Macro Roundup

Valletta's research cited in WSJ article (Note attached) on college wage premium, finds that the wage gap btw college and now college grew rapidly during the 1980's, and that growth of the wage gap flattened btw 2010-2015. note he adjust for composition shift, "...These controls adjust for the changing composition of the estimation sample, so that the results for the education categories reflect the average wage premium associated with educational attainment for an individual with a fixed set of other demographic characteristics..."but does so by demographic factors not by the likely deterioration in quality of college graduates in section. He does find, "....Figure 3 also indicates that the higher education wage premiums are larger for older than for younger workers, by about 5-10 log points on average.."which is perhaps capturing the quality deterioration in college graduates

"..Wage gaps between workers with a college or graduate degree and those with only a high school degree rose rapidly in the United States during the 1980s. Since then, the rate of growth in these wage gaps has progressively slowed, and though the gaps remain large, they were essentially unchanged between 2010 and 2015.... I assess this flattening over time in higher education wage premiums with reference to two related explanations for changing U.S. employment patterns: (i) a shift away from middle-skilled occupations driven largely by technological change (“polarization”); and (ii) a general weakening in the demand for advanced cognitive skills (“skill downgrading”). Analyses of wage and employment data from the U.S. Current Population Survey suggest that both factors have contributed to the flattening of higher education wage premiums.... In particular, after rising substantially in the 1980s, growth in the wage gap between individuals with a four-year college or graduate degree and those with a high school degree slowed progressively. The gaps have changed little since the year 2000, and they were flat to down during the period 2010-2015.... Between 2000 and 2010, only holders of graduate degrees saw any meaningful increase in real wages. Between 2010 and 2015, real wages were flat to down slightly for all groups. The gap in average real wages between individuals with a four-year college degree or graduate degree and high school graduates rose from 40-67 percent in 1980 to 72-120 percent as of 2015.... These patterns suggest that the previously growing complementarity between highly educated labor and new production technologies, especially those that rely on computers and related organizational capital, may be leveling off..... Occupational employment shifts have held down the college-only premium somewhat since the year 2000, suggesting that college-educated workers are increasingly sliding down into routine jobs. This is consistent with polarization or skill downgrading. More recently, since 2010, the wage gap between graduate degree holders and the college-only group within the same broad occupations has declined somewhat, suggesting that graduate training may be providing less of a competitive edge than it has in the past. This suggests that skill downgrading may be playing an increasingly important role at the top of the skill distribution. Overall, the results suggest rising competition between education groups for increasingly scarce well-paid jobs.....Although higher education may be financially advantageous on average, the flattening of returns as costs have continued to rise suggests that college may be an unfavorable financial investment for rising numbers of individuals..."

Robert Valletta, "Recent Flattening in the Higher Education Wage Premium: Polarization, Skill Downgrading, or Both?," National Bureau of Economic Research, August 2016, https://www.nber.org/chapters/c13705.pdf

Note mentioned in WSJ (Attached)

paper you requested cited in WSJ article on college wage premium to support, "...After the tech bust of the early 2000s, the economy demanded less of the type of cognitive skills that college graduates typically have....As a result, college graduates started taking up jobs previously held by those who went only to high school, pushing down wages for high-school graduates. College grads thus maintained an earnings advantage over nongrads, but their real wages didn’t rise...."

