there were 23 percent fewer job openings in early July 2020 than in the same moment the previous year. Data from the U.S. Bureau of Labor Statistics show that there are now almost four unemployed workers for every job opening.
Figure 1
Concerns about work disincentives overstate the negative impact of jobless benefits on employment and minimize the positive impacts evident in economic research
There is no academic consensus on the effect of the duration or generosity of unemployment benefits on employment. Research shows, however, that any effect these benefits might have on overall unemployment is small and likely to be weaker in downturns than in booms. Consider:
Cutting-edge research on the duration of Unemployment Insurance finds that the expansion of jobless benefits during and after the Great Recession had a negligible effect on unemployment rates. When comparing similar workers facing similar labor market conditions, states where workers could get benefits for longer did not have higher rates of unemployment.
By providing a lifeline when jobs are scarce, Unemployment Insurance can keep workers engaged in searching for jobs even when jobs are hard to find, keeping many from dropping out of the labor force altogether.
Unemployment Insurance provides liquidity to the workers who need it the most, getting cash in the hands of those more likely to spend it. Those who have been hardest hit by the crisis—Black, Latinx, and low-income households—are less likely to have the liquid financial assets needed to maintain their consumption when their earnings suddenly go down.
Until the coronavirus pandemic and recession are under control, rolling back unemployment benefits will exacerbate the public health crisis and deepen the downturn
Under normal circumstances, Unemployment Insurance allows workers to put food on the table as they search for suitable work, supporting overall economic activity. In the context of a global pandemic and the sharp recession it sparked, providing workers with time and financial resources as they search for suitable work is even more crucial. Specifically:
Without adequate health and safety workplace standards, face-to-face jobs will put millions of workers at risk. Workers need time and resources to search for suitable work that will not jeopardize their health or public health.
In the economics literature, the concept of compensating wage differentials describes the additional earnings needed to offset the negative risks associated with some jobs. The true costs to workers of being exposed to a deadly virus in a pandemic is not reflected in the pre-pandemic wage levels used to calculate benefit amounts. Enhanced Unemployment Insurance allows workers to make decisions based on safety rather than desperation during the pandemic.
The Economic Policy Institute estimates that extending Pandemic Unemployment Compensation payments through mid-2021 would provide 5.1 million jobs by maintaining demand for goods and services.
The emphasis on work disincentives serves to exclude Black and low-wage workers and reflects racist biases against low-income workers of color
As with other safety net programs, opposition to a robust Unemployment Insurance system often acts to prevent workers of color from receiving their fair share of unemployment benefits. This is especially true for Black workers. Consider:
Despite applying for Unemployment Insurance at similar rates than unemployed White workers, unemployed Black workers—and especially unemployed Black women workers—have been much less likely to receive benefits. States with a higher share of Black workers tend to have less generous jobless benefits. For Black workers, an estimate shows, the average maximum weekly benefit is $40 short of that received by White workers. (See Figure 2)
Figure 2
Depending on the state, the withdrawal of the additional $600 would lead to a median cut in benefits of 52 percent to 72 percent. The drop would be of 71 percent in Arizona, 71 percent in Louisiana, and 72 percent in Mississippi.
Conclusion
As a number of states reinstate lockdowns due to the recent surge in coronavirus cases and COVID-19 deaths, the prospect of a quick economic recovery is becoming increasingly unlikely. Concerns about work disincentives fail to recognize that job displacements have consequences beyond the loss of wages. Most workers find inherent value in their work and care about benefits, career advancement opportunities, and their long-term economic security.
If Congress lets the Pandemic Unemployment Compensation program expire, then those who have already been hardest hit by the downturn—Black workers, Latinx workers, women workers, and low-wage workers—will be most affected, making the current crisis longer and more severe.
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 will highlight scholars in the Equitable Growth network and beyond who are at the frontier of social science research. We encourage you to learn more about both the researchers featured below and our broader network of experts.
The future health and stability of the U.S. economy depends on our ability address the roots of longstanding racial inequalities. Continuing the theme from last month’s installment of “Expert Focus,” we highlight Black scholars whose cutting-edge research is influencing our understanding of the historic and persistent role that structural racism plays in driving wealth and income inequality for Black Americans particularly.
Peter Blair
Harvard University
Peter Blair is an assistant professor of education at Graduate School of Education of Harvard University, where he co-directs the Project on Workforce and serves as the principal investigator of the Blair Economics Lab—a research group with partners from Harvard University, Clemson University, and University of Illinois Urbana-Champaign. He received an Equitable Growth grant in 2019 to study the impacts of state-by-state occupational licensing policies on wage and employment outcomes for individuals with a previous felony conviction. Blair’s professional interests are broad in scope—he recommends that businesses wanting to address systemic racism in hiring and management should focus on job skills, rather than continuing to privilege college degrees, and has shared his views on the importance of mentorship, particularly to support diversity in the economics profession.
Terry-Ann Craigie
Connecticut College
Terry-Ann Craigie is an associate professor of economics at Connecticut College and economics fellow at the Brennan Center for Justice. She recently joined the Opportunity & Inclusive Growth Institute at the Federal Reserve Bank of Minneapolis as a visiting scholar. She is a labor economist who studies the intersections of mass incarceration, criminal justice reform, and labor markets. Her current research examines the economic and social costs of mass incarceration within the U.S. labor market context, as well as the implications for racial justice. In her most recent study, she evaluates the impact of “Ban the Box” policies on the public employment of people with criminal records and tests whether these policies lead to discrimination against young males of color.
Ellora Derenoncourt
Princeton University
Ellora Derenoncourt recently joined the University of California, Berkeley as an assistant professor in the Department of Economics and the Goldman School of Public Policy. She was previously a postdoctoral research associate in the Economics Department at Princeton University and has received several grants from Equitable Growth, including one as a graduate student for her work, in collaboration with Claire Montialoux of the University of California, Berkeley, on the historical determinants of racial gaps in earnings and upward mobility. That research resulted in a recent working paper that found a dramatic reduction in the racial earnings divide in the United States through a reversal of racist and exclusionary wage policy. Watch her discuss her and Montialoux’s research here at the Allied Social Sciences Associations’ 2020 annual meeting.
Damon Jones
University of Chicago
Damon Jones is an associate professor at the University of Chicago Harris School of Public Policy working at the intersection of public finance, household finance, and behavioral economics. His work has provided important insights into the ongoing debates around economic security and opportunity, universal basic income, retirement, and tax. He recently testified at a U.S. House of Representatives Committee on the Budget hearing about health and wealth inequality in the United States and how health and wealth interact with the current coronavirus pandemic. His recent working paper shows that income shocks affect Black and Hispanic households more strongly than their White counterparts, as a result of the persistent racial and ethnic wealth divide in the United States.
Equitable Growth is building a network of experts across disciplines and at various stages in their careers 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.
One of the explanations for this job-quality crisis is that not enough workers have the skills required for an increasingly digital and technologically advanced jobs market, leading to a widening gap between the rising wages of the highest-paid workers and everyone else. The concept of a skills gap was likewise blamed for high unemployment after the Great Recession ended in July 2009 and is now cited as the key challenge facing low-wage workers amid the current coronavirus recession. The proposed solutions to closing this apparent gap center around education and training for low-wage workers, often with a focus on getting more workers to obtain college degrees, so they can fill these high-wage, high-demand jobs.
Yet this focus on individual workers misses the structural conditions that constrain workers’ options and ability to share in economic growth. This issue brief examines recent data-driven research that demonstrates the skills gap is only a small and relatively unimportant explanation for the college wage premium because it fails to account for declining worker power and the role of monopsony in the labor market. These more important explanations for the college wage premium—and its recent decline—underscore why policymakers need to improve the underlying labor market conditions for all workers, instead of shifting responsibility to those already struggling in an uneven playing field.
The college wage premium can’t explain the ongoing rise in wage inequality
A recent National Bureau of Economics Research working paper by economists David Autor at the Massachusetts Institute of Technology (and a member of Equitable Growth’s Research Advisory Board) and Claudia Goldin and Lawrence F. Katz (also an Advisory Board member) of Harvard University demonstrates how the college wage premium changed over time in response to labor market changes and policy shifts affecting worker power. While the paper itself is based in a skills-focused framework, its findings show that even this framing falls short when attempting to explain the rise in wage inequality since 2000.
The paper is part of a series of research that assumes employers’ demand for skilled labor is driven by “skill-biased technological change.” This framework holds that technological advancements—such as computers or robotics—improve the productivity of workers with the skills and education necessary to use the technology more than they improve the productivity of less-skilled workers. The result is a “race” between technology and education, where technological advancements lead employers to require more highly educated workers, but immediate shortages in the supply of educated workers result in higher wages for the college-educated candidates already in the workforce.
This framework is premised on a simplistic supply-and-demand model of the market that supposes wages are purely a result of demand for worker attributes and those attributes explain wage levels for individual workers. In framing wage distribution and outcomes in this way, it overlooks other important factors such the influence of institutions, including unions, and the relative power of workers and employers in changing labor markets.
The new paper expands on previous research, including a 2007 paper by Goldin and Katz, “The Race Between Education and Technology,” which tracked the differences in wages for workers with different education levels from 1890 to 2005. This paper combines several data sources to extend that analysis to look at the relationship between years of schooling and wages over the period from 1825 to 2017.
