Macro Roundup

“…Among members of the top 0.1 percent, the researchers found, about three times as many make the majority of their income from owning a business as from being paid a wage. Salaries don’t make people rich nearly as often as equity does…”

Seth Stephens-Davidowitz, "The Rich Are Not Who We Think They Are. And Happiness Is Not What We Think It Is, Either.,"New York Times, May 14, 2022, https://www.nytimes.com/2022/05/14/opinion/sunday/rich-happiness-big-data.html

The Rich Are Not Who We Think They Are. And Happiness Is Not What We Think It Is, Either.

We now know who is rich in America. And it’s not who you might have guessed.

A groundbreaking 2019 study by four economists, “Capitalists in the Twenty-First Century,” analyzed de-identified data of the complete universe of American taxpayers to determine who dominated the top 0.1 percent of earners.

The study didn’t tell us about the small number of well-known tech and shopping billionaires but instead about the more than 140,000 Americans who earn more than $1.58 million per year. The researchers found that the typical rich American is, in their words, the owner of a “regional business,” such as an “auto dealer” or a “beverage distributor.”

This shocked me. Over the past four years, in the course of doing research for a book about how insights buried in big data sets can help people make decisions, I read thousands of academic studies. It is rare that I read a sentence that changes how I view the world. This was one of them. I hadn’t thought of owning an auto dealership as a path to getting rich; I didn’t even know what a beverage distribution company was.

What are the lessons from the data on rich earners?

First, rich people own. Among members of the top 0.1 percent, the researchers found, about three times as many make the majority of their income from owning a business as from being paid a wage. Salaries don’t make people rich nearly as often as equity does.

Second, rich people tend to own unsexy businesses. A different study, by the statisticians Tian Luo and Philip B. Stark, examined which businesses were most likely to fold fastest. The kind most likely to go out of business most quickly is a record store. The average record store lasts just 2.5 years. (For comparison, the average dentist’s office lasts more than 19.5 years.) Other businesses that fold quickly include toy stores (3.25 years), clothing stores (3.75 years) and cosmetics stores (4.0 years).

There are, however, plenty of unsexy businesses from which a few people are getting rich. These include auto repair shops, gas stations and business equipment contractors.

The third important factor in gaining wealth is some way to avoid ruthless price competition, to build a local monopoly. The prevalence of owners of auto dealerships among the top 0.1 percent gives a clue to what it takes to get rich.

Comparing data from the appendix of the economists’ study with data from the SUSB Annual Data Tables put out by the Census Bureau, I estimate that more than 20 percent of auto dealerships in America have an owner making more than $1.58 million per year.

Auto dealerships have legal protections; state franchising laws often give auto dealers exclusive rights to sell cars in a territory. Same for many beverage distributors, which act as middlemen between alcohol companies and stores and supermarkets. Beverage distributors have long been protected by a system set up after prohibition that prevents beverage companies from distributing their products themselves.

Of course, if upon learning this you try to buy someone’s auto dealership, you may not have much luck. Owners of auto dealerships know how good they have it.

Is there any business that tends to make people rich that you might have a better shot at?

My data-driven advice for getting rich for someone with good analytical skills and deep experience in a field is to start a market research business. Use your specialized knowledge in the field to write up reports; sell them widely and charge a fortune to your contacts in the field. I have estimated that more than 10 percent of owners of market research businesses are in the top 0.1 percent.

If pop culture is right, getting rich is a path to happiness. Is that true? Does money actually make people happy?

Just as anonymous tax data, which has been made widely available to researchers only in the past few years, has led to credible research on what actually makes people rich, new sources of data in the past decade have given us many insights into what actually makes people happy.

And money is not a reliable path to happiness. Matthew Killingsworth of the University of Pennsylvania has studied data from more than 30,000 adults, far larger than previous studies of money and happiness. He debunked a popular myth that there is no effect of money on happiness beyond $75,000 per year, but he did confirm a law of diminishing returns to money. In the end, Dr. Killingsworth found, the effects of money level off: You need to keep doubling your income to get the same happiness boost.

A study of thousands of millionaires led by researchers at Harvard Business School did find a gain in happiness that kicks in when people’s net worth rises above $8 million. But the effect was small: A net worth of $8 million offers a boost of happiness that is roughly half as large as the happiness boost from being married.

