Brookings: Experts - Michael Greenstone

Should the United States Have 2.2 Million More Jobs?

Michael Greenstone and Adam Looney, The Hamilton Project — Fri, 03 May 2013 10:30:00 -0400

Employers added 165,000 jobs in April, according to the Bureau of Labor Statistics, following upwardly revised gains of 332,000 in February and 138,000 in March. The three-month average pace of job gains of 211,000 was slightly above the average pace of 173,000 jobs over the last twelve months. The unemployment rate edged down to 7.5 percent, and the fraction of the population reporting a job edged up. The unemployment rate has now declined 0.6 percentage point since last April, although much of this change can be attributed to declining rates of labor-market participation rather than increases in employment.

These numbers continue a pattern of steady growth in the labor market, but they also confirm that America’s recovery from the Great Recession is still very much a work in progress. The public sector, especially, has been a drag on the economy in recent months. While the private sector has added roughly 2.2 million jobs over the past year, employment in state, local, and federal governments has declined by 89,000, including significant losses to teachers and emergency responders. In this challenging economic climate, there is growing concern about how sequestration—the across-the-board budget cuts to discretionary spending that took effect on March 1—may negatively impact the recovery even more. Indeed, forecasters at the Congressional Budget Office project that the sequestration could reduce overall GDP growth in the United States by 0.6 percentage point and cost the economy 750,000 jobs by the end of 2013.

In this month’s employment analysis, The Hamilton Project examines the trajectory of public-sector employment since the onset of the Great Recession and contrasts this decline to periods of economic recovery after previous recessions. We find that the last several years’ policy choices are starkly different from those following previous recessions. Specifically, there are 2.2 million fewer jobs today, relative to what would have occurred with the policy response typical of the five preceding recessions. We also continue to explore the “jobs gap” and find that the country needs to add about 10.0 million jobs to return to pre-recession employment levels.

Government Employment Since the Recession

The downward trend in public-sector employment, described in a Hamilton Project report last summer, has continued into the opening months of 2013. While the private sector has added jobs to the economy in every month since March 2010, a total increase of approximately 6.8 million jobs, the public sector has contracted. To put this in perspective, federal, state, and local governments added jobs in only twelve of the thirty-eight months since March 2010 and have lost more than 625,000 jobs over this period.

The graph below shows the ratio of government employment to the civilian non-institutional population (every civilian in the United States sixteen and older who is not in prison or a live-in care facility) going back to 1980. For the twenty years prior to the Great Recession, this ratio stayed relatively constant, but since then it has dropped precipitously, except for the temporary uptick in 2010 when government employment rose to accommodate demand for U.S. Census workers.

This figure shows that the percentage of individuals working for federal, state, and local governments is at a decades-long low. In fact, the ratio of government employment to population has not been below 9 percent since the mid-1960s. The result, as detailed in last summer’s Hamilton Project report, is over 200,000 fewer teachers, 50,000 fewer policemen, and 6,000 fewer air-traffic controllers since 2009.

Government Policy: It's Different This Time

By cutting jobs during a period of already high unemployment, budget policies have contributed to the tepid pace of labor-market recovery and stand out as a departure from typical policy responses after recessions. The figure below shows the change in government employment forty-six months after every recession in the United States going back to 1970. (The double-dip recessions of 1980 and 1981, which ended in November 1982, are counted as a single event.) The bars are scaled by the population of the United States in June 2009 so that the magnitudes of employment changes are comparable.

The ongoing recovery, which began when the Great Recession ended in June 2009, dramatically deviates from the usual pattern. In the forty-six months following the end of the five other recent recessions, government employment increased by an average of 1.7 million. During the current recovery, however, government employment has decreased by more than 500,000. Put together, the policy differences have led to 2.2 million fewer jobs today. Such a large contraction of the public-sector during a recovery is unprecedented in recent American economic history.

The April Jobs Gap

As of April, our nation faces a jobs gap of 10.0 million jobs. The chart below shows how the jobs gap has evolved since the start of the Great Recession in December 2007, and how long it will take to close under different assumptions of job growth. The solid line shows the net number of jobs lost since the Great Recession began. The broken lines track how long it will take to close the jobs gap under alternative assumptions about the rate of job creation going forward.

To explore the outcomes under various job creation scenarios, you can try out our interactive jobs gap calculator by clicking here. You can also view the jobs gap chart for each state here.

Conclusion

Policymakers are currently faced with the unenviable task of simultaneously increasing employment and addressing America’s long-term budget deficits, but—at a time when the rate of government employment is at a historic low—sequestration threatens to further slow the growth of the public sector and lengthen the time it will take to close America’s jobs gap. Even when ignoring any indirect impacts, a typical policy response to the Great Recession would have led to a jobs gap that is 2.2 million jobs smaller than current gap of about 10.0 million and commensurately reduced the amount of time until the economy returns to full employment.

It is critical to achieve both employment gains and fiscal stability. The textbook approach is for government to continue to support the recovery and credibly enact deficit reduction that will not take hold until the employment crisis has been mitigated substantially. With respect to deficit reduction, The Hamilton Project recently released a collection of fifteen proposals that seek to reduce the deficit while improving efficiency and promoting broad-based economic growth. To see how these proposals could impact the long-term deficit, you can try our interactive budget calculator here. The Hamilton Project also continues to explore policies to boost employment, including a recent discussion paper on improving worker training programs.

Authors

Michael Greenstone and Adam Looney, The Hamilton Project

Image Source: © Mike Segar / Reuters

Rethinking the Federal Budget: Build Your Own Deficit Reduction Plan

Michael Greenstone and Adam Looney, The Hamilton Project — Fri, 12 Apr 2013 11:25:00 -0400

Just over a month ago, The Hamilton Project released a menu of options for achieving responsible deficit reduction while promoting broader economic benefits in a new report, 15 Ways to Rethink the Federal Budget. Through a new interactive feature on The Hamilton Project’s website, you can build your own deficit reduction plan by choosing different combinations of these proposals and see how this package could affect the ten-year budget picture.

Click here to try your hand at rethinking the federal budget »

The proposals address topics ranging from immigration to transportation to tax deductions and were written by leading budget and tax experts from a variety of backgrounds, including academia, the private sector, and a range of NGOs such as the American Enterprise Institute, the Brookings Institution, and Pew Charitable Trusts. Each expert was asked to share his or her proposal for reducing spending or raising revenue in a way that also promotes broad-based economic growth. The individual proposals offer discrete, innovative ideas for achieving budgetary savings and broader economic benefits. However when viewed in combination, they could contribute meaningful deficit reduction and help the country confront its most pressing economic challenges. Of course, a balanced approach to deficit reduction might require other changes but a package of these proposals can serve as a starting point for illustrating what is possible.

The new interactive feature allows you to see the potential budgetary effects of implementing these proposals—either individually or several at a time. Additionally, you can see the total deficit reduction produced by the proposals you select and the Budget Control Act of 2011 (BCA) and the American Taxpayer Relief Act of 2010 (ATRA). The feature also provides a breakdown of what fraction of the deficit reduction comes through increased revenues, decreased spending, and lower interest payments.

It is important to bear in mind that no fiscal policy occurs in a vacuum. While the feature displays the ten-year deficit reduction and projected debt-to-GDP ratio in 2023 given your selection of proposals, these calculations are estimates that do not take into account budgetary interactions or macroeconomic effects that some of the proposals may have.

Michael Greenstone is the director of The Hamilton Project and Adam Looney is its policy director. For more about the Project, visit www.hamiltonproject.org.

Authors

Michael Greenstone and Adam Looney, The Hamilton Project

An Evidence-Based Approach to Improving Worker Training Programs

Michael Greenstone and Adam Looney, The Hamilton Project — Fri, 05 Apr 2013 09:13:00 -0400

The pace of job gains slowed last month, according to the Bureau of Labor Statistics. In March, the economy added 88,000 jobs, down from the higher-than-expected gains of 148,000 and 268,000 jobs in January and February, and below the average monthly gain of 169,000 per month recorded over the prior 12 months. The unemployment rate was little changed at 7.6 percent and the fraction of the population with a job edged down. Since March 2012, the unemployment rate has declined from 8.2 percent to 7.6 percent, but much of this decline appears to reflect changes in labor force participation--the fraction of the population employed is unchanged over the year. Over the last twelve months, the private sector has added roughly 2 million jobs; in contrast, employment in state, local, and federal governments has declined by more than 75,000.

Reducing unemployment and building the foundation for a more robust job market are just two of the challenges facing policymakers at every level of government. But given today’s austere budget outlook, the resources available to address the nation’s most pressing problems—from recidivism to school readiness to obesity to workforce development—are shrinking. Indeed, continuing to make progress on these social issues necessitates producing more value with each dollar that the government spends. The solution is to take advantage of the tremendous opportunities for using data and evidence to identify the highest-payoff uses of taxpayer dollars.

One area where better use of evidence could significantly improve outcomes for many individuals is workforce training programs. Covering a wide range of fields—from information technology to healthcare to auto repair—these programs offer the prospect of boosting incomes, increasing employment, and improving the nation’s productivity. Too often, though, these benefits go unrealized, largely because prospective trainees have little access to the information and guidance necessary to make well-informed decisions. These lost opportunities are especially poignant in the current environment of elevated unemployment.