In line with previous research, the latest paper by Autor, Goldin, and Katz finds that when demand for educated workers is high and supply is low, such as in the late 1800s, the wage premium for educated workers—defined as the average difference between their wages and those of less-educated workers—is high. When the supply of educated workers increases, as it did over the early part of the 20th century, the wage premium falls. The definition of a relatively eduated or skilled worker shifts over time, of course, depending on eduation trends and available data sources, beginning with those who did clerical work (which generally required a high school background) prior to 1914 and then tracking those with high school and college degrees or equivalents.
Since the beginning of the 20th century, the three researchers find that a 10 percent increase in the relative supply of college-educated workers leads to a 6 percent reduction in the college wage premium. The paper argues that models using this framework can explain most of the wage premium for educated workers—but only until the 2000s, when other factors appear to play a larger role.
As the authors note, the wages of educated workers only describe one side of the education wage premium. Because wage premiums refer to the difference between earnings for educated and less-educated workers, they depend not only on the added value for educated workers but also the opportunities for workers without that educational background. The strong decline in wage premiums for high school and college educations in the 1940s probably did not happen because the supply of educated workers increased dramatically—in 1940, the reach of high school education had expanded, but only 6 percent of men and 4 percent of women had completed 4 years of college. Instead, the authors write, the lower relative returns to education in the 1940s were “likely driven by strong unions, tight labor markets, and government wage pressures during World War II.”
Likewise, the three authors find that the strength of American unions and a robust national minimum wage also contributed to a decline in the college wage premium in the late 1970s. This happened because wages improved for those in occupations that did not require a college degree.
When the three authors examine more recent wage patterns, they find that wage inequality rose at roughly the same rate between 1980 and 2000 as it did between 2000 and 2017, but also that the college wage premium could explain 75 percent of this increase in the first time period and only 38 percent in the second time period. Furthermore, wage inequality increased within college degree holders since 2000, and workers with advanced post-college degrees earned even greater wage premiums.
The authors conclude that the framework of a race between education and technology “remains relevant in the 21st century, but needs some tweaks” to fully capture the drivers behind the rising wage inequality the United States experienced since 2000.
Rising education requirements are not necessarily due to increasingly skilled work, and the returns of a college education are often less for the workers who need it most
One of the factors complicating a straightforward interpretation of the college wage premium is that employers often require college degrees for positions for reasons other than the content of the role’s duties. One way this is evident is when employers often raise job education requirements during times of high unemployment, when there are many candidates for jobs, but may also drop these requirements when the labor market tightens. Over time, as a greater share of workers earns college degrees, education requirements may continue to rise—but, crucially, not because the duties of the job require greater skill or education levels.
As a paper by Paul Beaudry of the University of British Columbia and the National Bureau of Economic Research, David A. Green of the University of British Columbia and Institute for Fiscal Studies, and Benjamin M. Sand of York University found, the decline in demand for college degrees since 2000 led many college-educated workers to take jobs that did not require a degree, which, in turn, pushed workers without degrees down into even lower-wage jobs. The Roosevelt Institute also notes that requiring unnecessary degrees drives more students to attend college, often taking on large amounts of debt in the process, because they’ve been told they can’t afford not to.
The evidence is clear that while a college degree is increasingly a requirement for middle- and high-wage jobs, it is not a guarantee of higher earnings, especially for people of color. Discrimination and occupational segregation continue to limit wages and economic opportunity for Black and Latinx workers and intersect with gender discrimination to additionally lower wages for Black women and Latinas. The new NBER working paper by Autor, Goldin, and Katz examined in the previous section of this issue brief did not break out college wage premiums by race and ethnicity, but other research shows that Black and Latinx workers with college degrees continue to earn lower wages than White workers with college degrees.
In addition, Black workers with college degrees experience higher unemployment rates compared with White workers with college degrees, as shown by economists Jhacova Williams and Valerie Wilson of the Economic Policy Institute. The two economists also find that Black workers are more likely to be underutilized in jobs that do not require a college degree.
Then, there’s evidence that shows how external factors limit the role of a college degree in driving economic mobility. As economist Brad Hershbein writes for The Brookings Institution, a college degree is still associated with higher earnings, on average, but actually benefits the wages of those from lower-income backgrounds less. Hershbein finds that college graduates from very low-income backgrounds—those from families below 185 percent of the federal povery level—see less of a relative income bump from their degree over the course of their careers than college graduates from higher-income backgrounds.
College graduates from very low-income families go on to earn 91 percent more than people from the same income background who only graduated high school, but college graduates from families with higher incomes earned 162 percent more compared with high school graduates from that income background. If the content of a college degree is the key to skilled work and greater economic mobility, then these findings should be the reverse. Instead, these findings—along with research on the role of household wealth and of student debt—show that the college wage premium is not a straightforward story.
The skills gap framing ignores the underlying dynamics of job quality and worker power
The new NBER paper by Autor, Goldin, and Katz demonstrates that the college wage premium declined when unions were strong and the real minimum wage was at its peak. The research shows that the college wage premium is less a story of supply and demand—let alone about the inherent value of a college degree—and more about other U.S. labor market factors such as the underlying dynamics of job quality and worker power. It is also the story of the opportunities for workers without a degree and the protections they have.
We see the importance of these factors in another recent NBER working paper, by Matthias Doepke of Northwestern University and Ruben Gaetani of the University of Toronto, which sheds more light on the intersection of skills, job quality, and worker protections. Comparing college differentials in the United States and Germany since 1980, the paper’s findings suggest that a major reason why the college wage premium has risen in our nation compared to Germany is that German employment protections reduce the number of worker separations from their employers and encourages employers to invest in workers.
Doepke and Gaetani’s model suggests that the very precarity and lower-quality of jobs in the United States do not allow these workers to develop skills over time in the same way that college-educated workers can. This bolsters the idea that part of the cause for the college wage premium is higher-wage workers’ bargaining power.
Ultimately, the skills-focused competitive market approach needs more than a tweak to fully capture the forces shaping earnings for workers. As Equitable Growth Labor Market Policy Director Kate Bahn explains, the idea that a skills gap is at the root of wage inequality ultimately ignores the role of unions, worker power, and the broader policy decisions affecting low-wage workers. In a recent Equitable Growth working paper by Bahn and Mark Stelzner of Connecticut College, the authors demonstrate how barriers to job search by race and ethnicity, particularly lack of access to wealth for workers of color and women workers, means that these workers face more difficulty managing their lives and job searches while being unemployed longer without earnings.
Because workers from marginalized groups can’t afford to wait for better job opportunities, employers wield a greater ability to offer lower (discriminatory) wages. Fostering worker bargaining power through pro-labor institutions, such as supporting union organizing and enforcing anti-discrimination laws, reduces the ability of employers to use their monopsony power to exploit workers by race and gender. Similarly, other research shows that raising the minimum wage directly benefits low-wage workers, reducing income inequality and narrowing racial wage disparities.
To reduce wage inequality, improve conditions for all workers, not just those at the top
As Equitable Growth noted in 2014, one of the results of assuming that education differences provide the main explanation for rising wage inequality in the United States is to lead policymakers to view college as a blanket solution for inequality. But the evidence from the Great Recession shows that the apparent skills gap is often driven by greater employer power in times of high unemployment, and that a college degree does not protect workers from low-paying, low-quality job options with no bargaining power and no opportunities to learn and grow. Focusing on education as the first and leading solution to wage inequality ignores the larger issues that undercut workers’ options and further racial disparities. While education and training are often part of what workers need to access quality jobs, they will not be sufficient without worker power to ensure they share in the productivity gains their value-added inputs create.
If past trends continue, policymakers can expect employers to respond to the current record-setting unemployment levels by continuing to raise education requirements. And many policymakers will attempt to respond to this sudden skills gap with calls for more education and training. But the solution to today’s dismal jobs numbers is not tell workers to go into debt acquiring credentials only to be rehired at the same types of jobs that had not previously required a degree. Instead, policymakers need to address the structural conditions shaping jobs and wages across the board, focusing on the needs of workers at the bottom of the income ladder. This will require raising the minimum wage to improve outcomes for the country’s most vulnerable workers, actually enforcing anti-discrimination laws to reduce pay disparities by race and gender, strengthening unions to give workers a voice in their working conditions and training opportunities, and checking the rising monopsony power that prevents workers from sharing economic growth.
1. The old Chicago-school argument was that market pressures would not allow employers to discriminate—not unless their customers strongly and immediately demanded it. This was always subject to a critique: to the extent that market discipline was not immediate and absolute, market power gave running room to bad actors. Now come Kate Bahn and Mark Stelzner to point out that even good actors with market power will reflect, transmit, and amplify discrimination elsewhere in the system: Kate Bahn and Mark Stelzner, “How racial and gendered pay discrimination persists under monopsony in the United States,” in which they write: “There are many obstacles in finding a job … [that] inhibit workers from moving freely … and thus give employers monopsony power … Because these obstacles more commonly confront women and non-White workers, employers have more power over such workers, which means employers can push their wages down more compared to White men … These racialized and gendered wealth disparities reinforce discriminatory pay penalties … Greater protections for collective action and a more pro-worker National Labor Relations Board … can limit the ability of employers to exploit workers based on their gender or race and ethnic backgrounds … Wage disparities, and monopsony power more broadly, are moderated by workers’ ability to act collectively as a countervailing force, and that kind of worker power is a function of institutional supports for collective action … A variety of factors intersect to result in discriminatory wage outcomes for workers along the lines of race, ethnicity, and gender, and likewise shows that a suite of policies in tandem that address these broad constraints would lead to more efficient outcomes and higher levels of social welfare.”
