Make it payWill cutting unemployment benefits in America ease labour shortages?
The evidence so far is muddy, and points to at most a small effect
July 17th, 2021
AS AMERICA REOPENS for business, labour shortages continue to worsen. Firms are
advertising over 9m vacancies, the highest on record. Bosses complain they are unable to find
people to serve drinks, staff tills or drive trucks. So in an attempt to eliminate the shortages, half
of states are ending a $300 weekly top-up to unemployment insurance (UI), in place since
January, as well as other pandemic-related UI programmes. Is this change having the desired
effect?
It depends whom you ask. On June 27th the Wall Street Journal ran an article on Missouri, a
state that abolished the supplement on June 12th, claiming that people were flying off the
unemployment rolls. The very same day the New York Times ran an article also on Missouri,
which drew almost exactly the opposite conclusion. The reality is somewhere in between these
polarised extremes. Making benefits less generous may help America’s jobs market a little—but
other factors do more to explain labour shortages.
Removing the $300 weekly top-up certainly makes living off welfare less comfortable. At that
level 40% of people are earning more than they were in their previous jobs. It is hard to say right
now, however, whether imposing tougher conditions translates into more vigorous job searches.
The first four states to abolish the supplement did so too late for the effect, if any, to show up in
the latest jobs report, released on July 2nd. In the meantime economists must use high-frequency
data, such as online job postings and weekly figures on claims for UI, which are less reliable.
These suggest that a stingier UI makes a
difference. Both analysts at Morgan Stanley, a
bank, and economists at the St Louis Federal
Reserve find that continuous claims for UI have
fallen the most in “early-ending” states. Other
research finds similar trends in new claims for
UI. But there is enough going on to muddy the
picture: Daniel Zhao of Glassdoor, a job-search
website, adds a note of caution, pointing out
that new claims were already dropping faster in
reforming states.
It will not be until the August jobs report,
released in September, that wonks will have a
better idea of what is really going on at the state
level. It seems likely, though, that overall
employment in America will by then be
somewhat higher than it would have been
without the cut to UI. A survey from Indeed, a job-search website, suggests that a tenth of
unemployed people “not urgently” looking for work feel this way because of UI payments.
What is clear, however, is that there are other important reasons why so many workers seem jobshy. Across America the growth in the number of vacancies continued to rise in June and early
July, according to Indeed. That suggests that workers are unlikely to be battering down the door
to get an interview just because their benefit top-ups have ended.
People’s care responsibilities are one big impediment to returning to work (in-person schooling
is only set to resume in the autumn). A pile of “excess” household savings accumulated during
the pandemic, amounting to more than $2trn in total, has made it easier for many Americans to
withstand a spell of unemployment, say until they find the perfect job. Others are depending on
the salary of a spouse or partner. Moreover, fear of catching covid-19 is still apparently holding
many people back. Who would choose to be a chef, when research suggests that practically no
other occupation poses a higher risk of dying from covid-19? Until that threat abates, expect
labour shortages to continue. ■
The woes of the average Joe
America is getting richer, but most voters can’t feel it
Sep 27th 2014
BARACK OBAMA’S strenuous efforts to avoid being a war president have failed. But voters
care more about the economy than the Middle East, and here Mr Obama has a good story to tell.
The headline numbers are impressive: both output and employment have passed their prerecession peaks and the unemployment rate, at 6.1%, has fallen far enough to inspire the Federal
Reserve to debate, openly, when to raise interest rates. Though the latest jobs report was
disappointing, private payrolls have grown by 10m in the past four and a half years, the longest
uninterrupted streak in history.
Yet for all the upbeat economic news, Mr Obama has yet to reap any political reward. His
approval rating, at 43%, is stubbornly low. Just 39% of voters approve of his handling of the
economy, according to YouGov; 56% disapprove. Remarkably, they now trust Republicans more
than Democrats to manage the economy.
Voters give Mr Obama little credit for America getting richer because, by and large, they haven’t
felt it. Not only is the recovery subdued by historical standards, but widening inequality means
that the median household (in the middle of the income range) is doing far worse than the mean
(total income divided by the number of households).
Ken Hodges of Murfreesboro, Tennessee, thinks Mr Obama wasted money bailing out banks and
carmakers, “but it hasn’t helped the working-class people at all.” Mr Hodges used to build
guitars for a living but the business went downhill after the financial crisis, as did his
investments. He now sells barbecue lunches out of a food truck in Nashville and, between the
cost of meat, fuel and the thousands of dollars he spends on permits, reckons he makes 20% less
than he did in 2007. “I’m slowly but surely going broke, though I’m working like a madman,” he
says.