What, in addition to being married, tends to make people happy?

The most important happiness study, in my opinion, is the Mappiness project, founded by the British economists Susana Mourato and George MacKerron. The researchers pinged tens of thousands of people on their smartphones and asked them simple questions: Who are they with? What are they doing? How happy are they?

From this, they built a sample of more than three million data points, orders of magnitude more than previous studies on happiness. So what do three million happiness data points tell us?

The activities that make people happiest include sex, exercise and gardening. People get a big happiness boost from being with a romantic partner or friends but not from other people, like colleagues, children or acquaintances. Weather plays only a small role in happiness, except that people get a hearty mood boost on extraordinary days, such as those above 75 degrees and sunny. People are consistently happier when they are out in nature, particularly near a body of water, particularly when the scenery is beautiful.

The findings on the data of happiness are, to be honest, obvious. When I told my friends about these studies, the most common response was, “Did we need scientists to tell us this?”

But I would argue that there is profundity in the obviousness of the data on happiness.

Sometimes, big data reveals a shocking secret. At other times, big data tells us that there is no secret. And that’s the case with happiness.

This is crucial to keep in mind for the many of us who are not doing the obvious things that make people happy. We are falling for traps that the data says are unlikely to make us happy.

Many of us work far too hard at jobs with people we don’t like — not a likely path to happiness. Dr. MacKerron and the economist Alex Bryson found that work is the second-most-miserable activity; of 40 activities, only being sick in bed makes people less happy than working. The economist Steven Levitt found that when people are uncertain whether to quit a job, they can be nudged to quit. And when they quit, they report increased happiness months later.

Many of us move to big cities and spend little time in nature — also not a path to happiness. A study by the economists Ed Glaeser and Josh Gottlieb ranked the happiness of every American metropolitan area. They found that New York City was just about the least happy. Boston, Los Angeles and San Francisco also scored low. The happiest places include Flagstaff, Ariz.; Naples, Fla., and pretty much all of Hawaii. And when people move out of unhappy cities to happy places, they report increased happiness.

Many of us while away hours on social media — also not a path to happiness. The Mappiness project found that, of 27 leisure activities, social media ranks dead last in how much happiness it brings. A randomized controlled trial on the effects of social media found that when people were paid to stop using Facebook, they spent more time socializing and reported higher subjective well-being.

Big data tells us there are very simple things that do make people happy, things that have been around for thousands of years. After reading all the studies on happiness, I concluded that modern happiness research could be summed up in one sentence, a sentence we might jokingly call the data-driven answer to life.

The data-driven answer to life is as follows: Be with your love, on an 80-degree and sunny day, overlooking a beautiful body of water, having sex.

It’s a lot easier than owning an auto dealership.

Adam Coleman, "Anti-cop pols yawn as slay spike hits black Americans hardest,"New York Post, May 20, 2022, https://nypost.com/2022/05/20/anti-cop-pols-yawn-as-slay-spike-hits-black-americans-hardest/

Anti-cop pols yawn as slay spike hits black Americans hardest

There are no guarantees in life, yet we still have expectations. We expect our elected leaders to behave selflessly so they can keep the American people in mind first.

But when politicians ignore our humanity in pursuit of their own agenda, the American people tend to suffer the consequences, even with their lives.

Much like everyone else, I watched as America entered a phase of demoralization as they lost faith in institutions of immense importance and questioned the intentions of their neighbors. 2020 was not only a year to decide who our next president would be but also to determine what kind of society we want to maintain.

The elite decided that the safety of the American people is subject to political expedience. Our humanity no longer mattered.

During the nationwide riots, small business owners and residents pleaded for enforcement, and yet police officers were ordered to stand down. In the aftermath, the American people suffered the consequences with their livelihoods and, for some, their lives while our politicians were left mostly unscathed.

Innocents suffer

Centers for Disease Control and Prevention data show the murder rate between 2019 and 2020 increased by an astonishing 30%, and I place some of the blame on many of our supposed leaders.

Once Derek Chauvin became public enemy No. 1, city governments used his actions as an officer as the impetus to begin defunding police departments to appease activists instead of the residents who depend on their presence. Those efforts contributed to the rise in deaths — but not equally.