2. We have a Treasury. We have a Federal Reserve. We have an Internal Revenue Service. Those financial operations that can be done at scale and do not require the incentive of profit-seeking expertise—or that are hindered by the deployment of profit seeking expertise—should all be provided by the government. Why weren’t they so provided in the case of the Paycheck Protection Plan? Amanda Fisher asks the question, and give us an answer. Read her “Did the Paycheck Protection Plan work for small businesses across the United States.”
3. Back at the end of 2008 I lobbied the Obama administration to put the unemployed at work going door-to-door treating the chronic diseases of the uninsured. Win-win. Now the same logic applies, both at the federal and at the state level, to put the unemployed at work in public health. Win-win. The states may say they have no money. But states that suppress the coronavirus will end up having much more money, even in the short run, than states that do not. Read Delaney Crampton, “The United States needs a new Works Progress Administration to overcome the coronavirus recession,” in which he writes: “Our nation needs more tracking and tracing of cases so that people can be notified and help limit the contagion of others. Unfortunately, the implementation of contact tracing programs has been uneven … At the same time, more than 44 million Americans have filed for unemployment benefits in less than 4 months. These two dire and worrisome trends—one related to public health and the other economic—also create a singular opportunity. Policymakers could place millions of people searching for work into contact tracing jobs through a modern-day Works Progress Administration … In Massachusetts, the nonprofit global health organization Partners in Health has been tapped to spearhead the state’s new contact-tracing program. Already, it has hired and trained close to 1,000 contact tracers. They are paying workers $27 an hour for their time and providing all contact tracers with health insurance. Massachusetts is taking a step in the right direction, but there are estimates that the United States will need to hire as many as 300,000 contact tracers to track and prevent the spread of COVID-19.”
4. The relative material progress of Black Americans in the United States has been stalled since the 1970s. The black shadow of slavery and Jim Crow and its impact on the wealth distribution means that any “declining significance of race” has been offset by a rising significance of class. And then we need to add in the rising ossification of America’s class structure. Those of us who are African American do not forget this. Those of us who are not African American need to recall this many times each day: when we rise, and when we lie down; when we eat, and when we drink; when we work, and when we rest. Read Liz Hipple, Shanteal Lake, and Maria Monroe, “Reconsidering Progress This Juneteenth: Eight Graphics that underscore the economic racial inequality Black Americans face in the United States,” in which they write: “In observance of Juneteenth, the Washington Center for Equitable Growth is reflecting on the perceived progress made in the lives of Black Americans and highlighting evidenced-backed policy solutions needed to reduce economic racial inequality. Eight graphics on wages, wealth, and health: Black workers, especially Black female workers, have lower salaries than White workers with similar levels of education. While the median White male worker with a college degree earns $31.25 an hour, the median Black male worker with a college degree only earns only $23.08. This is only $5 more than a White male worker with a high school degree. Some of this wage gap is due to occupational segregation, but the majority of it is “unexplained” and is attributed to discrimination.”
Worthy reads not from Equitable Growth:
1. There is every reason to hope for a rapid economic bounceback toward full employment in Japan and Europe. But as best as I can see, Dan Alpert is right here: The right economic forecast for the short run here in the United States is one of fear and terror of a snowballing depression. Read his “The government needs to step in to save American businesses or the US is going to spiral into a second Great Recession,” in which he writes: “We have now entered the post-PPP Payroll Lay Off Phase (PLOP) of the COVID-19 Pandemic Recession of 2020 in the United States. Efforts by the federal government to soften the blow to businesses and households were bold—but we can see clearly now, not sufficient. America is still hemorrhaging jobs … Workers … not being “re-employed” … but … rather being “re-payrolled”… to meet the requirements of the Payroll Protection Program (PPP) … Many of the 4.9 million borrowers under the program may not be viable as ongoing enterprises. Even more will be non-viable unless they now cut costs and jettison a good number of the workers they added back to payrolls with the PPP dollars. The evidence of this re-furloughing and resumed layoffs is rolling in now like thunder … In addition to the 50 million claims above, there have been 8,792,890 in aggregate initial claims for unemployment insurance benefits made by self-employed persons under the Pandemic Unemployment Assistance Claims (PUAC) program, over one million in just this past week alone … It would be a mistake … to conflate these persistently high initial claims numbers with the new peaks in COVID-19 cases in the Southern and Western states. The data could not more clearly illustrate the opposite to be true … The layoffs and furloughs that are behind the continuing (and soon to be growing) volume of unemployment claims are evidence of the deep recession … deeper than that of the Great Recession. The only questions are whether this Greater Recession will last longer than its predecessor and whether it will turn into an outright economic depression.”
2. In the Clinton and Obama administrations legislative proposals tended to be crafted with an eye toward gaining of the approval of at least 60 Senators. The combination of senate procedural blockages and the belief that bills many Republican senators thought were good policy would be durable victories led to that strategy. It was a catastrophic failure. Joe Biden’s staff appears to have learned from Clinton’s and Obama’s mistakes, and is drafting proposals focusing on what would genuinely be the best policy. It is very nice to see. Read Matthew Yglesias, “Joe Biden’s surprisingly visionary housing policy, explained,” in which he writes: “Joe Biden has a housing policy agenda that is ambitious, technically sound, and politically feasible, and that would—if implemented—be life-changing for millions of low-income and housing-insecure households. According to original modeling by Columbia University scholars, it could cut child poverty by a third, narrow racial opportunity gaps, and potentially drive progress on the broader middle-class affordability crisis in the largest coastal cities as well. The plan hasn’t stirred an intraparty debate or really much attention at all, which could make it politically feasible to enact …The centerpiece is simple. Take America’s biggest rental assistance program — Section 8 housing vouchers — and make it available to every family who qualifies. The current funding structure leaves out around 11 million people, simply because the pot allocated by Congress is too small. Then pair it with regulatory changes to help the housing market work better for more people. It’s the general consensus approach among top Democratic Party politicians and left-of-center policy wonks.”
3. Is it the staying at home with lots of time to think, the economic distress and uncertainty, or the heightened fear and consciousness of mortality, or just chance that turned the coronavirus spring into the Black Lives Matter spring? Barry Eichengreen believes that it is the second. Read his ‘Rage Against the Pandemic,” in which he writes: “The connection running in the other direction—from the pandemic to the demonstrations—has received far less attention …Why now? … Before Floyd, there was the police killing of Michael Brown … Eric Garner … nearly 100 African-Americans who died in police custody over the past six years. One explanation for why Floyd’s killing triggered a national uprising is … an especially horrific recording … But this answer will satisfy only those who have forgotten the equally horrific recording of Garner’s killing. A more convincing explanation must include the pandemic …The COVID-19 mortality rate is 2.4 times as high among black Americans as white Americans … [a] situation … already approaching the unbearable…because of America’s threadbare social safety net … Certain states in the South provide fewer. Indeed, some, such as Florida, have intentionally designed their bureaucracies to make applying for unemployment benefits as difficult as possible.”
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 coronavirus recession and the current debate surrounding reopening the U.S. economy shine a blinding light on the role of child care in supporting our economy. In fact, writesSam Abbott, rarely before has it been so obvious how important various forms of child care—from schools to daycare to summer camps—are to the state of the economy and its ability to recover. A national set of safety standards must be developed by scientists and public health officials, he argues, and until that happens any plans to reopen schools and child care facilities will remain patchwork and random, shaped largely by uncertainty about the coronavirus pandemic and its impact on children and how it is spread by children. Likewise, Abbott says, policymakers should ensure that child care is affordable and accessible to all American families—an already daunting challenge made more formidable because the child care industry has suffered devastating layoffs and closures since the onset of the pandemic. Abbott reviews some pre-coronavirus trends in child care options and parental preferences, and why those choices could limit the post-pandemic child care industry without thoroughgoing reforms.
Now that some U.S. small businesses are attempting to reopen, and policymakers are still considering how to stabilize the economy while protecting public health, it is as good a time as any to look back at the Paycheck Protection Program and examine its efficacy in achieving its goals. The program was designed to help small businesses keep employees on payroll and avoid bankruptcy during the pandemic. While early research shows it did provide a liquidity backstop for some firms during lockdowns, Amanda Fischerexplains that studies also show that PPP loans did not go to small businesses in the country’s hardest-hit areas and that the program itself did not have a statistically significant impact on preventing layoffs. Fischer goes through the various studies that analyze the program and reveal its flaws, and then proposes several policy recommendations and alterations that could address these shortcomings in future iterations of the program.
New research from Kate Bahn and Mark Stelzner shows how employers have more power over—and thus can push wages down more—for women and non-White workers compared to White men workers. The co-authors look at how workers search for jobs to show how racial and gender wealth disparities reinforce discriminatory pay penalties. They find that workers with greater wealth (who, in the United States, tend to be White workers) are better equipped to weather drops in income levels during job search periods and can thus hold out for a job that pays well and fits their skillset, while workers with less wealth and less of a financial cushion (who tend to be workers of color) take jobs that pay “just enough” out of necessity. Similarly, women workers tend to have more household responsibilities and thus are constrained by geography in their job searches, reducing their job prospects and allowing employers to take advantage of that constraint. The co-authors also show how workers’ ability to act collectively limits employers’ monopsony power, or the ability to set wages, of employers and reduces exploitation of workers based on gender and race and ethnicity. Bahn and Stelzner then propose several policies that can strengthen worker power, reduce wealth inequality, and boost family economic security.
Head over to Brad DeLong’s latest Worthy Reads to get his takes on recent must-read content from Equitable Growth and around the web.