In this month’s employment analysis, The Hamilton Project explores how policymakers can better gather and disseminate evidence on worker training programs to help displaced and low-income workers determine which programs can help them find employment and increase their earnings most effectively. We also continue to explore the “jobs gap,” or the number of jobs that the U.S. economy needs to create in order to return to pre-recession employment levels.

The Potential of Training Programs

Education, in some form or another, has always been the key to the American Dream, as the development of new skills—paired with hard work and good fortune—leads Americans to better jobs and increased prosperity. For some, these skills are gained in primary and secondary school and culminate in a four-year college degree. But many others, particularly students pursuing career or technical training, obtain important education and skills at community colleges or through other workforce development programs that can help them secure a good job.

Indeed, for some workers, the benefits of worker training programs are large. The chart below, which draws on cutting-edge research and data systems from Florida, shows that students who complete two-year degrees in high-return fields, or who complete two-year programs that lead to four-year degree programs, earn more than $35,000 per year after graduating. Students who receive certain career-oriented certificates earn similar salaries.

But these positive outcomes are too often the exception rather than the rule. Students who complete low-return programs or who drop out before finishing a degree earn 33 percent less than their counterparts in high-return programs. The median salary for those who complete two-year degrees with low returns is a mere $24,100. As the light green bars in the figure above show, the vast majority of students fall into these lower-earning categories. More than 40 percent take less than a year of credits before leaving school, almost a quarter spend more than a year in community college before dropping out without a degree or certificate, and another 12 percent complete a degree in a field that does not lead to a good-paying job.

What is most concerning about these results is that the qualifications of many of these students are similar across the groups. Many, for example, have comparable high-school GPAs and work experiences. Yet too many end up in programs that they are unlikely to complete, or complete programs that are unlikely to raise their earnings. And furthermore, even more workers who could benefit from training fail to enter programs at all because they are unsure of the potential benefits. The result is that the economic opportunities of training for these workers are not adequately realized.

Developing and disseminating information on the effectiveness of various training programs, and helping prospective students use that information in their decision-making, are important parts of the solution. Today, prospective students make their enrollment decisions without knowing whether they are likely to succeed within a particular program, or whether they are likely to find a good-paying job in that field after completion. Gathering the information necessary to help students make better choices and guiding trainees to more appropriate courses of study could help increase the returns students realize on their investments of time and money.

The March Jobs Gap

As of March, our nation faces a “jobs gap” of 10.1 million jobs. The chart below shows how the jobs gap has evolved since the start of the Great Recession in December 2007, and how long it will take to close under different assumptions of job growth. The solid line shows the net number of jobs lost since the Great Recession began. The broken lines track how long it will take to close the jobs gap under alternative assumptions about the rate of job creation going forward.

To explore the outcomes under various job creation scenarios, you can try out our interactive jobs gap calculator by clicking here. You can also view the jobs gap chart for each state here.

Conclusion

Workforce development programs are just one example of how the use of evidence in policymaking can create government programs that more effectively serve the American people. Evidence-based policymaking allows lawmakers, in essence, to do more with less. While this is especially important in today’s era of tight budgets, a key goal of government—regardless of the fiscal climate—is always to achieve the most social good with taxpayer dollars.

To that end, The Hamilton Project, in partnership with Results for America, will host an event and release two new proposals on April 17th focusing on the importance of evidence in policymaking. A new paper by Louis Jacobson and Robert LaLonde provides a roadmap for using evidence to guide students to higher-return training programs that could vastly increase the economic benefits of career and technical education. A second proposal by Jeffrey Liebman discusses how the federal government can adopt strategies for more effective evidence-based policymaking across the board. The event will also feature a roundtable discussion with Senators Rob Portman (R-OH) and Mark Warner (D-VA), Chairman of the President’s Council of Economic Advisers Alan Krueger, and former U.S. Treasury Secretary Robert E. Rubin on the importance of evidence in driving public dollars toward policies that work.

The full agenda for the event can be found here. For more information about the event and new papers, follow us on Twitter @hamiltonproj and join the conversation using #evidenceworks.

Authors

Michael Greenstone and Adam Looney, The Hamilton Project

Real Specifics: 15 Ways to Rethink the Federal Budget

Michael Greenstone and Adam Looney — Wed, 20 Feb 2013 00:00:00 -0500

Despite widespread agreement that the federal budget is on an unsustainable path, there is also widespread disagreement about what should be done. The Hamilton Project asked leading experts from a variety of backgrounds—the policy world, academia, and the private sector, and from both sides of the political aisle—to develop and share their ideas for addressing the deficit. The proposals will be released at two events scheduled for February 22 and February 26. In a dialogue previewing those events, Hamilton Project Director Michael Greenstone and Policy Director Adam Looney discuss some of the key ideas offered by the experts.

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Michael Greenstone and Adam Looney: These Authors Have Drafted Policies That Help the Budget and Provide Economic Benefits

Greenstone stresses that the goal of the papers is to move beyond the fights and disagreements between President Obama and Congress and to provide some of the poetry, or some of the details, on how government might run better. The papers will also be featured in a book, 15 Ways to Rethink the Federal Budget, and will take on a wide-ranging set of topics, including immigration, transportation, health care, defense spending, and tax expenditures.

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Michael Greenstone and Adam Looney: These Authors Have Drafted Policies That Help the Budget and Provide Economic Benefits

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15 Ideas for Smart Deficit Reduction

Michael Greenstone and Adam Looney, The Hamilton Project — Wed, 20 Feb 2013 14:36:00 -0500

Few policy debates have been as contentious as the current tug-of-war over the federal budget deficit. Despite widespread agreement that the budget is on an unsustainable path, there is also widespread disagreement about what should be done, and, to complicate matters, this budgetary uncertainty comes at a time when policymakers are still trying to get Americans back to work in the wake of the Great Recession.

In the coming months, policymakers will make important decisions on how to reduce the budget deficit. These decisions pose significant political and economic challenges, but also create a rare window of opportunity for policymakers to decide what kinds of programs and investments our country values, and what sort of society we will create for future generations. Once consensus has been reached about the broad focus of future investments, the devil will be in the details of implementation. And without a doubt, a sound budget strategy will require ideas rooted in evidence, not ideology, if we are to achieve these long-term goals.

To this end, The Hamilton Project asked leading experts from a variety of backgrounds—the policy world, academia, and the private sector, and from both sides of the political aisle—to develop policy proposals that could form a partial menu of options to achieve responsible deficit reduction. These experts include Jonathan Gruber, an MIT professor who was instrumental in shaping health-care reform bills in Massachusetts and nationally; Jeff Liebman, a Harvard professor who previously served as acting Deputy Director at the Office of Management and Budget; Gary Roughead, a retired four-star admiral and former Chief of Naval Operations; Tyler Duvall, former Assistant Secretary of Transportation Policy at the Department of Transportation; Adele Morris of Brookings, who leads the institution’s climate and energy economics initiative; and many others.

The mandate given to the authors was to describe pragmatic, evidenced-based proposals that would both reduce the deficit and also bring broader economic benefits. The resulting fifteen proposals take on a wide-ranging set of topics, including immigration, transportation, health care, defense spending, and tax expenditures, and include options to reduce mandatory and discretionary expenditures, raise revenues, and improve government efficiency.

The opening table of The Hamilton Project’s forthcoming budget book presents the fifteen proposals and their potential impacts on the economy and the deficit over a ten-year period. Viewed individually, the proposals offer specific reforms and evidence-based policy ideas to achieve budgetary savings and broader economic benefits. Taken together, they offer a menu of policies—a mix of tax reforms, changes to major spending programs, and new revenue raisers—that could contribute meaningful deficit reduction and help the country confront its most pressing economic challenges. To preview the budget table, click here.

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Michael Greenstone and Adam Looney: These Authors Have Drafted Policies That Help the Budget and Provide Economic Benefits

The Hamilton Project budget report will be released on February 26th as part of a two-part forum:

Part I: Budgeting for a Modern Military — February 22nd
The first event will feature two proposals for reducing defense spending while preserving national security. The authors of the papers—Retired Admiral and former Chief of Naval Operations Gary Roughead, and former CBO Assistant Director Cindy Williams—will be joined to discuss their ideas by high-level experts including former Deputy Secretary of Defense and former CIA Director John Deutch, former Undersecretary for Defense Michele Flournoy, and former Senate Armed Services Chairman Sam Nunn.

Part II: Addressing Entitlements, Taxation, and Revenues — February 26th
The second event in our series will shift the focus to entitlements, tax reform, and new sources of revenue. Three former CBO directors—Alice Rivlin, Senior Fellow at Brookings, Robert B. Reischauer of The Urban Institute, and Donald Marron of the Tax Policy Center—will set the stage for the day’s discussions around 13 new proposals for reducing the deficit. A diverse group of authors will join the forum for roundtables focusing on an enduring social safety net, innovative approaches to tax reform, and new sources of revenue and efficiency.

