Macro Roundup

Amy Glasmeier, “Living Wage Calculator,” Massachusetts Institute Of Technology, Accessed May 2020, http://livingwage.mit.edu/

About the Living Wage Calculator

INTRODUCTION

Analysts and policy makers often compare income to the federal poverty threshold in order to determine an individual’s ability to live within a certain standard of living. However, poverty thresholds do not account for living costs beyond a very basic food budget. The federal poverty measure does not take into consideration costs like childcare and health care that not only draw from one’s income, but also are determining factors in one’s ability to work and to endure the potential hardships associated with balancing employment and other aspects of everyday life. Further, poverty thresholds do not account for geographic variation in the cost of essential household expenses.

The living wage model is an alternative measure of basic needs. It is a market-based approach that draws upon geographically specific expenditure data related to a family’s likely minimum food, childcare, health insurance, housing, transportation, and other basic necessities (e.g. clothing, personal care items, etc.) costs. The living wage draws on these cost elements and the rough effects of income and payroll taxes to determine the minimum employment earnings necessary to meet a family’s basic needs while also maintaining self-sufficiency.

The living wage model generates a cost of living estimate that exceeds the federal poverty thresholds. As calculated, the living wage estimate accounts for the basic needs of a family. The living wage model does not include funds that cover what many may consider as necessities enjoyed by many Americans. The tool does not include funds for pre-prepared meals or those eaten in restaurants. We do not add funds for entertainment, nor do we incorporate leisure time for unpaid vacations or holidays. Lastly, the calculated living wage does not provide a financial means to enable savings and investment or for the purchase of capital assets (e.g., provisions for retirement or home purchases). The living wage is the minimum income standard that, if met, draws a very fine line between the financial independence of the working poor and the need to seek out public assistance or suffer consistent and severe housing and food insecurity. In light of this fact, the living wage is perhaps better defined as a minimum subsistence wage for persons living in the United States.

FAMILY COMPOSITIONS

The living wage calculator estimates the living wage needed to support families of twelve different compositions: one adult families with 0, 1, 2, or 3 dependent children, two adult families where both adults are in the work force with 0, 1, 2, or 3 dependent children, and two adult families where one adult is not in the work force with 0, 1, 2, or 3 dependent children.

For single adult families, the adult is assumed to be employed full-time. For two adult families where both adults are in the labor force, both adults are assumed to be employed full-time. For two adult families where one adult is not in the labor force, one of the adults is assumed to be employed full-time while the other non-wage-earning adult provides full-time childcare for the family’s children. Full-time work is assumed to be year-round, 40 hours per week for 52 weeks, per adult.

Families with one child are assumed to have a ‘young child’ (4 years old). Families with two children are assumed to have a ‘young child’ and a ‘child’ (9 years old). Families with three children are assumed to have a ‘young child’, a ‘child’, and a ‘teenager’ (15 years old).

TECHNICAL DOCUMENTATION

For a more detailed description of the methodology used, please see the technical documentation here.

“…To see what might happen to restaurant jobs in states like Alabama if the minimum wage increases to $15 an hour and if the tip credit is eliminated, the chart above shows shows some of the fallout in New York City for jobs at full-service restaurants. The significant loss of food jobs in the Big Apple over the last few years are partly at least, if not mostly, a direct result of the negative impact of the $15 an hour minimum wage law that went into effect on December 31, 2018. The increase to $15 an hour at the end of last year followed three annual $2 an hour increases starting at the end of 2016 that increased the city’s minimum wage by 67% from $9 an hour in 2016 to $15 an hour at the end of last year….”

Mark Perry, "Minimum wage increases could devastate restaurants and food jobs. NYC may be the ‘canary in the coal mine’," American Enterprise Institute, June 22, 2019, https://www.aei.org/carpe-diem/minimum-wage-increases-could-devastate-restaurants-and-food-jobs-nyc-may-be-the-canary-in-the-coal-mine/

Minimum wage increases could devastate restaurants and food jobs. NYC may be the ‘canary in the coal mine

Want to earn a living wage in Alabama? Try working in a full-service restaurant. I’m a restaurant franchisee with nine locations throughout Alabama and Florida, and my tipped employees report an hourly wage between $18 and $28, inclusive of base pay and gratuities. That’s more than the living wage for a single adult in Alabama, as calculated by the Massachusetts Institute of Technology.

Unfortunately, some well-meaning members of Congress are trying to pass a minimum-wage bill that would destroy my business model. Tipped employees are currently paid a lower base wage and are legally guaranteed to earn at least the minimum wage with tips included. My employees average roughly three times the relevant minimum wage when tips are accounted for.

But Rep. Terri Sewell (D., Ala.) has introduced one of several bills that would upend this system. Under her bill, employees would have to earn at least the minimum wage before tips. A handful of states—Alaska, California, Minnesota, Montana, Nevada, Oregon and Washington—have adopted this approach. Were it to take effect in Alabama, it would represent as much as a 600% increase in the hourly cost of paying a tipped employee to work for me. In pursuit of a “living wage,” Ms. Sewell could cause my employees to lose their incomes entirely by forcing me to shut down my business.