Links from around the web
Until now, there has been very little acknowledgement of how truly vital child care and schooling is to the functioning of the U.S. economy—or the impact a broken child care system has on workers and their families. Vox’s Anna North gives us a deeper look at the numbers, providing an easy-to-grasp framework for looking at the impact of the current child care crisis on our economy and how important it will be to solve this crisis for our future economic recovery. North looks at data points such as the number of workers with children under age 18 who have lost their child care due to the pandemic, the impact of this loss on income, wages, and hours worked, and how differently this affects women and men workers, as well as two-parent and single-parent households. North then reviews the impact of the coronavirus pandemic and resulting recession on the child care system and its workers, and, in looking at the Trump administration’s failure to provide guidance in this area, concludes with an assertion that we must change how we value care work and education in order to carve out a path forward.
Eventually, the overall U.S. economy will recover from the coronavirus recession, but not before leaving a lasting impact on how many Main Streets across the United States are structured, writes James Kwak in The Washington Post. It’s likely that many small businesses will not survive, that “chain stores will replace mom-and-pop businesses, some storefronts will remain vacant, and cash that once went into local hands will be redirected to Amazon and Walmart.” In other words, the pandemic and the resulting recession are likely to amplify the two major trends that have been reshaping our economy in recent years: consolidation and inequality. Kwak explains the effect these two economic trends have had thus far, and how they will only be exacerbated by the hardships many small businesses and local economies are likely to face in the coming months and years.
Before federal aid lapses at the end of this month, policymakers in Washington DC must ensure that Unemployment Insurance benefits are extended until people can actually find new jobs and return to work safely, writesThe New York Times’ Editorial Board. Automatic stabilizers would work to increase support for those in need during this and future crises and wind down automatically when normal economic conditions return, the Board continues, thus guaranteeing that politics don’t play a role in helping vulnerable communities facing layoffs. The extended unemployment benefits provided in the Coronavirus Aid, Relief, and Economic Security, or CARES, Act in March have played an outsize role in stabilizing household finances and keeping families out of poverty. The end-of-July expiration date was placed on these extended benefits because policymakers hoped the pandemic would be under control by now. Because this is obviously not the case, the Editorial Board urges Congress to act swiftly to extend these benefits further and incorporate an automatic stabilizing element to ensure workers receive needed aid in the best, smartest, and most timely way.
By now, it is no secret that parents across the United States are struggling. Adapting to life during the coronavirus pandemic has been difficult for nearly everyone, but parents—particularly those with young children—are facing day-in, day-out work-life conflicts with no end in sight. Whether they are continuing to work from home, unemployed, or still working outside the house, providing for their children without the support of schools, daycare, camps, or even help from grandparents is taking an emotional and economic toll. Rarely has the role of child care in supporting our economy, by freeing up parents’ time and minds to focus on work, been more self-evident.
For weeks, experts and parents alike have been warning that child care will be essential in any economic recovery from the coronavirus recession. Without it, many parents, particularly women, will have to weigh dropping out of the labor force or reducing their work hours if their caregiving responsibilities remain incompatible with their work responsibilities. Still, plans to reopen schools and child care facilities remain scattershot, largely driven by uncertainty about how coronavirus infections spread in such environments, how children may contract or spread the virus to adult staff, and how susceptible children themselves are to COVID-19, the disease spread by the coronavirus.
How to provide child care safely is primarily a question for scientists and public health experts, but policymakers and social science researchers have their own role to play in this ongoing crisis. First, the coronavirus pandemic must be treated as the workplace safety issue that it is. This involves developing a national set of safety standards—along with the appropriate education, training, and funding to enact those standards—so that parents and staff can be confident that their care is as safe as it can be. Without such standards, each facility will have to fend for itself with limited knowledge and potentially disastrous consequences.
Also important are policies designed to make child care accessible and affordable even in the midst of a pandemic. Recent research suggests that the child care market will be unprepared to provide care in a post-pandemic environment without significant public investment. If parents are shifting their preferences as a result of the pandemic and ensuing economic crisis—either by desiring smaller providers or working more nonstandard hours—then the policy challenges of providing high-quality and affordable care will only grow.
More research on what child care services families need and what the child care industry is poised to provide will help target the policy response supporting families as they return to work and fuel the economic recovery.
Child care priorities prior to the coronavirus pandemic limit our post-pandemic options
The United States does not have a universal child care system, so many families rely on a patchwork of polices, including tax credits, licensing standards, and subsidy programs, to access high-quality child care. These policies help some families afford much-needed care, but they are largely insufficient in meeting the variety of care options that families need. What’s more, these policies underpin a child care system that lacks the flexibility necessary to meet the shifting needs of families in response to the current pandemic.
As the coronavirus and COVID-19 continue to spread through communities, larger child care centers, where dozens of children are together in one building, may be more prone to spreading both the virus and the disease. Already, some communities are reporting alarming transmission of COVID-19 in child care centers, though some studies suggest the disease is less likely to spread among children.
While wealthy families can hire nannies or babysitters to limit exposure, middle- and lower-incomes parents may be driven to seek in-home care. This type of care, also called home-based care, typically occurs in the provider’s home, where only a handful of children are present. It may be reasonable to assume these less-crowded settings are a safer alternative for families concerned about the safety of their kids and themselves. But the number of licensed in-home providers has rapidly declined over the past two decades. (See Figure 1.)
Figure 1
As some of these in-home providers exit the market, others may be transitioning to an “underground” market of unlicensed providers. These providers, which may be legally unlicensed depending on state statute, do not necessarily provide lower-quality care. But regulators cannot oversee the quality of care in these settings to the same extent that they can with those that are licensed. Parents who prefer in-home care over child care centers may be left with a difficult trade-off between accessibility of care and their confidence in a provider’s quality. Unfortunately, even parents who find an acceptable in-home provider could lose out on the subsidies that made their previous care arrangements affordable.
Child care can be incredibly expensive, even exceeding the cost of college in some states. Many families rely on some combination of tax credits or subsidies to help cover the cost. The Child Care Development Fund is the primary child care subsidy program for low-income families in the United States. When the program was reauthorized in 2014, it included important health and safety requirements for eligible child care providers but did not guarantee sufficient additional funds for states to enact these requirements. Experts say this has inadvertently advantaged child care centers, where states are better positioned to provide oversight and training.
Centers care for about 40 percent of preschoolers with a regular, nonrelative child care arrangement but serve more than 70 percent to 78 percent of similarly aged children receiving Child Care Development Fund subsidies. Conversely, in-home care serves 34 percent of similar preschoolers but around 18 percent to 25 percent of those receiving subsidies. This disparity in funding has dramatically widened in the previous decade. (See Figure 2.)
Figure 2
Reshifting subsidies toward these in-home providers is not a simple task. States will need to devote significant resources supporting in-home providers, particularly those that are exempt from licensing, to meet quality standards. Experts already worry that quality standards are too geared toward center-based providers and do not reflect the relative strengths and opportunities of in-home care. This could present an opportunity for high-level rethinking of what defines “quality” for these settings—a task for researchers as much as it is for regulators and policymakers.
Information on the spread of the coronavirus and COVID-19 and their effects on the economy changes rapidly. In the coming months, many families will be continuously reassessing their child care needs and what levels of risk are acceptable. The child care system, and the policies that help make it accessible to more families, must be flexible enough to meet parents’ needs without sacrificing quality or affordability. Unfortunately, these may be longer-term fixes in a system facing immediate shortfalls.
The supply of child care amid the pandemic is down, but parents are still searching for the care they need
These challenges in the U.S. child care market are longstanding, but they are now exacerbated by the coronavirus pandemic and COVID-19. More research is needed to understand how larger structural changes—such as additional subsidies or adjusted licensing standards—can be accomplished. In the meantime, the child care industry also faces an immediate critical shortage of providers who can care for the nation’s children once parents return to work.
Like many industries, the coronavirus pandemic and resulting public health measures were shocks to the child care market. An April poll by the Bipartisan Policy Center found 60 percent of licensed providers shut their doors amid lockdowns and stay-at-home orders. More than 330,000 jobs were lost in the child care sector in only a few short weeks. (See Figure 3.)
Figure 3
The U.S. child care system was already in a pre-existing financial crisis, and the fallout from the pandemic could mean millions of child care slots are permanently lost. Affordable and accessible child care will be the foundation of any economic recovery, but right now, that foundation has multiples fractures.
In addition to layoffs, the industry dramatically slowed hiring in recent months. A new working paper by Umair Ali, Chris Herbst, and Christos Makridis, economists at Arizona State University, titled “The Impact of COVID-19 on the U.S. Child Care Market: Evidence from Stay-at-Home Orders,” finds that new online postings for early child care and education jobs declined 13 percent per dayfollowing the adoption of states’ stay-at-home orders, resulting in approximately 1,000 fewer providers hired per month than if the pandemic had not occurred. Assuming that these postings were to replace providers who exited the field and not providers who may be postponing a retirement or resignation during the pandemic, 1,000 fewer providers could mean as much as 10,000 fewer child care slots each month.
Even as the industry has been rattled by the coronavirus pandemic and recession, there is evidence that families remain interested in—or at least curious about—their child care options. The same working paper by the three researchers finds no statistically significant decline in Google searches for child care-related terms following state lockdowns. Of course, parents searching for online information on child care does not mean that they currently want or need those services. Many parents—63 percent in one survey—are skeptical about sending their children to child care while the coronavirus and COVID-19 are still spreading.
But just because many parents are not sending their children to child care now doesn’t mean they will not want to—or need to—soon. Even larger child care centers could face a critical capacity issue as parents return to work. Child care operates with low child-to-caregiver ratios, which means providers may need to hire quickly in order to ensure appropriate staffing for returning children. Encouragingly, child care job postings have rebounded by 23.4 percentage points since their lowest point in May, but they remain more than 39 percent below the postings in July 2019. And these recent gains may be tenuous as states resume partial shutdowns through the summer.
