Antitrust remedies to the domination of digital platform technologies and the acquisition of nascent competitors

Posted on by Maria Monroe
A consumer uses Google on both her phone and her laptop. Google is the most used search engine in the world.

Overview

The debate over the role of large internet companies and their impact on the U.S. economy ranges from those who see nothing wrong to proposals to break them up. Within that broad debate, three recent reports—the “Market Structure and Antitrust Subcommittee” from the Stigler Center, “Unlocking Digital Competition,” a report commissioned by the United Kingdom, and “Competition policy for the digital era,” a report to the European Commission—coalesce around three broad principles.

First, digital markets have unique characteristics. Although those characteristics can generate important benefits, they also make it easier to throttle competition, harm consumers, and stifle innovation. Second, all three reports (although not exclusively) focus on two types of threats: the acquisition of nascent competitors by dominant firms, and the dangers when a company has a dominant position as a platform or digital marketplace. Third, a combination of stricter antitrust enforcement regulation is likely the best way to address the problem.

These reports reflect one view on the challenges and potential solutions to promoting competition in online markets. This column summarizes the paper about these three reports that I submitted to the American Bar Association’s Fall Forum being held today in Washington.

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Michael Kades - A Consistent if not Unified Vision

Digital market conditions

Online markets, which include everything from Alphabet Inc.’s Google unit selling advertising on its search result pages to Amazon.com Inc.’s marketplace to Apple Inc.’s App Store, all exhibit network effects. As the recent U.K. competition report explains, network effects can “occur when the benefits to a user increase as the number of users increases” or “when the benefits to users on one side of a platform market increase with the number of users on the other side of the market.”

Examples of these network effects are the exponential utility of mobile telephones as they became ubiquitous or (back in the day) a newspaper’s print circulation, which was more valuable to advertisers the larger the circulation. The same is true for information online. The more people who use Google search, the more valuable it is to advertise on its search results pages. As more people sell products on eBay Inc.’s online platform, more people will use it to buy products, and the reverse is true as well.

A second feature of online markets are substantial returns to scale. As the recent European Commission competition report explains, “new technologies of information are incompatible with traditional modes of competition” because “they show very strong returns to scale,” meaning the cost of producing or providing the service to many customers is little more expensive than to a few. Although returns to scale are common in many markets, the scale of the scale makes information technologies unique. The fixed cost to Google of updating calendars for 100 million users, for example, is not much more than if it serves a fraction of that number.

Third, digital markets have distribution costs that are close to zero and boast dramatic economies of scope based on data-driven products. For instance, an online platform that combines mapping software with email allows it to offer, say, higher quality restaurant recommendations. Similarly, on the revenue side, more customers and more products can lead to higher revenue per customer, and machine learning, once developed, can provide benefits across many products.

Fourth, unlike other industries, at minimal costs, information technologies and platforms have global reach in the sense that it is much easier for digital platforms to reach a worldwide market than traditional brick-and-mortar businesses, according to the Stigler report. The same report also discusses how insights from behavioral economics explain how consumer behavior can be and is exploited to maintain a dominant position.

As a result, internet search is free, consumers pay no fee to use eBay or Amazon, and Facebook.com Inc.’s users do not pay directly for the social network. This is not to say that there is no price. Users are giving up their data and attention.

What does all this mean for competition policy? There are some dramatic benefits. The European Commission competition report finds that consumers can “communicate seamlessly with virtually anyone around the world mostly for free,” while “the accessibility of information has greatly increased not least thanks to the emergence of new information intermediaries.” What’s more, the report finds that “the data revolution promises to bring about a revolution in healthcare, finance, mobility, and education, [with] digitization … impacting essentially every industry, from manufacturing to services to agriculture.”

But there are also dramatic risks. Without sufficient competition, innovation will slow, meaning economies fail to achieve the true benefits of these advances, and only a few firms and their shareholders will benefit from the developments that do occur. The UK competition report finds that these very same dynamics of network effects, economies of scale and scope, and near-zero distribution costs that have driven innovation in digital markets also create an opportunity to stifle competition. Digital markets are subject to tipping, or a winner-take-all scenario. Often, once one or two companies reach a certain size, they have won the market. Existing competitors wither away, and new entrants face a significant disadvantage because they must build scale and invest heavily.

This dynamic, however, does not mean that a winner of today’s market is unassailable or that competition is irrelevant. Rather, competition in these markets is different. Instead of the day-to-day competition in a brick-and-mortar market—such as in the automobile industry between and among Ford Motor Co., General Motors, Inc., Honda, Volkswagen AG, and Toyota all competing to win each customer—the meaningful competition among online platforms are during those short periods where firms in the market battle for overarching dominance, such as Google dethroning Alta Vista back in the 1990s or Facebook replacing Myspace in the 2000s. In these types of markets, we are likely to see periods of fierce competition in which a new entrant, either by offering a new or dramatically different product, seeks to dethrone the incumbent.

Those competitive wars yield tremendous benefits to users of the product, although at the end of each war, there will likely be only one or two companies standing. As a result, the incentive and pay-off from eliminating these periods of competition is larger than in traditional markets. “Competition for the market cannot be counted on, by itself to solve the problems associated with market tipping and winner-takes-most,” argue the authors of the UK competition report, because “large incumbent digital players are very difficult to dislodge.”

The acquisition of nascent competitors and possible antitrust remedies

Major digital platforms and e-commerce sites have acquired a substantial number of companies and assets over the past decade. The economic conditions of these markets, however, means that such acquisitions may prevent the short periods of competition for the market that are the source of the benefits that online markets deliver. Some have raised these concerns regarding Facebook’s acquisition of online photo platform Instagram in 2012 or its 2013 purchase of online mapping firm Waze, a potential challenger to Google’s Maps service.

