The Trump administration will reportedly raise the overtime pay salary threshold from $23,660 to $36,000 in the coming weeks. Anyone below the current threshold is eligible to be paid at least one-and-a-half times their regular wage for any hours worked above 40 per week. The proposed change would make approximately 1.3 million extra people eligible for overtime pay.
Economically, such a regulatory change is a great big nothing burger. It will do nothing to affect long-term overall compensation, but will bring mild labor market dysfunction and adjustment costs along the way.
Yes, in the short-run, employers have business practices and contracts with their employees that take time to change. Some workers will therefore benefit from higher total compensation in the immediate aftermath of the rule change, as employers are now legally obliged to pay them extra for overtime. This, no doubt, will be the outcome the Trump team trumpets.
But as time goes by, employers will adjust.
That might come initially through managing their workforce to minimize the likelihood of paying overtime rates - changing shifts patterns, recategorizing workers into exempt categories, outsourcing tasks, or trimming the workforce. Basic economics tells us, though, that what employers ultimately care about are the total costs of employment. In time, the overwhelming response will be employers cutting base pay rates or other perks and benefits (relative to where they would have gone) such that overall employment costs remain unchanged. This is exactly the response that empirical research has found.
So the broadened scope of the rule will do little for workers beyond the short-term. But we’d expect it to modestly reduce the efficiency of the economy in other ways. For example, more employers might decide to spend time tracking their employees’ hours closely, disallow “working from home,” or adjust contracts towards hourly wages that are less appropriate for the nature of their industries.
In a recent op-ed for CNN, Rep. Rashida Tlaib (D-MI) suggests a plan for improving the financial inclusion of minority households. She believes that reversing the Trump administration’s recent regulatory initiatives on credit discrimination and mortgage reporting legislation would improve matters.
While Rep. Tlaib is right to point out the disproportionate numbers of blacks among those lacking access to financial services, their financial exclusion goes back, not years or months, but decades. Moreover, her recommendations would mainly double down on existing regulations that seem to perpetuate rather than mitigate financial exclusion.
Rep. Tlaib begins with the striking finding that, ostensibly, the black homeownership rate in the second quarter of 2019 was lower than at any time since 1970. At 40.6 percent, it came in six percentage points below the Hispanic homeownership rate and almost a third below that of whites. Tlaib worries that, because black Americans are so much less likely than other racial groups to own their home, they will have a harder time achieving economic stability.
While homeownership is indeed a popular form of wealth accumulation, the share of Americans who own their homes is hardly a straightforward measure of financial security. For example, the homeownership rate among all households hit an all-time high of 69.1 percent at the start of 2005, a time of exceptionally high home prices and extremely loose credit standards. The financial crisis that followed, with foreclosures hitting up to 10 million families, belied the assumption that the new homeowners had achieved financial security.
Black Americans’ low homeownership rate is the product of many causes, notably decades of institutional discrimination that made it difficult or impossible for blacks to gain access to the same job opportunities and schooling as whites. Discrimination caused black households to have persistently lower incomes and greater professional and personal instability, frustrating their attempts to earn and save. Explicit government policies also limited black Americans’ access to credit by designating predominantly black neighborhoods as “hazardous” to prospective lenders. Because banks since the 1930s have sold most of their mortgages to government and government-sponsored entities, an official recommendation against lending in certain areas had the power of a veto.
Rep. Tlaib is right to focus attention on the troubling legacy of redlining, but blaming a recent and marginal reduction in regulation for blacks’ low homeownership rate is highly suspect. For one thing, the most recent quarterly rate of 40.6 percent is only slightly below the 41 to 43 percent range recorded for most quarters since the beginning of 2012. The estimate’s margin of error, at 0.9 percent, is also high. Thus, the record low reported for the last quarter could be a statistical fluke or a short-lived dip. Giving one quarterly result great significance is probably unwise at this stage.
Tlaib’s op-ed also makes an important category mistake. As evidence of redlining, it refers to a piece of investigative journalism that claimed to find discrimination against minorities in mortgage lending. But, while they may affect similar communities, credit discrimination and redlining are quite different practices. Redlining involves the systematic avoidance by lenders of certain neighborhoods. Discrimination, on the other hand, is the denial of credit to people because of their gender, race, age, disability status, or other personal traits. Redlining is geographical, whereas discrimination focuses on individual characteristics. Each calls for a different policy fix.
