by Rick McGahey, SCEPA Senior Fellow
While May's stronger job growth is welcome, continuing low inflation and annual wage growth below 2.5% don't present any macroeconomic threats that warrant driving up interest rates. But the Fed, like many economic policymakers, seems to be operating in a "new normal" where an unemployment rate of 5.5% is considered full employment. That is not a world where most workers and families will make any significant economic progress.
The May employment report shows job creation numbers bounced back with a gain of 280,000. And an upward revision of the numbers for the previous two months added 32,000 jobs, pushing the three-month rolling average to 207,000 new jobs per month. The unemployment rate ticked up by a probably meaningless one-tenth of a percent, to 5.5%. The big jump in employment has many observers predicting a Federal Reserve interest rate increase sooner rather than later.
But even with these job gains, we still are not seeing significant labor market pressures.
This week's Worldly Philosopher, Julia M. Puaschunder, describes how meritocracy enables intergenerational mobility to foster equitable societies.
Thomas Piketty's Capital in the 21st Century is about societal inequality, but it also raises important questions about social mobility.
Inequality occurs in immobile societies. If individuals cannot advance based on education, work and natural skills, societal status depends on their parents' wealth, income and networks. An Organisation for Economic Co-operation and Development (OECD) Economic Policy Reform Report finds a significant relationship (r=.56, 88, p<.05) between inequality and wage distribution by measuring the gap between the wages of those with fathers with and without any higher education. The Great Gatsby Curve connects wealth in one generation with the ability to move up the economic ladder in the next generation. As you can see, children from poor families are less likely to improve their economic status in countries where income inequality is higher.
by Rick McGahey, SCEPA Faculty Fellow
This morning's April employment report shows a U.S. economy with continuing weaknesses, underscored by other economic data indicating that first quarter GDP may actually have declined. The economy added 233,000 jobs, with a stagnant unemployment rate of 5.4% and a continuing historically low labor force participation rate. But jobs numbers for February and March also were revised, showing 39,000 fewer jobs than previously reported. That puts the three-month rolling average for job creation below 200,000 per month.
The weak jobs number must be viewed in relation to other data suggesting a weakening economy. In March, the dollar hit a 40-year high against the Euro and has been strengthening against almost all other currencies, hurting U.S. exports and leading to a March trade deficit of $51.4 billion, a six-year high.
Some of the dollar's growth has been driven by expectations of Federal Reserve interest rate increases, but today's employment report is another signal that the Fed should hold its fire. This is a weak economy that is going nowhere fast, and increasing interest rates could tip it into recession, or at least lock us into stagnation. We are now in the 70th month of the (very weak) economic recovery, much longer than the post-World War II average of 58 months.
In the labor market, working hours and wages aren't growing, another signal of overall economic weakness. Hours worked in April didn't increase, and average hours in the private sector are exactly the same as one year ago. And average hourly earnings increased by only 3 cents in April, for a 2.2% increase over the past year.
These are not strong labor market numbers.
All eyes are on Paris. The United Nations is working to secure a historic, legally binding international climate change agreement at its December meeting of the UN Framework Convention on Climate Change (UNFCCC) in the City of Lights.
But the negotiations have already begun. Governments are submitting their mitigation and adaptation plans. Scientists put forward a statement on the essential elements of a plan. And in May, Paris will host a climate summit with business interests. The anticipation for an agreement is building, and so is the pressure on the UN. How will they make the promise a reality?
Selwin Hart, Director of the UN Secretary-General's Climate Change Support Team, joined SCEPA on May 11th to present, "The Road to Paris and Beyond: Creating a Climate Change Agreement that Works." Hart shared his insider point of view on the UN's efforts to mobilize the support necessary to secure an agreement. He will also share the UN's vision to ensure it works, including a framework for a multilateral, rules-based climate regime.