In traditional, nondigital markets, if a small company is an important competitive constraint, its size and youth would suggest that another company can easily replace it. In contrast, the combination of factors that create winner-take-all markets makes it difficult to confidently conclude either that a particular nascent competitor will become a threat or that it is easily replaced. Yet these nascent threats “may be the most important source of competition faced by the incumbent firm,” according to the Stigler report. That means the cost of underenforcement—failing to prevent the acquisition of a potential competitor that would have disrupted the dominant incumbent—is high.

The UK competition report, the European Commission competition report, and the Stigler report offer related solutions. They variously suggest that antitrust regulators consider:

  • An analysis that focuses less on the likelihood a merger will have an effect and more on the cost-benefit look at a merger where the likelihood of the effect is less than 50 percent but the size of the harm is large
  • A more skeptical antitrust investigation when a market exhibits the characteristics of tipping or winner-take-all dynamics
  • A new antitrust presumption of illegality for mergers between dominant firms and uniquely likely future competitors

The bottom line is that these three reports agree antitrust law must be flexible enough to address the risks to market competition posed by the acquisition of nascent competitors by the big incumbent digital platform firms.

Online platform discrimination and possible antitrust remedies

Digital platforms and e-commerce sites, once they obtain a dominant position, can take actions that further limit competition without offsetting benefits. A dominant platform may also compete with those that rely on the platform and use its position to favor its own products. Or a dominant platform might impose rules that prevent others from developing competing platforms. Policies that make it difficult for customers to take their data from one service to another or that prevent interoperability also increase entry barriers and can limit competition.

The UK competition report, the European Commission competition report, and the Stigler report, to varying degrees, acknowledge that competition law alone is unlikely to resolve these problems and see regulation as providing a more effective solution. Broadly, the three reports suggest that antitrust law is best addressed at stopping or preventing harm, while regulatory policy can promote competition.

The three reports variously recommend that:

  • A new digital antitrust agency be established
  • A separate digital markets unit be set up within existing antitrust agencies
  • A new set of regulations specific to digital markets be crafted

In practice, this approach suggests that regulations can lower the barriers that limit competition and solve general problems. Regulations can promote interoperability, allowing companies’ products or systems to work with existing dominant online platforms. New rules that allow companies to offer complementary services on existing platforms can lead to greater competition. And regulations on data portability that make it easier for consumers to move from one platform to another can promote multihoming, where consumers or businesses use multiple platforms simultaneously.

Conclusion

There is no question that the discussion about competition on and among digital platforms and e-commerce will continue. Three recent reports discussed here, however, broadly agree that a combination of antitrust enforcement and competition-enhancing regulations likely provides the best path forward to exploiting the benefits of these markets while limiting the dangers they pose for competition.

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Weekend reading: The United States of Inequality edition

Posted on by Maria Monroe

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

Equitable Growth round-up

Need a refresher on the difference between wealth inequality and income inequality, and why intergenerational transfers of wealth are contributing to inequality? Look no further than Liz Hipple’s conversation with Fabian Pfeffer, an associate professor of sociology at the University of Michigan in Ann Arbor. Hipple and Pfeffer discuss topics ranging from racial disparities in wealth transfers across generations to the psychological processes of intergenerational transmission of wealth to how to use policy to ensure more equitable intergenerational transfers of wealth. Pfeffer’s research also touches on multigenerational wealth transmission, or grandparent-to-grandchild transfers, which, it turns out, may predict grandchild educational outcomes. “Children with parents who are similar on many, many observable characteristics are still distinct in their educational achievements depending on their grandparents’ wealth level,” Pfeffer says. “Racial disparities in wealth transmission are also stark once you expand beyond just two generations.”

This week, Brad DeLong shared his takes on two weeks of Worthy Reads from Equitable Growth and around the net.

A quick reminder to check out our 2020 Request for Proposals and 2020 Request for Proposals on Paid Family and Medical Leave.

Links from around the web

Inequality has been growing steadily in the United States for decades, to the point that in some areas of the country, the gap between the rich and the poor is reaching Roaring Twenties levels. This extreme inequality is the result of globalization policies and conscious choices made by elected leaders and the courts, writes Abby Kingsley for FastCompany. But which policy decisions, exactly, had a real impact on inequality, and when? Kingsley and her colleagues “looked through archives, examined economic programs, and [spoke] to experts in labor, trade, law, and tax policy to identify key points where policymakers chose to create inequality.” Their in-depth timeline, going back to 1949, lays out the case for how we got to this point.

Inequality may also persist because of vast power differentials between rich and poor. This has led to widening gaps in pay, supposedly based on skill level or productivity, but in reality, “skills that really matter in the workplace are much more evenly distributed than many people assume. Most low-wage workers are underpaid relative to their measured intelligence and personality traits, and many of the highest paid professionals—including doctors, lawyers, and financial managers—are overpaid according to the same metrics,” writes Jonathan Rothwell for The New York Times’ The Upshot blog. In fact, he argues, if workers were paid based on traits such as cognitive ability, years of experience, conscientiousness, and emotional stability—which he shows are evenly distributed across the population—then the United States would be as egalitarian as Sweden. And that’s without high-quality education and skills training being available to everyone.