Sooner or later, many parents will have to make difficult decisions on when their children are going back into child care and what type of child care is best for their family. Without significant public investment—more than $9 billion a month, according to some estimates—the industry will be unable to provide the care necessary to help families get back to work.
Conclusion
The struggle facing parents today is not one they face alone—it boasts important implications for everyone affected by the coronavirus recession. Research shows that when child care is not accessible or affordable, it can prevent parents, particularly mothers, from entering the workforce. Policymakers and economists are already seeing signs that the lack of child care is creating a drag on women’s employment during the current crisis. Fewer working parents means a smaller tax base, reduced household income, and less money spent on goods and services—all the tools needed to help the economy recover.
As states decide whether to continue to ease their coronavirus restrictions or return to earlier lockdown levels, and as families decide whether to take cautious steps toward resuming their pre-pandemic lives, the demand for child care is only going to rise, particularly as schools and summer camps remain closed and public health experts caution against grandparent care. Policymakers need to take bold action to ensure that child care is accessible and affordable, and high-quality research must help target the policy response.
Most immediately, the industry needs an injection of cash to keep the doors open and caregivers on the payrolls. Many child care advocates have requested $50 billion in flexible funding in the next congressional coronavirus relief aid package. Looking further out, policymakers and researchers will need to turn their attention to the structural challenges discussed above that could limit parents’ options as they seek safe and affordable child care for their children. Otherwise, child care could remain out of reach for many families returning to work, and the economic recovery will stall before it even begins.
A waiter disinfects tables at an outdoor café during the coronavirus pandemic.
Overview
Across the United States over the past few weeks, we’ve all seen advertisements, received emails, or heard from friends about small businesses trying to inch back to some semblance of pre-pandemic normal. Hair salons reopening. Gyms welcoming people back into their facilities. Restaurants shifting from take-out only to dining outside and even inside. Specialist retail shops reopening their doors for walk-in customers. Daycare centers beginning to test whether parents will re-enroll their kids.
Now, governors and mayors across the country are giving businesses large and small the green light to invite back their customers. But these openings remain fragile, at best, or are even slipping out of reach in some places as the community spread of the coronavirus hammers Michigan bars, Texas daycare centers, and Florida restaurants. Premature reopenings, without adequate public health controls, may well put the U.S. economy right back to where it was months ago.
The minutes from the Federal Reserve Board’s closed-door interest-rate-setting meeting in mid-June showed the very real possibility of a much worse recession later this year if coronavirus cases continue to spike and the death rate begins to rise. A third of small business owners don’t expect their businesses to be back to normal for more than 6 months, according to a recent survey by the U.S. Census Bureau—and that survey was completed before it became clear that the coronavirus was never truly contained.
Against that backdrop, Congress this month extended the deadline for small businesses to apply for Paycheck Protection Program loans—loans authorized by Congress under the Coronavirus Aid, Relief, and Economic Security, or CARES, Act that allow firms with fewer than 500 employees to keep workers on payroll and pay for certain other expenses necessary to stay open. In total, Congress authorized $670 billion for the program—an amount larger than any other previous small business investment. Of the money provided by Congress since April, about $130 billion remains unused, with lawmakers debating changes to the program’s loan terms, eligible uses, and whether to create set-asides for the smallest of small businesses, as well as broader changes such as restructuring the program to work better alongside Unemployment Insurance.
As policymakers consider how to keep the U.S. economy stable while efforts to control the public health crisis continue, it is useful to evaluate the early research on the efficacy of the Paycheck Protection Program—most notably, whether the money went to the hardest-hit areas, encouraged firms to keep employees on payroll, and kept small businesses from going bankrupt. It is unlikely that any businesses—and particularly, small businesses—will be able to return to normal anytime soon, and the early evidence suggests that the Paycheck Protection Program is struggling to meet its intended goals. Examining what we know about the program can provide a roadmap on how to deploy aid to American small businesses moving forward. Here’s what the early research says:
The Paycheck Protection Program did not generally go to small businesses in the areas hit hardest by the pandemic in terms of coronavirus infection rates and COVID-19 deaths, social distancing measures imposed, or declines in employment.
For those businesses that received Paycheck Protection Program loans, the funding did not have a statistically significant impact on preventing avoidable layoffs among employees.
Financial institution composition had a large effect on how many loans an area received.
There exist significant gaps in our understanding of how Paycheck Protection Program funding served Black- and Latinx-owned small businesses.
In short, it appears that the Paycheck Protection Program was a successful liquidity backstop for firms that may have needed marginal help meeting payroll during the worst of the mandatory lockdowns, but it did not prevent layoffs.
This issue brief details these findings and then examines how different courses of action by Congress may have better met the intended goals of the program, including providing funding directly to businesses to cover revenue declines amid the coronavirus recession and removing the mediating role of private-sector financial institutions. The issue brief then concludes with program changes for Congress and the Small Business Adminisration to consider moving forward as the last tranche of PPP funding is deployed, including creating incentives for short-term compensation arrangements (otherwise known as work-sharing), dedicating set-asides for certain subsets of locations or borrowers, and using available data to monitor effects by race and ethnicity.
Was the Paycheck Protection Program effective?
The goal of the Paycheck Protection Program was to keep the employees of small businesses attached to their workplaces at pre-pandemic wages and to prevent firm bankruptcies during the pandemic by providing government support. Small businesses were invited to apply to lending institutions for loans, fully backed by the Small Business Administration, that would convert to grants if certain conditions were met. After some amendments were made to the original program design, the Paycheck Protection Program now requires businesses to devote at least 60 percent of any loan amounts to payroll costs in order for loans to be forgiven and converted into grants. These loans can be forgiven on a prorated basis if payroll spending amounts dip below 60 percent. If the loans are not forgiven, they carry a 1 percent interest rate and must be paid back within 5 years. The remainder of any business’s PPP funding can go toward paying the mortgage or rent, or certain other expenses.
There are a number of ways to measure whether the original goals of the program were met, among them:
Geographic targeting
Effects on employment
Effects of intermediation by financial institutions
Racial equity
Early research provides us some evidence in each of these arenas.
Geographic targeting
A primary question to ask in any research on the efficacy of PPP loans is: Did the funding go to the areas hit hardest by the pandemic, and therefore the areas most likely to experience small business closures?
Research suggests that was not the case. Researchers João Granja, Constantine Yannelis, and Eric Zwick of the University of Chicago Booth School of Business and Christos Makridis of the MIT Sloan School of Management find in their working paper titled “Did the Paycheck Protection Program Hit the Target” that firms were more likely to receive a PPP loan if they were located in areas with better employment outcomes, fewer coronavirus infections and COVID-19 deaths, and less social distancing. Specifically, their research finds that 15 percent of establishments in the regions most affected by declines in hours worked and business shutdowns received PPP funding. In contrast, 30 percent of all establishments received PPP funding in the least-affected regions.
Other research supports this finding. Analysis by Haoyang Liu and Desi Volker of the Federal Reserve Bank of New York titled “Where Have the Paycheck Protection Loans Gone So Far?” shows a negative relationship between coronavirus cases and COVID-19 deaths per capita in a state and the share of eligible small firms receiving PPP loans, meaning that the more cases in a community, the fewer the eligible firms that received aid. Less than 20 percent of small businesses in New York City, for example, received PPP loans, compared to more than half of firms in Nebraska. This disparity is stark, considering that New York City saw a death rate from COVID-19 approximately 20 times the rate of Nebraska. 1
Moreover, New York City began its lockdown of all but essential businesses on March 22 while Nebraska never issued a mandatory stay-at-home order and many nonessential businesses remained open during the pandemic. Liu and Volker’s research also finds no statistically significant relationship between economic hardship, as measured in unemployment claims in the state, and what proportion of the state’s small business workforce was employed at a firm that received a PPP loan.
Why is this the case? Both research studies point to the role of financial institutions, discussed more fully below, in mediating which firms did and did not receive aid.
Effects on employment
Now that we know where small business funding went, the next question is: Did it have the intended effect of preventing avoidable layoffs for the firms that did receive aid? Recent research published by the Opportunity Insights team, led by former Equitable Growth Steering Committee member and Harvard University economist Raj Chetty, suggests that the Paycheck Protection Program had little bearing on whether a business remained viable or kept their workers on payroll. Using the SBA definition of an eligible firm (generally 500 or fewer employees) and data from payroll firms, Chetty and his colleagues find that PPP-eligible businesses were no more likely to maintain workers on payroll than non-PPP-eligible businesses.
Why is that the case? The researchers suggest that funding went to firms that were most likely to keep their workers on payroll to begin with, mostly businesses that don’t need to meet face-to-face with customers, including small businesses in the professional, scientific, and technical services industry. The researchers point to SBA data, noting:
Firms in the Professional, Scientific, and Technical Services industry received a greater share of the PPP loans than Accommodation and Food Services. Yet Accommodation and Food Services accounted for half of the total decline in employment between February and March (prior to PPP enactment) in BLS statistics, while employment in Professional, Scientific, and Technical Services accounted for less than 5 percent of the decline.
In other words, the Paycheck Protection Program served as a liquidity backstop for firms that may have needed a marginal boost to keep workers on the payroll but did not contribute to employers’ threshold decisions in terms of whether to keep workers.2
Liu and Volker’s research corroborates this, but only in part. While their analysis finds a correlation between an industry being affected by coronavirus cases and COVID-19 deaths and that industry’s receipt of a PPP loan, they did not find that loan amounts were proportional to the industry’s employment decline. They also find instances of significant exceptions to this rule, with the construction industry, for example, receiving a large amount of loans despite the sector being deemed “essential” and staying open in many states.