Paul Beaudry, David Green and Benjamin Sand, "The Great Reversal in the Demand for Skill and Cognitive Tasks," National Bureau of Economic Research, March 2013, https://www.nber.org/papers/w18901.pdf

"..In this paper, we present theory and evidence suggesting that to understand the current low rates of employment in the US one needs to recognize the large reversal in the demand for skill and cognitive tasks that took place around the year 2000. In particular, we have argued that after two decades of growth in the demand for occupations high in cognitive tasks, the US economy reversed and experienced a decline in the demand for such skills. The demand for cognitive tasks was to a large extent the motor of the US labor market prior to 2000. Once this motor reversed, the employment rate in the US economy started to contract. As we have emphasized, while this demand for cognitive tasks directly effects mainly high skilled workers, we have provided evidence that it has indirectly affected lower skill workers by pushing them out of jobs that have been taken up by higher skilled worker displaced from cognitive occupations. This has resulted in high growth in employment in low skilled manual jobs with declining wages in those occupations, and has pushed many low skill individual's out of the labor market.....we argue that in about the year 2000, the demand for skill (or, more specifically, the demand for cognitive tasks that are often associated with high educational skill) underwent a reversal, and that this reversal can help in understanding poor labor market outcomes after 2000 more generally.... The key idea is that the IT revolution, and the revolution in organizational form that has gone with it, can be seen as a General Purpose Technology (GPT) and, like all GPTs before it, it will eventually reach maturity. If the implementation of the GPT has a capital investment form and cognitive tasks are a key component of the investment then, under reasonable conditions, demand for cognitive tasks will have an over-shooting property. During the key investment stage, there will be high and growing demand for cognitive tasks to build the new capital, but once the new capital is in place, cognitive task workers are only needed to maintain the new capital. At this maturity stage, there will be greater demand for cognitive tasks than before the technological revolution but we will see a reduction in demand for these tasks relative to the investment stage. We argue that the turn of the century is that approximate turning point from the investment to the maturity stage....Our second main contribution is that we provide a detailed picture of the changes in employment patterns and wages over the last thirty years with a particular focus on the reversal in the growth in demand for more cognitive intensive occupations and the adjustment of more skilled workers to this change. Importantly, we view this contribution as standing even if the reader is not convinced about our specific story behind the cognitive task demand reversal.....But all three task prices fall in the 2000s and, notably, are declining well before the onset of the late 2000s recession. Our measure of the cognitive task price falls by about 2% in real terms, fitting with our story of declining demand for these tasks. This decline is dwarfed by the 8% decline in the price of manual tasks. The latter drop fits with our claim that the manual task market in the 2000s can be characterized as being dominated by an outward supply shift. To complete the wage picture,in Figure 30 we report changes in real wage by deciles for young workers when we do not divide by education level. This has both advantages and disadvantages relative to the earlier figures controlling for education. On the one hand, if there has been sorting of individuals between education groups over the period in question, the distribution of unobservable skill within an education group may change, and comparing percentiles while conditioning on education is less clean as a measure of task prices. On the other hand, increases in educational attainment over time may change the quality at a given percentile. Hence, we choose to present results with and without conditioning on education. When we do not condition on education, as in Figure 30, the 1990s show a clear ‘U’ shaped wage growth pattern that has been documented elsewhere....In this paper, we document a decline in that demand in the years since 2000, even as the supply of high education workers continues to grow. We go on to show that, in response to this demand reversal, high-skilled workers have moved down the occupational ladder and have begun to perform jobs traditionally performed by lower-skilled workers. This de-skilling process, in turn, results in high-skilled workers pushing low-skilled workers even further down the occupational ladder and, to some degree, out of the labor force all together...."

Paper finds that in 2000 demand for skill (for cognitive tasks often associated with high educational skill, they are using education as a proxy for skill) underwent a reversal and high-skilled workers have started to moved down the occupational ladder and have begun to perform jobs traditionally performed by lower-skilled workers

“…Now, this gives conservatives — who are at present, at best, adrift on Social Security policy — some room to maneuver. We’re already putting a lot of revenues from high-income taxpayers into Social Security, they might argue. If progressives want to raise taxes on those same taxpayers to keep the system solvent thereafter, that’s fine. But they can’t do that and retain a half-trillion dollars per year of income taxes used to repay the Social Security trust fund once those revenues are no longer needed. With the trust fund repaid, there is no reason those income taxes should be redirected to new spending. Instead, income taxes could be cut which would keep higher Social Security tax rates from pushing U.S. top marginal rates to Scandinavian levels. Alternatively, the now-unneeded income-tax revenues could be used to reduce the budget deficit and debt…..”