“Democrats have a clear theory of how they’ll make the economy fairer, but do they have a theory for making it grow faster?” asks Emily Stewart for Vox. Progressives have spent a good deal of time figuring out how to redistribute resources to make the economy work for everyone, but now are looking at ways to make the markets themselves more fair, not just the benefits that markets produce. Stewart runs through how to differentiate between redistribution and growth, potential policy changes to boost innovation and productivity, and how now is a good time for progressives to be proposing these big ideas.

Friday Figure

Figure is from Equitable Growth’s “GDP 2.0: Measuring who prospers when the U.S. economy grows” by Austin Clemens.

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Brad DeLong: Worthy reads on equitable growth, November 12–15, 2019

Posted on by Maria Monroe

Worthy reads from Equitable Growth:

  1. Very nice congressional testimony on labor-side monopsony from Kate Bahn before the U.S. House of Representatives Judiciary Committee, in which she said: “New sources of data and innovative econometric methods have allowed researchers to test and confirm the premise that employers have geographic concentration over jobs that lead to lower pay. Using new data from CareerBuilder.com, economists Jose Azar at the IESE Business School at the Universidad de Navarra, Ioana Marinescu at the University of Pennsylvania, and Marshall Steinbaum at the University of Utah, Salt Lake City find that going from a less concentrated labor market to a more concentrated one was associated with a 17 percent decline in the wages employers were posting to the website. While mining towns may be more rare, increasing concentration in a number of sectors of the U.S. economy can still lend market power to individual employers, which leads to low wages.”
  2. Greg Leiserson was a panelist at the Penn Wharton Budget Model’s “The Wealth Tax Debate,” during which the panelists examined: “Presidential candidates such as Elizabeth Warren and Bernie Sanders have proposed taxes on wealth. Why a wealth tax? Will it likely raise the money they hope? What are the trade-offs? What has been the experience of other countries?”
  3. Very smart congressional testimony from Jason Furman on data and privacy in online platforms’ market power, in which he said: “The major digital platforms are highly concentrated and, absent policy changes, this concentration will likely persist with detrimental consequences for consumers. More robust competition policy can benefit consumers by helping to lower prices, improve quality, expand choices, and accelerate innovation. These improvements would likely include greater privacy protections given that these are valued by consumers. However, it is not clear that competition will be sufficient to adequately address privacy and several other digital issues. More robust merger enforcement should be part of the solution to expanding competition, including better technical capacity on the part of regulators, more forward-looking merger enforcement that is focused on potential competition and innovation, and legal changes to clarify these processes for the courts. A regulatory approach that is oriented toward increasing competition by establishing and enforcing a code of conduct, promoting systems with open standards and data mobility, and supporting data openness is essential. This is because more robust merger enforcement is too late to prevent the harms from previous mergers, and antitrust enforcement can take too long in a fast-moving market.”

 

Worthy reads not from Equitable Growth:

  1. That Uber Technologies Inc. is so exercised about being treated as an employer suggests that a substantial part of the firm’s hopes for profitability hinge on successfully running a let’s-make-someone-else-pay-for-our-workers’-social-insurance game. Read Bloomberg Law’s Daily Labor Report, “Uber Hit With $650 Million Employment Tax Bill in New Jersey,” in which it reports: “Uber Technologies Inc. owes New Jersey about $650 million in unemployment and disability insurance taxes because the rideshare company has been misclassifying drivers as independent contractors, the state’s labor department said. Uber and subsidiary Rasier LLC were assessed $523 million in past-due taxes over the last 4 years, the state Department of Labor and Workforce Development said in a pair of letters to the companies. The rideshare businesses also are on the hook for as much as $119 million in interest and penalties on the unpaid amounts, according to other internal department documents. … Uber extended declines on news of New Jersey’s efforts, falling as much as 3.9 percent. Ridehailing competitor Lyft Inc. also dropped. The state’s determination is limited to unemployment and disability insurance, but it could also mean that Uber is required to pay drivers minimum wages and overtime under state law.”
  2. Yes, we know that job training programs can be very effective. But how can we keep them effective as they scale up? Normally, we rely on markets and the profit motive to incentivize preserving effectiveness with scale. But with social insurance and other pro-poor programs, the beneficiaries do not have the social power to use the market to keep the programs that serve them on track. Read Paul Osterman, “An MIT economist on how to turn bad jobs into good ones,” in which he writes: “Research shows the benefits of retraining and raising wages outweigh the costs … Part of the problem lies in low skill levels. In Massachusetts, 53 percent of workers who earn $15 an hour or less have no more than a high school degree. But we also know that most people can improve their skills. Effective job training programs, such as those offered by the workforce development organization JVS Boston, can make a real difference. As an example, in the past year, its 12-week pharmacy technician training program placed 45 people in better-paying jobs; graduates went from earning an average of $13 an hour before gaining new skills to $17 an hour after. We have good evidence that well-run job training programs, ones that include significant investments in training, support services (for example, help with small unexpected expenses), and coaching for participants, are effective in moving people into better jobs and raising their earnings. High-performing programs are also characterized by strong relationships with employers. We know how to make these work, but we face two big challenges: spreading the model to reach more workers, and providing the resources needed to pay for it.”
  3. The point of the actions by the U.S. Senate majority and of the current political appointees at the U.S. Department of Health and Human Services is not to create flexibility, but to make it legal to provide not-insurance. Read Sarah Gantz, “A Philly Woman’s Broken Back and $36,000 Bill Shows How Some Health Insurance Brokers Trick Consumers into Skimpy Plans,” in which she writes: “She was left with $36,000 in hospital bills that she’s still paying off. ‘What the hell did I do? How did I get into this mess?’ said Martin, 54, of Horsham, PA, recalling the panic she felt after the December 2017 fall. ‘I have a broken wrist, a broken back, and I don’t have real health insurance’ … Access to these plans was limited under the Affordable Care Act, but the websites selling such plans have gotten bolder in their marketing as President [Donald] Trump and free-market Republicans chip away at ACA rules, saying people need more affordable alternatives. But shopping savvy isn’t necessarily enough to protect consumers. The insurance brokers who rely on such websites for leads use scripts carefully worded to instill trust and push consumers to act quickly.”
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Brad DeLong: Worthy reads on equitable growth, October 26–November 12, 2019

