This Is What Capitalism Looks Like

We all know the Econ 101 lyrics: the economy strengthens, labor markets tighten, wages rise. But we often miss the music: Solidarity Forever. Wages do not raise themselves. It’s when workers won’t take it anymore that employers feel the need to boost wages, when capital is willing to take less, and when prosperity is shared.

In 2018, workers are rising up, and the protests are having an effect. Teachers in Arizona (see over 50,000 people protested teacher pay and low education spending in Phoenix in April), Oklahoma, and West Virginia all got raises through protest. (It’s no surprise that these states have had healthy economic growth.)

Don’t forget another protest: there were “Occupy” movements in 70 cities and in as many nations. The grievance was plain, the remedies diffuse, the aggrieved self-identified. “We are the 99%” buttons and placards drove people to the internet. How much annual income did you need to be in the 1% in 2009? I did the work for you. In 2009, the answer was $983,734. In 2015, the answer was $1,483,596 according to the IRS.

Income inequality will not fall without sustained growth and protest. Our research shows that without real wage growth, it will be hard to save for retirement. The economy at the time of the Occupy movement was not hot. In 2011, we had just been through the worst economic recession since the 1930s, and the recovery was anemic. Many families were devastated. But government policy focused on strengthening banks and bank executive bonuses, and profits snapped back quickly. The 2010 bonuses in the financial sector – a total of $144 billion - could have lifted almost all full-time minimum wage workers out of poverty that year.

Another stanza from Econ 101 is that economic growth helps everyone. This is the well-known mantra that rising tides – or hot economies - lift all boats. This means that economic growth shrinks income, economic, and opportunity gaps between classes.

Even with the hot economy we’ve had since 2016, there is no evidence that the bottom is coming up or the top is falling. In 2018, signs are that the distance has only grown wider between the middle class, or the 40% of Americans with annual incomes between $12,943 and $34,504, and the top 5% who earn more than $375,088.

In the mid-90s, the middle 40% had 30% of all annual income, and the top 5% had 15%. In 2016, the share going to the middle class fell and the share going to the top 5% increased.

The growing gap between the middle class and the very wealthy is caused by stagnant wages and rising profits. Since income for the middle class comes from work (earnings) and income for the top 5% from owning (stocks, bonds, businesses), workers did worse than owners in the last 20 years.

 graph         Calculations based on CPS data

Government rules and corporate power have made unions weaker, while laws have made owning more rewarding. Trump’s 2017 GOP tax reform law (almost all Republicans voted for it, and no Democrats, out of 240, voted for it) rested on the belief that raising corporate after-tax profits would give corporations wiggle room to raise wages and keep profits steady. Forgone government revenue – under this belief system – would be shifted to workers. Instead, the tax breaks allowed managers to buy stocks back from investors, causing stocks to go higher and wages to languish.

In the economics textbooks, hot economies and tight labor markets cause wages to rise. Nothing in this hot economy signals that the middle 40% will benefit from this boom. Are we inviting another Occupy? Time to change the textbooks or time to change the rules?

Thanks To Martha Susana Jaimes for research assistance for this post.

Stranded in Stagnant Regions, Older Workers Left with Low Wages

May 2018 Unemployment Report for Workers Over 55

The Bureau of Labor Statistics (BLS) today reported a 2.8% unemployment rate for workers age 55 and older in May, a decrease of 0.2 percentage points from April.

The economy is expanding, unemployment is low, and wages are growing. But wage growth for workers ove

r 55 is slower than wage growth for younger workers. Why? Older workers are more likely to get stranded in stagnant regions earning low wages - they are only 17% as likely to move for a job compared to younger workers. click

June Jobs Report updated2Economic growth varies by region due primarily to differences in types of industries. If their local economy slows down, older workers face higher costs of moving for a better job; they are more likely to own homes and have deeper family networks and community connections than younger workers. Older workers also have fewer working years to recoup the costs of moving. Immobility is a source of a labor market condition called monopsony power, which leaves older workers with less bargaining power and allows employers to suppress wages.