Inequality actually began to widen in the early
1980s. But, for two decades, overall growth was still
healthy enough to lift the median household. During
Ronald Reagan’s first six years in office, GDP grew
22% while the median income grew 6% (see chart
1). During Bill Clinton’s first six years, GDP grew
24%; median income, 11%. But growth began to
slow in the 2000s, undermining both the mean and
the median. In George Bush’s first six years GDP
rose 16%, but median incomes fell 2%. Under Mr
Obama it has been even worse: GDP is up 8% and
median income is down 4%, according to the Census
Bureau and Sentier Research, a private outfit.
Though median income performed almost as badly
under Mr Bush as Mr Obama, there was an
important difference. During the first part of the
2000s consumers could borrow easily, thanks to
rising property prices. Between 2001 and 2007 the
median household’s real net worth rose 19%, to
$135,400. The collapse of the housing bubble sent it
plunging. By 2013 it was $81,200, less than in 1989.
In contrast, the mean net worth of American
households has increased by 60% since 1989, to
$534,600, thanks to the soaring fortunes of those at
the top (see chart 2).
Efforts by the Fed to support the economy have
bolstered stock and house prices, but the benefits
have bypassed many households. Just 65% owned their own home in 2013, compared with 69%
in 2007. Fewer owned shares or mutual funds outside retirement accounts. Even the impressive
decline in unemployment has partly come about because many people have given up looking for
work, and so are not counted as unemployed. In previous recoveries the labour-forceparticipation rate rose even as unemployment fell; this time, it has fallen (see chart 3).
Voters tend to blame the president for bad times and give him credit for good ones, regardless of
the real cause. Thus presidential approval ratings depend a lot on median household income (see
chart 1, again). Mr Obama is not on the ballot in November, but history suggests that voters will
vent their frustrations on his party, as they did on Republicans in 2006, when George W. Bush’s
approval rating was even worse than Mr Obama’s is now.
The economy and presidential popularity are not everything, of course. Ronald Reagan’s
approval rating was over 60% in 1986, but Republicans still lost control of the Senate, thanks to
the quirks of the electoral calendar. Senators serve six-year terms; every two years, a third of
them stand for election. Many Republican novices won Senate races in Democratic states in the
Reagan landslide of 1980; six years later, few could hold onto their seats.
Mr Obama has the worst of both worlds. Not only are voters feeling glum; Democrats are also
fighting to hold on to several Senate seats in Republican states, such as Arkansas. It is not that
voters love Republicans, says Jim Kessler of Third Way, a Democratic think-tank. Rather, this
year could see “an anti-incumbent wave, and Democrats happen to have more beach-front
property”.
Charlie Cook, an elections analyst, thinks the Senate could flip back and forth over the next four
years, with neither party securing the 60 seats (out of 100) needed to pass big laws without help
from the other side. Disgusted voters may be open to radical alternatives. Mr Hodges, the
Tennessee food-truck operator, despises Democrats and most Republicans, but would vote for
Ted Cruz, a Texan Tea Party populist, if he could. Mr Cook recently advised some bankers to
hope that Democrats nominate Hillary Clinton for president in 2016, because the alternative is
Elizabeth Warren, a banker-bashing Massachusetts senator. “The energy and passion of the
Democratic Party is a heck of a lot further to the left than Hillary,” says Mr Cook.
On the stump, Mr Obama offers morsels of economic populism aimed at the Democratic base: a
higher minimum wage, debt relief for students and a law that will make unequal pay for women
even more illegal than it has been since 1963. Also, on September 22nd, the White House
announced rules to stop companies from moving their headquarters abroad to avoid taxes. Such
policies could marginally reduce inequality, but they do nothing to boost underlying growth.
A better bet would be free trade, tax reform, more money for infrastructure and training and an
overhaul of entitlements such as disability insurance. Many of the jobless end up drawing
disability benefits and never return to work, another reason labour-force participation has fallen.
Even if Congress were to co-operate, such policies would take years to bear fruit. But surveys by
Global Strategy Group, a Democratic consultancy, found that voters prefer a candidate who
promises higher growth to one who promises to reduce inequality. Alas, neither party has
plausible plans for that.
Inequality and the narrowing tax base
Too reliant on the few
Taxes are best raised on a broad base, but in many countries it is worryingly narrow
Sep 20th 2014 edition
“I LIKE to pay taxes,” said Oliver Wendell
Holmes. “With them I buy civilisation.” Most
people recognise that taxes pay for public services,
but few are as keen to stump up for them as Justice
Holmes was. High income taxes tend to discourage
effort and entrepreneurship, while encouraging all
manner of activity to avoid them. That is why a
basic principle of good tax policy has long been to
charge a low rate over a broad base.
