Topic: Poverty & Social Welfare

It’s the Demographics, Stupid: The Employment Rate Is Better Now Than Its Pre-Crisis Peak

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.

Employment to Population Ratio

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+.

Be Skeptical of Income and Wealth Claims

As the 2020 presidential election campaign heats up, get ready for a torrent of claims about incomes, wealth, and inequality. The rich are grabbing all the wealth! The working class is struggling! The middle class never had it so good!

In my op-ed yesterday in The Hill, I noted that politicians and pundits are often sloppy or untruthful with data when making such claims. But a different issue is that there are pessimistic and optimistic versions of most income and wealth statistics.

Economist Joseph Stiglitz opted for the pessimistic in his recent New York Times op-ed: “Some 90 percent have seen their incomes stagnate or decline in the past 30 years.” That sounds really bad. Stiglitz provided no source for his claim, but shouldn’t we just trust him as a Nobel prizewinner?  

Well, no, because a lot of other data sharply conflicts with his unsourced claim.

recent study by Stephen Rose of the Urban Institute illustrates the wide variation in incomes data, as shown in the table. He compared six scholarly estimates of U.S. real median income growth between 1979 and 2014. The results span a huge range—from an 8 percent decrease to a 51 percent increase in a recent CBO study. Four of the six indicate solid middle-class income gains.


John Early, Ryan Bourne, and I discussed income and wealth issues at a Capitol Hill forum on Monday, which you may view here.

Punishing Housing Providers for Racial Imbalances They Didn’t Cause Will Only Lead to More Racial Bias

The federal Fair Housing Act (“FHA”) makes it unlawful to discriminate based on race (among other categories) in the sale, rental, and financing of housing. Four years ago, in a case called Texas Department of Housing v. Inclusive Communities Project, the Supreme Court determined that the FHA allows certain claims based on “disparate impact”—meaning that tenants don’t need to prove discriminatory intent behind housing policies, only an adverse effect on members of their protected class, even if it was the unintended result of an otherwise neutral policy.

Enter Waples Mobile Home Park in Fairfax County, Virginia. Waples rents primarily to Hispanic tenants, but, to avoid violating federal immigration policy, it requires all community residents to provide their social security numbers or otherwise show proof of legal immigration status. Several current and former tenants filed an FHA complaint against Waples, alleging that this policy has a racially disparate impact. Why? Because most undocumented people in Fairfax County are Hispanic.

Although the trial court threw out the lawsuit, the U.S. Court of Appeals for the Fourth Circuit resurrected it. According to the court, a mere showing of statistical disparity is enough to establish a valid claim. But, as the Supreme Court in Inclusive Communities emphasized, “[w]ithout adequate safeguards … disparate-impact liability might cause race to be used and considered in a pervasive way and ‘would almost inexorably lead’ governmental or private entities to use ‘numerical quotas,’ and serious constitutional questions then could arise.” One of those important safeguards, called the “robust causality” requirement, makes sure that housing providers aren’t punished for racial imbalances they didn’t cause. 

Waples is not, and cannot, be responsible the geographic distribution of undocumented individuals within the United States. It simply isn’t the park’s fault that most undocumented people in Fairfax County happen to be Hispanic. Its policy of requiring tenants to provide proof of immigration status thus could not have “caused” a disparate impact. Allowing FHA claims based on this sort of coincidence would destroy the Inclusive Communities safeguards and shift the burden to housing providers to prove the absence of discrimination. Doing so will only undermine the core purpose of the FHA—to decrease racial bias in housing decisions—by encouraging more race-based decision-making among housing providers for fear of being sued. 

What the Data Say About Equal Pay Day

This week saw the passing of “Equal Pay Day,” which marks the culmination of the roughly three extra months that an average female employee had to work in 2019 to match the amount of money made by an average male worker in 2018. Many people see the pay gap as unjust, but is it really a result of rampant sexism in the workplace as the critics allege?

A survey unveiled on Tuesday by CNBC and Survey Monkey suggests that, actually, both men and women are equally pleased with their employment situations and the earnings gap can largely be explained by women being more likely on average to choose part-time work.

“Men have a Workplace Happiness Index score of 72 and women a score of 70, close enough to lack a statistically meaningful difference,” according to the newly released data. That fits with earlier polling that was conducted by Cato’s Dr. Emily Ekins, which found that in the United States, the vast majority of women “believe their own employers treat men and women equally.” Fully 86 percent of women polled believed that their employer pays women equally.