Effects of intermediation by financial institutions
Paycheck Protection Program funding did not go to the geographic areas and business sectors hit hardest by the pandemic and the ensuing recession. What explains the disparities in which areas received funding? Evidence suggests that the size and types of financial institutions had a large role in determining which small businesses received aid, with firms in areas with the highest shares of big banks less likely to receive funding.
Congress directed the Small Business Administration to implement the Paycheck Protection Program by authorizing banks, credit unions, community development financial institutions, and certain financial technology firms to accept applications from small businesses, complete initial underwriting per the terms of the program, and send applications along to the agency for funding. In exchange for their participation, financial institutions received more than $18 billion in fee income, calculated on a percentage basis as a proportion of the total loan amount.3
Because the demand for PPP loans exceeded the supply and financial institutions were left with discretion on how to prioritize applications, lenders had a large role in deciding which applications were accepted, reviewed, and funded. Particularly for the first round of PPP funding, the program became fully subscribed quickly, running out in just 2 weeks, so lending institutions’ prioritization of applications had a material impact on who received funding.
The evidence in the available research suggests that big banks had less interest in the Paycheck Protection Program than their smaller counterparts, meaning areas with high concentration of smaller institutions performed better than others. Liu and Volker, in their analysis “Where Have the Paycheck Protection Loans Gone So Far?,” find a strong relationship between the market share of mid-sized and community banks in a state and the share of small businesses within a state that received a PPP loan.4 This is corroborated by analysis from the Institute for Local Self-Reliance, which also finds that states where community banks had a larger market share had a higher distribution of PPP loans per capita.5
Granja and his co-authors, in their study “Did the Paycheck Protection Program Hit the Target?,” came to similar conclusions, noting that areas predominately served by the largest banks—JPMorgan Chase & Co., Wells Fargo & Co., Citigroup Inc., and Bank of America Corp.—underperformed in the provision of PPP loans, given those banks’ market share of typical small business lending. Indeed, while these four large banks originated 36 percent of all small business loans before the pandemic, they originated just 3 percent of PPP loans.
These conclusions intuitively make sense, considering that rural areas, which received an outsized share of PPP loans, are more likely to be served by community financial institutions and less likely to be served by big banks. That said, Granja and his co-authors did find areas served by larger mid-sized banks typically had more PPP loan penetration than areas served strictly by the smallest banks. This suggests there were some advantages in economies of scale and nimbleness in responding to new program terms, up to a point.
Neither Liu and Volker nor Granja and his co-authors offer hypotheses on why the largest banks underperformed in PPP lending. That said, some rough data and anecdotal evidence provide some potential explanations for why smaller institutions generally did a better job than the largest U.S. lending institutions in deploying small business funding. SBA data show that the average PPP loan size for banks with more than $50 billion in assets was nearly $120,000, while the average loan size for banks with less than $1 billion in assets was around $85,000, and the average loan size for community development financial institutions—some of the very smallest financial institutions—was around $51,000. This suggests that perhaps large banks prioritized making fewer, bigger loans due to the fee income structure of the program and the more complex bureaucracies at the institutions.
Additionally, past research from the Federal Deposit Insurance Corporation, the nation’s supervisor of most small U.S. banks, notes that community banks “are said to be relationship lenders, which rely to a significant degree on specialized knowledge gained through long-term business relationships. They are likely to be owned privately or have public shares that are not widely traded, and therefore tend to place the long-term interest of their local communities high relative to the demands of the capital markets.” In the case of the Paycheck Protection Program, the relationship lending model may have meant that community banks had better pre-existing relationships with local small businesses and a greater focus on lending rather than, say, investment banking or trading.
Finally, other reporting by Barron’s suggests that community banks saw the Paycheck Protection Program as an opportunity to build new lending relationships. This opportunity was perhaps overlooked by larger financial institutions with more customers and more lines of business.
Whatever the explanation, it is clear that the composition of lending institutions in an area had a significant impact on mediating aid to eligible businesses, providing policymakers with considerations for how to structure rules around remaining payouts and suggesting that future programs may want to consider distributing aid in more geographically neutral ways.
Racial equity
It is also crucial to understand whether the Paycheck Protection Program is reaching small businesses owned by people of color, particularly Black and Latinx small business owners who have historically faced lending discrimination and other barriers to entrepreneurship. Encouraging small business formation and survival for Black and Latinx entrepreneurs is a worthy goal for public policy. Research evidence from the Federal Reserve Bank of St. Louis shows that for Black Americans who achieve small business ownership, Black entrepreneurs have both higher levels of wealth and higher levels of wealth mobility than Black workers.
The same study also found that Black entrepreneurs have levels of wealth mobility equal to those of White entrepreneurs, while White workers have greater wealth mobility than Black workers. History also demonstrates that Black-owned small businesses help cultivate a vibrant civil society. Black-owned businesses were crucial in financing the civil rights movement of the 1960s, for example, by providing goods and services to people otherwise locked out of White-owned businesses and supporting the autonomy of Black activists, who as employees or customers would not be punished for exercising their right to protest.
How did Black and Latinx small businesses fare under the Paycheck Protection Program? Because policymakers chose not to track PPP funds by race or ethnicity, it is hard to know how the money was distributed disaggregated by the race or ethnicity of the business owner. Lenders were not required to collect information on the demographics of borrowers at the time of the loan application or when the loan was funded. Though Congress, in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, required that the Consumer Financial Protection Bureau establish a framework for small business application and lending data collection by race, ethnicity, and other protected characteristics, the new agency never finalized that rulemaking.
That said, the Small Business Administration did include a field requiring that small business owners report their gender, race, ethnicity, and veteran status in paperwork required for loan forgiveness, which will be submitted by borrowers when they seek to have the loan extinguished after meeting program requirements. The agency last week committed to publicly providing those data and has released initial data on the program, though without demographic information.6
While this transparency effort is significant, it will still leave some gaps in our understanding. First, the data will not cover those businesses that do not wish to have their loan forgiven, and it also will not include information about loan applications submitted but not approved, meaning it will be impossible to see how many Black and Latinx small businesses had their funding requests rejected.
In the meantime, lacking hard data, we turn to survey evidence to determine whether the Paycheck Protection Program is adequately serving Black and Latinx small business owners. One survey by the advocacy groups Color of Change and UnidosUS, taken between April 30 and May 12, finds that just 12 percent of Black and Latinx small business owners who applied for aid from the Small Business Administration reported receiving the amount they requested, while 26 percent said they had received only a portion of what they had requested. These figures, while distressing on their own, are particularly troubling, given that small businesses owned by Black and Latinx entrepreneurs are more likely to be in industries highly impacted by the coronavirus—meaning they’re more likely to need this bridge funding than other businesses more insulated from the pandemic’s effects.
Policy recommendations
The Paycheck Protection Program, totaling $670 billion in funding, is the largest investment in our nation’s small businesses and has the power to reshape our economy. Early lessons from the rollout of the program suggest some benefits—namely, that the money was nearly fully subscribed and that there was robust interest among eligible small businesses. But it appears that the program’s design impaired the loans from going to the neediest areas and businesses and from preventing avoidable layoffs.
The preliminary evidence strongly suggests that PPP funding was more of a liquidity program for small businesses that needed a boost in payroll funding to get through the early weeks of mandatory lockdowns rather than a social insurance program designed prevent avoidable layoffs. That said, early research findings must be caveated by reports of data errors. The Small Business Administration should work to improve the accuracy of data reporting, particularly as business owners move to have their loans forgiven.
Given the shortcomings of the PPP, if policymakers could rewind the clock, what should Congress have done instead? The Paycheck Protection Program’s tripartite goals—keeping workers’ income steady, keeping workers attached to firms, and helping workers weather mandatory lockdowns—at times may have run at cross-purposes. It is hard to access the efficacy of a counterfactual, but proposals similar to the Danish model, in which small businesses were automatically provided with stopgap funding to cover revenue lost for a certain time, may have proven more successful.
Indeed, Paycheck Protection Program rules requiring that funding go directly to payroll support may have disadvantaged businesses in areas with high rent or mortgage costs, businesses that might take a while to hire back employees (including those operating in areas with longer periods of mandatory lockdowns), or businesses that needed to make substantial investments in social distancing measures before reopening. A blanket promise to cover revenue losses and invest in social distancing, via grants, would have better addressed these issues.
Similarly, policymakers should consider deployment mechanisms in the future that provide aid to small businesses directly rather than via banks, credit unions, and other lenders. Small businesses in certain areas should not be disadvantaged in accessing a government-authorized program simply because of the composition of lending institutions in their area. As discussed in a previous Equitable Growth analysis, options include expanding public banking options and increasing the in-house capacity of the Small Business Administration, which has only around 3,300 employees, with total salaries and expenses of around $447 million. Given the $18 billion spent on administering the Paycheck Protection Program through private lending institutions, an additional investment in agency capacity may be wise in terms of minimizing long-term costs while meeting policy goals related to the equity of rescue funding deployment. After all, emergency SBA funding may be needed again in the future, including but not limited to instances involving natural disasters.
With the available evidence today, what short-term changes could policymakers consider implementing to guide the last tranche of available funding?