But, as the Manhattan Institute’s Christos Makridis and Robert VerBruggen note, “since the black homicide rate was already many times higher than the white one, this translated into 8 additional black deaths for every 100,000 population” while “the death rate for whites rose by only 0.5 per 100,000.”

With these numbers, it is understandable why Pew Research recently found that the most important issue for black Americans was related to violence and crime.

While politicians were marching in arms with protesters claiming to care about black lives, they were actively making their lives worse. For black Americans who live in dangerous neighborhoods, removing the police has made them even more unsafe and has emboldened the criminal element that resides alongside the innocent.

If everyone believes that we are in constant danger by the very people we need the support of, then no one will care when mayors across the nation remove them from street corners. No one will care when the few activists speak for the many whose safety is at risk.

"...The average family of five in Florida, for instance, earns $93,000. If that couple takes the standard deduction and their employer-provided health insurance premiums cost $6,000, plus they max out their health-savings account with a $7,300 contribution, plus they put 3% in their 401k, that leaves them with taxable income of about $51,000. They would owe $5,725 in federal income taxes, but with three kids, they get a $6,000 tax credit, which brings their federal income taxes down to zero...."
Timothy Carney, "Rick Scott’s Tax Plan Is Dumb, Immoral, and Bad for Republicans,"Straight Arrow News, May 13, 2022, https://www.aei.org/multimedia/rick-scotts-tax-plan-is-dumb-immoral-and-bad-for-republicans/

Rick Scott’s Tax Plan Is Dumb, Immoral, and Bad for Republicans

When you think of Republicans, you don’t typically think of tax hikes. But these days, there’s one specific tax hike some Republicans are touting: a tax hike on half of all Americans—specifically the half with the lowest incomes.

It’s politically dumb, fiscally pointless, economically harmful, and morally bankrupt.

So what are these tax-hiking Republicans thinking? Here’s the argument from Senator Rick Scott:

“All Americans should pay some income tax to have skin in the game, even if a small amount. Currently over half of Americans pay no income tax.”

Scott’s idea is to reverse some of the tax cuts President Trump gave to working men and women, and then go further in hiking taxes on low-income Americans.

There are so many mistakes here, but let’s focus on the four biggest:

First, Scott wrongly implies that half of Americans aren’t working.

The people who pay no federal income tax aren’t mostly dilettantes sitting on the couch. They are largely parents who benefit from family-friendly tax breaks passed by Republicans.

The average family of five in Florida, for instance, earns $93,000. If that couple takes the standard deduction and their employer-provided health insurance premiums cost $6,000, plus they max out their health-savings account with a $7,300 contribution, plus they put 3% in their 401k, that leaves them with taxable income of about $51,000. They would owe $5,725 in federal income taxes, but with three kids, they get a $6,000 tax credit, which brings their federal income taxes down to zero.

These aren’t slackers. These are beneficiaries of a tax code that respects families and encourages savings.

Second, Scott wrongly suggests that these folks are avoiding taxes. In reality, they might be paying more $10,000 in taxes to state and federal government, just not in income taxes.

Everyone who earns even a single dollar is pays payroll taxes—the taxes that fund Social Security and Medicare. If you buy gasoline, you pay state and federal gas taxes. If you buy almost anything, you’re paying sales tax. If you own your home, you’re paying property taxes.

It would be easy for that median Florida family of five to pay more than $10,000 in taxes, with most of it going to the federal government—but because none of it would be federal income tax, we’re supposed to think these folks are tax dodgers?

The third problem with Scott’s plan is the politics: Republicans simply shouldn’t raise taxes or talk about raising taxes. They especially shouldn’t push a tax hike on the working class. The best thing Donald Trump did was make the GOP more of a working-class party. Scott’s plan would demolish the gains that Trump has made in that regard.

Scott has a political angle himself. He thinks that too many Americans support bigger government because they don’t pay for it. He believes that if poor and working-class people had “skin in the game” they would see the importance of smaller government.

But there is no evidence for that theory. Republicans have been knocking working-class families off the income tax rolls since the Bush Era, and if anything, those working-class parents have become more Republican.

But the opposite of Scott’s story is more likely: People who can better afford to care for their family—because they are paying less in taxes—are more likely to believe in freedom and self-reliance. Those who pay more in income taxes may be more likely to demand more government in return. Ask yourself: Who’s more conservative? People in low-tax Florida or people in high-tax New York?