For updates on the event, follow us @hamiltonproj and join the conversation using #RethinktheBudget.

Michael Greenstone is the director of The Hamilton Project and Adam Looney is its policy director. For more about the Project, visit www.hamiltonproject.org.

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Michael Greenstone and Adam Looney: These Authors Have Drafted Policies That Help the Budget and Provide Economic Benefits

Authors

Michael Greenstone and Adam Looney, The Hamilton Project

Image Source: © Larry Downing / Reuters

Not All Cuts Are Created Equal: Why Smart Deficit Reduction Matters

Michael Greenstone and Adam Looney, The Hamilton Project — Fri, 01 Feb 2013 12:54:00 -0500

According to the Bureau of Labor Statistics, the economy added 157,000 jobs during the month of January and an average of 200,000 jobs in the prior three months. These new estimates of job gains now reflect the annual “benchmark” revision to the payroll survey, which showed that the level of employment in December last year was about 650,000 jobs higher than previously reported. As a result, estimates of total job creation in 2012 were increased to 181,000 jobs per month, or a cumulative 2.2 million added jobs over the year. The unemployment rate, at 7.9 percent, has remained at roughly the same level since September of last year.

Thus far in 2013, the major economic focus has been on the budget—the “fiscal cliff” in particular—and the effect of the federal deficit on broader economic activity. Indeed, over the past two years, policymakers have made much progress on reducing the budget deficit. As currently legislated under the American Taxpayer Relief Act of 2012 (ATRA), the deficit is projected to fall to a more manageable 2.6 percent of GDP in 2018. However, the deficit is projected to rise thereafter, highlighting that, over the longer term, there is still more work to be done in matching revenues and spending.

In this month’s employment analysis, The Hamilton Project explores how the design of budget cuts could impact economic growth and living standards in the coming years and beyond. We also continue to explore the “jobs gap,” or the number of jobs that the U.S. economy needs to create in order to return to pre-recession employment levels.

The Current Path Toward Deficit Reduction

In the past two years policymakers have enacted $3.5 trillion of deficit reduction set to take place over the next 10 years, with $1.1 trillion of these cuts coming from the sequestration scheduled for March 1. Should all these policies go into effect, the ratio of spending cuts to revenue increases would be more than 4-to-1, and the forecasted deficit in 2018 would be about 2.6 percent of GDP, down from 10.1 percent in 2009 and 7.0 percent in 2012. Indeed, according to the Center on Budget and Policy Priorities (CBPP), if most of these policies take effect, policymakers would need to find as little as $257 billion to stabilize the national debt at a sustainable level by the end of the decade ^[1]. On paper, at least, that suggests policymakers are within reach of resolving the near-term deficit problem.

The problem, however, is that currently scheduled cuts are hugely unpopular with analysts, the public, and most lawmakers. The automatic spending cuts mandated in the Budget Control Act (BCA) of 2011, are scheduled to begin in March 2013 and end in 2021, evenly divided over the nine-year period. The cuts are split between defense spending (with spending on wars exempt) and non-defense discretionary spending, which does not include entitlements like Social Security, Medicare, and Medicaid. This type of indiscriminate cutting has profound implications for our nation’s economic well being.

For example, the figure below shows the effects of the recent budget changes, including the sequester, on non-defense discretionary spending. Under scheduled cuts this category of spending would fall to its lowest level in recent history. Why is this a concern?

In today’s increasingly competitive global economy, many Americans have seen their wages stagnate or even decline over the last several decades, and non-defense discretionary spending includes the public investments that, for generations, have helped improve the lives of Americans and provide economic opportunities of the working and middle classes. Reductions in these spending categories mean less funding for the National Science Foundation, less research into new sources of energy, less training and workforce development, and less spending on education through initiatives such as Pell Grants. This funding provides support to our ailing infrastructure, enables research and development to improve health and foster innovation, and increases access to higher education at a time when we have fallen from second to fifteenth in international college completion rates.

The sequester also threatens to impose deep cuts to defense spending. The new caps would cut non-war defense spending from previously planned levels by about 6 percent this year and about 10 percent from 2014 to 2021. These cuts are particularly challenging because of internal pressures within the military budget in areas where costs are projected to rise faster than inflation. Between 2000 and 2010, the Department of Defense expanded its force by 4 percent, but costs increased by more than 40 percent. Much of this cost growth is driven not by increases in capacity or new investments, but by rising costs in areas such as military personnel and operation and maintenance. Left unaddressed, these growing costs will crowd out spending for military readiness and other vital capabilities.

But there are also short-term concerns about the economic effects of the sequester. The U.S. economy is still weak. As we discuss below, the nation faces a massive jobs gap, and private forecasters suggest that the sequester could subtract 0.7 percentage points from economic growth in 2013. In this respect, the sequester runs counter to the textbook economics solution to this situation, which is to enact sustainable budget consolidation today, but to delay its effect until the economy is on sounder footing.

The January Jobs Gap

As of January, our nation faces a “jobs gap” of 10.3 million jobs (even after incorporating the effects of this month’s positive revisions to employment growth). The chart below shows how the jobs gap has evolved since the start of the Great Recession in December 2007, and how long it will take to close under different assumptions of job growth. The solid line shows the net number of jobs lost since the Great Recession began. The broken lines track how long it will take to close the jobs gap under alternative assumptions about the rate of job creation going forward.

If the economy adds about 208,000 jobs per month, which was the average monthly rate for the best year of job creation in the 2000s, then it will take until April 2020 to close the jobs gap. Given a more optimistic rate of 321,000 jobs per month, which was the average monthly rate of the best year of job creation in the 1990s, the economy will reach pre-recession employment levels by November 2016. Again, these figures do not reflect the anticipated update to the payroll data due in February, which may reduce the actual jobs gap. You can also try out our interactive jobs gap calculator by clicking here and view the jobs gap chart for each state here.

Conclusion

The spending cuts and revenue increases made in the last two years put the nation on a path toward fiscal sustainability, but the real challenge lies in ensuring that deficit reduction is done in a way that preserves the ability of the government to make much-needed public investments and to tackle our long-run economic challenges. Achieving real fiscal balance will require creative thinking about which areas of the budget can be made more efficient and about which areas should be preserved.

To that end, The Hamilton Project asked experts from a variety of backgrounds—the policy world, academia, and the private sector—and from both sides of the political aisle, to provide innovative, pragmatic proposals for lowering the deficit that take into account impacts to the economy at large. The resulting 15 proposals range across budget groups, and include options to reduce mandatory and discretionary spending, to raise revenues, and to improve economic efficiency. The proposals will be featured this month in a two-part budget series.

The first event, “Budgeting for a Modern Military,” will be held on February 22nd and feature two proposals for reducing defense spending while preserving national security. The authors of the papers—Retired Admiral and former Chief of Naval Operations Gary Roughead, and former CBO Assistant Director Cindy Williams—will be joined to discuss their ideas by high-level experts including former Deputy Secretary of Defense and former CIA Director John Deutch, former Undersecretary for Defense Michele Flournoy, and former Senate Armed Services Chairman Sam Nunn.

The second forum, “Addressing Entitlements, Taxation, and Revenues,” will be held on February 26th and feature a diverse group of authors who will present their proposals, which touch on topics as wide-ranging as immigration, transportation, healthcare, and mortgage interest. These proposals provide options for bringing the budget into balance that, in contrast to the sequester, do not compromise the future well-being of Americans by sharply cutting public investments.

For updates on the event, follow us @hamiltonproj and join the conversation using #RethinktheBudget.

^[1] This estimate assumes that the $1.1 trillion sequestration takes effect and the costs of $400 billion of so-called “tax extenders” are paid for, but that scheduled cuts to Medicare physicians (totaling roughly $250 billion) will not take effect and would not be paid for.

Authors

Michael Greenstone and Adam Looney, The Hamilton Project

Image Source: Medioimages/Photodisc

The Economics of Immigration Reform

Michael Greenstone and Adam Looney, The Hamilton Project — Tue, 29 Jan 2013 17:32:00 -0500

With bipartisan momentum mounting for comprehensive immigration reform, cautious optimism has emerged that 2013 will be the year for action. Most Americans agree that our immigration system is flawed, but there remains a lack of understanding about the real effects that new immigrants have on wages, jobs, budgets, and the U.S. economy in general. Two recent Hamilton Project papers provide important economic context for the issue and a potential path forward.

The Project’s “Ten Economic Facts About Immigration” memo explores some of the questions frequently raised around immigration in the United States and provides facts to address many immigration myths. For example, there is concern in some communities that immigrants will replace American workers and reduce our standards of living. On the contrary, the evidence suggests that immigrants typically boost American workers’ overall standard of living by increasing American wages and lowering prices for consumers. Furthermore, the evidence shows that immigrants and U.S.-born workers do not generally compete for the same work. As the chart below illustrates, immigrants create average wage increases of between 0.1 percent and 0.6 percent for American workers. The greatest academic dispute is around the effect on the wages of Americans with less than a high school diploma, with estimates ranging from slightly positive to a decline of 4.7 percent. All in all, immigrants appear to only modestly impact the wages of U.S.-born workers.