Posted on by Maria Monroe

Worthy reads from Equitable Growth:

  1. Be sure to apply by January 26 for Equitable Growth’s 2020 Request for Proposals: “Equitable Growth considers proposals that investigate the link between economic inequality and individuals’ economic outcomes and well-being, poverty and mobility from poverty, the macroeconomy, and sustainability. We are particularly interested in dimensions of inequality, including race, ethnicity, gender, and place, as well as the ways in which public polices affect the relationship between inequality and growth.”
  2. The Economist quotes Equitable Growth’s Kate Bahn in “Belligerent unions are a sign of economic health.” The article says that when “economists argue that unions impose economic costs, they typically assume that markets are competitive. Across much of the American economy that is not always the case. Sometimes one or a few big employers dominate local labour markets, and can thus impose below-market wages on vulnerable workers, a condition economists call ‘monopsony.’ In recent testimony in a congressional hearing on antitrust issues, Kate Bahn of the Washington Centre for Equitable Growth, a think-tank, noted that though wages in manufacturing industries are close to the level one would expect in competitive markets, those in some others, like healthcare, are not. For workers frustrated by stagnant pay, a work stoppage may be the only way to determine if an employer is constrained by competitive markets or abusing its market power.”
  3. An excellent podcast on Heather Boushey’s new book, Unbound: How Inequality Constricts Our Economy and What We Can Do About It, featuring her and Matthew Yglesias at Vox.

 

Worthy reads not from Equitable Growth:

  1. The U.S. economy now has a manufacturing recession. Paul Krugman correctly explains why. Read his “Manufacturing Ain’t Great Again. Why?,” in which he writes: “Many of Trump’s economic promises were obvious nonsense. The hollowing out of coal country reflected new technologies, like mountaintop removal, which require few workers, plus competition from other energy sources, especially natural gas but increasingly wind and solar power. Coal jobs aren’t coming back, no matter how dirty Trump lets the air get. And farmers, who export a large fraction of what they grow, should have realized that Trump’s protectionism and the inevitable retaliation from other countries would have a devastating effect on their incomes.”
  2. The marketplace can work well when it is competitive. I am still waiting to hear the argument made coherently that it works well when it is characterized by monopolies, monopoly platforms, or cozy oligopolies—and I think I will wait a long time. Read Thomas Philippon, “The U.S. Only Pretends to Have Free Markets,” in which he writes: “From plane tickets to cellphone bills, monopoly power costs American consumers billions of dollars a year: When I arrived in the United States from France in 1999, I felt like I was entering the land of free markets. Nearly everything—from laptops to internet service to plane tickets—was cheaper here than in Europe. Twenty years later, this is no longer the case. Internet service, cellphone plans, and plane tickets are now much cheaper in Europe and Asia than in the United States, and the price differences are staggering. In 2018, according to data gathered by the comparison site Cable, the average monthly cost of a broadband internet connection was $29 in Italy, $31 in France, $32 in South Korea, and $37 in Germany and Japan. The same connection cost $68 in the United States, putting the country on par with Madagascar, Honduras, and Swaziland. American households spend about $100 a month on cellphone services, the Consumer Expenditure Survey from the U.S. Bureau of Labor Statistics indicates. Households in France and Germany pay less than half of that … None of this has happened by chance. In 1999, the United States had free and competitive markets in many industries that, in Europe, were dominated by oligopolies. Today the opposite is true.”
  3. I have been quite surprised to discover that the 2019 Economics Nobel laureates have not received enough praise since the announcement. So, go read Oriana Bandiera, “Alleviating Poverty with Experimental Research: The 2019 Nobel Laureates,” in which she writes: “Development economics had no Ph.D. courses, no group at the NBER or CEPR, and hardly any publications in top journals until the early 2000s. What this year’s Nobel laureates did was to build the infrastructure to make fieldwork widely accessible and the methods to make the analysis credible. What they did, and what they were awarded for, is to put development economics back on center stage … What is unusual and relevant is that the nomination explicitly mentions that the winners lead a group effort … What is even more unusual and extremely relevant is that the nomination emphasizes the practical applications of their methods, which ‘have dramatically improved our ability to fight poverty in practice.’ This is a monumental change, and one that the profession should welcome for the obvious reason that making the world a better place is a desirable goal.”
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Weekend reading: Equitable Growth’s 2020 Request for Proposals edition

Posted on by Maria Monroe

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

Equitable Growth round-up

Equitable Growth released our 2020 Request for Proposals this week, kicking off the next cycle of our academic grants program. We are looking for proposals that investigate the link between economic inequality and individuals’ economic outcomes and well-being, poverty and mobility from poverty, the macroeconomy, and sustainability. We are particularly interested in dimensions of inequality, including race, ethnicity, gender, and place, as well as the ways in which public polices affect the relationship between inequality and growth. For more information, eligibility requirements, deadlines, and more, visit our 2020 RFP website.