Moreover, the study in question was controversial at its publication because, in analyzing lending data for different racial groups, it did not consider borrowers’ credit scores. These scores seek to summarize the risk of lending to individuals and predict their likelihood of default. They are probably the most important factor in a lender’s decision to approve a loan and on the terms of the loan. Excluding credit scores from a study of discrimination will almost surely yield spurious findings, because credit scores correlate with both borrower income and race.
Rep. Tlaib believes the Trump administration’s housing policies, such as a rumored tightening of the evidentiary standard required to make a discrimination claim and a reduction of mortgage reporting requirements for small lenders, attack “the last line of defense against the declining rate of minority homeownership.”
But there is no clear positive correlation between these regulations and the black homeownership rate. On the contrary, the fear of a disparate-impact claim under the current standard may chill lending activity and innovation. Furthermore, tighter mortgage underwriting rules – whether beneficial or harmful on net – did lead banks small and large to reduce their footprint in this area, a retreat that nonbank fintech lenders have only partially offset. The CFPB’s recent request for comments on how its qualified mortgage (QM) regulations should change ostensibly seeks to make compliance less burdensome, without promoting loans that will likely fail.
Rep. Tlaib rightly points out the unintended phenomenon whereby regulations under the Community Reinvestment Act (CRA) cause most of the lending for which regulators grade banks to flow to higher-income borrowers in low-income areas. My own research using District of Columbia data shows that two-thirds of mortgages eligible for CRA points in 2017 went to this group. Further statistical analysis undertaken with my colleague Andrew Forrester suggests that CRA lending may in fact accelerate the displacement of low-income residents in gentrifying neighborhoods. In DC’s census tracts, each additional percentage-point increase in CRA lending between 2012 and 2017 correlated with a three-percentage-point decline in the minority share of that tract’s population.
Tlaib wants CRA points to be “based more heavily on a person’s income, rather than location.” But such a shift would violate the statutory language of the CRA, which requires that lending be “consistent with the safe and sound operation” of banks. Because lower-income borrowers tend to be riskier, mandating that banks lend to them could harm financial stability. Recent experience of how the executive and legislative branches carelessly expanded the affordable housing goals of Fannie Mae and Freddie Mac, the dominant purchasers of mortgages originated by U.S. banks, suggests that the risk low-income lending would backfire is not merely hypothetical.
The high rate of unbanked and underbanked households among minority Americans is a serious concern, as limited access to banking impairs one’s ability to borrow, save, and invest for the future. But the statutes Rep. Tlaib cites in her op-ed, such as the Fair Housing Act, the Home Mortgage Disclosure Act, and the CRA cannot help to increase the share of Americans with bank accounts, because their goal is to combat credit discrimination (for the FHA and the HMDA) and redlining (in the case of the CRA). Instead, public policy should seek to reduce the cost of holding a bank account for people who maintain low balances and to enable firms that the unbanked trust to provide basic banking services. According to government surveys, cost and trust are the two main factors causing the unbanked not to hold bank accounts. As I explained in Sunday’s Washington Post, cutting the regulatory cost of bank accounts and allowing nonbanks such as retailers and tech firms to offer mobile accounts would help to reduce the number of unbanked.
I applaud Rep. Tlaib for bringing the financial exclusion of lower-income and minority Americans into the spotlight. Unfortunately, her recipe to address exclusion relies almost exclusively on the regulatory status quo. One hopes that, as a prominent progressive, Tlaib will come to recognize that the policies of the 1970s cannot solve the policy concerns of 2019.
[Cross-posted from Alt-M.org]
Some Democratic presidential candidates want to introduce government-funded, universal childcare programs.
The stated rationale is usually the need for targeted financial help for families with children. But this reasoning is usually buttressed by a faith that government-funded care or preschool would improve the life chances of the children using it.
Such assertions are based on extrapolating research findings from more limited programs targeted at those on low incomes, such as Head Start, the Perry Preschool Project and the Carolina Abecedarian Project. But assuming these results apply to more universal programs is fraught with danger. Wise heads, such as Nobel Prize winning economist James Heckman, have previously warned that:
A much more careful analysis of the effects of scaling up the model programs to the target population, and its effects on costs, has to be undertaken before these estimates [of their impact] can be considered definitive.