One policy option worth considering is the Rebuilding Main Street Act from Sens. Chris Van Hollen (D-MD), Jeff Merkley (D-OR), and Chris Murphy (D-CT). This legislation would rejigger the Paycheck Protection Program to work in tandem with the enhanced Unemployment Insurance benefits under the CARES Act. Specifically, the proposal would provide grants to particularly hard-hit small businesses to cover fixed costs and expenses, provided that the employers use short-term compensation arrangements or a system whereby employers avoid layoffs and instead reduce the hours worked by each employee at the firm. Employees would then continue to receive Unemployment Insurance on a prorated basis to compensate for reduced wages. Short-term compensation arrangements are already in place in 26 states plus Washington, D.C.
These PPP enhancements could allow businesses to cover the fixed costs needed to get started again, including supplies, rent, mortgage, investments in social distancing, and personal protective equipment. And it would enable the firms to slowly ramp up the hours worked by employees as the business gradually recovers. At the same time, it would allow employees to maintain a relationship with their employers and more quickly resume past earnings as the economy recovers.
Research from Marth Gimbel of Schmidt Futures and Jesse Rothstein and Danny Yagan of the University of California, Berkeley looking at CARES Act programs compared to other global responses note that job losses have been lowest in countries that either contained the coronavirus early or had robust systems for subsidizing employment at reduced hours. Their research also points to historical data, noting that many credit Germany’s quicker recovery after the Great Recession to the short-term compensation program.
Beyond the macroeconomic benefits, research from Steven Davis of the University of Chicago and Till Von Wachter of Columbia University suggests that workers who are laid off from a job take a long time to gradually climb back up the job ladder and find a match as good as the one they once had. Reworking the Paycheck Protection Program with enhanced Unemployment Insurance benefits to better interlock unemployment benefits and PPP lending objectives could help the United States achieve these goals.
Short of a wholesale redesign along the lines of the Rebuilding Main Street Act, policymakers might want to consider program enhancements to correct for the program’s funds not reaching the areas hardest hit by the coronavirus pandemic. Dedicated set-asides by state according to the number of people employed by eligible small businesses, or in certain sectors, may be warranted, if coupled with loosening rules to allow more investments in nonpayroll expenses. Of course, if this route is taken, it is especially imperative for policymakers to extend enhanced Unemployment Insurance benefits to offset any workers losing employment through the Paycheck Protection Program.
Policymakers may also want to consider certain program changes to better serve industries disproportionately left behind by the early rounds of PPP lending, especially the accommodation and food services industry. Economist T. William Lester of the University of North Carolina, Chapel Hill provides some policy recommendations for how to reach small restaurants and bars, for example.
Policymakers also must closely examine data on small business loan forgiveness by race and ethnicity when they become available. If initial survey evidence holds, then firms owned by Black and Latinx entrepreneurs may not have had equal access to PPP lending. At a minimum, the coronavirus pandemic’s impact on small business financing demonstrates that the Consumer Financial Protection Bureau should finalize the required rule on small business data collection so that policymakers and advocates have actionable information moving forward.
Finally, some research suggests that policymakers should prioritize extending social insurance benefits over continuation of the Paycheck Protection Program. Harvard’s Chetty and his co-authors suggest in their recent research that a better approach moving forward would be to invest in income support for individuals, including extending increased Pandemic Unemployment Insurance benefits past the current July 31, 2020 deadline. As the Opportunity Insights team notes, “it may be more fruitful to approach this economic crisis from the lens of providing social insurance to reduce hardship rather than stimulus to increase economic activity. Rather than attempt to put workers back to work in sectors where spending is temporarily depressed because of health concerns, it may be best to focus on mitigating income losses for those who have lost their jobs.”
Conclusion
The still-spreading coronavirus pandemic makes clear that no amount of declaring businesses reopened will create an economic recovery. Research suggests that consumer spending will remain woefully anemic until the public health crisis is under control. The Paycheck Protection Program, as currently designed, is not well-equipped to prevent avoidable small business closures or employee layoffs. Policymakers should consider implementing program improvements, particularly short-term compensation arrangements but also more modest measures, remain committed to income supports until safe jobs are actually available, and reassess the small business landscape once the virus subsides. Even if policymakers change course now, it is clear that significant investments in small businesses, perhaps akin to a domestic Marshall Plan to rebuild these critical engines of employment, entrepreneurship, and economic growth, may be needed to reverse the effects of the coronavirus and its recession.
1. Put me down as saying that we require, right now, not just additional social insurance payments but additional government purchases, additional government employment of test-&-tracers and nurses, plus powerful steps to boost all forms of investment spending while in-person consumption is depressed. Read Liz Hipple and Amanda Fischer, “Enhanced U.S. social insurance will be necessary until the coronavirus recession recedes,” in which they write: “Raj Chetty and his Opportunity Insights colleagues … [find that] U.S. consumer spending fell dramatically over the past few months, driven by public health and safety concerns … [that] are keeping people, especially those in high-income households, away from purchasing in-person services, indicating that until people feel safe engaging again in in-person services such as dining out or getting haircuts, consumer spending on services—which accounts for 66 percent of all consumer spending—will not meaningfully rebound … To fix the U.S. economy … [requires] first fix[ing] the U.S. public health crisis. Merely announcing that the economy is “reopened” will not make it so … Investing in social insurance programs—such as the expanded unemployment benefits enacted by Congress in the Coronavirus Aid, Relief, and Economic Security, or CARES, Act—is the best way to mitigate economic suffering during the recession, rather than stimulus measures targeted toward businesses or the rich … The fall-off in consumer spending is being driven by high-income households, particularly in areas with high rates of COVID-1 … As of May 31, two-thirds of the total reduction in credit card spending since January was from households in the top 25 percent of the income distribution, whereas spending by households in the bottom quartile had returned to normal levels.”
2. There is potential political support for, and there is certainly both technocratic justification and fiscal space for hitting both the economic recovery and the global warming fight together through coronavirus repression relief. Read Parrish Bergquist, Matto Mildenberger, and Leah Stokes, “Americans want green spending in federal coronavirus recession relief packages,” in which they write: “We launched a nationally representative survey of slightly more than 1,000 people between May 15, 2020 and May 20, 2020 … [the survey finds that] the public supports green stimulus but not at the expense of broad economic relief. Our experimental results show that including green infrastructure spending increases support for a coronavirus relief package. Support for wind and solar investments and for clean transportation investments is particularly strong. Including these measures increases support by 8.5 percentage points and 6.1 percentage points, respectively. Notably, including electricity transmission investments does not cause a change in support for the package.”
3. Very much worth reading is Heather Boushey, “The link between structural racism, the coronavirus recession, & economic inequality: Weak Institutions,” in which she writes: “The evidence that inequality harms is all around us. The vulnerability of communities of low-income, as well as Black, Latinx, and Native American families to the effects of the coronavirus and the recession is stark. The same living and working conditions that obstruct people’s economic opportunities—the lack of access to affordable housing, inadequate healthcare, unsafe working conditions, the lack of paid sick leave—expose them in greater numbers to sickness and death from COVID-19. The failure to have effective institutions that protect all workers means our entire economy is less resilient—and more economically unstable as a result … This brings us back to trust. Government must work on behalf of low-income, Black, Latinx, and Native American people and make sure their needs are truly reflected in the policy agenda. People must see that they can both develop and deploy their talents and skills in the economy and that those at the top are not encouraged to subvert outcomes to benefit themselves rather than our economy and society writ large. People must have both confidence and proof that they are protected from oppression and state-sanctioned violence. As we look to strengthening our democracy and recovering from this coronavirus recession in the years to come, core to any economic agenda must be to confront the role that effective institutions play in fostering growth that is strong, stable, and broadly shared. If large portions of our population can’t trust the government to act on their behalves, then we need to acknowledge our government isn’t working the way it needs to.”
Worthy reads not from Equitable Growth:
1. I have been convinced by the work done by Austan Goolsbee, and by many others, that the fall in aggregate demand when the 2019 coronavirus pandemic hit was larger than the fall in aggregate supply. But there is a fall in aggregate supply. And there is a profound shift in demand away from close-contact indoor activities. I had originally hoped that the shocks would be temporary, on the order of magnitude of a quarter of a year, as we got the coronavirus on the run and got test-trace-isolate systems up and running so that our society and economy could return to normal. But it now we appear to be currently running at 200,000 new coronavirus cases a day. Of these, our testing system is catching only 1/3 at best. At this pace we face at least another four months of the current situation: a very high savings rate and a large shift in the composition of demand as well. We could reattain and then maintain something close to full employment if we shifted workers accordingly. The government could be doing a lot to incentivize the rapid move of labor into investment goods production, public-goods production, and low-contact production. But the government is not. And there are no channels for the private economy to respond appropriately given that the largest shock component is not an aggregate supply or a demand composition but rather an aggregate demand shock. Thus I agree with the very smart Muhamed El-Erian here: we are unlikely to see much of a recovery bounceback in the third quarter. We may not see any at all. Read Mohamed El-Erian, “Covid-19: Sunny Third-Quarter Economic Outlook Turns Cloudier,” in which he writes: “A few weeks ago, the expectation was that the onset of the third quarter would mark the close of a highly damaging and uncertain second quarter for the U.S. economy and, importantly, herald a sharp and durable reversal. Instead, with health concerns forcing a growing number of states to either stop or reverse their reopenings, and with some businesses and households withdrawing from active economic re-engagements, a cloud is now forming over the third quarter, threatening the depth and breadth of the economic recovery. With an initial phase of seemingly healthy reopenings, and with government relief measures in full force, high-frequency indicators of economic well-being (household confidence, new jobs and retail sales) started improving in May or deteriorated at a slower rate (jobless claims). Such absolute and relative improvements were countering what was shaping up to be a brutal set of economic data for the second quarter as a whole, including the largest contraction in gross domestic product on record. But with a continuing uptick in economic data that repeatedly beat consensus expectations, the thinking was the hit to this year’s GDP could be contained to 5 percent to 8 percent, with the prospects of recovering the entire loss of output in 2021 … Since then, however, confidence in improving high-frequency data has been dented by indications that the “R-naught” of Covid-19 … has increased above 1 once again in a majority of states … Consistent with these developments, the highest-frequency indicators of household economic activity, such as mobility and restaurant bookings, have already flattened or started to head back down in a growing number of states.”