This year, Equitable Growth also released a 2020 Request for Proposals on Paid Family and Medical Leave specifically. We are seeking proposals in this category that advance the evidence on how paid leave affects engines of economic growth such as labor force participation, the development of human capital, consumption, and macroeconomic stability. For more details, eligibility requirements, deadlines, and more, visit our 2020 RFP for Paid Family and Medical Leave website.

While many of us have been following the Varsity Blues college admissions scandal—in which wealthy celebrities paid various bribes to get their children into elite colleges—the bigger scandal ought to be the completely legal way that wealth buys access to these institutions: through expensive tutors and college prep courses, financial contributions to universities, and legacy preferences, to name a few, writes David Mitchell. Research shows that many of these mechanisms reinforce the unequal status quo, allowing rich students to get into elite colleges and universities, and restricting access for bright and talented low-income students to the very opportunities that could help them improve their economic outcomes in adult life. Mitchell details the various ways elite colleges give wealthy students advantages, how this affects the student bodies at these institutions, and concludes with some of the policy solutions that have been put forward to address these issues.

The U.S. Bureau of Labor Statistics late last week issued its monthly report on the U.S. labor market for October. The employment rate for prime-age workers is continuing its upward trend, but black and Hispanic unemployment rates remain higher than those of white workers, as do employment rates in service-sector jobs (as opposed to manufacturing and construction). The data also show that the share of unemployed workers re-entering the labor market has been declining for the past six months. Raksha Kopparam put together five graphs highlighting these important trends in the monthly announcement.

The U.S. Bureau of Labor Statistics also released the September data from the Job Openings and Labor Turnover Survey, or JOLTS. Kopparam and Austin Clemens produced four graphs using the data, which demonstrate that while the job opening rate has declined slightly, the number of hires made per job opening appears to be trending upward and the quits rate has remained steady for more than a year.

Links from around the web

This month’s jobs report continues to show decreasing unemployment and more jobs being created in the U.S. economy. But, write Arne Kalleberg and David Howell for Business Insider, there’s more to the story than meets the eye. While job quantity may be rising, job quality has been steadily decreasing for the past 40 years. In other words, U.S. workers may be employed, but many are working in jobs that pay less and are less able to provide a decent standard of living—especially for young, less-educated workers. Kallenberg and Howell suggest two main courses of action to reverse this decades-long trend—resetting corporate norms to protect workers over profits and giving workers more power at work by passing state and federal labor laws.

New research shows the prices of products that the bottom income quintile buys have increased faster than the prices of products the top income quintile purchases, leading low-income families to experience an annual rate of inflation that is almost 0.5 percentage points higher than that of wealthy families, writes Annie Lowrey for The Atlantic. And income inequality is exacerbating this inflation inequality: Richer people have more and more disposable income, which incentivizes retailers to cater to higher-end clients, increasing the number of these retailers, leading to more competition for those consumers, more product innovation and product choice for those consumers, and lower prices for the goods those consumers purchase. Unfortunately, the same cannot be said for retailers of products that low-income Americans tend to purchase.

Amit Kapoor and Bibek Debroy argue that it is “time to acknowledge the limitations of GDP and expand our measure of development so that it takes into account a society’s quality of life.” In the Harvard Business Review, the two look at India as an example, where they are working with the government to develop a so-called Ease of Living Index to measure quality of life, economic ability, and sustainability as a complement to GDP to provide a more comprehensive view.

Many families in the United States today face an unfathomable choice: taking care of unwell family members or retaining a meaningful, well-paid job. Kristina Brown, a fourth-year medical student, describes her family’s own experience with this impossible choice in The Washington Post: “Like many families, we could not afford full-time coverage. This posed a life-altering dilemma: One of us had to stay home to care for [our mother].” Brown continues to describe the setbacks she and her sister will almost inevitably face as a result of their difficult situation and the lack of resources and support available to people like them: “Caregiving fuels generational poverty, disproportionately affecting millennials and women who take on that role in their families.”

Friday Figure

Figure is from “Equitable Growth’s Jobs Day Graphs: October 2019 Report Edition” by Raksha Kopparam.

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Higher education is not the U.S. mobility engine it could be because admissions practices are rigging the system

Posted on by Maria Monroe
Harvard University students and family gather for graduation ceremonies on Commencement Day on May 29, 2014 in Cambridge, MA.

Higher education in the United States has historically been a source of economic mobility—a ticket to the middle class and higher—for millions of Americans. But at a time of sustained high economic inequality, there is growing evidence that admission practices such as legacy preferences have turned some elite colleges and universities into protectors of the economic—and racial—status quo.

One by one, the rich and famous are going to jail in the Varsity Blues scandal, the college admissions imbroglio in which the culprits used bribery and other means to get their children into the college of their parents’ dreams. But did the wealthy parents of their college-bound kids really need to rig the system? In fact, their scheming has focused attention on the enormous routine advantages already possessed by students from families of means, all of which are entirely legal.

The far greater societal scandal than the pitiful actions of these few desperate, wealthy parents is the tutors, the SAT classes, the costly extracurricular activities, the resources to make contributions to colleges, the ability to make early action decisions without needing to wait for financial aid packages, and, for some, legacy preferences that the children of wealthy families enjoy. As Richard Reeves of The Brookings Institution writes, “The difference between this illegal scheme and the legal ways in which money buys access is one of degree, not of kind.”