The nation needs to offer older workers trapped in bad jobs a path to a secure retirement. Strengthening Social Security and creating universal, secure retirement accounts will allow all Americans access to dignified retirements after a lifetime of work. Guaranteed Retirements Accounts (GRAs) are a proposal for individual retirement accounts funded by employer and employee contributions throughout a worker’s career paired with a refundable tax credit. Better pensions help older workers gain bargaining power in the labor market.

*Arrows next to "Older Workers at a Glance" statistics reflect the change from the previous month's data for the U-3 and U-7 unemployment rate and the last quarter's data for the median real weekly earnings and low-paying jobs.

Why 55-Plus Workers Have So Many Bad Jobs

This is a repost from Forbes.

The economy is hot. After 106 months, the U.S. is in the second-longest recovery ever. Jobless rates are at historic lows, especially for the fastest-growing segment of the workforce, those 55 plus.
With such tight labor markets, we expect red hot wages. But wages for workers over 55 are practically frozen. The average weekly wage for full-time older workers has slowed, declining from $936 in 2016 to $811 today. Between 2005 and 2015, the growth in bad jobs – low pay and unstable – held by older workers outpaced the growth in decent-paying, stable jobs.

Employers are not bidding up wages to attract workers or using higher wages to retain their employees. This is what we would see in a low-unemployment rate environment if workers had bargaining power. Older workers are working more, seeking more work, and handed lower wages.

Why? A new paper by Courtney Coile argues eroding retirement security leaves them with few choices. Many 55-plus workers are stuck in low paying and/or unstable jobs because they lost their career jobs and took pay cuts in new ones. They may be stuck in regional economies that are shrinking. Or, quite possibly, they are being targeted by low-wage employers seeking experienced workers for physical labor, such as older workers recruited to work in Amazon warehouses.

Unstable or low-wage jobs make up more than half of older workers' job growth. Between 2005 and 2015, the number of jobs held by older workers increased by 6.6 million. 3.4 million or 52% are bad jobs (paid full-time workers less than $15,000 a year, or two-thirds the median wage or are in temporary or on-call work). The growth in these bad jobs outpaced the remaining 48%, or 3.2 million traditional jobs paying more than $15,000 or independent contractor jobs.

May Jobs Report updated 2

Boomer men and women may be working more for love – work is more attractive if people are healthier and more educated. But many other older workers are working for money because retirement accounts, retiree health care plans, and Social Security benefits have eroded.
The swell of older workers without adequate retirement incomes are being told to get a job. But we are not sure that they can get jobs beyond low-paid “greeters” at WalMart, or, as the book Nomadland documents, they live in RVs, chasing down low-paid, seasonal work.

If “working longer” is the new norm, then job quality at older ages needs to keep up with the capacities and needs of older workers. Older workers face the risk of wage declines, layoffs, and of not being trained in dynamic markets. We are going through an era where employers are preferring to “buy” not “make.” They have backed away from training, shifting the expense to workers. And older workers are the last to get training or perceived to have the right skills; tech and finance are especially troublesome for older workers.

Given this environment of more supply and less high-quality demand, an older worker may find it tough to upgrade themself (I am using the grammatical convention of a gender-neutral pronoun). My advice to older workers seeking work has three beats:

1.) “Badge” yourself with skills in an affordable way. No master’s degrees at 55? Prove you are able and eager to acquire new skills. Finish a free online course. Get certified with a computer skill. Engage in community service.

2.) Navigate around or confront persistent age discrimination. The growing sectors of tech and finance seem to avoid older workers. Seek help, either political or professional, to enforce age discrimination laws in those industries.

3.) Move to a labor market that is friendlier to older workers.

Working longer in a low-wage or precarious job is not a humane or practical solution to the retirement income crisis. Tony James and I proposed Guaranteed Retirement Accounts, or GRAs, which are universal retirement accounts that provide employees with a safe, effective vehicle to save over their working lives and to expand Social Security. Decent pensions provide workers with reliable retirement income and an alternative to working a bad job.