A new paper on the effects of the universal childcare program in Quebec (by economists Michael Baker, Jonathan Gruber, and Kevin Milligan) shows why Heckman was right to be cautious. The results are devastating for the case for universal care.
On a sweep of evidence of universal programs around the world, the paper concludes that “there is a little clear evidence that these programs provide significant benefits more broadly,” than for some disadvantaged children.
The results in Quebec were even worse. The government there introduced heavy subsidies for care for all children from ages zero through four in the 1990s, alongside regulations designed to improve “quality.” Maternal labor supply unsurprisingly rose, and child care services were used more heavily than in the rest of Canada.
Disturbingly, though, “there was a large, significant, negative shock to the preschool, noncognitive development and health of children exposed to the new program, with little measured impact on cognitive skills.” This included “increases in early childhood anxiety and aggression.”
Proponents of universal care usually say, to paraphrase, that “a good start in life is crucial to future wellbeing.” It stands to reason then that interventions that harm children can likewise have enduring scarring effects. When it comes to Quebec, this is exactly what the economists found.
Though their results find “no consistent evidence of a lasting impact of the Quebec program on cognitive test scores,” the rest of their findings are extremely worrying:
We do, however, find a significant decline in self-reported health and in life satisfaction among teens. Most strikingly, we find a sharp and contemporaneous increase in criminal behavior among the cohorts exposed to the Quebec program, relative to their peers in other provinces. We illustrate graphically a monotonic increase in crime rates among cohorts with their exposure to the child care program, and we show in regression analysis that exposure led to a significant rise in overall crime rates. We also report that these effects are primarily for boys, who also see the largest deterioration in noncognitive skills [the later includes aggression and hyperactivity].
The economists charitably conclude that their results confirm that early life interventions can have sustained impacts on life chances (implying the importance of doing childcare policy “right”).
A more pessimistic reader would foresee potentially disastrous social consequences from adopting the sorts of universal programs that Democratic candidates are pushing.
More on childcare, and a better way of helping families, here and here.
You really couldn’t script it.
Faced with campaign staff complaining their hourly wages are too low, 2020 presidential candidate Senator Bernie Sanders (D-VT), he of “Fight for $15” federal minimum wage fame, is currently mitigating discontent by restricting the hours his staff can work rather than raising their pay.
Salaried Sanders field staff earning $36,000 have complained of working up 60 hours per week. Once one accounts for the number of weeks they work, they say this is equivalent to just $13 per hour.
Given Sanders describes $15 per hour as a living wage (something he wants to institute through federal legislation), the union representing his workers demands a rise in salary to $46,800 to fully compensate for their current activities. Instead, at least while discussions continue, Sanders will cap the hours the staff can work, such that their current salary equates to no less than a $15 minimum wage per hour.
This serves as a useful lesson in the trade-offs associated with pay hikes. In order to raise the hourly pay of his staff, Sanders is having to restrict the hours they work. Presuming they were at least doing something productive in the additional time they currently spend campaigning, this hour cap represents a fall in the overall “product” of the workers, and so, one imagines, will weaken the campaign.
The Sanders camp obviously thought other “channels of adjustment” to hourly wage rises were even more unpalatable. His campaign could have laid off field staffers, for example, cut back on other campaign expenses such as rallies or ads, or even sought to undertake one-off investments in campaign tools to “automate” workers by shifting to electronic electioneering. It turns out too that Sanders’ campaign doesn’t believe in fairy tales one hears about how higher wages will induce much more highly productive and loyal workers, making increased pay self-financing (in this case with a better campaign attracting more donations).
Perhaps next time Bernie Sanders advocates that all employers nationwide face an elevated minimum wage, his experience will make him realize the potential costs of cuts to jobs, hours, other worker perks, or the efficiency of the firms affected.
One of the problems with federal hand-out programs is that individuals take advantage of them and scam artists outright loot them. You see this in programs such as Medicaid, Medicare, school lunches, earned income tax credits, housing aid, student loans, and farm subsidies.