Research over the past few years makes it clear that elite institutions enroll elite—meaning relatively wealthy—student bodies. Former Washington Center for Equitable Growth Steering Committee member and Harvard University economist Raj Chetty and several colleagues have shown in their paper “Mobility Report Cards: The Role of Colleges in Intergenerational Mobility” that among the “Ivy-Plus” colleges (the eight Ivy League schools, plus four other top universities), “more students come from families in the top 1 percent of the income distribution (14.5 percent) than the bottom half of the income distribution (13.5 percent).” Fewer than 4 of every 100 students at these schools come from the bottom one-fifth of the income distribution.

Disturbingly, the percentage of students from this bottom 20 percent at these universities did not change between 2000 and 2011, despite substantial tuition reductions for low-income students (as well as middle-class students at some schools) and specific outreach efforts, according to Chetty and his co-authors.

This is not a question of ability. According to Chetty and his co-authors, children from low- and high-income families who attend these elite schools generally achieve similar earnings outcomes. So, these colleges do represent an opportunity for significant mobility for poor students. Indeed, 60 percent of students at these schools who come from the bottom fifth of the income ladder reach the top fifth as adults.

But they have to get into the elite college in the first place. And there’s the rub.

Such efforts as the American Talent Initiative and the CLIMB Initiative bring together four-year colleges and universities at all levels across the country to try to help more low-income students enroll and succeed in college. And research by University of Michigan economist Susan Dynarski and her colleagues shows that elite institutions can expand their applicant pools and enrollments among high-achieving low-income students by encouraging them to apply and offering them unconditional full tuition grants.

Yet elite institutions’ own admissions practices might be standing in the way, giving wealthy white students distinct advantages over others—advantages that they hardly need. Many or most of these schools pile specific preferences on top of the routine advantages of wealth:

  • For children of alumni with legacy preferences
  • For children of donors to the institution
  • For children of faculty members and other employees
  • For student athletes who participate in a vast array of mostly upper-class sports

Legacy admissions are an especially pernicious practice. A wide range of commentators have called for its elimination. “I really don’t see how our best universities can continue to justify this practice,” said William Dudley, Federal Reserve Bank of New York president, in an October speech quoted by Melissa Korn in The Wall Street Journal. “Such an approach only preserves the status quo and constrains economic mobility.”

Between 2010 and 2015, Korn notes, legacy applicants at Harvard were five times as likely to be admitted to the school as nonlegacies. At the University of Notre Dame, the University of Virginia, and Georgetown University, she added, the legacy admission rate is double the rate for all applicants. At Princeton University, it is four times that rate. And at Notre Dame, legacies outnumber first-generation college students by more than three-to-one. In fact, writes Richard D. Kahlenberg in his introduction to Affirmative Action for the Rich: Legacy Preferences in College Admissions, nearly all liberal arts colleges and almost three of every four research universities offer a legacy preference.

Colleges and universities—especially private institutions—jealously guard their admissions policies and practices from public view. But a recent lawsuit against Harvard University yielded a treasure trove of data about how the school decides whom to admit from the 40,000 or so students who apply every year. With only 1,600 spots in the freshman class available, there is intense interest in every admission decision.

Earlier this year, Peter Arcidiacono of Duke University, Josh Kinsler of the University of Georgia, and Tyler Ransom of the University of Oklahoma published two papers that describe the impacts of Harvard’s admission preferences—legacy, children of donors, children of faculty or staff, and student athletes. They estimated, based on a Harvard Crimson survey of the incoming freshman class in 2015 (known as the class of 2019, for their anticipated year of graduation) that 40.7 percent of respondents with legacy status have parents who earn more than $500,000 annually (the top 1 percent in U.S. income). The corresponding share for all respondents, including legacies, is only 15.4 percent—still large but far lower than for legacies alone.

The racial effects of the four preferences at Harvard are stark, according to Arcidiacono, Kinsler, and Ransom. More than 43 percent of white students admitted to the Harvard classes of 2015—2019 (admitted 2011—2015) received a preference of some kind, whether legacy, donor, children of faculty and staff, or athletic. For African American, Asian American, and Hispanic admits, the share with such a preference was less than 16 percent.

What’s more, it is white students who get the biggest admissions boost from the preferences. Indeed, the authors estimate that only one-quarter of white students admitted to Harvard with one of these four preferences would have been admitted had they been treated as “regular” applicants. Compare that to the more than one-half (53 percent) of Hispanic legacies who would likely have been admitted even without a parent alumnus. Harvard, of course, is not the only school that uses a legacy preference, and while we can’t perfectly extrapolate these findings to other schools, there is reason to believe that the policy also biases admissions against the poor and people of color at other schools.

While the number of preferential admissions—even across all the colleges that use them—is not very high as a percentage of all college students, there is no denying that the practice limits the number of openings for highly talented low-income students and students of color. Perhaps just as importantly, it also corrodes trust in institutions that hold themselves out to be bastions of American meritocracy.

Equitable Growth President and CEO Heather Boushey writes in her new book, Unbound: How Inequality Constricts Our Economy and What We Can Do About It, that concentrated economic power subverts the institutions that shape society, protecting the wealth and status of the rich. She also writes about the ability of parents of means to devote far more time and energy than other parents to their children’s preparation for and participation in the college admissions competition, one of countless ways inequality obstructs too many children from fulfilling their potential. Elite, well-endowed colleges and universities could help push back against both these troubling trends if they were willing to buck their rich and powerful alumni.

A number of policy ideas have been put forward to address this issue. Wealthy colleges argue that the recent tax on large endowments imposed by the Tax Cuts and Jobs Act of 2017 was mainly a political gesture that infringes on their missions of research, education, and community service. But Aaron Klein and Reeves suggest that the tax could be modified to create incentives for colleges to enroll more students from lower-income families, including by the elimination of legacy admissions.