The lecture was followed by a presentation on "The Oxford Handbook of the Macroeconomics of Global Warming" by SCEPA Faculty Fellow Willi Semmler and New School economic alumnus Lucas Bernard, Professor of Business at CUNY's College of Technology. The handbook analyzes the economic impact of global warming and how the responses to it - including preventative measures, adaptation policies and international agreements - affect growth, sustainability and society. With articles from over 50 different scholars, it considers how these consequences differ between developed and developing nations.
The event was hosted by SCEPA's Economics of Climate Change Project, led by New School Professor of Economics Willi Semmler, and is generously supported by the Fritz Thyssen Foundation and the Macroeconomic Policy Institute (IMK).
This week's Worldly Philosopher, Ismael Cid-Martinez, reveals the challenges older workers face in the labor market.
Last month the unemployment rate for workers age 55 and over dropped to 3.9% from 4.3%. This fall obscures the challenges older workers continue to face in the labor market - prolonged unemployment and underemployment. This reality means that those who can find jobs often accept lower pay, poorer working conditions and reduced benefits.
Since the Great Recession, the unemployment rate of older workers has not shown a consistent recovery. Instead, it has been up and down. In December of 2007, it was 3.2%, but four years into the recovery in December of 2013 it was 5.1%. A year later, it fell below 4%, only to climb back to 4.3% by February of this year.
Not only do workers of older ages experience inconsistent employment opportunities, they are also victim to prolonged joblessness. Last month's job numbers show jobseekers between the ages of 55 to 64 spent an average of 43.7 weeks actively looking for work and those 65 years and older 42.6 weeks. In 2014, nearly half (45%) of older workers were unemployed for 27 weeks or more, making up the second largest group among the long-term unemployed.
These long periods of unemployment are eroding the bargaining power of older workers. AARP's Public Policy Institute confirmed this in a recent survey examining how unemployment affected workers between the ages of 45 and 70 over the past five years.
AARP's results show that older workers are not finding work that reflects an extension of their careers.
by Rick McGahey, SCEPA Faculty Fellow
A provocative new document on global environmental challenges says that "climate change and other global ecological challenges are not the most important immediate concerns for the majority of the world's people. Nor should they be." Is this just the latest self-regarding propaganda from international agribusiness and oil companies? No, the statement comes from the new "manifesto" just released on "eco-modernism."
The ecomodernists are associated with the Breakthrough Institute, founded by activists associated with the Apollo Alliance and other thinkers who want a more dramatic move to clean energy to spur economic growth while reducing carbon release and environmental damage. Eduardo Porter has a positive piece on the manifesto in the New York Times.
The manifesto calls explicitly for more urban development and growth, arguing that is the best way to increase the standard of living for the world's population. They see the possibility of a greener, better managed way of living in a more urban-centered world.
The manifesto explicitly rejects what they view as romantic visions of rural living and subsistence agriculture. The authors argue that "The average per-capita use of land today is vastly lower than it was 5,000 years ago, despite the fact that modern people enjoy a far richer diet. Thanks to technological improvements in agriculture, during the half-century starting in the mid-1960s, the amount of land required for growing crops and animal feed for the average person declined by one-half."
So they want more intensified, productive agriculture and aquaculture, along with nuclear power, desalinization, and other technologies. I think the manifesto is very hopeful to naive about our ability to manage some of these specific technologies (especially nuclear waste). But I'm drawn to their argument that says smarter and lower carbon technologies can help raise everyone's standard of living, shifting our economy to less polluting and carbon-intensive services.
In what seems a deliberate echo of Karl Marx, this manifesto says,
SCEPA Faculty Fellow Rick McGahey published an opinion piece on CNN.com today, Where are the Good Jobs?" McGahey explains why the recent job growth has not led to wage growth. The 'weak wage growth puzzles economists. After all, as the labor market improves, workers should be able to get raises as employers compete for a tighter labor force.' McGahey lists four reasons for the suppressed wage growth:
- People are still out of work. In March labor force participation was 62.7%, the U.S. hasn't experienced a labor force participation this low since 1978.
- Job growth is too slow. It took 6 ½ to regain the jobs lost in the Great Recession.