Daily Beast writer Evan Wright has the appalling story of Christopher Bathum, who looted addiction-treatment funds made available by the Obamacare law. The law required addiction-treatment funding by Medicare, Medicaid, and private insurance companies.
Addiction is, of course, a huge problem, but to me Wright’s article indicates that the wrong solution is throwing federal money and mandates at it. The costly Americans with Disabilities Act also played a role in Bathum’s scam.
Here are excerpts from Wright’s excellent story:
He’s a convicted sexual predator who targeted women in his care. Soon he’ll be tried for an alleged $176 million insurance fraud. He’s an exceptionally bad person, but as a businessman he was fairly typical of rehab operators in America’s $42 billion-a-year treatment industry.
His name is Christopher Bathum. Until his arrest in 2016 he ran Los Angeles-based Community Recovery, among the fastest growing rehab chains in the nation. Starting with a single treatment center in 2012, Bathum grew Community Recovery into two dozen facilities in California and Colorado, with 400 beds, medical clinics, a testing lab and a Hollywood art center and café, where patients could work and express themselves creatively.
… The most astounding aspect of Community Recovery was its price. It was free, sort of. Some were charged ten or twenty thousand dollars to enter. Many others were given scholarships. Though it turned out Community Recovery bought insurance policies for patients without telling them. To those desperate for help or a place to sleep, the details of how they got in hardly mattered. It was free enough.
The Affordable Care Act made sweeping changes to the recovery industry, which went into effect in 2012. After decades of denying coverage, insurance companies were required to pay for treatment, and at rates comparable to coverage for major illnesses. The net effect for addicts was that virtually anyone could get a policy, and it would cover up to about $3,000 per day for the first 30 days of treatment, or roughly $100,000 a month. To rehab owners, addicts, no matter how broke or hopeless, suddenly were gold mines, potentially worth up to $100,000 if they could wrangle them into treatment.
The recovery boom was on. Community Recovery was one of hundreds of new rehabs that opened in Southern California. So many popped up that the hundred-mile stretch of coastline from Orange County to Malibu was nicknamed “Rehab Riviera.” Similar booms took place in Florida and in the more ski-friendly parts of Utah. While Affordable Care made it possible to get treatment in any state, apparently many addicts when given the choice would rather try to get sober in scenic areas than in fly-over places like Pittsburgh or Omaha.
… Community Recovery was a luxury rehab for the people. Many patients lived in hilltop mansions with pools and spas. It abounded with fun activities—surfing, hiking, yoga, paintball fights, go-kart racing, zip-line adventures, and (pseudo) Native American healing sessions that Bathum led in smoke-filled teepees.
… In late 2015 LA Weekly reporter Hillel Aron published an astonishing exposé. It revealed that Bathum never finished college and faked his persona as a psychotherapist. Prior to running rehabs, Bathum had been a pool-cleaner. He had four felony convictions for committing fraud on eBay. He had a major drug problem, meth and heroin. A few weeks before Aron’s story ran, Bathum had overdosed in a Malibu motel while shooting drugs with patients. There was a photograph of Bathum being loaded into an ambulance during his overdose. Aron unearthed a lawsuit filed by a former patient from Seasons in Malibu who claimed Bathum offered her drugs in exchange for sex. Patients from Community Recovery stepped forward to say Bathum had sexually assaulted them. Some told their stories on 20/20. Bathum went on 20/20, too, and gave an absurd, seemingly methed-out interview in which he denied their allegations and claimed the photo him overdosing at the motel was a simple case of identity theft.
All of it should have led to the immediate shut-down of his rehab. Hundreds of patients remained in his care. Authorities did nothing.
… Bathum’s rehabs operated under a perverse legal loophole: he ran them as unlicensed “sober living homes.” As such, they were protected by the Americans with Disabilities Act, which included an obscure provision that gave recovering addicts status as a protected class. Their inclusion as a protected class was done to prevent neighborhoods from discriminating against recovering addicts who wanted to live together in “sober living homes.” Such homes were defined as places where no medical treatment or therapy could be offered. But since the Americans with Disabilities Act prevents state agencies from inspecting sober living homes, it’s nearly impossible to know what’s going on inside them.