A New York Times editorial calling for the elimination of legacy admissions points to a bill introduced in the California state legislature that would bar any school with legacy or donor preferences from participating in the state’s need-based grant program. The editorial writers suggest other ideas, such as requiring colleges to make public the number of their students admitted with a legacy preference or barring schools from asking applicants where their parents went to college. The editorial also suggests a voluntary approach—that a group of competitor schools “take the leap together, a mutual stand-down.”

In his book introduction, Kahlenberg cites data showing that legacy status “is worth the equivalent of scoring 160 points higher on the SAT.” He notes that legacy preferences “were born of anti-immigrant and anti-Jewish discriminatory impulses,” adding that they “are an unfair and illegal anachronism … [T]hey are fundamentally anti-American, at odds with the very founding of this nation … That this remnant of ancestry-based discrimination still survives—in American higher education of all places—is truly breathtaking.”

The leaders of higher education need to change these discriminatory, out-of-date practices if they want to restore their institutions’ role as the key to economic mobility our country so desperately needs.

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New paid leave research demonstrates challenge of balancing work and caregiving

Posted on by David Evans
Aimé Perret, The lettuce patch

Paid leave supports people who hold dual roles as members of the workforce and members of families. Effort expended in worksites from office buildings to restaurant kitchens to factory floors provides crucial goods and services to people living in the United States. So, too, does work done in homes—from the production of goods such as home-cooked meals to the provision of services such as house cleaning and assistance to family members trying to access medical care. New research on paid leave in California demonstrates the challenge of balancing the dual nature of our obligations as employees and caregivers.

Four economists—Martha Bailey of the University of Michigan, Tanya Byker of Middlebury College, Elena Patel of the University of Utah, and Shanthi Ramnath of the Federal Reserve Bank of Chicago recently released a new paper that draws on rich administrative data and high-quality surveys to examine how an expansion in paid leave in the state of California in 2004 affected both the parenting experienced by the next generation and the work effort of the current generation.

The key takeaway of their research is that between 2004 and 2006, mothers who were having their first child and accessed paid leave in response to the policy change parented more intensively but earned less and were less likely to work both in the short term and long term. These first-time mothers who took up paid leave after the policy change were 2.8 percent less likely to work in the short term and 5.4 percent less likely to work in the long term.

To arrive at this conclusion, the researchers took advantage of a “natural experiment.” Since 1946, women giving birth in California have had access to publicly funded temporary disability insurance—medical leave that women can take for 6–10 weeks depending on their medical condition preceding and following the birth of a child. In the third quarter of 2004, the state added an additional 6 weeks of bonding leave, available to both mothers and fathers to care for a new child. So, on July 1, 2004, the maximum length of paid leave available to new mothers increased from 10 weeks to 16 weeks.

This change spurred many more women to take paid leave. Mothers exposed to the policy change after 2004 were 18 percentage points more likely to use paid leave than similar women who were not exposed to the change prior to that year. (See Figure 1.)

Figure 1

The researchers compared women who wouldn’t have taken up paid leave but for this policy change to similar women who did not experience the policy change—women who gave birth just prior to July 1, 2004, and women in similar states without paid leave policies. They look at women at many points across time, which allows them control for characteristics of the leave-takers that don’t vary over time. They also look at a variety of different groups of women—across age groups, marital status, and income level.

Perhaps the key subgroup whose experiences they examine are women who are giving birth for the first time. These are women who have not yet settled into a routine of parenting, so their experiences are likely to be different from women who established routines when they could not access the expanded paid leave for their first child. And this is likely to be the most policy-relevant group going forward: In the future, hundreds of thousands more women will have first children with access to state-provided paid leave in the state of California, but never in the future will women who continuously live in California have one or more children without access to paid leave and then have another child with access to paid leave.

Using survey data from the U.S. Census Bureau’s Survey of Income and Program Participation, the research team finds that first-time mothers who took up paid leave in response to the policy change spend more time reading to their children, taking them on outings, and eating breakfast as a family, compared to similar mothers not exposed to the paid leave policy change. The researchers surmise that when women take time off for paid leave, they develop a more intensive parenting style than women who have to balance work and parenting from the very beginning of their children’s lives.

This finding squares well with evidence from other studies that suggests that paid leave increases the duration of breastfeeding, reduces pediatric head trauma, and lowers rates of attention deficit/hyperactivity disorder among children, as well as their rates of obesity, ear infections, and hearing problems. Intensive parenting doesn’t just improve child health in the short term, but also improves the long-term educational and labor market outcomes of those children.

The study finds, however, that this critical work at home comes at the price of lost opportunity in the paid labor force for new mothers. Bailey, Byker, Patel, and Ramnath find that first-time mothers who took up paid leave in response to the policy change were 2.8 percent less likely to work when their child was between 1 and 5 years old, and 5.4 percent less likely to work when their child was between 6 and 12 years old than similar mothers not exposed to the policy change. The four economists find that this effect holds for almost all subgroups of mothers. (See Figure 2.)

Figure 2

Among mothers who do work, earnings are also affected. First-time mothers who took up paid leave in response to the policy change earned 6.1 percent less in reported wages when their child was between 1 and 5 years old, and 5.3 percent less in reported wages when their child was between 6 and 12 years old (note that these figures don’t include earnings from self-employment or unreported earnings). Similar to the employment findings, this effect holds for almost all subgroups of mothers. (See Figure 3.)