It is a target which many countries miss, and the
gap is growing. Income taxes—one of the main
sources of tax revenue across the rich world—are increasingly paid by a small minority of the
most affluent. In Britain, employment has risen by 1.3m in the past five years, but the number of
taxpayers has fallen by 2.2m. More than 40% of American households pay no income tax. In
contrast, the most highly paid 1% of workers in Britain pay 28% of all income tax, while in
America it is 46%. In 1979 those shares were 11% and 18% respectively. Corporate income
taxes show the same concentration. In Britain just 830 firms pay almost half of all corporation
tax. Five American industries account for 81% of the country’s corporate tax revenue, but just a
third of its companies.
This narrowing of the tax base is partly the natural consequence of widening inequality. Since an
ever bigger share of overall income goes to the highest earners, and since income taxes are
progressive (with a higher rate levied at higher income), it is inevitable—and appropriate—that
the most affluent should pay a growing share of the overall tax take. Well-intentioned efforts to
encourage work among poorer folk have also concentrated the pool of taxpayers. America’s
Earned Income Tax Credit (EITC), which tops up the earnings of the least-skilled, is one of its
biggest poverty-fighting schemes. Thanks to the EITC, millions get a cheque from Uncle Sam
rather than paying income tax. Much of the drop in the number of British taxpayers is also thanks
to generous new exemptions for low earners.
Unfortunately, the narrowing of the tax base, both personal and corporate, also reflects two
failures of tax policy. The first is the proliferation of exemptions and deductions that go far
beyond reasonable poverty-fighting policies. America is the most egregious offender. Its income
tax (which contributes a bigger share of overall revenue than in other rich countries) is riddled
with myriad deductions, from medical insurance to mortgage interest, which collectively cost a
whopping 7% of GDP and mean that income tax is levied on a much narrower base than it could
be. Other rich countries, from Italy to Australia, also have too many unnecessary deductions.
The second problem, which applies most to corporate income taxes, is that tax rules have failed
to keep up with the reality of the 21st-century economy. A web of arcane bilateral tax treaties
allows clever companies to shift their profits from high-tax to low-tax jurisdictions, whether by
registering patents or setting up intra-company loans. A firm’s tax bills depend more on what
industry it is in and how clever its accountants are than its profitability. America, with the
highest marginal rate, has the biggest distortions.
Better simpler and better together
These failures need to be fixed. A narrow tax base is economically and politically risky,
particularly if the logic for who pays taxes seems capricious. Governments across the rich world,
but particularly in America, should aggressively prune deductions. And they should work
together to reach international agreement on how firms should book their profits. This week’s
blueprint from the OECD is a good start. As with trade, a multilateral approach to tax treaties is
far better than bilateral deals. That way, more countries have a better chance of raising the taxes
that help build civilisation.
Wage stagnation
The big freeze
Throughout the rich world, wages are stuck
Sep 6th 2014
CENTRAL bankers once used to inveigh against wage inflation. Guarding against a return to the
ruinous price-wage spirals of the 1970s was a constant preoccupation. Since the financial crisis,
however, they have started to fret about the opposite concern: stagnant wages and the growing
risk of deflation.
There has been a squeeze on pay in the rich world for several years now. Between 2010 and
2013 real (inflation-adjusted) wages were flat across the OECD, according to its annual
“Employment Outlook”, published on September 3rd. Real wages have barely grown at all in
America over that period and have fallen in the euro area and Japan (see chart). Declines have
been particularly sharp in the troubled peripheral economies of the euro zone, such as Portugal
and Spain, but real wages have also tumbled in Britain.
These sharp adjustments have hurt but were in large
part unavoidable. Real wages can grow in the long
run only at the pace of productivity. If productivity
has deteriorated, as for example in Britain since 2007,
real wages must fall. The crisis-hit countries of the
euro area, meanwhile, needed to lower labour costs to
reverse their loss of competitiveness relative to their
northern neighbours (the currency union makes the
more common form of adjustment, a devaluation,
impossible).
In most advanced countries—though not in Britain or
Italy—labour productivity is picking up again.
Moreover, the downward pressure on wages from
high unemployment is easing in some countries,
including America and Britain (in the euro area, alas, the jobless rate is still 11.5%). Yet even
though unemployment in America has dropped from a peak of 10% in late 2009 to 6.2%, growth
in even nominal wages (ie, not adjusted for inflation) is tame. In the private sector, they had been
rising by around 3.5% a year before the crisis, but are currently increasing by less than 2% a
year. In Britain, where unemployment has fallen from a peak of 8.4% to 6.4%, nominal pay is
growing by 0.6% a year, far below the pre-crisis average of 4%.
