Ben Casselman at the Wall Street Journal wondered last month whether the economy was doing better than the GDP numbers suggested. By contrast, we learn today that even GDP hasn’t done as well as those GDP numbers suggested.
The latest from the Bureau of Economic Analysis indicates that the economy was smaller in the first three months of 2013 than previously reported. In May, BEA reported 2.4 percent economic growth in the first quarter of the year. Today, that figure was revised down to 1.8 percent.
Domestic demand for all newly-produced goods and services contributed 1.3 percentage points to GDP growth—revised down from 2.0 percentage points in April’s estimate. All categories were revised downward, with personal consumption contributing 1.8 percentage points rather than 2.2, fixed investment contributing 0.4 percentage points instead of 0.5, and government expenditures subtracting 0.9 percentage points down from a previously reported -0.8.
Foreign demand was revised down as well. Though exports had been thought to have added 0.4 percentage points to GDP growth, BEA now reports that exports fell, subtracting 0.2 percentage points.
At least one observer had previously pointed to the rebound in inventory accumulations as indicating “future consumer spending” but that rebound was much smaller than initially thought— adding only 0.6 percentage points to economic growth, rather than 1.0.
All in all, this is very bad news for how the economy performed in early 2013. Major historical revisions are on the way next month. Perhaps the second quarter numbers will look better than the first. The downward revisions to the first quarter data makes that a lower bar.
While many are celebrating the Supreme Court’s decision granting marriage equality to same sex couples, some have been quick to highlight the potential budgetary costs of this decision. In particular, opponents of the court’s ruling are warning the public that it will lead to much higher costs for Social Security.
Before anyone rushes to push through a constitutional amendment, it would be worth trying to get an idea of the potential costs to Social Security resulting from this decision. Essentially the decision says that same sex couples have the right to be married and enjoy the same benefits and protection that Social Security provides to heterosexual couples.
There would be some issues involving children of spouses of disabled workers or workers who have an early death, but the bulk of the impact will be from spouses in same sex couples who will be entitled to a higher retirement benefit as a result of marriage. This takes two forms. First, in retirement a spouse is entitled to half of their married partner’s benefit if this would be larger than the benefit they would receive based on their own work history. Second, after a spouse dies, a retiree is entitled to the higher of either their own benefit or their spouses. By virtue of the fact that same sex couples will now be able to have the same rights in marriage as heterosexual couples, both of these channels will lead to higher benefit payouts.
Of course in the vast majority of cases, the wage-based benefit of the lower earning spouse will be more than half of the benefit of the higher earning spouse. The reason is that the benefit structure is very progressive. Suppose that a higher earning spouse had an average lifetime indexed-earnings of $100,000 in 2013 dollars. Under the current benefit formula this worker would be entitled to $2,500 a month or $30,000 a year, if he or she waited until age 66 to start collecting benefits.
In order for a worker’s wages to qualify them for at least half of this benefit or $1,250 a month, they would need average earnings of just $29,750 a year (@ $15 an hour for a full-year worker), less than one-third of their high earning spouse’s wages. While there continue to be large gaps between male and female earnings, the gaps are likely to be smaller between the earnings of two men or two women in a same sex marriage. Therefore it is likely that in the case of most same sex couples, the lower earning spouse will have a wage-based benefit that is at least half as high as that of the higher earning spouse. In the cases where this is not true, the bump up to half of the spouses benefit is likely to be small.
The Coalition for Sensible Safeguards (CSS) released a report this month detailing several would-be federal regulations currently delayed by bureaucratic logjams. Business interests lobby the White House Office of Information and Regulatory Affairs (OIRA) and draw out the rule-making process with lawsuits and meetings, often forcing OIRA and other agencies to miss important statutory deadlines. Aptly titled “Down the Regulatory Rabbit Hole: How Corporate Influence, Judicial Review and a Lack of Transparency Delay Crucial Rules and Harm the Public,” the report argues for numerous pending rules that would regulate automobile rearview visibility, silica dust exposure levels for construction workers, coal ash waste containment, imported foods, wage standards for homecare workers, energy efficiency standards and consumer financial protections. What holds this seemingly disparate list of demands together is an urgent cry for an effective federal regulatory system that protects workers and consumers from corporate interests.