Despite the widespread popularity of restaurants the public has surprisingly little understanding of how the business works. At my restaurants we sell a six-piece plate of chicken wings for $10. Customers typically assume we keep $6 or $7 in profit from that sale. In fact, our profit on that six-piece is closer to 50 cents, after accounting for food and labor costs, rent, overhead and other expenses.

My employees actually make more money from a sale than I do. I earn 5% on each customer check, while they earn 20% or more of the check in tip income. If that doesn’t seem shocking to you, consider this: labor costs are about a third of a restaurant’s budget. Now, imagine if a household expense that takes up a third of your income—maybe a mortgage payment or rent—increased by 600%. You’d probably be panicking. So am I.

MP: To see what might happen to restaurant jobs in states like Alabama if the minimum wage increases to $15 an hour and if the tip credit is eliminated, the chart above shows shows some of the fallout in New York City for jobs at full-service restaurants. The significant loss of food jobs in the Big Apple over the last few years are partly at least, if not mostly, a direct result of the negative impact of the $15 an hour minimum wage law that went into effect on December 31, 2018. The increase to $15 an hour at the end of last year followed three annual $2 an hour increases starting at the end of 2016 that increased the city’s minimum wage by 67% from $9 an hour in 2016 to $15 an hour at the end of last year.

Based on employment data released yesterday by the Bureau of Labor Statistics, jobs at New York City full-service restaurants fell by 4,000 from last May, or by 11 jobs lost every day over the last year. The job losses in New York City over the last few years have been much worse than during the Great Recession, and even slightly worse than the loss of food service jobs during the 2001 recession and the devastating effects of the 9/11 terrorist attacks that year. New York City could be the “canary in the coal mine” that predicts what happens when politicians force significantly higher labor costs on restaurant owners that put restaurant jobs at great risk as well as jeopardizing the financial profitability and long term viability of restaurants.

We hear a lot about the living wages of unskilled, low skilled and limit-experienced workers, but what about the “living profitability” of small business owners and restaurateurs like Mr. Fox who may not survive a 600% increase in their labor costs?

new John Fernald (FRBSF) on the impact of demographics and productivity on GDP growth

"....The solid growth in GDP over the past year naturally raises the question of whether we have been understating the potential trend. Nevertheless, it is far too early to declare that trend growth is higher than current estimates of 1.6-1.7%. The most natural interpretation of the strength in hours worked is that any structural element represents an effect on the levels of employment, hours, and potential output—perhaps in response to the TCJA—not a persistent growth effect.Policy changes such as family-friendly policies common in other OECD economies might lead to trend increases in labor force participation (Daly et al. 2018). But such policies are unlikely to be implemented soon.....slow pace relative to history reflects two factors. Most importantly, demographic trends leave little doubt that the labor force will grow slowly at best over the next decade. There is more uncertainty about the other factor, productivity growth. Our forecast assumes that productivity will grow at a pace similar to recent decades. Averting this slow-growth future would require a sustained increase in productivity growth..... Demographics are the key reason future trend growth is expected to be low relative to history. Figure 1 shows that labor force growth has slowed markedly since the 1970s, when baby boomers reached working age and female participation in the labor force rose rapidly. However, stagnating growth in female participation since the 1990s combined with projections for birth rates, immigration, and mortality suggest growth of the traditional working-age population ages 16-64 is slowing to a historically low pace.....Figure 2 shows growth of real GDP per hour, a broad measure of labor productivity, broken into periods since 1973 that reflect variation in productivity growth. Figure 2 depicts how productivity growth has shifted between normal and exceptional periods (Fernald 2016). Unusually influential innovations—such as the steam engine, electric dynamo, internal combustion engine, and microprocessor—typically led to a host of complementary innovations that boosted productivity growth broadly for a time.....This measure of productivity growth has slowed since 2004. The green dashed line in Figure 2 is productivity growth averaged over 2004-2018, which is very close to the 1973-1995 average pace. During the fast-growth period from 1995 to 2004, productivity growth averaged 2½%. During the slower periods of 1973-1995 and 2004-2018, growth averaged only 1% to 1¼%, and that pace dropped dramatically lower most recently in 2010-2018....The black dot in the figure shows 2018 growth in real GDP per hour of 1.1%. This is higher than the average growth rate over 2010-2018 and may suggest a pickup in productivity growth. However, in our view, it is best to view the years since 2004 as a whole; in this case, the 2018 pace is close to the period average. We focus on the average since 2004 because labor productivity has some persistent cyclical dynamics. The large shock of the Great Recession caused a temporary boost in productivity growth from 2007 to 2010 that has since unwound. For one thing, less-skilled workers were more likely to lose jobs in the Great Recession than more-skilled workers, who typically have higher productivity. For another, businesses came out of the Great Recession with ample productive capacity but limited demand. Over time, increases in capacity per worker are an important source of productivity growth, but for a time after the recession, businesses could meet the recovery in demand without investing. Hence, that capacity channel was temporarily dialed down. Once we average over the transitory ups and downs, it appears that we have been in a slow growth regime for the past 15 years. Regimes generally appear persistent—lasting a decade or longer. For this reason, our most likely or “modal” estimate is that the slow-growth regime will continue for at least the next few years.That said, productivity is highly uncertain in both a statistical and an economic sense. Under the regime view of productivity growth, much of the statistical uncertainty is about which regime we will be in. Neither economists nor statisticians have a good track record of forecasting changes in trend productivity growth. In addition, even within a regime, productivity is inherently volatile from year to year. Economically, major technological gains could remain narrowly focused, leaving modest and incremental productivity growth as the norm for the broader economy, as we assume in our benchmark. Or, we might see another broad-based wave of the IT revolution. Alternatively, future growth might look substantially different from the past, reflecting the innovative contributions of robots and machine learning. Despite this inherent uncertainty, our best guess is that productivity growth over the next five to six years will be in line with previous slow regimes. During those regimes, GDP per hour rose around 1-1¼% per year...."