Divergent trends in the supply of labour help to explain why the pay squeeze has been more
intense in Britain than in America. The British labour participation rate—the proportion of adults
who are either in work or looking for jobs—has returned to its previous peak of almost 64% and
looks set to rise further. By contrast, America’s participation rate has declined by three
percentage points since the financial crisis and is now bumping along at around 63%.
Working out to what extent the low participation rate is structural, meaning that it will persist,
rather than cyclical, caused by a weaker-than-usual recovery, will be crucial in determining when
the Federal Reserve raises interest rates. The Fed has seen quiescent nominal wages as evidence
the labour market has more slack than falling unemployment suggests. But Janet Yellen, its
chairman, recently said that the weakness in wages might be deceptive. New research by the San
Francisco Fed suggests that many employers froze pay during the recession because workers
resist cuts in nominal pay more fiercely than the erosion of their purchasing power by inflation.
Employers, unable to reduce wages when times were bad, have not been raising them now that
times are better. But once this “pent-up wage deflation” has run its course, pay growth might
take off.
Such a rebound may occur outside America, too, since there has been a widespread—although
by no means universal—reluctance to cut nominal wages across the OECD, according to this
week’s report. Between 2007 and 2010 there was a big jump in the share of workers whose
wages remained flat in nominal terms. In Spain, for instance, the proportion of full-time workers
having to accept pay freezes rose from 3% in 2008 to 22% in 2012.
Weak Japanese wages are worrying Haruhiko Kuroda, who as governor of the Bank of Japan is
in charge of his country’s latest attempt to vanquish deflation. A new programme of quantitative
easing—creating money to buy bonds—has been more successful than previous, half-hearted
attempts to get prices rising again, but wages have remained sluggish. Although cash earnings
jumped by 2.6% in the year to July this largely reflected bigger bonuses; regular pay rose by only
0.7%, well below the newly revived level of inflation. Mr Kuroda recently said that a “visible
hand” was needed to co-ordinate higher wages.
Such a solution smacks of desperation but it might work in Japan, which retains its currency. It
would not make sense for the euro area, the other big economy where deflation remains a risk.
Prices rose by just 0.3% in the year to August, but in a currency club it is vital to allow wages to
rise and fall freely to provide the internal equivalent of fluctuating exchange rates.
If wages in Germany rise, the downward adjustment in less competitive economies in the euro
zone need not be so severe. That is why Jens Weidmann, the head of Germany’s central bank,
has been calling for higher pay—a daring step in a country of inflation hawks. The European
Central Bank, which cut interest rates this week, could also act more boldly to raise inflation
towards its target of almost 2%. That would allow the euro zone’s invalids to regain
competitiveness through wage freezes rather than outright cuts.
Wages, of course, are not just important to central bankers. Weak pay saps revenue from income
tax and social-security contributions, making it harder for governments to mend public finances.
The lack of growth in real wages hurts household finances, too, keeping consumers tight-fisted.
A healthy and sustained recovery in the rich world will remain elusive until the pay squeeze
ends.
Extra credit
The Earned Income Tax Credit almost pays for itself
The policy that reduces unemployment, boosts wages and costs a pittance
The economist, November 22nd, 2018
DEMOCRATS AND Republicans can sometimes agree that splashing water on things might
make them wet, but not on much else. How remarkable, then, that the Earned Income Tax Credit
(EITC), which tops up the earnings of low earners, is beloved by politicians of all stripes. EITC
is one of the most effective government programmes. Analysis from the Centre on Budget and
Policy Priorities, a think-tank, finds that it boosts the income of around 28m Americans every
year, lifting 9m of them above the poverty line. A new working paper finds the programme
might be even better than was previously realised, because it costs so little to administer.*
The study, written by Jacob Bastian, a post-doctoral researcher at the University of Chicago, and
Maggie Jones of the Census Bureau, points to two reasons why the EITCcosts taxpayers less
than is generally understood. First, the EITC, unlike many other welfare programmes, is
designed to encourage more people to work, since only the employed can receive benefits. This
results in a bigger pool of people paying income tax. Second, the EITC raises incomes of the
poor, which means fewer are dependent on other forms of welfare. Mr Bastian and Ms Jones find
that once you take these two factors into account, every dollar the government notionally spends
on the EITCcosts taxpayers just 13 cents on net.