There is still a pay gap between men and women who work full-time, but that may be partly due to men and women opting to work in different fields. Dangerous jobs in fields like mining and fishing, for example, tend to attract men. Those jobs also tend to be relatively well-remunerated. (As advisory board member Mark Perry points out, the gender gap in workplace deaths far exceeds the gap in pay).

Even so, among full-time workers, the “pay gap” is rapidly narrowing. Data from the OECD shows that the gender wage gap in median earnings of full-time employees is declining in practically all countries for which there are data. In the United States, highlighted in blue in the graph below, the wage gap has fallen dramatically since the 1970s. In 1975, the U.S. gender wage gap was 38 percent. By 2015, it had shrunk to 18 percent.

That 18 percentage point difference does not take into account important characteristics like “age, education, years of experience, job title, employer, and location,” according to my Cato colleague Vanessa Calder. A recent study, which controlled for those characteristics, concluded that the U.S. gender pay gap is only around five percent, meaning that Equal Pay Day should actually be in January.

Of course, if any of that small remaining five percent gap is the result of sexist discrimination—rather than additional mitigating factors that the study failed to control for—then that is unacceptable. We should denounce all forms of inequitable treatment, wherever it persists. We should also take a clear-eyed view of the data and recognize the remarkable gains women have made in the workplace—and how labor market participation has transformed women’s lives for the better.

The FAMILY Act Costs More than Expected

A new report suggests that the Democrats’ FAMILY Act paid leave proposal is substantially more costly than previously estimated. The difference is meaningful: using more realistic assumptions, the cost of national paid leave is 7-fold greater than previous estimates, and taxpayers would be picking up the tab.

The American Action Forum analysis uses data from Cato’s paid family leave poll to estimate the cost of the FAMILY Act. Previously, assumptions used to model the cost of the program relied on the use of national unpaid leave benefit take-up rates (FMLA), or lesser-known, less generous, state paid leave program take-up rates. Unfortunately, neither are good proxies for the likely use of a paid, nationally-known, and more generous FAMILY Act-like program.

The nationally representative Cato paid leave poll asked directly about respondent’s intended use of a FAMILY Act-like benefit. The take-up rate and benefit use duration for the FAMILY Act were substantially higher than previous estimates that relied on take-up rates for unpaid leave or lesser-known and less generous state programs.

Figure 1: Three Estimates of the Cost of the FAMILY Act 

 Estimates of FAMILY Act Cost

Using more realistic use assumptions, the FAMILY Act would cost 7-fold as much as previously estimated (Figure 1) and require a 2.85 percent payroll tax on workers. For an average worker, that means paid leave would cost $1,440 per year. This is substantially more expensive than previously claimed: elsewhere, advocates assert that the FAMILY Act would require a 0.2 percent payroll tax on workers, at a cost of $75-95 annually.  

Accurately forecasting the cost of paid leave is critical, because Americans are price-sensitive. For example, when costs aren’t mentioned, 74 percent of Americans say they support national paid leave policy. But if paid leave costs workers $1,200 per year, a majority of Americans oppose paid leave. 

It seems likely the FAMILY Act will cost substantially more than advocates claim, either because estimates use erroneous assumptions or because the policy grows substantially over time, as paid leave policies have elsewhere in the world. Either way, taxpayers deserve accurate information about the cost of paid leave before policymakers ask them to sign on the dotted line. 

Could HUD Help Fix Zoning By Withholding Community Development Block Grant (CDBG) Funds?

Secretary Carson’s Department of Housing and Urban Development (HUD) is in the process of revising Affirmatively Furthering Fair Housing (AFFH), an Obama-era regulation. The idea is to reform the regulation to simplify and streamline it, and encourage local beneficiaries to liberalize zoning regulations in order to qualify for funding. Peter Van Doren and I outline one way of doing this in a public comment, here.

Under the reform scenario, CDBG funding would act as a federal carrot to induce communities to rethink counterproductive local zoning policies that reduce housing affordability. CDBG funds are supposed to improve housing affordability, but they can’t do that when local government policies actively and effectively undermine affordability goals.