John Fernald and Huiyu Li, "Is Slow Still the New Normal for GDP Growth?," Federal Reserve Bank of San Francisco, June 24, 2019, https://www.frbsf.org/economic-research/publications/economic-letter/2019/june/is-slow-still-new-normal-for-gdp-growth/

"....In the years since the Great Recession, social scientists have anticipated that economic recovery in the United States, characterized by gains in employment and median household income, would augur a reversal of declining fertility trends. However, the expected post-recession rebound in fertility rates has yet to materialize....If fertility responses to economic recessions are in fact cyclical, then economic recovery and expansion should predict increased fertility rates in the same way that economic recessions predict decreased fertility rates. However, fertility rates have yet to return to pre-recession levels. Cherlin and colleagues’ (2013) analysis indicated an 11 percent decrease in TFR between 2007 and 2011 - a drop from a 2.1 to 1.9. By 2013, six years after the onset of the Great Recession, the national TFR remained below the level of population replacement (Mather 2014). Only in 2014 did the TFR briefly reverse course and increase before decreasing yet more in 2015 and 2016 (Hamilton et al. 2017; Hamilton and Kirmeyer 2017). This ongoing fertility decline in the U.S. is at odds with slow, yet steady improvements in economic conditions, including unemployment and household income. Nationally, household income returned to pre-recession levels in 2015 while the unemployment rate returned to pre-recession levels in 2016....In this study, I propose an economic explanation for why fertility rates have continued to decline regardless of improvements in conventional economic indicators. I argue that ongoing structural changes in U.S. labor markets have prolonged the financial uncertainty that leads women and couples to delay or forgo childbearing. Combining statistical and survey data with restricted-use vital registration records, I examine how cyclical and structural changes in metropolitan-area labor markets were associated with changes in total fertility rates (TFRs) across racial/ethnic groups from the early 1990s to the present day, with a particular focus on the 2006-2014 period. The findings suggest that changes in industry composition—specifically, the loss of manufacturing and other goods-producing businesses—have a larger effect on TFRs than changes in the unemployment rate for all racial/ethnic groups. Because structural changes in labor markets are more likely to be sustained over time—in contrast to unemployment rates, which fluctuate with economic cycles—further reductions in unemployment are unlikely to reverse declining fertility trends....."

Nathan Seltzer, "Beyond the Great Recession: Labor Market Polarization and Ongoing Fertility Decline in the United States,"Demography, June 18, 2019, https://link.springer.com/article/10.1007/s13524-019-00790-6

new paper (not peer reviewed yet) finds almost no nominal wage growth in low-wage jobs from 2010-2014, but then a catch up btw 2014-2018. over same time period time wages in high wage jobs grew at a steady rate.

"...In this paper, we introduce a concept of position specificity, where skilled workers are horizontally differentiated in the firm. In a frictional labor market with upward sloping retention functions, high-specificity workers are more costly to replace due to employers searching in thinner labor markets for a specific combination skills. This leads high-specificity firms to offer higher wages as average product at the firm rises, while also insulting workers in high-specificity positions from changes in labor market conditions....Figure 1 shows that wage growth in high wage occupations was nearly constant over these two periods, but wage growth in low-wage occupations was substantially lower in the early period but shows nearly perfect catch-up growth in the later period....Figure 2 plots employment growth by occupation over same period, showing that employment growth over these two periods are essentially identical for both high- and low-wage occupations. In addition to differences within business cycles, there is evidence that low-wage occupations' relative sensitivity to slack holds across business cycles as well...skilled workers appear to differential earn larger wage premia at more productive fi rms, not only in response to shocks to rm productivity, but also in the cross-section, thus reflecting long-term or steady state wage dispersion....We believe that this model provides insight into heterogenous wage setting decisions where it appears that different kinds of workers have different levels of “bargaining power”, as well as has the potential to help explain unresolved questions in the change of the distribution of wages in the last two business cycles. We conclude that the concept of position specificity can be useful for a wide range of questions in labor economics and may have important policy considerations for understanding and addressing wage inequality...."

Justin Bloesch and Bledi Taska, "Which Workers’ Wages Track Productivity? The Role of Position Specificity and On-the-Job Search," Harvard University, June 26, 2019, https://scholar.harvard.edu/files/bloesch/files/wages_productivity_position_specificity_otj_search.pdf