At a time when the issue of jobs is a high national priority, one proposal around wage standards for homecare workers stands out. Specifically, CSS calls to expand the Fair Labor Standards Act (FLSA) to cover homecare workers, a change that has been under OIRA review for the past two years. Since 1974, homecare workers have been excluded from federal minimum wage and overtime requirements by an exemption intended for casual workers, such as teenage babysitters. However, this rule does not reflect the reality of today’s industry. As CSS reports, homecare is a growing and increasingly formalized industry made up of approximately 2.5 million workers nationally. Outdated labor standards mean that, according to Think Progress, “…many home care workers make below minimum wage and aren’t paid overtime, even if they live with their clients…[and] nearly 40 percent of these workers make so little that they turn to public benefits such as food stamps or Medicaid to get by.”
Prospects for homecare workers at the state level are mixed. While many homecare workers are protected by state minimum wage and overtime laws, 28 states have no such mandates. According to the Paraprofessional Health Institute and National Employment Law Project, in 2010, 15 states granted specific wage and overtime rights to homecare workers while seven states had wage minimums without overtime coverage. Moreover, many of the state wage and overtime protections exclude certain workers such as “personal attendants” and those employed directly by private households.
In the great state of California, approximately 360,000 largely unionized homecare workers are employed by In-Home Supportive Services, a state program subsiding homecare services for around 450,000 elderly, blind, and disabled residents. Since California already extends minimum wage requirements to homecare workers, revising the FLSA would impose new overtime rules on California, costing what detractors estimate at $150 million per year. Among them is California’s Governor Jerry Brown, who the Los Angeles Times reports would likely respond to the new rule by limiting the hours state homecare workers may work, effectively cutting the amount of care beneficiaries receive and pitting advocates for the disabled against labor.
As with the case of homecare workers and the FLSA, our regulatory system speaks to our national values. Rather than pay the true price of elder care, energy, construction, etc., we often opt for the absolute cheapest goods and services. Never mind the external costs to workers and consumers. A strong regulatory system lifts those costs off the backs of our neighbors, protects us from similar harm, and makes us all better off.
One of the most compelling lines put forward by those seeking cuts in Social Security and Medicare is that spending on the elderly is coming at the expense of our children. The people putting forward this argument typically point to the high percentage of children living near or below the poverty line. The argument is that if we could cut money for programs that primarily serve the elderly then we would free up money that could be spent to ensure that the young get a decent start on life.
There are many reasons this logic is faulty, most importantly by implying that there is any direct relationship between the money we spend on seniors and the money we spend on our children. Even if we were to cut funding for Social Security and Medicare there is no mechanism that ensures the money saved would go to helping children. It is entirely possible that the money would simply be diverted to tax cuts targeted to the wealthy or for some other purpose.
As a practical matter, if we look across countries we find that there is actually a positive relationship between spending on the elderly and spending on children. Countries that have been willing to commit a larger share of their output to ensuring that seniors enjoy a decent standard of living also seem willing to commit the necessary resources to ensure that their children have a good start in life.
While there may actually be no tradeoff between spending on seniors and spending on kids, there do appear to be other tradeoffs. For example, if we look at the share of GDP devoted to finance we find solid evidence of an inverse relationship with the willingness to support children.
Figure 1 graphs government spending per kid divided by per capita GDP against the share of GDP originating in the financial sector. There is a significant negative relationship, meaning the larger the share of the financial sector in the economy the less money is spent on kids. (The countries are all the OECD countries for which data is available, excluding former Soviet bloc countries.)
The chart clearly shows that countries with larger financial sectors are less generous to their children. While this hardly proves causation (it could be that if countries spend more money on their kids they won't go into finance), it certainly should raise questions as to whether financial interests are hostile to public spending on kids.
It is widely believed that volunteering improves people’s job prospects during economic downturns, however there is actually little research on the effect of volunteering on employment and pay – that is until now. This week not one, but two studies were released which found that volunteering increases the probability of employment of people who were not previously employed.
My study “Does It Pay to Volunteer?” and a study “Volunteering as a Pathway to Employment” conducted by the government agency Corporation for National & Community Service (CNCS) both examined this issue. Both studies relied on the BLS/Census survey on volunteering and used the same general methodology. And both studies found that volunteering improved the probability of employment significantly.