- The jobs created pay worse that the jobs lost during the Great Recession.
- The suppressed wage growth is due to the long-term failure to share productivity gains between workers and businesses.
McGahey recommends that 'we won't see higher wages without two important policy changes: more government stimulus to create jobs, and changes in labor market rules to rebalance power between business and workers.'
This week's Worldly Philosopher, Kyle Moore, discusses how the disparity in morbidity between Black and White individuals can result in unequal retirement time and benefits.
The New England Journal of Medicine recently published two articles calling on the medical and public health fields to engage in the #BlackLivesMatter movement. In a previous post, I spoke about the importance of the #BlackLivesMatter movement to economic policy in general and retirement policy in particular. Policymakers and the public need to understand how different racial group's health status effects retirement. Otherwise, they run the risk of enacting policies, such as raising the retirement age, that are likely to have a disparate impact on communities of color.
Blacks Don't Make it to Retirement Without Health Limitations
We know that being sick increases the chance that a person will retire early. We also know a lot about the differences in morbidity between Blacks and Whites. For example:
- Blacks have a 36% higher chance than Whites of developing a work-limiting health condition during their working careers.
- Blacks develop activity limitations caused by chronic conditions around age 61 – six years before Social Security's normal retirement age - while Whites develop these limitations around 67.
The German Research Foundation (DFG) awarded grants to seven SCEPA economists to support research on wealth and disparity in the United States and Germany. SCEPA Faculty Fellows Willi Semmler, Mark Setterfield, Christian Proaño, Teresa Ghilarducci, Rick McGahey, Research Economist Joelle Saad-Lessler, and NSSR Dean William Milberg are among the experts chosen for funding.
Semmler and Setterfield will research the trends, policies, and macroeconomic implications of inequality. Proaño's research focuses on experimental economics, entrepreneurship, and inequality. Milberg will analyze research from Lederer and other German University in Exile scholars who studied labor markets and inequalities. Ghilarducci, McGahey, and Saad-Lessler will research employment and retirement outcome inequalities in the two countries.
On March 17, 2015, Scott Carter, New School economics alumnus and Professor of Economics at the University of Tulsa, discussed the need to make public Piero Sraffa’s unpublished notes on his book, “Production of Commodities by Means of Commodities: Prelude to a Critique of Economic Theory.”
Piero Sraffa (1898-1983) was an Italian economist at the University of Cambridge known for his criticism of mainstream economics. Citing an insight made by Ajit Sinha, Carter noted that the Prelude's text can be considered as a ‘masterpiece of minimalist art.’ At only 99 pages, it fueled the neo-Ricardian school of economic thought with a critique of the neo-classical theory of value.
Written over 30 years and originally comprised over 7,000 pages, Carter is working to assemble the work into an online timeline and database.
On March 10, 2015, David Kotz, Professor of Economics at University of Massachusetts Amherst and Distinguished Professor of Economics at Shanghai University of Finance and Economics presented a seminar on his new book, "The Rise and Fall of Neoliberal Capitalism."
Kotz began studying neoliberal capitalism in the 1990s and was one of the few academic economists to predict the economic collapse of 2008. His presentation provided a historical trajectory of neoliberal capitalism from the Carter administration through the aftermath of the Great Recession.
Wage Stagnation: The Unsustainable Outcome of Neoliberalism
Kotz's analysis reveals that neoliberalism provided a long period of economic growth with low inflation, but that the corresponding decrease in wages had three significant side effects, including increasing inequality, asset bubbles, and financial institutions' increasingly risky behavior.
This precarious situation was initially supported by the growth in housing values. However, once the bubble burst, the unsustainability of neoliberal capitalism became clear in the rising household and financial debt, the spread of toxic financial assests and capacity in excess of demand. The recession and financial crisis that followed resulted in the structural crisis we experience today - stagnation.