There are many different approaches to comprehensive immigration reform, including several fresh ideas being proposed by the President and congressional leaders. One innovative approach that could provide important principles for lawmakers can be found in a Hamilton Project discussion paper, “Rationalizing U.S. Immigration Policy: Reforms for Simplicity, Fairness, and Economic Growth,” by economist Giovanni Peri of UC Davis. In his proposal, Peri offers an incremental, market-based approach to comprehensive reform. Peri proposes starting with market-based changes to employment-based visas to better link visas with labor-market demand.

The proposed system uses market-based auctions to allocate employment-based permits to employers and visas to immigrants that have the greatest propensity to contribute to economic activity and thus to generate the largest benefits for the U.S. economy. These auctions would also generate revenue for the federal government. Policymakers, in turn, could use that revenue for a host of purposes—to tackle the federal deficit, compensate local communities that deliver social services to immigrants, or to invest in the skills of American workers.

How would Peri’s model work? The essential features of the proposal would be implemented in three steps:

The first step involves a series of incremental phases starting with a pilot program that uses an auction-based system to allocate temporary employment visas.
After a successful pilot with the existing classes of temporary employment visas, the second phase would expand the auction to permanent labor-sponsored visas.
A final phase would provide a reassessment of the balance between employment-based and family-based visas, as well as a broad simplification of complicated rules in the current system such as country quotas.

Employers would have the ability to resell or trade permits, and foreign-born workers would have the flexibility to move between permit-holding employers. The added employee flexibility and employer competition provide a strong element of protection for the workers.

The new system would thus eliminate the cumbersome ex-ante labor verification procedures for employers who intend to hire immigrants. This proposal also recommends improvements in immigration enforcement through the use of technology-based enforcement in the workplace and measures to address the current population of undocumented workers.

To read the full proposal, click here. To read the policy brief, click here.

Regardless of the approach, the potential economic benefits of comprehensive immigration reform are great—for American workers and their families, for employers, and for foreign-born workers seeking opportunities in the United States. The key will be to match, at least to some extent, the flow of immigrants with labor market demand, to help ensure the greatest economic boost for all involved. By adding market forces to the equation, immigration reform offers new promise for the American economy—whether through high-skill or agricultural sectors—that we cannot afford to ignore.

Michael Greenstone is the director of The Hamilton Project and Adam Looney is its policy director. For more about the Project, visit www.hamiltonproject.org.

Authors

Michael Greenstone and Adam Looney, The Hamilton Project

Image Source: © Keith Bedford / Reuters

The Fiscal Cliff Deal and Our Long-Run Budget Challenge

Michael Greenstone and Adam Looney, The Hamilton Project — Fri, 04 Jan 2013 09:30:00 -0500

According to the Bureau of Labor Statistics, the economy added 155,000 jobs during the month of December and an average of 151,000 jobs over the prior three months. The pace of job creation has been remarkably steady for two years—job gains averaged 153,000 per month in both 2011 and 2012. This rate of job creation has gradually chipped away at the unemployment rate, which was unchanged at 7.8 percent in December and has now been below 8 percent for four months. (These figures do not reflect the anticipated annual revision to the payroll data, which will be official in February and is expected to show that the level of employment was about 386,000 jobs higher in March 2012 than previously reported.)

This week marked the passage of the American Taxpayer Relief Act, which averted many of the tax increases and spending cuts that made up the so-called fiscal cliff. By passing that bill, policymakers avoided most of the near-term drag on the economy that would have occurred in the absence of an agreement. In the process, the Act reduced the projected budget deficit over the next decade by 7 percent from $10 trillion to $9.3 trillion.

In this month’s employment analysis, The Hamilton Project explores the projected impacts of the American Taxpayer Relief Act on economic growth and discusses the challenges still ahead with regard to the nation’s long-run deficit. We also continue to explore the “jobs gap,” or the number of jobs that the U.S. economy needs to create in order to return to pre-recession employment levels.

The American Taxpayer Relief Act and the Deficit Outlook

In last month’s employment analysis, The Hamilton Project studied the employment effects of the fiscal cliff, a set of federally legislated tax increases and spending cuts that were scheduled to take effect at the beginning of 2013. The policies that made up the cliff included the expiration of measures aimed at addressing the economic downturn, the expiration of Bush-era tax rates, and the onset of automatic budget cuts. This sudden reduction in government expenditures and spike in taxes could have badly damaged the fragile economy and, according to the Congressional Budget Office (CBO), would have reduced employment by 3.4 million jobs.

As 2012 came to an end, policymakers passed legislation that averted the worst projected impacts of the fiscal cliff on the economy. Income-tax cuts were extended for almost all taxpayers; the Alternative Minimum Tax was permanently patched; emergency unemployment insurance benefits were extended for a year; scheduled cuts to Medicare payments to doctors were averted; and the large automatic cuts in discretionary spending that were scheduled to take place at the beginning of 2013 were delayed by two months. All in all, these changes may have averted roughly 2.6 million of the 3.4 million job losses projected from going over the fiscal cliff.

The immediate budgetary impact of the American Taxpayer Relief Act is an approximately 7 percent reduction in the 10-year deficit. To arrive at this estimate, we contrasted the new legislation with the CBO’s alternative fiscal scenario, which includes a full extension of Bush-era tax rates and an indefinite postponement of the mandated spending cuts scheduled for 2013. According to the CBO’s latest budget outlook, under the alternative fiscal scenario, the nation faced a 10-year budget deficit of about $10 trillion. CBO scoring indicates that the American Taxpayer Relief Act will reduce the budget deficit by a little more than $700 billion over the next decade relative to that scenario. The figure below plots budget deficits under the alternative fiscal scenario before and after the American Taxpayer Relief Act for the coming decade. Despite the modest reduction in deficits under the new law, the debt-to-GDP level is still projected to increase for the foreseeable future.

The textbook solution to the dual problems of continuing near-term economic weakness and long-run budget deficits is to pair short-run economic stimulus with gradual but credible changes to spending and taxes that reduce deficits in the long run. By avoiding some parts of the fiscal cliff today, the American Taxpayer Relief Act is supportive of the first pillar. But much work remains to be done on part two—addressing the longer-run budget challenge. In the coming months, the task for policymakers is to achieve deficit reduction in the long run without drastically cutting essential services or damaging a recovering economy in the short run. This will not be easy from either a political or policy perspective and will require innovative proposals and solutions.

The December Jobs Gap

As of December, our nation faces a “jobs gap” of 11.0 million jobs. The chart below shows how the jobs gap has evolved since the start of the Great Recession in December 2007, and how long it will take to close under different assumptions of job growth. The solid line shows the net number of jobs lost since the Great Recession began. The broken lines track how long it will take to close the jobs gap under alternative assumptions about the rate of job creation going forward.

If the economy adds about 208,000 jobs per month, which was the average monthly rate for the best year of job creation in the 2000s, then it will take until August 2020 to close the jobs gap. Given a more optimistic rate of 321,000 jobs per month, which was the average monthly rate of the best year of job creation in the 1990s, the economy will reach pre-recession employment levels by January 2017. Again, these figures do not reflect the anticipated update to the payroll data due in February, which may reduce the actual jobs gap. You can also try out our interactive jobs gap calculator by clicking here and view the jobs gap chart for each state here.

Conclusion

Compared to going over the fiscal cliff, the American Taxpayer Relief Act will be beneficial for our economic recovery. But the United States still faces a daunting long-run budget outlook, and when policymakers return to Washington this month, they will face a host of budget challenges, including the rapidly approaching debt ceiling.

The Hamilton Project will host a two-part budget event in February that will present innovative policy options that help forge a path forward as the country’s leaders grapple with these longer-run challenges. The first in the series will be held on February 22nd and will focus on ways to create greater efficiency in our nation’s defense budget. Retired Admiral Gary Roughead, former Chief of Naval Operations, and Cindy Williams, former CBO Assistant Director, will present proposals for streamlining the military budget. The second event, on February 26th, will feature the release of fourteen targeted policy proposals for rethinking entitlement spending, tax reform, and how to create new sources of revenue and efficiency. Economists from around the country are participating in this broader discussion, bringing a diversity of perspectives from academia and the private sector, in addition to a range of political views. More information on The Hamilton Project budget events will be available in the near future.

Authors

Michael Greenstone and Adam Looney, The Hamilton Project

Publication: The Hamilton Project

Image Source: © Joshua Roberts / Reuters

How Long Will it Take to Get to 6.5 Percent Unemployment?

Michael Greenstone and Adam Looney, The Hamilton Project — Fri, 14 Dec 2012 11:45:00 -0500

Last week, the Fed announced its intention to keep interest rates at historic lows until the unemployment rate drops below 6.5 percent, so long as projected inflation remains below 2.5 percent. The Fed has now explicitly linked its interest-rate policy with future economic conditions.

But how long it will take to reach 6.5 percent?

In today’s analysis, The Hamilton Project presents a range of estimates of when the unemployment rate will reach the Fed’s benchmark. The chart below shows how long it will take to reach an unemployment rate of 6.5 percent based on different assumptions of monthly job growth.