The two studies covered somewhat different groups of people. The CNCS study looked at people who wanted to work at the beginning of the 12-month period, while my study looked at everyone who was not previously working, including recent graduates who were not necessarily looking for work before they volunteered. The studies also looked at different time periods – my study looked specifically at the recession years, while the CNCS study looked at a 10-year period from 2002-2012. Finally, the studies looked at different age groups – my study looked only at the working-age population defined as 20-65 years old, while the CNCS study looked at everybody over the age of 16. Despite these differences, the overall findings are similar in the two studies, lending further support to the conclusion that volunteering does improve job prospects.
However, my study went one step further, and looked not only at the event of volunteering, but also the amount volunteered. It found that the number of hours that a volunteer engages in volunteer activities does matter. For people who volunteered less than 20 hours in a year, volunteering did not improve job prospects or at best had a small effect. However, for people who volunteered between 20 to 99 hours in a year, volunteering increased the probability of landing a job by 6.8 percentage point on average.
This is not really a surprising finding, since one would not expect that volunteering for a few hours, such as washing dishes in a homeless shelter at Thanksgiving, would be associated with much skill acquisition or network building. Moreover, brief volunteering would be a weak signal to prospective employers about a person’s abilities, motivation, initiative, creativity, or reliability.
The fact that volunteering only few hours is not associated with increased employment means that people who are more committed to servicing the community through volunteering and put in a substantial number of hours face even better odds of employment than the estimates in the CNCS study imply.
The study also found that there was no effect for people who volunteered more than 100 hours. Presumably these hardcore volunteers for the most part viewed volunteering as an alternative to paid employment.
In a post for Juncture, IPPR's Journal of Politics, economist Dean Baker, co-director of the Center for Economic and Policy Research, wrote a memo on how he would advise Mark Carney, the incoming governor of the Bank of England.
Since you’re no doubt getting a great deal of advice about how to address the current downturn, let me step back and look at the longer-term picture. Central bankers, including your predecessor, have fallen down on the job by not taking asset bubbles seriously. Contrary to the folklore that was popular during the days of the ‘Great Moderation’, it is not easy to clean up the mess after an asset bubble has burst.
Collapsed asset bubbles are likely to lead to periods of prolonged weakness, as we are now seeing in the UK, the eurozone and the United States. The basic point is simple: large asset bubbles distort the economy. In the case of the housing bubbles that afflicted most wealthy countries in the last decade, these led to excessive building and extraordinary levels of consumption through the housing wealth effect. There is no easy way to replace these sources of demand when a bubble bursts.
This means that it is incumbent on central banks to prevent the growth of dangerous bubbles. Higher interest rates are one possible tool, but it is worth trying less-drastic steps first.
The initial route is simple: talk. Central banks have the public’s ear. If they not only argue for the existence of a bubble but carefully document the case with research as well, it will be harder for the public to laugh off the evidence. This may not work, but what’s the downside? Talk is cheap.
Second, there are regulatory tools that can be used to try to stem the flow of finance that fuels a bubble. These should be used to their fullest possible extent.
Higher interest rates are a last resort, but are certainly preferable to the alternative, allowing bubbles to grow as large as those we saw in the last decade.
Targeting 2.0 per cent inflation is something that only matters to economics nerds and bankers – bubble-fighting is an agenda that makes a difference for the whole country.
It’s really hard to explain the outsized incomes of those at the top without pointing fingers at the government. Take N. Greg Mankiw. Earlier this month he produced a paper, “Defending the One Percent,” to be published in a major economics journal.* Mankiw opens with a little thought exercise about a world of perfect equality. He supposes that supply and demand in this world “happen to produce” such a market outcome and that the outcome is one of perfect efficiency.
Mankiw then goes on to suppose that an entrepreneur disturbs this “utopia” by producing new products which everybody likes, and so makes a whole lot of money and income is no longer equally distributed. He then wonders to what extent his or her income should be redistributed to everyone else.