Although the EITCis generally well-regarded, it does have some kinks. A single person without
children can only receive benefits if they earn less than $15,270 a year, or roughly the federal
minimum wage. They also can only receive up to $519. By contrast a parent with one child can
receive up to $3,461. A single parent with one child can claim benefits if they earn less than
$40,320, while a couple with one child can claim benefits if they earn less than a combined
$46,010.
This means the programme has a bigger impact on the behaviour of some than on others.
Research has found single mothers are the most likely to join the workforce because of the EITC.
The tax credit has little effect on the employment rates of fathers since they are more likely to
have jobs anyway. The EITC also has some downsides. Married women who are not their
families’ chief breadwinners are actually discouraged from working if their households are near
the eligibility threshold.
The fact that the EITC makes people richer, and hence less likely to be eligible for other kinds of
welfare programmes, might mean some of its reported benefits have been overstated. But past
research has found that beyond its impact on household finances, the EITC has also been shown
to lower crime rates for women, and to improve health and education. Mr Bastian reckons the
EITC might have further positive effects: single mothers who are nudged into work, might serve
as better role models for their kids, for instance.
The EITC does have one glaring shortcoming: it does little to help the childless. America’s
labour-force participation rate is below that of many other rich countries, including Britain,
Canada and Germany. Closing this gap would be a boon for the economy. But convincing a
discouraged worker to start looking for jobs again will probably take more than $519 a person.
*“Do EITC expansions pay for themselves? Effects on tax revenue and public-assistance spending,” by Jacob E. Bastian and Maggie R. Jones.
We often hear that “a picture is worth a thousand words”. There is no better description than this adage
for the article “Tax and inequality” published by The Economist. The central idea in that article is that
inequality that matters is as much of a consequence of distribution of value created in production by
markets as by government fiscal process.
The Gini coefficient is a standard measure of inequality and is computed from the Lorenz curve. A
society with perfect equality has a Lorenz curve that looks like a 45-degree line with a Gini of 0. The
most extreme inequality, where one household earns all and nobody else has any, has a Gini of 100. The
further the Lorenz curve bends outward from a 45-degree line towards the extreme case, the more unequal
the distribution is and the higher the Gini coefficient is.
A households’ income before going through fiscal process, the pre-tax income, is distributed by markets.
According to what we have learned, this type of income depends on ownership of factors of production
and the usefulness of factors measured by their marginal product. But the pre-tax income is not what
matters for individual households; the post-tax income is, because it is the amount that a household is free
to spend according to its preferences and wishes. Fiscal process, through taxation and transfer, can change
the distribution of income achieved by markets, i.e. redistribution.
The first graph in this article shows the inequality of income distribution through markets (pre-tax income
Gini) and the effect of redistribution through fiscal process (pre-tax income Gini minus post-tax income
Gini) for OECD countries using data in recent years. When we look at the end result, the post-tax income
Gini, redistribution is as important as markets. For example, Ireland has the most unequal income
distribution fresh from markets, with a pre-tax income Gini of 50 while South Korea is the most equal
with a pre-tax Gini of 30. But the after-tax income Gini coefficients of the two countries are only 3 points
apart, 30 vs. 27.
The second graph shows the correlation between reduction of inequality through redistribution and size of
government measured by government spending as a percentage of GDP. Using the fitted trend line, we
can induce that in order to reduce Gini by 1, we need to increase government size by roughly a 2.4% of
GDP. Of course the article did point out that using this as a basis of policy is unrealistic. I completely
agree. In addition, I think this graph can be improved to show the minor point of the article, i.e. why
Ireland is such an outlier. The Irish government is smaller than the Swedish government, but Ireland is
able to cut the Gini by 20 through redistribution while Sweden can only by 10.
We have learned that government expenditure has two components, purchasing of goods and services and
transfer payments. The former is linked with provision of public goods while the latter is pure
redistribution. Instead of using total spending, it is better to use the size of transfer payment plus the
progressiveness of tax collection. Both are directly involved with redistribution. We should expect a
tighter connection between these two with reduction of inequality. The fitted linear line would describe
the average efficacy of redistribution better. Any country deviating from this trend is obviously an outlier.
I suspect that Ireland will still stand out but not as ostentatiously.
The article further points out that the Irish model is not duplicable. Ireland is considered the tax haven for
multinational corporations. Not only does it have a low corporate income tax rate of 12.5%, it also
provides various mechanisms to reduce the effective tax rate to less than 5% according to a Bloomberg
study conducted in 2018. Irish Revenue Commissioners also reports that corporate tax accounted for 16%
of total net receipts in 2017 and foreign owned multinational firms paid 80% of Irish corporate tax. In
comparison, the share of corporate income tax in the US is only 6-7% of total tax revenue.
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