Predicting when the economy will get back to 6.5 percent unemployment depends on many factors. For example, if monthly job growth averaged 150,000, the unemployment rate would not reach 6.5 percent until 2018. Employment growth—as measured in the household survey—has averaged about 220,000 jobs per month over the past year. Continuing at this pace, it would take about two and a half years to get back to 6.5 percent [1].

While the Federal Reserve has set its benchmark at 6.5 percent, that is significantly higher than the unemployment rate in the year before the start of the Great Recession, which never exceeded 5 percent. Returning to pre-recession normal will necessarily take even longer.

The Hamilton Project’s “jobs gap” calculator allows you to explore how long it will take to return to the pre-recession employment rates, rather than unemployment rates, at various levels of job growth each month. The jobs gap calculator can be found here, and the state-by-state breakdown of the jobs gap, updated each month, can be accessed here.

[1] Because the unemployment rate is defined as the share of the labor force without a job, changes in the labor force—the number of American either working or actively searching for work— have important implications for the unemployment rate. Consequently, these estimates depend critically on assumptions about changes in the labor force. Our calculations use the 2011 estimates from the Congressional Budget Office of labor force participation over the next decade, which are subject to uncertainty; to the extent that the labor force grows more quickly over the next few years, the length of time required to return to 6.5 percent will be longer (and the converse is true if labor force growth is slower).

Michael Greenstone is the director of The Hamilton Project and Adam Looney is its policy director. For more about the Project, visit www.hamiltonproject.org.

Authors

Michael Greenstone and Adam Looney, The Hamilton Project

Image Source: © Kevin Lamarque / Reuters

The Impact of Fiscal Cliff Negotiations on American Jobs: The Tradeoff Between Deficit Reduction and Economic Growth

Michael Greenstone and Adam Looney, The Hamilton Project — Fri, 07 Dec 2012 10:27:00 -0500

According to today’s employment report, the labor market continued modest improvement in November. The unemployment rate edged down to 7.7 percent and has now remained below 8 percent for three consecutive months. Payroll employment increased by 146,000 jobs, about the same monthly pace recorded over 2012 as a whole, but the gain in employment in the previous two months was revised down by a total of 49,000. According to the Bureau of Labor Statistics, Hurricane Sandy had little effect on employment estimates despite its considerable impact on coastal areas. (These figures do not reflect the anticipated update to the payroll data, which will be official in February and is expected to show that the level of employment was 386,000 jobs higher in March 2012 than previously reported.)

As the year draws to a close, policymakers and the media have their sights fixed on the “fiscal cliff,” the federally mandated set of cuts in spending and increases in taxes scheduled to go into effect at the beginning of 2013. Most economic observers agree that, unchecked, this precipitous drop in government expenditures and spike in taxes could send the economy back into recession. What has not received as much attention is that a given level of deficit reduction can be achieved with very different impacts on employment.

In this month’s jobs analysis, The Hamilton Project focuses on how alternative approaches to confronting the fiscal cliff are projected to impact the nation’s employment situation in the coming year. We also continue to explore the “jobs gap,” or the number of jobs that the U.S. economy needs to create in order to return to pre-recession employment levels.

The Effect of the Fiscal Cliff on Job Growth

A wide range of forecasters, including the Congressional Budget Office (CBO), Moody’s, and Macroeconomic Advisers, project that the wholesale implementation of tax increases and spending cuts scheduled to take place at the year’s end would sharply reduce employment. What does this mean from a practical standpoint? If all the policies that compose the fiscal cliff fully go into effect, the job losses would more than erase all of the gains we have made in returning to full employment, as measured by the jobs gap detailed in the next section, since the start of the recovery.

The CBO recently published estimates of just how many jobs may be lost by the end of 2013, depending on actions policymakers take to resolve the fiscal cliff. For example:

If the automatic cuts to the discretionary defense budget go forward as planned, the nation would have 400,000 fewer jobs this time next year, compared to if the defense budget remains intact.
The mandatory reductions in the nondefense discretionary budget, combined with the restructuring of Medicare payment rates for physicians, would also reduce the number of jobs in the United States by about 400,000 by the end of 2013.

Of course, if cutting spending reduces employment, then avoiding these cuts would result in a greater number of jobs. The chart below provides estimates of how many additional jobs would exist in the United States in the fourth quarter of 2013 if policymakers eliminate various provisions of the mandatory spending cuts and tax increases that are elements of the fiscal cliff.

If lawmakers do away with the defense and non-defense discretionary budget cuts, and extend the Bush-era tax rates—a suite of policies known as the “alternative fiscal scenario”—the country would have about 2.7 million more jobs at the end of next year.

The payroll-tax holiday and extended unemployment insurance (UI) benefits, two policies that were enacted during the recovery, are also set to expire at the end of this year. The former is a temporary reduction in the payroll tax that gives consumers more spending money, which stimulates the economy. The latter extends the period that an unemployed worker can claim unemployment benefits.

If policymakers do not implement the alternative fiscal scenario (either in part or in whole) and do not extend the reduction in the payroll tax and emergency unemployment benefits, the CBO estimates that there would be 3.4 million fewer jobs in the fourth quarter of 2013, one year from now, compared to outcomes under the alternative fiscal scenario.

As the White House and Congress go about the necessary task of reducing the deficit as part of a fiscal cliff deal, there are opportunities to choose approaches that are less harmful to the already weak labor market. The chart below is taken from a recent CBO analysis and shows how many jobs would be saved for every $1 million of mandated spending cuts or tax increases policymakers choose to eliminate as part of a budget deal. For instance:

Every $1 million of the defense budget that is exempted from mandatory cuts preserves, on average, seven jobs.
Every $1 million of income tax increases avoided would preserve three jobs.

When it comes to preserving jobs, not all deficit-reducing policies have the same effect. For example, letting the Bush-era tax rates expire saves about half as many jobs as a dollar-for-dollar reduction to the deficit through eliminating automatic cuts to discretionary spending. With the currently high unemployment rate, near-term employment impacts are a critical consideration in choosing the best way to confront the nation’s structural deficit problems.

The November Jobs Gap

As of November, our nation faces a “jobs gap” of 11.1 million jobs. The chart below shows how the jobs gap has evolved since the start of the Great Recession in December 2007, and how long it will take to close under different assumptions of job growth. The solid line shows the net number of jobs lost since the Great Recession began. The broken lines track how long it will take to close the jobs gap under alternative assumptions about the rate of job creation going forward.

If the economy adds about 208,000 jobs per month, which was the average monthly rate for the best year of job creation in the 2000s, then it will take until August 2020—a little less than eight years—to close the jobs gap. Given a more optimistic rate of 321,000 jobs per month, which was the average monthly rate of the best year of job creation in the 1990s, the economy will reach pre-recession employment levels by December 2016—not for another four years. Again, these figures do not reflect the anticipated update to the payroll data due in February, which may reduce the actual job gap. You can also try out our interactive jobs gap calculator by clicking here and view the jobs gap chart for each state here.

Conclusion

As these last few years have shown, it has taken extraordinary and unprecedented efforts by the President, Congress, and the Federal Reserve Board to steer the economy along the road to recovery in the wake of the Great Recession. Once again, lawmakers are tasked with resolving a crisis, this time one borne of risks associated with large budget deficits and debt, whose resolution will have profound short- and long-term implications for the country. However, with the labor market still weak, the most economically sound approach is to combine credible deficit reduction that takes full effect when the economy is on more sound footing with continued support of the economy in the near term.

If deficit reduction is enacted without also considering its impact on employment, we risk reversing all of the hard-fought gains in the labor market over the past three years. However, by keeping an eye on jobs—in addition to deficits—it is possible to find a balanced approach that advances the nation’s interests on both fronts.

Authors

Michael Greenstone and Adam Looney, The Hamilton Project

Image Source: © Kevin Lamarque / Reuters

The Importance of Unemployment Insurance for American Families and the Economy

Michael Greenstone and Adam Looney — Tue, 04 Dec 2012 12:22:00 -0500

Among the many spending cuts and tax increases legislated to take effect at the turn of the year, few policies have as direct an effect on those most affected by the Great Recession than the expiration of extended unemployment insurance (UI) benefits. In the first week of January, roughly two million individuals will lose extended benefits with the expiration of legislation that temporarily increased the duration individuals can claim UI. Although these benefits make up only $30 billion of the roughly $500 billion ‘fiscal cliff,’ they have a disproportionate effect on the lives of the unemployed and their families, as well as on the aggregate economy.

Whether to extend unemployment benefits—a decision currently tied up in the greater debate around the federal budget—should be motivated by consideration of the benefits and costs of the program. Advocates of an extension of UI benefits point to the fact that these benefits accrue to unemployed workers and their families and help put food on the table and pay the rent at a time of extraordinary economic weakness; in doing so, these benefits also boost the economy as a whole as UI recipients maintain consumption. Skeptics of an extension point to potential costs arising because beneficiaries may spend less time and effort searching for work, and the impact of funding the extension on the deficit.