Hilariously, Mankiw’s asks us to think of Steve Jobs, J.K. Rowling, and Steven Spielberg. All three have in real life amassed incredible wealth it is true. But none of the three could have amassed that kind of wealth in a free market. All three owe their incomes primarily due to government interference in the free market.
Spielberg may have great ideas for movies, and it may have cost millions of dollars to film an E.T., but the second copy and third copies cost almost nothing to produce. Yet this 31-year-old movie is $14.96 at Wal-Mart. Rowling’s Harry Potter series is available as an e-book. Copies of the complete series may be produced at zero cost—yet consumers must pay $57.54 for theirs. I enjoy Apple products, but once under production, a new iPod touch costs far less than $299.
In a classroom-economics sense, these kinds of gaps between what it costs to produce another unit and the price in the market should not exist—and is highly inefficient. People can copy DVDs for a couple cents or share e-books for nothing. And people frequently do. But Spielberg and Rowling are able to charge a relative fortune for copies of their work because the government makes it illegal for anyone to produce what they produce. Apple, at least, makes something physical in the iPod, but still suffers no competition. The government does not allow anyone else to make iPods—or indeed anything too similar.
This allows Universal, Sony, and Apple to charge much more than they could in a free market. Of course, all three examples required an enormous amount of up-front costs. The iPod had to be designed and redesigned by some rather creative folks, and setting up a factory to produce them requires large sums of money. Rowling couldn’t know that her stories would be so well received when she wrote them. E.T. cost an estimated $10.5 million to produce. Certainly, granting the creators of these products protection from any competition has allowed them to recoup their losses.
Certainly, these are works of value, and perhaps these works would never have been created but for the promises of government. However, I favor more efficient ways to finance creative works. Artistic Freedom Vouchers could support hundreds of thousands of people producing works for the public domain. The public already finances much of basic pharmaceutical research, and public financing of clinical trials could save tens or hundreds of billions of dollars per year in lower drug prices.
Still, the financial successes Mankiw offers cannot possibly be attributed to the free market. Mankiw should not be wondering if the government should get involved in redistributing income away from these entrepreneurs, but rather the degree to which the government already redistributes income to them. Mankiw surely knows his examples are terrible. Whether he has given it any thought is another matter.
* Thanks to Jurriaan Bendien for bringing this to my attention.
A lot of academic research supports the finding that, on average, small businesses pay lower wages to their employees than larger businesses. This “size-wage premium” was recognized as early as 1911 by Henry Moore, who focused on the benefits and conditions of Italian working women working in textile mills (as cited by Oi and Idson, 1999, p. 2172). Since then, researchers have expanded the studies to account for employee characteristics and job conditions at a large variety of industries and locations. Every major study has confirmed that, on average, larger employers offer their employees higher wages.
Economists have suggested several explanations for this phenomenon, though many of the hypotheses have been difficult to test empirically. Some assume that larger employers, who are more likely to be more profitable, simply have more of an ability to pay their workers better wages (also known as rent-sharing). Others have proposed that larger firms may offer a "compensating differential" to make up for poorer working conditions at the larger firms, but the evidence suggests that working conditions and benefits are also better at larger establishments. A more promising explanation argues that workers with different productivity levels get “sorted” into establishments of different sizes.
Evans and Leighton (1989), for example, found that more “stable” workers (married, low frequency of past terminations) were more likely to be in larger businesses, which are typically less likely to fail than smaller ones. Todd Idson (1993) found that this sorting improved the “internal job markets” of larger employers, allowing employees to develop their skills and increase their productivity. Though not conclusive, research performed to date suggests that greater job tenure and wider array of opportunities offered by larger employers are also associated with greater productivity and compensation than smaller counterparts.
Earlier this month, the Movement Advancement Project, Human Rights Campaign, and Center for American Progress released “A Broken Bargain: Discrimination, Fewer Benefits and More Taxes for LGBT Workers,” a thorough examination of the unique economic hardships faced by many LGBT workers in the United States. According to the authors, inadequate legal protections and exclusionary family policies weaken job security and lead to lower compensation for LGBT workers, especially transgender workers.