Austerity: A Doomed Answer to the Structural Crisis
According to Kotz, labor force participation has been dropping since 2007. And while the profit rate bounced back immediately after the recession due to the federal rescue of financial institutions, capital accumulation did not. Kotz points to austerity policies, or curtailing public spending, as a doomed attempt to" double-down" on neoliberalism, but the conditions necessary to promote consumer spending are no longer present. According to Kotz's reading of history, "stagnation will continue unless and until there is a major institutional restructuring."
The Real Answer: Restructuring
Kotz gives us three potential scenerios for the future. First is a nationalist form of capitalism that relies on military growth to prop up spending and demand. Second is a return to neoliberalism's predecessor, regulated capitalism, which was built on a coalition between labor and capitol. Third is a transition to an alternative socialist system.
Of the many possible critiques of the first two options, Kotz highlights that any system that rapidly accelerates economic growth will also accelerate climate change. However, the third option holds open the door to a transition beyond capitalism that increases social welfare while decreasing the production of goods.
The event was part of the Spring 2015 Seminar Series hosted by The New School Economics Department.
by Rick McGahey, SCEPA Faculty Fellow
Read Rick's comments in today's International Business Times, "Unemployment Report: Six Years After The Great Recession, Are The Good Jobs Ever Coming Back?"
This morning's employment report for February continues the story of this recovery: job growth trending upward, but still lots of slack in the labor market, and no signs of inflationary pressure. Jobs are growing, but wages and hours are not, and many of the jobs are low-wage.
295,000 jobs were added in February, in line with the three-month average of 288,000. Over the past year, job growth has averaged 266,000 per month. The unemployment rate ticked down slightly to 5.5% from 5.7 in January; over the past year, the rate has fallen by 1.2%, so we are seeing an improving labor market. But the labor force participation rate remained essentially unchanged, and is stuck at its lowest level in 37 years.
Wages and hours also remain flat, tempering any interpretation that we have a booming labor market. Average hourly wages were up by three cents, and have only risen by 2% in the past year. And average hours worked also remained flat—in February 2015 hours were 34.6, only two-tenths more than one year ago.
So we are seeing some job growth. But it isn't very strong, and the jobs aren't very good. Labor force participation, wages, and hours all are signaling a labor market with a lot of slack, and no significant upward cost pressures. The Federal Reserve should not be considering raising interest rates when faced with these numbers.
This week's Worldly Philosopher, Anthony Bonen, discusses how even the best models for estimating the costs of adapting to climate change are still a guessing game.
Estimates of the social cost of carbon (SCC) focus almost exclusively on the net benefit/loss of mitigating climate change. The cost of adapting to the unmitigated impacts of climate change remains an even more elusive figure. Properly calculated, however, SCC should include both dimensions.
As discussed in an earlier SCEPA working paper, SCC model estimates of mitigation costs are notoriously difficult to pin down. But, after being asked to give a presentation on adaptation, I soon learned that there is far less certainty in these costs. For developing countries, estimating the cost of climate change adaptation is essential. Their success or failure in saving lives, reducing poverty and becoming resilient to climate change depends in large measure on how much support – financial, logistic and political – the industrialized world is willing to provide.
Systematic efforts to estimate the global cost of adapting to climate change began in earnest only in 2006 with a World Bank study of investment flows in the developing world .1 The second generation of adaptation estimates relies on impact-level assessments. The best example of these more detailed, but still top-down, studies is the World Bank's report . The IPCC's chapter on the Economics of Adaptation  calls it "[t]he most recent and most comprehensive to date global adaptation costs [in which] costs range from US$70 to more than US$100 billion annually by 2050." The conservative estimates for each of the 6 sectors are reproduced in Table 1.
Brad DeLong, a widely-read economist and blogger, cites SCEPA economist David Howell's work investigating the causes of wage inequality and unshared productivity growth as today's "Morning Must-Read." Howell's research with the Washington Center for Equitable Growth asks, what happened to shared growth?
"Most economists continue to explain the explosion of earnings inequality with conventional supply-and-demand stories, in which worker compensation is believed to accurately reflect the contribution workers make to production. Thus, in this view, CEOs and financiers have received skyrocketing salaries, especially since the mid-1990s, because they are now contributing dramatically more to their firms and to the economy as a whole.