When Is The Next Recession?

This is a repost from Forbes.

Standard indicators point to a coming downturn. However, a new indicator – racial unemployment rate gaps – may also help understand the recession in our near future.

After 11 years of economic expansion, the difference in the unemployment rates between black and white older workers is at historic lows – just 1.1 percentage points apart (details below). This may seem like good news, since black workers usually suffer from higher rates of unemployment than whites. And, while it is indeed good news for racial equity, it is likely temporary. Based on historical patterns, which often best predict the future, not only will racial gaps get worse in the next recession, the next recession will be soon.

Racial jobless gaps are widest at the depth of recessions and narrowest at the peak, right before the economy goes into recession. Now, we see the narrowest differences in joblessness rates by race since the last peak. This indicator MAY be pointing TOWARD a recession.

Of course, predicting the precise time of the next recession is not possible, but the consensus among economists is that we are due: the 11-year economic expansion is one of the longest in U.S. history.

The St. Louis Fed provides a helpful list of the standard leading indicators of a recession:

1. “A big increase in oil prices has preceded nearly every U.S. recession since World War II.”

President Trump tweeted on April 20, “Oil prices are artificially very high! No good and will not be accepted,” as if President Trump could stop the price rise and stop the recession. Brent crude prices increased to $74.62 on April 24th, climbing over 50% in the last year. Increases in gas prices have erased the expected income boost of the tax cut for most families below the median.

This indicator is pointing TOWARD a recession.

2. “Asset prices swelled before the two most recent recessions: stock prices before the dot-com bust in 2000 and housing prices before the financial crisis.”

The Economist’s lead story six months ago was “The Bull Market In Everything.” In April, the Shiller price-earnings ratio measure for the U.S. stock market was about 31. For reference, the PE ratio was about 27 in October 2007 and 44 in December 1999.

This indicator MAY be pointing TOWARD a recession.

3. Inverted interest rates, or when interest on a short-term debt (say, three-month Treasuries) is higher than interest on a long-term debt (say, 10-year Treasuries).

An inverted yield curve, or inversion, has preceeded all recessions since 1960. Long-term interest rates are becoming less “inverty,” which could be good or bad news. It's good news if investors are willing to pay more for long-term debt because expectations about growth and profits are high – what economists say is a “real” economic phenomenon, or because wages and oil prices will drive inflation.

This indicator is pointing AWAY from a recession.

I wish I could tell the over 15 million older workers in the U.S. when the recession will hit so that the half of them with significant retirement assets can time the market and protect their nest egg. But really, the best advice comes from 12-step programs – know what you can control and what you can’t. Ignore all feelings of panic and temptation to control asset prices with market timing – like ignore this essay about the next recession. And keep your wealth diversified: 40-ish percent in stock, 40-ish percent in cash and bonds, and 20 percent-ish in home equity, which is part equity and part consumption (you gotta live somewhere).

As promised, I’d like to share more details supporting my speculation. With my team at the Schwartz Center for Economic Policy Analysis (SCEPA) in the The New School’s economics department, we found that the black/white unemployment gap might become a predictor of downturns.

In the aftermath of the recession in 2003, the black unemployment rate for older workers was 6.8%, 2.9 percentage points greater than the older white unemployment rate of 3.9%. By the time that expansion peaked in December 2007, signaling the start of the Great Recession, unemployment rates dropped to 4.2% for black older workers and 3.3% for white older workers, narrowing the racial jobs gap to 0.9 percentage points. When unemployment increased again in 2011, black older workers’ unemployment rate grew to 10.1%, 3.6 percentage points higher than white older workers at 6.5% - the largest gap in the past 15 years. As of February 2018, almost 11 years since the last round of low unemployment rates, the racial unemployment gap has once again narrowed to a gap of just 1.1 percentage points.

Economic growth shrinks the racial gap in unemployment for a number of reasons. When workers are scarce, employers relax hiring practices that have discriminatory effects. In recessions, the racial unemployment rate gap grows because older black workers lose their jobs faster than older white workers.