Complete with heartbreaking personal testimonies, the report provides ample statistical evidence to show systemic employment discrimination based on sexual orientation and gender identity. Federal protection against these forms of employment discrimination—stemming from Title VII of the Civil Rights Act—is limited in scope, while state-level nondiscrimination laws vary greatly from state to state. This leaves an estimated 4.3 million LGBT people vulnerable. As the authors report, only 16 states and the District of Columbia prohibit employment discrimination based on gender expression and gender identity, while 21 states and the District of Columbia protect against discrimination based on sexual orientation. Twenty-nine states offer no protections whatsoever. The following map illustrates this inconsistency.
Click for a larger version
An interactive version of the map, available on the Movement Advancement Project website, allows users to view sub-state non-discrimination policies as well.
Other sources of economic hardship for LGBT people and their families include tax policies and employer benefits that favor families headed by married heterosexual couples. Same-sex couples (married or not) cannot benefit from joint tax filing, the child tax deduction or childcare expense tax credit for the non-dependent child of a spouse, or Social Security survivor and spousal benefits. Tenuous legal ties to partners and non-dependent children mean that employer-provided benefits such as retirement plans and health care coverage disparately benefit same-sex-headed families. Employer-provided healthcare plans often deny coverage to transgender workers for routine preventative and transition-related health services. These and other practices amount to higher effective taxation and lower benefits for LGBT workers and their families.
So the Center for a Responsible Federal Budget is pushing “The Reformer”—their latest tool for confusing the daylights out of anyone interested in Social Security. According to the CRFB, “The Reformer” lets users select among various options for changing Social Security “in order to close the program’s 75-year shortfall and keep it sustainable for future generations.”
To do this, “The Reformer” estimates the path of the Trust Fund (shown relative to each year’s benefits) over the next 75 years. So long as the Trust Fund remains positive, “The Reformer” will report that the 75-year shortfall is closed.
However, “The Reformer” doesn’t let anyone off the hook that easily. If, in 2087, revenue exceeds outlays, “The Reformer” warns “the program is not yet sustainable.” It tells us this even if the Trust Fund is growing faster than spending! What is going on here? Let us take a relatively simple example with two quick changes to the program and see what “The Reformer” says.
First, Social Security caps the payroll tax in relation to the average wage. Unfortunately, wage gains in recent decades have gone overwhelmingly to those at the top. This means that Social Security contributions have fallen relative to payrolls. Suppose we raised the payroll tax cap to cover once more 90% of wages. This would mean higher-wage workers would get larger benefits, but the program would receive more in additional contributions than it would pay in additional benefits.
Second, the prospect of longer retirements requires workers to save more. Social Security is no different in this regard. Thus, in the 25 years from 1965-90, the contribution rate for employees rose 13 times. On average, the rate rose nearly 0.2 percentage points every other year. Yet there has been no increase in contributions since then. If we had continued raising rates like that, it would have stood at 8.4 percent in 2012. Suppose then that we raised the contribution rate to 7.7 percent and likewise for employers and then never raised it again for at least the next 75 years. (In real life, I would prefer to delay and phase in such a change but “The Reformer” isn’t that flexible.)
What does “The Reformer” tell us about these changes? By 2087, the Trust Fund would hold bonds valued at 774 percent of that year’s outlays and be growing. This wildly exceeds “The Reformer” condition for closing the shortfall. Nevertheless, “The Reformer” declares that we have closed only 77 percent of the projected gap between spending and revenue in 2087.
Strictly speaking, there would still be a gap between spending and, say, contributions. But contributions are not the only source of income to Social Security. If we are genuinely interested in the sustainability of the program, we must look at all sources of income. How much more income do we need to fill the gap in 2087? According to “The Reformer”, outlays exceed revenues by 1.1 percentage points of payroll. Likewise, the Trust Fund’s bonds-- at 774 percent of outlays—amount to 142 percent of payroll. That means if the Trust Fund accrued interest of only 0.8 percent in the year, interest income would more than cover the difference.
Some might grow concerned about the amount of interest the government would be paying for the money it had borrowed previously from workers through Social Security, but the program is entirely sustainable so long as the government continues paying interest on those bonds. It is unfortunate that CRFB would design “The Reformer” to mislead in this fashion.
The following newsletter highlights CEPR's latest research, publications, events and much more.
