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Expanding America’s expansion

Jul 27,2019 - Last updated at Jul 27,2019

By Lenny Mendonca, Laura Tyson

 

BERKELEY — The United States is enjoying the longest economic expansion on record, surpassing the decade-long growth run between 1991 and 2001. And yet, while most standard indicators, the unemployment rate, growth in non-farm payroll jobs, the number of job openings, imply a vibrant labour market, for too many Americans, the good times do not feel particularly good. Wage gains for most workers have been stubbornly disappointing, barely keeping up with the cost of living; and more than 4.3 million workers who want full-time positions can find only part-time jobs.

To be sure, as labour markets have tightened, nominal wage growth for nonsupervisory and production workers has accelerated, averaging slightly over 3 per cent year on year in recent months, with some of the strongest gains going to low-wage workers in the 20th and 30th wage percentiles. The problem, as US Federal Reserve Chair Jerome Powell acknowledged in recent congressional testimony, is that wages are not growing as rapidly as in previous recoveries. Standard models linking the unemployment rate to wage growth and inflation have broken down, confounding macroeconomists and complicating the Fed’s job. Annual nominal wage growth would need to be at least 3.5-4 per cent or more to be consistent with the Fed’s 2 per cent inflation target, 1.5 per cent productivity growth, and a stable share of national income for labour.

In fact, this past May, average real (inflation-adjusted) weekly earnings for the bottom 80 per cent of production and nonsupervisory workers, a widely used measure of the “typical” worker, were about the same as they were in 1974. And if 45 years of wage stagnation were not bad enough, the average obscures growing wage inequality. For decades, wage growth has been heavily concentrated in the top quintile, while real wages in the bottom quintile have actually fallen, further exposing persistent differences that are strongly correlated with ethnicity, race and gender.

For many Americans, the challenge is not finding work, but finding work that pays a living wage. While the federal minimum wage remains where it was a decade ago ($7.25 per hour), minimum-wage increases went into effect in 18 states this year, already raising the pay of around five million workers, and are planned in another four states. Moreover, minimum-wage hikes in recent years have occurred in both red (Republican-leaning) and blue (Democratic-leaning) states. According to the Economic Policy Institute, wage growth at the 10th percentile was 50 per cent faster in states that raised the minimum wage between 2013 and 2018 than in those that did not, and the gains were even stronger among female workers.

Similarly, in 2019 alone, the earned income tax credit (EITC) has been expanded in six of the 29 states that have it. In addition to reducing poverty and improving health, particularly for single mothers and children, the EITC boosts employment, because it encourages work. The EITC works best when it is paired with a higher minimum wage, so that employers cannot foist the cost of paying their workers onto taxpayers. California, which has the highest poverty rate in the US, 19 per cent, increased its minimum wage in 2019, with additional annual increases planned through 2023. It is also pursuing an expansion of its EITC that will extend it to workers without children and self-employed workers, and will provide an extra $1,000 allowance to eligible families with children under six. The expansion will enable a million more families to receive the credit. Meanwhile, at the federal level, progressive Democrats are advocating a “caregivers EITC” that would allow those caring for children and vulnerable adults to claim the same benefits they would obtain were they working in a paid job.

Still, while some state and local governments have adopted measures to help workers, geographic disparities are widening. According to a new McKinsey Global Institute study, the wage and employment gains of the current expansion have varied sharply across cities, states and regions, reflecting a long-term trend that started accelerating after the 2008-2009 recession. At both the national level and in California and other states, gains in employment have been heavily concentrated in urban areas, while employment in rural communities and distressed cities has continued to fall.

The industrial heartland and rural areas in the South, Southwest and Midwest have been particularly hard hit, and now have persistently high rates of joblessness and opioid addiction among prime-age males. Making matters worse, worker mobility has declined: The share of the adult population that moves each year has fallen from around 20 per cent in the 1950s to below 10 per cent today.

These geographic disparities have led to renewed interest in place-based policies to boost employment in struggling areas. Among the more promising proposals are wage subsidies that vary by region and specialised training programmes tailored to local labour markets. For example, California’s new Regions Rise Together initiative will convene leaders from different sectors and locales to develop a comprehensive plan for improving labour-market conditions statewide. It will build on already active local initiatives around the state, such as Fresno DRIVE, while also leveraging state-level investments and resources.

California has also established a Future of Work Commission to analyse the likely impact of automation on workers, employers and jobs, and to recommend policies to support employment and wage growth throughout the state. The challenges are significant. Six out of 10 California workers lack a college degree, and an estimated 33 per cent of jobs in the state are at risk of being disrupted by automation. The commission’s task is to develop educational opportunities, so that workers can keep up with changing skill requirements and credentials, and to provide incentives for employers, local communities, educational institutions and others to make the investments needed for an economy that works for everyone.

As the current expansion demonstrates, strong aggregate demand is essential to job creation, but it is not enough to generate robust wage growth for the majority of workers, nor will it narrow the yawning gaps between cities, states and regions. Only smart, forward-looking policies can do that.

 

Lenny Mendonca is chief economic and business adviser for the State of California. Laura Tyson, a former chair of the US President’s Council of Economic Advisers, is a professor at the Haas School of Business at the University of California, Berkeley, a senior adviser at the Rock Creek Group, and a senior external adviser to the McKinsey Global Institute. Project Syndicate, 2019. www.project-syndicate.org

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