Building on previous Hamilton Project work, we show that the evidence continues to suggest that extended benefits provide a sizable boost for workers and the economy, but have little negative effect on work incentives and unemployment.

The Value of UI for Individuals and the Economy

First and foremost, UI benefits help individuals and families by assisting them through times of unemployment without a dramatic change in lifestyle. Research by Jonathan Gruber of MIT shows that individual consumption for those receiving UI benefits falls only one-third as much as it would have in the absence of the program (Gruber 1997). In other words, this means workers losing jobs can still put food on the table for their children and not have to cut back drastically to manage the unemployment spell. To be sure, these families still feel the pain of unemployment, but it is less intense and life-changing than it would otherwise be.

The gains go beyond the families of those directly affected to the greater economy. According to the Congressional Budget Office, each dollar of UI benefits raises aggregate economic activity by $1.10, and each million dollars of UI benefits increases employment by six jobs. Among the components of the ‘fiscal cliff,’ this places UI benefits at the top of the list of policies that have the largest impact on the economy per dollar spent. The reason that there is such a large effect is that families on UI rely on it to maintain necessary spending, thus the money is rapidly spent rather than saved. Absent such benefits, spending would fall sharply, resulting in hardship on not just their families but also on the shops and workers that depend on those consumers for their livelihoods.

Concerns About the Impact of UI on the U.S. Economy

While the benefits to millions of American families are many, the costs of extending UI are likely to be relatively small in the current economy. These potential costs would typically arise because UI skews labor-market decisions, blunting the incentive for those out of work to search for a new job. However, the magnitude of this effect is modest even in normal economic times. For instance, research has shown that few workers actually wait until benefits run out to find a job (Card and Levine 2000; Card, Chetty and Weber 2007), and that the job searching process is ongoing. Data collected on workers who became unemployed during the Great Recession suggest, moreover, that any impacts of benefits on the length of unemployment are, if any, extremely small. Rothstein (2011) finds that extended benefits may have increased the unemployment rate by only about 0.2 percentage points and the long-term share of unemployment by 1.6 percentage points.

In summary, the economic evidence suggests that extended benefits help insure the living standards of unemployed workers and boost economic activity more generally, but have little impact on the duration of unemployment. The main reason why unemployment remains too high and today’s unemployed workers are experiencing unusually long spells of unemployment is the soft economy.

The Unique Importance of UI for Today’s Unemployed Workers

Today’s labor market provides the strongest case for extending UI benefits. It has always been harder to find work the longer you are unemployed, but the situation facing today’s workers is exceptional. No matter how long a worker has been unemployed, the odds that they find a job are far lower than before the Great Recession. Furthermore, the odds of experiencing long-term unemployment are highly related to losing a job in a particularly hard-hit industry, like construction or manufacturing, and are disproportionately concentrated in certain distressed states.

The chart below shows the likelihood of finding a job as measured in the monthly Current Population Survey data. The chart shows the probability of leaving unemployment for employment in each month. These rates are simply at exceptionally low levels. The odds that an unemployed worker found a job each month fell from 28 percent in 2007 to an average of 16 percent during the last three months of 2009. This year, the job finding rate is still 30 percent lower than the average from 1990-2007.

Why is the job-finding rate so low? The basic reason is that job openings remain depressed and there are a lot of unemployed workers competing for those jobs. The job opening rate fell more than 40 percent between 2007 and 2009 and is still almost 20 percent lower than that level now. As a result, the number of unemployed workers per job vacancy surged, as the next chart illustrates.

In 2007, there were 1.6 unemployed workers for each job vacancy; that ratio increased to nearly 6.7 unemployed persons per job opening at the peak of the crisis. Today, there are still more than 3 unemployed workers per job, roughly twice the pre-recession level.

Conclusion

The potential benefits from extending UI benefits are significant. Not only do they help families through what can be an extremely difficult period, but they also provide some of the greatest “bang-for-the-buck” in terms of their impact on the economy. Moreover, the evidence suggests that extended benefits are having at most a small effect on the duration of unemployment. Rather, today’s tough economic situation is the central cause of these lengthy durations of unemployment.

As Congress and the Obama administration negotiate a path past the fiscal cliff, they should keep in mind the evidence that, with the economy still struggling, extended UI benefits help families and the economy in a number of ways that likely outweigh the costs.

Authors

Image Source: Keith Brofsky

New Hamilton Project State-By-State "Jobs Gap" Map

Michael Greenstone and Adam Looney, The Hamilton Project — Fri, 16 Nov 2012 13:17:00 -0500

Each month, The Hamilton Project examines the “jobs gap,” which is the number of jobs that the U.S. economy needs to create in order to return to pre-recession employment levels while absorbing the people who enter the labor force each month. As of September, our nation faces a gap of 11.1 million jobs, but the job loss that has occurred since the onset of the Great Recession has not been evenly distributed across the country. The Hamilton Project has created a new web feature that shows the difference in the employment-to-population ratio (in percentage points) in every state between the start of the recession and today. By hovering over a state, you can also see the number of jobs each state would have to add in order to bring its employment-to-population ratio to its pre-recession level.

Visit The Hamilton Project's website to use the web feature to look at a state-by-state breakdown of the “jobs gap.”

Authors

Michael Greenstone and Adam Looney, The Hamilton Project

How Does Our Economic Future Compare with That of 2008? A Glimpse at America’s Road to Recovery

Michael Greenstone and Adam Looney, The Hamilton Project — Fri, 02 Nov 2012 11:14:00 -0400

Today’s employment report showed that the nation’s unemployment rate was essentially unchanged at 7.9 percent in October, and remained below 8 percent for the second month in a row. The reason for the recent improvement is that more Americans were at work and more reported participating in the labor force. The share of working-age Americans who are employed increased to 58.8 percent, the highest level since August 2009. Employers added 171,000 jobs last month and an average of more than 170,000 over the past three months, after revisions to August and September’s estimates boosted estimated job gains. (These figures do not reflect the anticipated update to the payroll data, which will be official in February and is expected to show that the level of employment was 386,000 jobs higher in March 2012 than previously reported.)

Once every four years Americans gather to choose a new president—a natural time for voters to pause and assess the state of the economy. A simple and perhaps naïve approach to this type of assessment is to focus on a single figure like the unemployment rate that provides a current snapshot of the economy and ask whether that number is higher or lower than it was before. This provides a quick and easy answer but fails to tell us much about what lies ahead. Indeed, elections are less about looking back and more about what the future holds—a story that cannot be told with data from a single point in time.

In this month’s employment analysis, The Hamilton Project reviews the available data to explore whether America’s economic future looks brighter today than it did four years ago. Based on a variety of measures, the data clearly indicate a much rosier future for the United States than was the case in 2008. Of course, more work is necessary to fully recover from the Great Recession, but we found that the economy’s prospects have greatly improved and there is reason for optimism. The Project also continues to explore the nation’s “jobs gap,” or the number of jobs that the U.S. economy needs to create in order to return to pre-recession employment levels.

A Brighter Future Today, Compared With That of 2008

It is difficult to recall just how precarious America’s economic situation was in the fall of 2008. The economy had already stumbled into recession in December of 2007, and financial and housing markets had been roiled by falling housing prices, rising defaults on home mortgages, the bankruptcies of a number of large mortgage originators, and the government takeover of Fannie Mae and Freddie Mac. But the failure of Lehman Brothers, one of the country’s most established financial institutions, sparked a panic in financial markets reminiscent of the bank runs of the Great Depression.

Like during the Depression, most victims of the financial collapse were ordinary American workers. In the year following the onset of the financial crisis, more than 6.5 million Americans would lose their jobs. Consumer confidence hit an all-time low, the Dow Jones Industrial Average had plunged more than 20 percent, and a host of near-term indicators for retail sales, business activity, housing starts, or manufacturing were in outright freefall. As the nation went to the polls in November 2008, the outlook was dire.

Since that time, the Bush administration, Obama administration, and the Federal Reserve have taken extraordinary policy measures to combat the crisis. Economists and politicians will be debating the exact contributions of these policy choices to the recovery for years to come. In many respects, however, this debate about past actions misses the broader point. The most important question to address is whether the net result is an economic future that looks brighter today than it did four years ago.

Looking strictly at the incoming data, the answer is clearly yes, the economic outlook today is much more promising. As seen in the table below, since 2008 most economic indicators have vastly improved. Consumer confidence recently reached the highest levels in almost five years, housing activity has improved and home prices have recently trended up. Economic indicators for consumer purchases and manufacturing output are all more favorable.

One summary measure of these positive indicators is the forecast for job growth over the next several years. While the outlook for the labor market beginning in the September 2008 was terrible, two state-of-the-art macroeconomic forecasts now project that the economy will add roughly 215,000 new jobs per month over the next four years. The outlook for aggregate economic output, measured by Gross Domestic Product, is also anticipated to rise. Similarly, the stock market—represented here by the Dow Jones Industrial Average—is 40 percent higher today than it was at the end of October 2008, indicating a much higher level of optimism by investors on the prospects for American businesses.