CEPR on No-Vacation Nation, Redux… CEPR’s latest paper, “No-Vacation Nation Revisited” by former CEPR Research Associate Rebecca Ray, Program Assistant Milla Sanes, and Senior Economist John Schmitt, finds that the United States is the only advanced economy that does not guarantee its workers any paid vacation time. As a result, almost 1-in-4 Americans do not receive any paid vacation or paid holidays, trailing far behind most of the rest of the world's rich nations.
The new report revisits an analysis originally performed by CEPR researchers six years ago. Since the 2007 CEPR study, the U.S. has made up none of the gap with the rest of the major economies that are members of the Organization for Economic Cooperation and Development (OECD). “It is striking that six years after we first looked at this topic absolutely nothing has changed. U.S. law and U.S. employer behavior still lags far behind the rest of the rich countries in the world,” said John. He elaborated on these themes in a discussion on HuffPost Live with Joe Robinson, founder of the Work To Live Campaign and Ellen Bravo, Executive Director of Family Values @ Work. John was also interviewed by WWL Radio’s The Tommy Tucker show.
And on Workplace “Flexibility” CEPR also weighed in on the"Working Families Flexibility Act of 2013." As CEPR Senior Economist Eileein Appelbaum wrote in this April op-ed for The Hill: “Touted by House Republicans as a new comp time initiative that will give hourly-paid workers the flexibility to meet family responsibilities, it is neither new nor about giving these workers much needed time off to care for their families… Its major effect would be to hamstring workers – likely increasing overtime hours for those who don't want them and cutting pay for those who do.”
Eileen reiterated these points in this interview that aired on NPR’s Morning Edition, Eileen was also quoted in this Time magazine article as well as this piece that appeared on NBCNews.com’s First Read. Eileen addressed these and similar issues in several op-eds timed to coincide with Mother’s Day. Here she is in the Huffington Post, and she penned this piece for US News and World Report.
The 2013 Social Security and Medicare Trustees reports will be released tomorrow. There is much discussion in policy circles of how the cost of these programs is projected to rise over the next three decades due to both the retirement of the baby boom cohorts and the increased cost of health care, which is the main factor behind the projected increase in Medicare costs. These projected cost increases have frequently been presented as implying a disastrous scenario for today’s young. In today’s edition, economist Dean Baker of the Center for Economic and Policy Research examines how the cost of these programs is likely to affect the financial well-being of our children and grandchildren:
Disaster stories about rising Social Security and Medicare costs ignore the fact that the tax increases projected over the next three decades are not very different than the tax increases that we have actually seen since 1980. Furthermore, the far more important factor in determining the well-being of our children and grandchildren is the extent to which their before tax wages increase in the decades ahead.
Starting with the issue of tax increases, if we assume that the projected shortfall in Social Security is met entirely by increasing the size of the payroll tax, according to the 2012 Trustees Reports it would be necessary to have an increase in the tax of 3.91 percentage points by 2045.
This assumes that there are no cuts in scheduled benefits, no other taxes are used to finance Social Security and the cap on wage income subject to the Social Security tax (currently around $113,000) is not raised.
In the 2012 Medicare Trustees report, the projected increase in the tax needed to keep the program fully solvent in 2045 was 1.91 percentage points.
It is worth noting that the size of the projected shortfall in Medicare has fallen by more than 60 percent since 2008, from 3.54 percent of payroll to 1.35 percent of payroll in 2012.
This is in spite of the fact that the change in the 75-year projection period would have increased the projected shortfall by close to 0.20 percentage points.
The combined tax increase needed to keep both programs fully funded in 2045 under the 2012 projections was 5.81 percentage points.
By comparison, since 1980, the Social Security tax rate has increased by 2.24 percentage points.
In addition, the self-employed were required to pay for the employer’s side of the payroll tax as well. This was an additional increase of 5 percentage points on the roughly 9 percent of the workforce who is self-employed, which is equivalent to a 0.45 percentage point increase.
That makes the total increase in the Social Security tax to 2.69 percentage points over this period.
The Medicare tax rate increased by 1.9 percentage points from 1980 to the present.
That brings the total increase in the payroll tax since 1980 to 4.59 percentage points.
While this increase is less than the 5.81 percentage point increase that would be implied by the projections in the 2012 reports for 2045, assuming no other changes to the programs, it is not hugely different.