In order for AFFH reform to work, CDBG must be a politically popular program with local politicians and policymakers. By all accounts, it is highly popular with politicians and policymakers (for evidence, witness the political reaction to the White House’s proposal to cut CDBG funding the last three years). If politicians and policymakers value CDBG funding as much as they say they do, withholding CDBG or other HUD funding in the absence of local reform may act as a powerful incentive for change.

However, the idea has been challenged in some places, including this Brookings article from last year. The article suggests that 1) many of the HUD jurisdictions that recieve funding are counties, rather than cities, and counties don’t have control over zoning and 2) the most exclusionary jurisdictions don’t receive much CDBG money, so the reform might have minimal impact.

These arguments warrant a second look. First, it is accurate that HUD awards some CDBG money to counties (and states, too). However, this probably constitutes an advantage, rather than a disadvantage under the reform. Indeed, effectively liberalizing zoning regulations likely benefits from aligning pro-growth city incentives with higher levels of government, including county and state governments.

Government Mandated, State-Run Auto-IRAs Can Cause Real Harm

A number of states have recently enacted employer mandates that force companies who don’t offer retirement plans to enroll their workers in a state-run, auto-IRA plan. Oregon’s program – known as OregonSaves – is the oldest and most established. By mid-2020, Oregon’s mandate will cover all companies; it currently covers companies with twenty or more workers.

One myth – perpetuated by the National Employment Law Project – is that state mandates expand opportunity to retirement savings, especially for low-income workers. They don’t. OregonSaves initially defaults worker contributions into a conservative capital preservation fund before redirecting contributions to a life-cycle fund once balances exceed $1,000. Since inception in 2004, the capital preservation fund has offered a paltry nominal return of 1.52% (essentially an inflation-adjusted return of 0%). OregonSaves also assesses an administrative fee of 100 basis points (that is, 1%) regardless of investment choices, further diminishing this return. This set-up isn’t really an opportunity for Oregon workers, because they already have access to Roth IRAs and investments with a more beneficial set-up. A 25-year-old worker might actively choose a life cycle fund with no minimums for initial investment or additional contributions, along with administrative fees of 75 basis points, significantly lower than OregonSaves. Choosing an index fund that tracks the S&P 500 could have administrative fees as low as 1.5 basis points. Without mandating Oregon employers to enroll their workers, OregonSaves would struggle to compete in a vibrant marketplace with many inexpensive alternatives for retirement contributions.

If government mandates don’t improve access to retirement plans, why have the program? The real reason is that the programs increase participation through inertia; simply put, many workers are asleep at the wheel. Many workers don’t take active steps to plan for retirement regardless of how a program is designed. If the default choice is to actively enroll, many workers won’t participate. If the default choice is automatic enrollment with an opt-out option, many workers do participate. Oregon’s 28% opt-out rate is relatively high, highlighting some of the problems of the program’s design. Among those enrolled, fully 93% of participants stick with the specified contribution rate and an astonishing 79% of all fund balances are invested in the capital preservation fund. Almost all remaining balances are invested in target date funds, likely for workers who have exceeded the $1,000 contribution.

Worker inertia is real, meaning that design choices like opting in or out, asset classes and contribution rates are likely to stick. The one-size-fits-all design of OregonSaves can cause real harm for many workers, an issue I explored with my colleagues in a new study for Journal of Retirement. If OregonSaves were adopted nationally, 24.2 million workers aged 25-64 would initially be opted-in. Approximately 33% of affected workers carry high-interest credit card debt, with balances averaging nearly $5,500. Around 15% of affected workers struggle to meet basic needs like paying rent or utility bills. Workers in these situations come out ahead by paying down debt or meeting basic needs, and siphoning off 5% of their paycheck will likely worsen their overall financial situation.

Financial planning websites consistently emphasize paying off revolving high-interest debt before saving for retirement (unless a company offers a match rate), yet auto-IRAs fail to take these investment lessons into account. Advocates for government mandates emphasize the benefits of compounding for assets in an IRA, while curiously ignoring the reality that unpaid debt compounds in the exact same manner! At an 18% interest rate, an unpaid $5,500 credit card debt would mushroom to $28,800 in ten years. The same amount of money directed towards OregonSaves might accumulate to $12,900 under rosy assumptions about investment returns. Ultimately, our study shows a significant number of workers are in situations like this, and auto-IRAs would do more harm than good for them.