Of course, threats to a robust economy abound including the ongoing crisis in the eurozone and the impending fiscal contraction legislated to occur at the end of this year. Moreover, while most indicators of economic activity are positive, some recent evidence suggests decelerating business activity. Nevertheless, the overall trajectory is positive. And that positive trajectory is important because of what it portends for the job prospects of American workers and the well-being of American families for years to come.

The October Jobs Gap

As of October 2012, our nation faces a “jobs gap” of 11.1 million jobs. The chart below shows how the jobs gap has evolved since the start of the Great Recession in December 2007, and how long it will take to close under different assumptions of job growth. The solid line shows the net number of jobs lost since the Great Recession began. The broken lines track how long it will take to close the jobs gap under alternative assumptions about the rate of job creation going forward.

If the economy adds about 208,000 jobs per month, which was the average monthly rate for the best year of job creation in the 2000s, then it will take until July 2020—or eight years—to close the jobs gap. Given a more optimistic rate of 321,000 jobs per month, which was the average monthly rate of the best year of job creation in the 1990s, the economy will reach pre-recession employment levels by November 2016—not for another four years. Again, these figures do not reflect the anticipated update to the payroll data due in February, which may reduce the actual job gap. You can also try out our interactive jobs gap calculator by clicking here.

Conclusion

The United States is on the road to economic recovery, but more work needs to be done—both to overcome the losses from the Great Recession and to address the long-term challenges resulting from a new global economy that have been underway for decades. We are also facing a widening budget deficit driven largely by seemingly inexorable increases in health spending and an aging population and exacerbated by policy choices a decade ago. These are indeed important issues that The Hamilton Project has explored in previous analyses, and that we will continue to address in our future work.

As Americans prepare to go to the voting booths to choose a president, it is natural for them to consider the state of the economy. And there is certainly no shortage of rhetoric about the depth of the recession, the policies enacted to boost the economy, and our economic future. For today, however, if we look forward instead of looking backward and examine the available data across a range of economic indicators the message is clear: the economy is better off than it was four years ago and we are indeed on a path to recovery.

Authors

Michael Greenstone and Adam Looney, The Hamilton Project

The Uncomfortable Truth About American Wages

Michael Greenstone and Adam Looney — Tue, 23 Oct 2012 14:25:00 -0400

Job creation has rightly been the central economic issue of the last three years as the United States continues its recovery. But the problems with the job market are not entirely recent. The downturn also exacerbated longer-term challenges in the labor market that are driven by a variety of factors, including technological change, international trade and the decline of unions. Many of these forces have been around since the 19th century, but today, for what may be the first time in American history, we are failing to invest enough in our skills and productivity to stay ahead of these trends, and the impacts of this failure are reflected in the declining wages of many American workers.

Because the role of women in the labor force has changed strikingly over the last 40 years, the problem is most evident in trends in male earnings. And, in fact, there has been a lot of talk about the stagnating wages of American male workers. Using conventional methods of analysis, the data show that the median earnings for prime-age (25-64) working men have declined slightly from 1970 to 2010, falling by 4 percent after adjusting for inflation.

This finding of stagnant wages is unsettling, but also quite misleading. For one thing, this statistic includes only men who have jobs. In 1970, 94 percent of prime-age men worked, but by 2010, that number was only 81 percent. The decline in employment has been accompanied by increases in incarceration rates, higher rates of enrollment in the Social Security Disability Insurance program and more Americans struggling to find work. Because those without jobs are excluded from conventional analyses of Americans’ earnings, the statistics we most commonly see — those that illustrate a trend of wage stagnation — present an overly optimistic picture of the middle class.

When we consider all working-age men, including those who are not working, the real earnings of the median male have actually declined by 19 percent since 1970. This means that the median man in 2010 earned as much as the median man did in 1964 — nearly a half century ago. Men with less education face an even bleaker picture; earnings for the median man with a high school diploma and no further schooling fell by 41 percent from 1970 to 2010.

Women have fared much better over these 40 years, but they started from a lower level, and the same problems faced by their male counterparts are beginning to have an effect. Since 1970, the earnings of the median female worker have increased by 71 percent, and the share of women 25 to 64 who are employed has risen to 71 percent, from 54 percent. But after making significant wage gains over several decades, that progress has slowed and even reversed recently. Since 2000, the earnings of the median woman have fallen by 6 percent.

Though these trends in earnings for American workers — men and women alike — are troubling and have many causes, the data do present some clear guidance for policy makers. Among the most robust findings in economics is that education reduces unemployment and increases earnings. But even with the remarkable capacity for education to produce growth, the rate of educational attainment in the United States has slowed, especially for men. The share of men 25 to 34 with a college degree, for example, has barely increased over the last 30 years. (The trends are much better for women.) The United States, once the world leader in educational attainment, has been surpassed by many countries.

Strengthening our K-12 education system and increasing college-completion rates are, therefore, imperative to improving living standards for future generations. It is also clear that changes in the global economy that generate vast opportunities for the American economy have created difficulties for many Americans; the continued pursuit of pro-growth policies will require the identification of policies that help these workers to remain active participants in the economy. These are difficult tasks, but the last four decades demonstrate that the stakes are high. Our children’s living standards are at risk, and with them the American Dream that each generation can do better than the previous one.

Authors

Publication: New York Times' Economix

Image Source: StockRocket

Regardless of the Cost, College Still Matters

Michael Greenstone and Adam Looney, The Hamilton Project — Fri, 05 Oct 2012 09:00:00 -0400

According to today's employment report, the unemployment rate dropped to 7.8 percent in September, falling below 8 percent for the first time since January 2009. Furthermore, the share of working-age Americans who are employed increased to 58.7 percent, the highest level since May 2010. Employers added 114,000 jobs last month, and an average of more than 145,000 over the past three months, roughly the same pace of job growth experienced over 2011 and 2012. (These figures do not reflect the anticipated update to the payroll data, which will be official in February and is expected to show that the level of employment was 386,000 jobs higher in March 2012 than previously reported.)

As America continues its recovery from the Great Recession, there is an ongoing debate in the media and among policymakers about the value of a college degree in today’s economic climate. One issue that is receiving a significant amount of attention is the rising cost of college. Indeed, tuition has increased by almost 50 percent in the last 30 years, prompting some people to ask whether college is still worth the price of admission.

In this month’s analysis, The Hamilton Project confirms its previous findings that the returns to college attendance are much higher than other investments, such as stocks, bonds, and real estate. We also find that the returns to college have been largely constant over the last 35 years, indicating that the rising tuition costs have been offset by the increased earnings premium for college graduates. Finally, we continue to explore the nation’s “jobs gap,” or the number of jobs that the U.S. economy needs to create in order to return to pre-recession employment levels.

The Value and Cost of a College Degree

In most respects, a college degree has never been more valuable. As highlighted in a recent Hamilton Project piece, recent college graduates earn more money and have an easier time finding employment than their peers who only have a high school diploma. What may be less intuitive is that these gaps have been growing in recent years. As the graph below illustrates, a young college graduate earned about $4,000 more per year in the 1980s, adjusting for inflation, than someone of the same age who did not attend college (averaged across the entire population, not just those in the workforce). Over the last three decades, that figure has climbed to $12,000 per year.

Differences in employment rates between college graduates and non-graduates have not demonstrated as clear of a trend over this period, with one key exception. In recent years—particularly in the aftermath of the Great Recession—college has become an increasingly important determinant of one’s employment status. Today, a college graduate is almost 20 percentage points more likely to be employed than someone with only a high school diploma. This “employment gap” between college and high school graduates is the largest in our nation’s history. What’s more, these figures include all individuals between the ages of 23 and 25, even those college graduates who are not employed because they are pursuing advanced degrees. If these individuals were excluded from the calculations, these differences would likely be even starker.

While the evidence is clear about the lifelong value of more education, skeptics are increasingly pointing to rising tuition costs to claim that college is not as sound of an investment as it once was. And it is true that tuition has increased significantly over the past few decades. In 1980, it cost an average of about $56,000 (adjusting for inflation) to attend a university for four years. This figure includes tuition, fees, and the “opportunity cost,” or income one foregoes to attend school instead of holding a job. (This figure excludes room and board: one must eat and sleep whether she is in college or not.) In 2010, four years of college cost more than $82,000, a nearly 50 percent increase over that 30-year period.

This increase in tuition is based on calculations from the National Center for Education Statistics but it may overstate the rise in the costs of college. First, this rise in tuition does not account for recent increases in financial aid. Thus, while the sticker price of college may have gone up, it is unclear to what extent the cost to students and their families has increased. Indeed, according to the College Board, the actual cost of a four-year degree has remained relatively constant over the last 15 years.

Regardless of the magnitude of the exact increase in tuition, a sole focus on the cost of college is misleading because it only tells half of the story. Specifically, the monetary benefits of a college degree have increased dramatically over the last few decades. An individual who entered college in 1980 could expect to earn about $260,000 more over the course of her life compared to someone who received only a high school diploma. In contrast, for someone starting college in 2010, the expected lifetime increase in earnings relative to a high school graduate was more than $450,000. These estimates are adjusted both for inflation and the fact that most of this additional income will come much later in a graduate’s life, and the calculations are described in more detail here.