The more important part of the equation for living standards is the wage growth that workers will see over the next three decades.
The wage growth assumptions in the 2012 report implied that the average annual wage would be $68,300 in 2045 (in 2012 dollars).
This implies an increase of more than 55 percent over the average wage of $43,800 in 2012.
Even if we assume that the Social Security and Medicare taxes are together raised by 5.81 percentage points by 2045, the average wage in 2045 after deducting payroll taxes would still be more than 46.0 percent higher than it is for workers today.
It is difficult to see this as a story in which our children and grandchildren are being impoverished by these programs.
Most workers have actually seen little real wage growth over the last three decades in spite of a substantial increase in average wages over this period.
This is due to the fact that top end earners -- doctors, lawyers, CEOs and those in the financial industry – have captured the bulk of the gains from economic growth over this period.
If this pattern continues, then the before tax wages of most workers will not be much higher in 2045 than they are today.
However, that would clearly be an issue of the distribution of income within a generation, not a question of distribution across generations.
This should illustrate the importance of wage inequality in determining the well-being of our children and grandchildren.
The amount of money at stake in terms of the distribution of future wage gains is an order of magnitude greater than the potential tax increases needed to maintain full funding of Social Security and Medicare. For this reason, it is ironic that discussions of future the well-being of our children and grandchildren tend to focus on these programs and the budget more generally. The distribution of income in three decades will be of far greater importance.
Yesterday, Carmen Reinhart—she of the infamous Excel error—wrote an open letter to Paul Krugman taking issue with his “spectacularly uncivil behavior.” That his “characterization of our work is selective and shallow.” In particular, Reinhart citesKrugman’s views on Italy. She writes:
However, [falling interest rates in “high-debt Italy”] is meant to re-enforce your strongly held view that high debt is not a problem (even for Italy) and that causality runs exclusively from slow growth to debt. You do not mention that in this miracle economy, GDP fell by more than 2 percent in 2012 and is expected to fall by a similar amount this year. Elsewhere you have stated that you are sure that Italy's long-term secular growth/debt problems, which date back to the 1990s, are purely a case of slow growth causing high debt. This claim is highly debatable.
In fact, Reinhart recently cited Italy as an example of a “more recent public debt overhang episode”. She cites another paper to back up her claim that the evidence shows the direction of causality runs from high debt to slow growth. But even a cursory examination of the data undermines that case.
Figure 1 takes data from Reinhart’s paper in the Journal of Economic Perspectives and shows very clearly that Italy built up its debt after growth slowed significantly—not the other way around. In fact, when growth slowed back in 1974, Italy’s debt-to-GDP was only 41.3 percent. Italy did not reach 90 percent debt-to-GDP until 1988—some 14 years later.
Figure 1: Real GDP Index (Italy Since 1947) (log)
Source: Reinhart, Reinhart, and Rogoff and author’s calculations.
Note: Specified years indicate first year of high-debt episode (see Reinhart, Reinhart, andRogoff)
Indeed, there is a clear association in Italy’s post-war data between high debt and slow growth, but it clearly tells a story very different than what Reinhart would have us believe.
From 1947-74, real economic growth in Italy averaged 5.8 percent per year. Over the period 1975-88 (when Italy’s debt grew from 41.3 to 90.9 percent of GDP) economic growth averaged only 2.7 percent per year—a fall of 3.2 percentage points. It is clear, based on Reinhart’s data, that high debt could not have caused this slowdown in Italy’s economic growth, even if Italy’s period of low debt is associated with much faster growth.
Nor is Italy the sole example. In all four such recent examples of advanced countries with episodes of high debt, the slowdown precedes the increase in debt.
Figure 2: Real GDP Indices Since 1947 (log)
Source: Reinhart, Reinhart, and Rogoff and author’s calculations.