Figure 3

Importantly, the four researchers measure earnings by looking at the wage earnings reported by workers on tax forms, so they can’t determine the number of hours worked, the types of jobs worked, or wage rates. But because they uncover large effects for first-time mothers only, they hypothesize that changes are being driven by changes in family behaviors—such as mothers spending more time parenting and less time in paid work or working at more flexible jobs with lower pay. This suggests that the increased investment in parenting encouraged by paid leave is not compatible with strong labor market attachment in our current policy context.

Without a doubt, the change to California’s paid leave policy that occurred in 2004 made big changes in the lives of California women with children. They were more likely to take up paid leave and take it for longer. They parented more intensively, were less likely to work outside the home, and earned less in reported wages.

In contrast, the lives of men with children in California didn’t change much. Fathers took up paid leave at low rates (3 percent to 4 percent). In heterosexual married couples, when women intensified their work in the home and ramped down their paid work, their husbands did not increase their earnings to compensate. If heterosexual men felt the effects of paid leave, then it was through the changed behavior of their partners and the changed experiences of their children, not through changes in their own behaviors.

Taken as a whole, the study’s findings sit in sharp contrast to earlier work that indicates that the labor force participation of women in the United States is unaffected by paid leave, or even increases. As is the case for any research study, careful readers are likely to raise further questions about the findings. For example: Would the effects on earnings seem so large if we included earnings that are not recorded as wages on W-2 tax forms? The researchers report on average experiences, but might there be two types of responses from women—one type that increases attachment to the labor force and one type that diminishes that attachment—which average to the effect sizes they uncover?

Still, the rich data and rigorous methods underpinning the findings by Bailey, Byker, Patel, and Ramnath suggest that the findings hold water overall, and the key questions relate to their generalizability rather than their veracity.

The cohorts of mothers in the “treatment” group took up paid leave at a time when the paid leave policy was new and did not include job protection, in an economic context of expansion, and in a social context in which their male partners were unlikely to take full advantage of the leave available to them.

Since then, California women have had children in contexts that differ from that of the women in the study period. They have taken paid leave when the policy was more widely known about and included job protection and higher wage-replacement rates. They have entered motherhood during moments of serious economic recession and parented elementary-schoolers in moments of economic expansion—in contrast with the women in the study, whose children entered school age during the Great Recession and sluggish recovery. And they have shared household responsibilities with men who are far more likely to take paid leave themselves. Men’s rates of take-up of paid leave to care for a new child increased from 3 percent to 4 percent in 2004 to 15 percent in 2017, which is a rate almost equal to that of women—40 percent of bonding claims were filed by men in 2017.

So, given the context of the research, what lessons can policymakers take away from this new research? This is a rigorous study that should be taken seriously by the policy community. For the women in the treatment group—and for more than 200,000 Californians each year—paid leave to care for a new child makes a difference. Families can care for their children with less worry about short-term financial insecurity and subsequently the more-intensive parenting appears to persist at least until their children complete elementary school.

But perhaps the key takeaway from Byker, Bailey, Patel, and Ramnath’s research is that our economy, our workplaces, and the way our economy and society divide labor along gendered lines may prevent families from simultaneously prospering financially and parenting intensively. This study illustrates the challenge of designing a single policy that can overcome these cultural and structural barriers. In California at the time the study was conducted—and still today—childcare was expensive and in short supply. A more effective and affordable system of childcare provision that could support parents in providing the high-quality supervision that children need through elementary school, while allowing both parents to work.

Yet other research does point to tweaks to paid leave policy that could improve labor market outcomes for mothers. When countries from Canada to Denmark implement policies that encourage fathers to use paid leave, work inside the home is divided more equitably between members of heterosexual couples, and mother’s earnings from work outside the home increase.

Future research in the U.S. context will show whether the findings from Bailey and co-authors’ study persist in other contexts. If they do, these other cases will offer instructive examples of tweaks to paid leave policies and policy pairings that could yield large dividends for parents’ productivity at home and at work.

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JOLTS Day Graphs: September 2019 Report Edition

Posted on by Raksha Kopparam

Every month the U.S. Bureau of Labor Statistics releases data on hiring, firing, and other labor market flows from the Job Openings and Labor Turnover Survey, better known as JOLTS. Today, the BLS released the latest data for September 2019. This report doesn’t get as much attention as the monthly Employment Situation Report, but it contains useful information about the state of the U.S. labor market. Below are a few key graphs using data from the report.

1.

The quits rate has been stable at 2.3% or 2.4% for more than a year.

2.

The number of hires made per job opening appears to be trending up now.

3.

There has been little movement in the number of unemployed workers per job opening.

4.

The job opening declined slightly, to its lowest point since March of 2018.

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Equitable Growth’s Jobs Day Graphs: October 2019 Report Edition

Posted on by Raksha Kopparam

On November 1st, the U.S. Bureau of Labor Statistics released new data on the U.S. labor market during the month of October. Below are five graphs compiled by Equitable Growth staff highlighting important trends in the data.

1.

The employment-to-population ratio for prime-age workers continued its upward trend from 80.1% in September to 80.3% in October, after a steady increases over the prior months.

2.

Average hourly earnings grew at 3.0% year over year, however there is no evidence that the tight labor market is exerting upward pressure on wages.

3.

The unemployment rate for Black workers continued to decline to 5.4% in October, while the Hispanic workers’ unemployment rate increased slightly to 4.1%, but both still remain significantly higher than the unemployment rate for White workers.

4.

The share of unemployed workers who are re-entering the labor market has been trending downward for 6 months.

5.

Employment growth continues to be dominated by service sector jobs like healthcare, which increased by 34,000 jobs in October, while manufacturing saw a decrease in 36,000 jobs.

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