If we hike payroll taxes as much as they want to, billions in income-tax revenues are no longer needed.

Social Security reform hasn’t seen this much activity since President Bush’s ill-fated efforts in the mid 2000s. But this time, the action is on the Democratic side, with near-unanimous support among House Democrats for the Social Security 2100 Act, which would make Social Security solvent by increasing payroll taxes and taxing high earners more heavily. But what most people don’t know is that the Social Security 2100 Act would actually make Social Security’s funding less progressive, because those payroll-tax increases would replace an even more progressive source of funding that the one the program now relies upon. This opens some opportunities for conservatives, who currently are rudderless on Social Security reform, to expand the field for coming to a deal.

Thanks to the aging of the population, Social Security faces a future with more beneficiaries and fewer workers to support them. Based on current trends, Social Security’s trustees project it will be unable to pay full promised benefits beginning in 2035. Social Security reform plans would address that looming insolvency by raising taxes, cutting benefits, or both. Social Security 2100 is on the far end of the progressive spectrum, in that it not merely fully funds promised benefits, but actually expands benefits across the board.

To pay for these benefits, the Social Security 2100 Act gradually raises the payroll-tax rate from 12.4 percent to 14.8 percent in annual increments of 0.1 points. At the same time, while Social Security taxes currently apply only to earnings up to $132,900 — and benefits are based solely on those capped earnings — Social Security 2100 would also tax earnings above $400,000, with an untaxed “doughnut hole” in between. Since the new $400,000 threshold is not indexed while the $132,900 current-law wage ceiling rises annually with wage growth, the gap would shrink over time, such that by 2048 all earnings would be taxed by Social Security.

On paper, this looks like the usual progressive playbook of pushing the tax burden upward, even for a program like Social Security that historically has sought not to appear like a “welfare program.”

But there’s another perspective, from which the Social Security 2100 Act would be a regressive change that would make Social Security’s funding less progressive. That perspective takes into account the massive amounts of income-tax revenues that will be funneled into Social Security in the years leading up to its insolvency.

From the mid 1980s through 2009, Social Security ran payroll-tax surpluses that were credited to the program’s trust fund. However, economic research concludes that these surpluses weren’t saved in a broad budgetary or economic sense. Instead, Social Security surpluses allowed the rest of the federal government to tax less or spend more than it otherwise would have, because borrowing from Social Security isn’t reflected in the unified budget deficit or the publicly held national debt. Nevertheless, those past Social Security surpluses were credited to the trust fund, and Social Security is now drawing those balances down. And since the trust fund doesn’t reflect an actual store of wealth, this money is coming from other taxes.

When the federal budget repays the Social Security trust fund using general tax revenues, it is effectively transferring income taxes to Social Security, because income taxes are by far the largest source of general tax revenues. Those transfers to Social Security are growing ever larger as Social Security’s own dedicated annual tax revenues increasingly fall short of benefit costs. By the year 2034, 19 percent of Social Security’s resources will come from general tax revenues. That $431 billion is equal to about 11 percent of the income-tax revenues expected to be collected in that year.

But in 2035, Social Security’s trust fund runs dry, and so will its legal right to make those claims on income-tax funds. In the absence of reform, Social Security would have no legal option but to cut benefits by roughly one-fifth — to the level payable through Social Security’s own dedicated taxes, which consist mostly of the 12.4 percent payroll tax plus a small amount derived from income taxes levied on Social Security benefits.

The Social Security 2100 Act prevents that outcome by levying new taxes that increase Social Security revenues in 2035 by $461 billion over current-law levels. In other words, payroll tax increases substitute for expiring income-tax transfers. Now, those new Social Security payroll taxes might be more progressive than the current Social Security payroll taxes. But they’re a lot less progressive than the income taxes currently being used to keep Social Security checks arriving in mailboxes.