Note: Specified years indicate first year of high-debt episode (see Reinhart, Reinhart, andRogoff)
Though less obvious for Belgium, most of the jump in debt-to-GDP came in 1980 and was largely the result of a series break in the data. According to the data on Reinhart andRogoff’s website, Belgium’s gross general government debt-to-GDP was 62.5 percent in 1970 and falling (debt-to-GDP stood at 57.8 percent in 1974—the year real GDP peaked). Nevertheless, from the peak in real GDP in 1948 to peak in 1974, economic growth in Belgium averaged 4.2 percent per year. When the economy bottomed out in 1975, debt was only 54.4 percent of GDP, and did not reach 90 percent until 1983. Yetfrom 1975-83, growth averaged only 2.2 percent per year.
For the other countries, it is even more obvious that the economies slowed well before reaching high levels of debt. Clearly, Reinhart should look carefully to her own data before lashing out at Krugman.
In addition to the legal and ethical concerns with unpaid internships, which I raised in a recent post, unpaid internships also pose a number of economic issues. First and foremost, unpaid internships require a substantial financial commitment from interns. Young adults participating in unpaid internships typically sacrifice time they could spend earning money at paying jobs. Even so, many interns work second jobs at night shifts to make ends meet. As many of the most desirable internships are located in cities, interns often have to endure long, costly commutes or somehow afford housing closer to the city. Some interns even paymore than $12,000 for a semester-long internship placement (includes housing costs) in cities like Washington, D.C.
Some students and recent graduates are fortunate enough to have families that can afford to subsidize these costs. For many students from modest backgrounds, however, their families cannot bankroll their living expenses as they perform unpaid work. It is not possible for these students to work unpaid internships when they need to take paying jobs in order to put themselves through school or cover their living expenses. Without internship experiences, lower-income students will be at a competitive disadvantage when applying for future jobs. In this regard, unpaid internships can reinforce socioeconomic inequalities.
Unpaid internships don't always provide the returns many interns expect. The 2011 National Association of Colleges and Employers (NACE) graduate survey (includes every organization type: for-profit, non-profit, government) found that graduates who had unpaid internships not only performed worse in job offers and starting salaries compared with those with paid internships but they also had worse prospects than those who had no internship experience at all (Eisenbrey, 2012).
Jeremy, a member of the Writers Guild, is a cancer survivor, and he gives credit to his union for negotiating his health care plan in a new video by the American Worker Project at the Center for American Progress Action Fund.
His is just one of the moving stories told in three short videos released today. These profiles show how unions have helped workers in very different occupations — child care, freelance writing and taxi driving — gain and maintain wages and benefits that are key to a middle-class standard of living.
On the flip side, La Tonya describes the hardship she's faced since public sector workers lost their right to collectively bargain in Wisconsin.
These videos bring to life a huge body of research that finds that unions provide invaluable benefits for workers. CEPR regularly focuses on this topic and has many reports about how union membership increases workers' chances of having health insurance and a retirement plan. Some reports focus on specific groups of workers — African American, Latino, women, young, low Wage, service sector, and immigrant — and find the same positive effects across the board.
Internships can be great opportunities for undergraduates or recent college graduates to gain career-related experiences or skills. Additionally, these learning experiences can improve trainees’ chances of future employment as they develop networks and connections. But, the widespread use of unpaid internships also raises legal and ethical questions, especially in the for-profit sector. Unpaid internships at non-profit organizations and government bodies also deserve attention, but these programs are not subject to the same rules as at for-profit, private businesses because interns can be considered “volunteering” their time.
The Obama administration had considered cracking down on illegal unpaid internships, which perhaps prompted the Department of Labor’s Wage and Hour Division (WHD) to release a memo that clarifies what constitutes a legal unpaid internship with a six-part test.
The internship, even though it includes actual operation of the facilities of the employer, is similar to training, which would be given in an educational environment;
The internship experience is for the benefit of the intern;
The intern does not displace regular employees, but works under close supervision of existing staff;
The employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded;
The intern is not necessarily entitled to a job at the conclusion of the internship; and
The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.
Recently, over 3,000 former unpaid interns of the Hearst Corporation filed a class action lawsuit against the magazine business. The former interns argued they had been doing the work of paid employees and the “unpaid” classification was misused and illegal. The lines between a mutually beneficial learning experience and free labor have thus become increasingly blurred as more businesses have adopted unpaid internships in recent years. It appears likely that many other for-profit organizations either openly ignore the six-part test or bend the rules in order to avoid paying for work or any other benefits.