… His behavior was outrageous, yet Bathum exemplified a unregulated industry. The Affordable Care Act poured money into an already broken system. Industry revenues jumped from slightly more than $20 billion to about $42 billion today.
A newly-published study on 5,000 British children reveals that those from higher socioeconomic groups or from white backgrounds perform more exercise than do children from lower socioeconomic groups or from certain ethnic backgrounds including Indian, Pakistani, Bangladeshi and Black Caribbean/African. The amount of exercise correlated inversely with levels of overweight and obesity (i.e., the more exercise a child took, the slimmer they were likely to be).
Not mentioned by the authors of the study is that their data also correlate inversely with the consumption of breakfast (children from lower socioeconomic groups tend to skip breakfast more than do children from higher socioeconomic groups).
The cereal companies like to claim that the association of breakfast-skipping with overweight and obesity means that eating breakfast makes a person slim. That is a false claim. Indeed, experiments show repeatedly that eating breakfast increases the numbers of calories a person ingests.
Socioeconomic status is the great determinant of weight in children, and children from higher socioeconomic groups tend to take more exercise and eat healthier food and lead more ordered lives (which includes eating breakfast), while children from lower socioeconomic groups tend to take less exercise, eat unhealthier food, and lead more chaotic lives (which promotes breakfast-skipping). The association of breakfast-skipping with overweight and obesity, therefore, is only an association, and children from higher socioeconomic groups are slimmer despite their ingestion of breakfast, and children from lower socioeconomic groups are larger despite skipping breakfast.
The cereal companies exploit this paradox to promote the consumption of an unhealthy meal. Which is regrettable.
Today’s jobs numbers surprised on the upside. The unemployment rate fell to 3.6 percent and 263,000 jobs were created in April, exceeding analysts’ expectations.
Yet one indicator looks as if it still lags its pre-crisis peak: the employment-to-population ratio.
The headline rate for all aged 16+ topped out at 63.4 percent in December 2006. Today, it stands at just 60.6 percent (a 2.8 percent point decline). To translate that difference to hard numbers: if the employment rate of 2006 was replicated today, 7.4 million more people would be in work.
Should this be a matter of great concern? No. For there’s a simple explanation: demographics.
A structural decline in that ratio is what we would expect from an aging population. If one adjusts for the demographic change we have seen, the employment rate is already performing better today than at the height of the pre-crash boom.
Consider Figure 1 below. The employment rate for prime age adults has near enough fully recovered. The rate for those over 55 actually peaked a couple of months ago but is still 3.8 percentage points higher than in December 2006. It’s only the youth employment-to-population ratio (16-24 year olds) that falls significantly below its pre-crash summit.
Yet the employment rate overall has remained subdued. That's because a greater proportion of people today are in the older age groups. The elderly are much less likely to work. The Bureau of Labor Statistics (BLS) data shows those aged 50-54 have an employment rate of 77.9 percent. But this falls to 70.8 percent for those aged 55-59, to 56.6 percent for those aged 60-64 and then to just 32.9 percent for those aged 65-69.
So as an increasing share of the population has become old (the proportion of the total population over 55 has increased from 29.6 percent to 36.6 percent since 2006), we’d fully expect the headline employment rate to structurally fall, even if the proportion of that elderly population working rises somewhat.
To see how today’s employment rate truly compares with December 2006, we can make a simple calculation: estimating what the 2006 employment rate would have been if the economy back then faced today’s population structure. We can do this by applying today’s age group population data against the 2006 employment rates (the likelihood of being employed in the pre-crash economy).*
This calculation shows an employment rate in December 2006, adjusted to today's population structure, of 60.5 percent. The actual employment rate today is 60.6 percent. Once one accounts for aging then, the employment rate today is stronger than its pre-financial crisis peak.
The same calculation limited to just those aged 20+ gives an even stronger result. The actual employment rate today is 62.8 percent, much higher than the estimated rate of 62.2 percent in 2006 if today’s population structure is applied.
The US labor market, on employment rates at least, appears to be performing better now than prior to the crash.
*The age groupings used for this overall calculation are non-seasonally adjusted data provided by BLS for ages 16-17, 18-19, 20-24, 25-34, 35-39, 40-44, 45-49, 50-54, 55-59, 60-64, 65-69, 70-74, 75+.