According to IRS data, the top 10 percent of households pay nearly half of all income taxes, and the top 1 percent by themselves pay nearly one-fifth of income taxes. So the $431 billion in general revenues to be paid back to the Social Security trust fund in 2034 is heavily weighted toward the rich.

Versus that 2034 status quo, the Social Security 2100 Act will shift the Social Security tax burden downward. For instance, a Joint Committee on Taxation analysis found that by 2029, the Social Security 2100 Act would increase total federal taxes by 8.6 percent for taxpayers making from $20,000 to $30,000 and by 5 percent for taxpayers making $30,000 to $40,000. Taxes would rise by 7.4 percent for taxpayers making $500,000 to $1 million, while taxes would increase 9.4 percent for taxpayers making $1 million or more. By itself, this doesn’t seem massively progressive.

But there’s something even more important: These figures don’t account for the fact that if the Social Security trust funds are exhausted in 2035 and payroll taxes go up to replace the lost general-revenue funding, the hundreds of billions of dollars of income taxes currently flowing to Social Security will no longer be needed. Instead, over a one-year period, a potential 11 percent cut in income taxes comes onto the negotiating table. That potential tax cut could easily offset Social Security 2100’s payroll tax increases on high earners while giving little back to low earners who currently don’t pay much in income taxes. As a result, come 2035 the overall federal tax code could become less progressive.

Now, this gives conservatives — who are at present, at best, adrift on Social Security policy — some room to maneuver. We’re already putting a lot of revenues from high-income taxpayers into Social Security, they might argue. If progressives want to raise taxes on those same taxpayers to keep the system solvent thereafter, that’s fine. But they can’t do that and retain a half-trillion dollars per year of income taxes used to repay the Social Security trust fund once those revenues are no longer needed. With the trust fund repaid, there is no reason those income taxes should be redirected to new spending. Instead, income taxes could be cut which would keep higher Social Security tax rates from pushing U.S. top marginal rates to Scandinavian levels. Alternatively, the now-unneeded income-tax revenues could be used to reduce the budget deficit and debt.

Alternatively, if Republicans are truly frightened of Social Security reform and want as much of a do-nothing policy as possible, they might simply propose that we continue the 2034-level income-tax allocations to Social Security, with some marginal changes to adapt to the relatively modest Social Security cost increases that occur post-2035. That would retain continuity with the current tax code while avoiding the across-the-board benefit increases embedded in the Social Security 2100 Act.

Ideally, of course, conservatives — along with moderates, liberals, and everyone else — would put their own best Social Security policy on the table. “Policy” means going beyond simply how we finance currently promised Social Security benefits, or how much we cut back Social Security benefits to the level we’re willing to pay for. It means rethinking, in a 21st-century way, how an old-age and disability-insurance program should be designed.

I believe an updated program would look very different from one designed in 1935, when demographics, work patterns, and financial markets were very different. I’ve proposed gradually transitioning Social Security to a flat-dollar benefit that guarantees beneficiaries against poverty in a way the current program doesn’t, and that helps Americans to save to provide themselves benefits over and above that guaranteed government payment. This approach, which resembles the retirement programs in New Zealand and the United Kingdom, would strengthen poverty protections, increase saving, and improve incentives to work and delay retirement.

But however one thinks Social Security should be fixed, the expiration of massive income-tax transfers to Social Security come 2035 throw another option into the policy mix. Congress and the Trump administration should think over the opportunities for compromise it might offer.

Andrew Biggs, "How the Democrats’ Social Security Plan Could Finance a Tax Cut," National Review, August 15, 2019, https://www.nationalreview.com/2019/08/how-democrat-social-security-plan-could-finance-tax-cut/

How the Democrats’ Social Security Plan Could Finance a Tax Cut