March OWAAG Graph

Can Americans Afford to be Old?

This is a repost from Forbes.

The need to solve the retirement crisis is defying today’s political divisiveness by giving us a rare example of bipartisanship. In the last month, four experts of varying political stripes called for creation of mandatory retirement savings accounts to replace our failed “do-it-yourself” voluntary system. This includes economist Teresa Ghilarducci (an author here) and Rescuing Retirement co-author Tony James, president of private equity firm Blackstone; Jason Fichtner, a former Bush administration economist; and Third Way, a centrist Democratic think tank.

And while there are significant disagreements in the details, it is nothing less than a sign of the growing political will to take bold action to ensure our workers can retire and our retirees stay out of poverty.

Unfortunately, the shared call for mandatory retirement accounts neglects the foundation of retirement security, Social Security. The protection and expansionion of this program is a necessary starting point for securing and building retirement security. To be clear, we believe that bold proposals for individual retirement accounts – as necessary as they are – simply will not work without first strengthening Social Security.

Polls of the American public persistently report two results. First, that Social Security is highly popular, considered efficient and effective. And second, that over half of Americans don’t think they will have enough money in retirement. On both, the public is spot on. Without reform to bridge the gap between Social Security and private savings, when they reach age 65, 30 percent, or 21 million Americans ages 50-60, will be poor or near poor as retirees.

As economists, we believe it’s possible to fund both an expansion of Social Security and mandatory individual retirement accounts on top of Social Security.

To ensure all workers a secure retirement and the end of elderly poverty would require an additional $500 billion in retirement contributions from workers, employers, and the government. While less than 3 percent of GDP, $500 billion is not trivial. Rather, it is similar in magnitude to the 10-year cost of $5.5 trillion to fund the recent GOP tax cut.

How does this work? First, every worker would pay an additional 5.8 percent of pay towards their retirement security, or about 80 cents per hour. This breaks down into three parts.

First, 2.78 percent to secure Social Security (one way among many to provide needed revenue). This would ensure workers receive their full and promised Social Security benefits and provide retirees with an average of 36 percent of their pre-retirement income.

Second, an additional 0.02 percent would raise the special minimum benefit to bring almost every elder above the poverty line. The special minimum benefit places a floor under the benefits of lifetime low earners, but has eroded over time and now almost no new claimants qualify.

Third, 3 percent to fund mandatory individual savings accounts for retirement. Alone, this contribution is unlikely to permit all workers to maintain their living standards in retirement. However, it is designed to add on to retirees’ monthly Social Security benefit to ensure they can live well clear of poverty or near poverty. We could follow the lead of Australia’s mandatory retirement savings program, which started with a 3 percent required contribution and is now up to 12 percent. The program will also allow for those who want to contribute more to do so.

Accumulating retirement savings is just the beginning. How the money is invested matters, as does how savings are paid out to retirees as well as how retirement tax breaks are distributed to low-, middle-, and high-income workers. The Ghilarducci/James proposal for Guaranteed Retirement Accounts (GRAs) calls for pooled investments to ensure workers earn the highest risk-adjusted returns possible, guaranteed principal to make sure workers’ contributions aren’t eroded by market risk, and annuity pay-outs to ensure retirees don’t outlive their savings. And lastly, the GRA includes an inflation-adjusted flat tax credit to incentive savings and ensure contributions are cost-neutral for those with low incomes.

Bottom line: If young workers and their employers, with assistance from a government refundable tax credit, paid 5.8 percent more – 2.78 percent in Social Security, 0.02 percent for poverty alleviation, and 3 percent in an well-managed and invested retirement account - they would be secured from poverty and near poverty in retirement. Workers approaching retirement without adequate savings would have to increase their savings by considerably more that 3 percent. But these workers would be better off than they are today, with universal access to a low-cost savings retirement program. And the lesson of Australia is that the sooner the program starts, the sooner it matures.

This post was written with ReLab Research Director Anthony Webb and SCEPA Associate Director Bridget Fisher.