Even if we assume that all students actually pay tuition at the published rates, the bottom line is this: while college may be 50 percent more expensive now than it was 30 years ago, the increase to lifetime earnings that a college degree brings is 75 percent higher. In short, the cost of college is growing, but the benefits of college—and, by extension, the cost of not going to college—are growing even faster.

The returns to an investment in a college education, therefore, are high. In a previous post, The Hamilton Project estimated that investing in a four-year degree yields a return of above 15 percent. While this is down slightly from almost 18 percent in the late ’90s, attending college remains one of the best ways one can invest her money. The return to college is more than double the average return over the last 60 years experienced in the stock market (6.8 percent), and more than five times the return to investments in corporate bonds (2.9 percent), gold (2.3 percent), long-term government bonds (2.2 percent), or housing (0.4 percent).

As the graph below demonstrates, the claim that college is no longer a sound investment is not rooted in fact. The rate of return has remained relatively constant over the last three decades. If attending college was a good idea in the ’80s, it’s still a good idea today.

The cost of college can be daunting for many families, but it is precisely because college is such a sound investment that there is an important role for government to ensure that loan programs are plentiful and accessible. The nation and the economy are strengthened when college attendance is determined by students’ abilities, not their families’ financial background. Indeed, it is not just the direct recipients of these loans that benefit from the increased number of Americans who are able to go to college. One recent study showed that even individuals with only a high school diploma earn more when they live in cities populated with more college graduates. More education is not just good for individuals; it’s a good investment for the broader community.

The September Jobs Gap

As of September, our nation faces a “jobs gap” of 11.2 million jobs. The chart below shows how the jobs gap has evolved since the start of the Great Recession in December 2007, and how long it will take to close under different assumptions of job growth. The solid line shows the net number of jobs lost since the Great Recession began. The broken lines track how long it will take to close the jobs gap under alternative assumptions about the rate of job creation going forward.

If the economy adds about 208,000 jobs per month, which was the average monthly rate for the best year of job creation in the 2000s, then it will take until August 2020—or eight years—to close the jobs gap. Given a more optimistic rate of 321,000 jobs per month, which was the average monthly rate of the best year of job creation in the 1990s, the economy will reach pre-recession employment levels by November 2016—not for another four years. Again, these figures do not reflect the anticipated update to the payroll data due in February, which may reduce the actual job gap. You can also try out our interactive jobs gap calculator by clicking here.

Conclusion

While rising student debt and payments to colleges are a cause for concern, we have found that college is still one of the best investments an individual can make. Ensuring that all students have access to this investment requires both a commitment to making it financially feasible at all income levels and a productive K-12 system that prepares students for the next level of education. A recent Hamilton Project event highlighted three new proposals for improving student attainment and achievement in our nation’s K-12 system. In the spring of 2013, The Hamilton Project will hold a forum to discuss policy proposals for improving access to post-secondary education for all Americans.

Authors

Michael Greenstone and Adam Looney, The Hamilton Project

Publication: The Hamilton Project

A Dozen Economic Facts About K-12 Education

Michael Greenstone and Adam Looney — Thu, 27 Sep 2012 08:00:00 -0400

Education is a powerful force for promoting opportunity and growth. It is not surprising that an individual’s educational attainment is highly correlated with her income: college graduates generally earn more than less-educated Americans. What might be less obvious is that education is also a significant determinant of many other very important outcomes, including whether individuals marry, whether their children grow up in households with two parents, and even how long they will live. What’s more, on all of these dimensions, the gap between highly educated and less-educated Americans is getting bigger—in some cases, much bigger.

The following facts help illustrate the state of educational attainment in the United States and the growing importance of education in determining people's well-being. On many dimensions—lifetime earnings, incarceration rates, and life expectancy, to name a few—Americans who do not graduate from high school or college are increasingly falling behind those with a college degree. This paper explores both the condition of education in the United States and the economic evidence on several promising K-12 interventions that could improve the lives of Americans.

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A Dozen Economic Facts About Education

Authors

Publication: The Hamilton Project

Innovation Is the Key to Better Education

Fri, 21 Sep 2012 15:48:00 -0400

In the modern economy, innovation drives growth. From the telegraph to the telephone to the Internet, new technologies increase productivity and allow Americans to prosper. But while innovation has revolutionized the American economy as a whole over the last century, the education sector has benefitted relatively little from these advances.

Although computers and Smartboards are becoming increasingly common in the nation’s classrooms, over the past three decades average math and reading test scores of American seventeen-year-olds have remained largely unchanged. Meanwhile per-pupil spending has almost doubled. This increase in spending partially reflects that schools must compete to hire college-educated teachers in a labor market where well-educated workers command higher and higher salaries, but it also indicates that innovation and increases in productivity have occurred faster and been more effective in the broader economy than in the field of education.

In other words, education has faced a relative innovation deficit. Overall, the United States spends about three percent of its total expenditures on research and development (R&D), with that figure reaching as high as 23 percent in pharmaceuticals (see figure below). In education, however, only 0.2 percent of expenditures are spent on R&D.

Increasing productivity and innovation requires identifying promising approaches, testing those approaches rigorously, and disseminating results. In a forthcoming Hamilton Project discussion paper, "Harnessing Technology to Improve K–12 Education," Aaron Chatterji of Duke University and Benjamin Jones of Northwestern University put forward a proposal for making the marketplace for education technologies transparent, thus unleashing the powers of innovation in education.

This proposal, and other ideas to improve America’s schools, will be released on September 27th as part of a Hamilton Project event focusing on the value of education, and opportunities to promote attainment and achievement in our K-12 system. U.S. Secretary of Education Arne Duncan will give featured remarks, highlighting recent progress on education reform, the difficult work still ahead, and the need for innovation to help advance reform efforts. Harvard University Professor Roland Fryer, a recent MacArthur Foundation Genius Award Winner; Terry Grier, Superintendent of the Houston Independent School District; Dennis Van Roekel, President of the National Education Association; Karen Cator, Director of the U.S. Department of Education’s Office of Educational Technology, and LearnZillion Founder Eric Westendorf are among the participants in the panel discussions.

Michael Greenstone is the director of The Hamilton Project and Adam Looney is its policy director. For more about the Project, visit www.hamiltonproject.org.

Authors

Michael Greenstone
Adam Looney
Michael Greenstone and Adam Looney, The Hamilton Project

Education Is the Key to Better Jobs

Michael Greenstone and Adam Looney, The Hamilton Project — Mon, 17 Sep 2012 14:17:00 -0400

Few issues are more critical than putting Americans back to work. With the economy adding private-sector jobs for the last 30 consecutive months and the unemployment rate continuing to tick down, another concern has begun to dominate the discussion. Is it enough to find a job, or should we be more focused on the quality of that job? For those Americans who have been displaced in the workforce, what are their prospects of finding comparable employment in the 21st century, post-recession economy? After all, having a job—any job—does not guarantee a wage that will support a family. How, then, can we foster an economy that produces quality, high-paying jobs?

There may be a range of perspectives on the best way to move our economy forward, but one element essential to any answer is education. It may seem intuitive that more educated people earn more, yet the extent to which this is true is striking. A picture is often worth a thousand words, and the graph below illustrates this point.

The horizontal axis measures income while the vertical axis breaks up the income level by education level. As we move to the right toward higher incomes, we see that college graduates make up a bigger and bigger chunk of those earners. A few numbers help to underscore this. Those with only a high school diploma accounted for 39 percent of those who made between $20,000 and $30,000, but just 8 percent of those earning more than $100,000. In contrast, college graduates only accounted for 18 percent of the $20,000-to-$30,000 group and 75 percent of people earning more than $100,000, despite the population of these two educational demographic groups being roughly equal.

The message is clear—more education opens the gateway to better, higher-paying jobs. To put this into perspective, consider this:

An individual with only a high school diploma is twice as likely to make under $40,000 per year than someone with a college degree.
In contrast, an individual with a college degree is nearly nine times more likely to make over $100,000 than someone with only a high school diploma and 13 times more likely to make more than $200,000 per year.

On September 27th, The Hamilton Project will host an event focusing on the value of education, and opportunities to promote attainment and achievement in our K-12 system. We will release a series of economic facts about K-12 education in addition to three new discussion papers by outside authors— "Staying in School: A Proposal to Raise High School Graduation Rates," "Learning from the Successes and Failures of Charter Schools," and "Harnessing Technology to Improve K-12 Education." Focusing on the new papers, three panels of distinguished experts will explore the value of stricter and better-enforced attendance laws, in coordination with other programs, to increase the high school graduation rate; the use of new evidence to demonstrate how targeted charter school methods could be successfully applied in public schools; and a new approach to evaluating education technologies to help speed the development of valuable new products.

The new Hamilton Project papers will be available on September 27th at 9:00 AM ET. For more information or to register for the event, click here.

Michael Greenstone is the director of The Hamilton Project and Adam Looney is its policy director. For more about the Project, visit www.hamiltonproject.org.

Authors

Michael Greenstone and Adam Looney, The Hamilton Project

Publication: The Hamilton Project