2. The relative poverty of emerging market economies means that, because of less effective indoor heating and cooling systems, their interior spaces tend to have more ventilation and so are a lot less like batcaves than are interior spaces in the global north. So far, at least, this has meant the 2019 coronavirus pandemic outbreaks in emerging markets appear to be less serious and virulent than outbreaks in poor neighborhoods in global north economies. And the oil sheikhdoms of the Middle East, where urban indoor cooling systems are very effective, may be the example that tests and proves the rule—via the virulence of their 2020 coronavirus pandemic outbreaks. On the other hand, they do have less effective governments, and less societal wealth to mobilize. Michael Spence and Chen Long, however, worry that Florida, Texas, and other states will make up another example that tests the rule, and proves it by developing the worst 2020 coronavirus outbreaks in the world because effective indoor cooling systems in a hot summer come close to turning the spaces where people are into a giant network of coronavirus-friendly batcaves. Read Michael Spence & Chen Long, “Florida as a Developing Country,” in which they write: “The latest data on new infections in Florida suggest that cases are doubling at a rate below 19 days, which puts the state’s outbreak firmly in the “uncontrolled” phase. And a similar recent pattern can be found in Texas and several other states … The explanation for the deepening crisis in developing countries is obvious: many lack the economic, medical, and fiscal resources with which to contain the virus and support their populations through an extended lockdown. But these reasons cannot reasonably be applied to an advanced economy such as the United States … It seems that one part of the country will follow the second-wave pattern, alongside Europe, Canada, Australia, and New Zealand, while another part takes a path similar to that of the developing world. But unlike developing countries, these [other] U.S. states will still have the option of changing course, possibly catching up to the second wave, provided that they can muster the political will to do so.”
3. The United States having neither contained the coronavirus early nor robust systems for subsidizing jobs at reduced hours is likely to be about to see the worst-in-the-world second wave—save possibly for Brazil. The coronavirus recession may soon be a depression, and the proportion of the population dead may well be worst in the United States as well. Read Martha Gimbel, Jesse Rothstein, and Danny Yagan, “Jobs Numbers across Countries since COVID-19,” in which they write: “Post-COVID job losses have varied dramatically across countries. The United States experienced the largest January-to-April rise in unemployment and along with Canada lost more than 15 percent of employment, amounting to 25 million newly jobless U.S. individuals. Germany, Japan, South Korea, Australia, and Israel lost only 0.7 percent to 4.4 percent of employment—equivalent to 18-to-24 million fewer jobless individuals on America’s population base. Germany and Japan each lost only 0.9 percent of employment as millions of their workers received assistance while working reduced hours under previously established “short-time” work systems. In contrast, employers in the United States and Canada eliminated jobs altogether as the coronavirus spread. South Korea and Australia share strong travel ties with China but contained their outbreaks quickly, experiencing respective employment declines of only 3.6 percent and 4.4 percent, respectively. Hence, job losses have been lowest in countries that either contained the virus early or had robust systems for subsidizing jobs at reduced hours.”
There are many obstacles in finding a job in the United States. Some of these obstacles are socially constructed, such as more household responsibilities shouldered by women compared to men. Other obstacles are the result of a long discriminatory past, especially the immense inequality in household wealth between racial and ethnic groups. These obstacles inhibit workers from moving freely between jobs and thus give employers monopsony power—the power to push down wages when workers have few suitable outside options.
Because these obstacles more commonly confront women and non-White workers, employers have more power over such workers, which means employers can push their wages down more compared to White men workers. In a new working paper, we demonstrate how these racialized and gendered wealth disparities reinforce discriminatory pay penalties by examining how workers search for jobs. We find that institutional support for worker power—in the form of greater protections for collective action and a more pro-worker National Labor Relations Board that facilitates organizing through overseeing union elections and hearing unfair labor practice charges—can limit the ability of employers to exploit workers based on their gender or race and ethnic backgrounds.
But first, let’s look at the corollary history of racial and gender wage gaps, which have been remarkably persistent. The gender wage divide converged somewhat in the 1970s and 1980s, but since the early 1990s, those gains have stalled. As of 2018, White women only earn around 79 percent of equivalent White men. And since at least the 1980s, the wage gap has widened between equivalent Black and White workers.
The predominant model in economics to explain these differences is the human capital model, in which differences in earnings are presumed to reflect differences in “capital” allotments that result in productivity differences between workers. Yet this model is insufficient when describing changes over time and as human capital investments among groups of workers has changed. The failure of the human capital model to explain outcomes in the real economy is evident in the higher discriminatory wage penalties for Black workers compared to White workers with similarly higher levels of education. Audit studies likewise demonstrate how pay and hiring discrimination persists for equivalently productive workers.
Employers’ wage-setting power, or monopsony power, may explain some of these persistent differences and how they have changed over time. Applying the original application of monopsony pioneered by the late British economist Joan Robinson to gender wage gaps explains why different rates of unionization between men and women affected wages. Robinson showed that employers are less able to extract monopsony rents for primarily male unionized workers. Limited subsequent research also found differences in labor supply elasticity between men and women and between Black and White workers.
Yet no theoretical extension of the monopsony model has been developed to illuminate the underlying dynamics that result in these outcomes. Our new working paper develops a theoretical monopsony model to explain these dynamics—a model that shows pre-existing disparities in individual wealth influence job search behavior. Workers with greater wealth are more able to navigate potential money shortfalls in the job search process and are thus more responsive to market signals. Conversely, lower levels of wealth decrease the level of the so-called reservation wage, or the wage level that is just enough to incentivize the worker to take a new job. Thus, more wealth among job candidates reduces employers’ ability to push down their wages.
White workers, of course, are more likely to have access to more wealth due to the persistent wealth gap in the United States. In contrast, individuals with less household wealth, predominantly workers of color, are less able to weather potential household financial crises that could result from switching jobs.
Likewise, if women workers are constrained in their geographic job search due to household responsibilities, then fewer suitable job prospects will also reduce their ability to search for jobs. Thus, employers can exploit workers with lower household wealth and more household responsibilities more intensely, and it is profit maximizing to do so.
Empirical research demonstrates this multiplicative intersectional wage gap, and our theoretical model shows how these constraints to job search are greater than the sum of their parts, reducing wages offered to women of color workers under monopsony. Thus, the wages these workers receive represent discriminatory pay because two elements—systemic racism and misogyny—confront workers in the U.S. economy and American society in general.
Yet these wage disparities, and monopsony power more broadly, are moderated by workers’ ability to act collectively as a countervailing force, and that kind of worker power is a function of institutional supports for collective action. Thus, policies that reduce monopsony power also will limit the ability of employers to exploit workers based on their race, ethnicity, gender, and other socially salient identities correlated with average wealth.
Our model is extended to include varying government support for collective action, in parallel with the model by one of the co-authors of our working paper, Mark Stelzner, along with Mark Paul at the New College of Florida, in the Equitable Growth working paper “How does market power affect wages? Monopsony and collective action in an institutional context.” In our working paper, “Discrimination and Monopsony,” we show that institutional support for organized labor is able to offset employers’ monopsony power along racial, ethnic, gender, and intersectional lines.
In practice, proposed policies—such as the Protecting the Right to Organize Act (passed by the U.S. House of Representatives but stalled in the Senate in early 2020) that would expand the ability of unions to organize workers alongside institutions, including a more effective National Labor Relations Board, which upholds current U.S. labor organizing laws but is largely ineffectual—would limit employers’ ability to exploit workers along multiple axes. The need for more pro-labor policies is increasingly evident as employers’ monopsony power mounts, partially due to an anti-labor policy and institutional environment since the 1970s, and as racial and gender wage disparities remain persistent and are likely to worsen due to differences in unemployment amid the coronavirus pandemic.
In addition to policies aimed at balancing worker power, broader policies that reduce racial and gender wealth disparities and household constraints facing women workers also would increase the ability of workers to search for and match into better jobs at higher levels of pay. One of the most sweeping ideas for addressing racial wealth disparities are proposals for reparations, which would be targeted at wealth redistribution among the descendants of enslaved Black Americans, who continue to be negatively impacted not just by the devastating legacy of slavery but also by barely less violent and oppressive post-Civil War discrimination.
Family economic security policies are another pro-worker set of policies that help families manage care responsibilities, such as paid leave and accessible quality childcare. As long as women continue to take responsibility for the lion’s share of family caretaking, these polices can increase women’s ability to search more broadly for jobs and help reduce the gender wage gap.
Our model demonstrates how a variety of factors intersect to result in discriminatory wage outcomes for workers along the lines of race, ethnicity, and gender, and likewise shows that a suite of policies in tandem that address these broad constraints would lead to more efficient outcomes and higher levels of social welfare. Amid the life-altering circumstances brought about by the coronavirus recession and the subsequently swift shift in work-life balances among women frontline workers and workers of color in particular, pro-labor policies to strengthen collective action by workers in the United States is of paramount importance.