Similarly, the bottom 90 percent have seen stagnant and falling wages because they've fallen behind in the "race between education and technology." The computerization of the workplace requires greater cognitive skills, but workers have not kept up, as indicated by the slowdown in college graduation rates. Assuming (nearly) perfectly competitive markets, the explosion in wage inequality in this view must reflect a similarly explosive increase in skill mismatch (too many low skill workers, too few high skill ones).
Such arguments leave little or no room for labor market institutions and public policies in determining changes in the distribution of earnings up and down the income ladder. An alternative view is that institutionally-driven bargaining power is a critical piece of the story, whether it is the noncompetitive "rents" earned by top managers and financiers, or the collapsing power of hourly wage employees."
On April 21, 2015, William "Sandy" Darity presented "Does Racism Make You Sick?: Health, Wealth, and Race in America" at SCEPA's Annual Robert Heilbroner Memorial Lecture on the Future of Capitalism. Sandy Darity is the Samuel DuBois Cook Professor of Public Policy, African and African American Studies, and Economics and the Director of the Duke Consortium on Social Equity at Duke University. His research focuses on inequality by race, class and ethnicity.
Anwar Shaikh, Professor and Chair of the Economics Department at The New School for Social Research
Teresa Ghilarducci, Professor and Director of Schwartz Center for Economic Policy Analysis
Darrick Hamilton, Associate Professor of Urban Policy at The New School for Public Engagement
Cole Strangler of the International Business Times provides context for the Department of Labor's January employment report in his article, Job Growth Still Hasn't Translated Into Wage Gains. He describes real people's experiences with wage stagnation and illustrates the balance between business and labor.
"Standard economic theory holds that, at some point, sinking unemployment will translate into wage gains: When companies have a smaller pool of talent to choose from, they tend to offer more attractive salaries. By the same token, when workers have a sense of job security, they're more likely to ask for a raise.
This hasn't happened.
"I haven't run any empirical work on this, but I'd want to see the unemployment rate a lot closer to 5 percent, maybe even slightly below, before I would expect to see that we'd get significant wage pressure," said Richard McGahey, an economist at the New School and former economic policy adviser for Sen. Edward Kennedy.
Shrinking union density has boosted the share of profits going to bosses rather than workers, McGahey said."
by Rick McGahey, SCEPA Faculty Fellow
Employment for the first month of 2015 continued the steady growth from last year. 257,000 new jobs were added, and although the unemployment rate ticked up one-tenth of a percent to 5.7, that resulted from people entering the labor force to look for jobs—what economists call "labor force participation." Participation in December was at an historic low, so there's a long way to go to restore healthy levels there.
Average hourly wages in January rose to $24.75, up half a percent from December (December's average wage rate actually declined). But wages are only 2.2% higher than one year ago. Weekly hours worked, however, were flat, at an average of 34.6 hours per week, the same as December, and virtually unchanged from last January's level of 34.4.
So jobs are being added at a steady pace—260,000 per month in 2014, the highest average monthly level since 1999. But the wage and hour data are not signaling any huge economic rebound or inflationary pressures. Make no mistake, this is still a lukewarm economy and labor market, and we are now 67 months into the recovery, above the 58-month average for recoveries since 1945.
The weak wage and hour data are part of a longer running economic trend—declines in the "labor share" of GDP. The share of gross domestic income going to employee compensation peaked in 1970 at 58.4%, and has been on a steady decline since then. In recent years, that share rose to 55.3% in 2008, just before the Great Recession, falling to 52.1% in 2013. A weaker labor share means weaker overall consumption and consumer demand, and the economy will not grow strongly.
There are various theories about why the labor share has declined. Some blame technological substitution, especially the spread of information technology into all sectors of the economy. Other scholars emphasize the loss of good-paying jobs to trade and corporate outsourcing (NSSR Dean Will Milberg's recent book with Deborah Winkler makes a strong case for this). Labor share also is reduced by declining union power, and economic "financialization," as businesses retain profits, hoarding cash, buying back stock and paying dividends instead of making new productive investments.
But all these factors pull in the same direction - a continuing shift in power towards business and away from labor. These longer-term forces are undercutting workers' bargaining power, so the steady job growth we are now seeing is not translating into higher wages. We need greater government investment to compensate for weak overall demand, and the Federal Reserve should not raise interest rates, as annual wage growth is very modest and well within their already conservative inflation targets.
This week's Worldly Philosopher, Ozlem Omer, discusses the flaws in the latest IMF policy recommendations for Turkey.
The December 2014 IMF Report is no exception. In it, the IMF warns Turkey that its persistent and large external debts make the country vulnerable to foreigners' willingness to lend - even though the Turkish economy has been growing 6% per year since 2010. The report criticizes Turkey's high inflation and foreign exchange rates, low interest rates, low levels of domestic savings, high external deficit, and, of course, increasing levels of private external debt. It predicts Turkey will likely face a dangerous reversal of capital flow. If foreign pension funds, rich foreign investors, and other countries stop lending money in Turkey, the nation could experience economic and social shocks exceeding the fallout from the 2009 recession.
The IMF suggests Turkey "curb its current account deficit and reduce the external deficit by boosting savings without decreasing investment—and lowering inflation to preserve competitiveness." In short, it calls for Turkish austerity.
This week's Worldly Philosopher, Ismael Cid, discusses how the decline in employer-sponsored retirement plans has forced a growing number of Americans to postpone retirement.
In his 1930 essay, "Economics Possibilities for Our Grandchildren," economist John Maynard Keynes predicted a future of increased living standards and 15-hour workweeks. He envisioned a rise in living standards - equivalent to what we have experienced over the last 85 years – that would allow us to devote our energies to non-economic purposes. In his words, "the lilies of the field who toil not, neither do they spin."
A future of longer and healthier lives proved right. Unfortunately, however, reality does not bear out Keynes' vision of security and leisure. In fact, it is the opposite. Increased life expectancies and the challenges of a graying population have encouraged some economists to champion a retirement policy described as "work until you drop."
SCEPA Director and retirement expert Teresa Ghilarducci recently described the growing problem of retirement insecurity behind this new reality. Rather than a savings problem, SCEPA research documents the underlying structural problem: employer sponsorship of retirement plans for prime-aged (25-64) workers declined from 61% to 53% from 2002 to 2012.
This week's Worldly Philosopher, Raphaele Chappe, questions the inequality in investor returns.
As discussed at great length in prior posts, Piketty has argued that inequality is directly linked to the return on capital r exceeding the growth rate of the economy g. Yet a fascinating (perhaps controversial, and less discussed) claim is that the average rate of return on capital is not the same for all investors depending on the size of the portfolio – in short, contrary to the efficient market hypothesis, some investors do earn higher returns in the long run.
Piketty points to the fact that the wealthiest individuals in the world have earned annual returns of 6.8% per year since 1987, compared to the world average of 2.1%. Using university endowments as a case study, he also points to higher endowments earning higher returns in the long run (see Tables 12.1 and 12.2 in Piketty, 2013). Other research confirms that rich universities are getting better returns and do seem to benefit from better asset selection abilities.
Finance tells us that higher returns for wealthier investors could be achieved in two ways. First, by taking on more "risk" and investing in stocks with higher "beta," or products with embedded leverage (such as derivatives). Second, by getting a higher return per unit of risk than what should be expected given the beta. This second component is known as the "alpha," measuring the return above the risk-adjusted performance of a benchmark index and (supposedly) a measure of the skill of the active asset manager. We can imagine that factors such as better information (or even insider information), arbitrage opportunities, or advanced tax planning can generate considerable alpha. Piketty points to significant economies of scale associated with the size of the portfolio.
Do higher returns to high net-worth individuals or institutions come from an ability to take more risk or from higher alphas?