The final reason to oppose a tax hike on the poor and working class is that it’s simply immoral. It’s wrong to needlessly take someone’s income before that person is able to meet all his family’s needs.

Raising taxes on anyone is a bad idea for a Republican. Having Uncle Sam pick the pockets of the poorest 40% of Americans is a bad idea for anyone.

“…The high cost of bringing up children gobbles up a big share of disposable income in some countries, particularly in Asian countries such as Japan, South Korea and China….”

For all the many rewards that children bring, they are financially draining. They bring economic benefits, but these are not reaped by the parents who bear the brunt of the costs. Boosting the former may require more sharing of the latter.

Countries that provide generous financial support appear to have more births. Nordic countries, noted for their gender equality and generous welfare states, have birth rates that are close to replacement levels. Providing financial support for childcare, making it easier to combine work and parenthood, is particularly effective, according to the OECD.

Sovereign bond investors are increasingly mindful of demographic risks. Rapidly ageing populations increase public spending on health, social care and pensions, while the tax burden is spread over fewer workers. Rating agency Fitch calculates that the impact of ageing costs on sovereign ratings could result in a 10.5-notch downgrade for Slovakia, the most extreme case, by 2070 assuming no policy changes.

But helping parents financially is one obvious way to lower barriers. The high cost of bringing up children gobbles up a big share of disposable income in some countries, particularly in Asian countries such as Japan, South Korea and China.

For equity investors, ageing populations present opportunities as well as risks. Rising demand for healthcare and automation should benefit companies such as Japan’s Fanuc and Germany’s Siemens. Even nappy manufacturers like Japan’s Daio Paper, Nippon Paper and Unicharm can adapt to demographic trends. Sales of adult diapers in Japan have exceeded those for babies since 2011, says Jefferies.

FT Staff, "Fertility: childcare costs exacerbate the demographic drought,"Financial Times, May 15, 2022, https://www.ft.com/content/fcb40906-3f1d-4962-9ae8-4943271af9f5

Fertility: childcare costs exacerbate the demographic drought

The Covid-19 baby bust — marked by falls of up to a fifth in December 2020 birth rates — was shortlived. But a reversion to pre-pandemic trends still leaves about half the world’s population below the replacement rate of fertility. The economic consequences are a big issue for politicians and portfolio managers alike.

Nearly 64 percent of adults between the ages of 55 and 64 were working in April, essentially the same rate as in February 2020. That’s a more complete recovery than among most younger age groups. The share of Americans reporting that they were retired did rise sharply in the spring of 2020. But retirement is not an irreversible decision. And research from the Federal Reserve Bank of Kansas City has found that at the pandemic’s onset, there was a steep drop in the number of people leaving retirement to return to work, attributable at least partly to fear of the virus and a lack of job opportunities, swelling the ranks of the retired. As the economy has reopened and the public health situation has improved, these “unretirements” have rebounded and have recently returned roughly to their prepandemic rate, according to an analysis of government data by Nick Bunker of the Indeed Hiring Lab. The return of older workers has been concentrated among those in their late 50s and early 60s, people who were still several years or more away from retirement when the pandemic began. The employment rate among those 65 and older fell more sharply and has been much slower to recover.That suggests that the pandemic might have led some people who were already closer to retirement to accelerate those plans, and that the greater health risks they faced may have made them less likely to return to work while the virus continues to circulate.

Ben Casselman, "‘I Had to Go Back’: Over 55, and Not Retired After All,"New York Times, May 19, 2022, https://www.nytimes.com/2022/05/19/business/economy/older-workers-labor-force.html

‘I Had to Go Back’: Over 55, and Not Retired After All

When Kim Williams and millions of other older Americans lost their jobs early in the coronavirus pandemic, economists wondered how many would ever work again — and how that loss would weigh on the economy for years to come.

Ms. Williams, now 62, wondered, too, especially when she struggled for months to find work. But in January, she started a new job at an AAA office near her home in Waterbury, Conn.

“I’m too young to retire, so I had to go back,” she said.

Whether by choice or financial necessity, millions of older Americans have made the same move in recent months. Nearly 64 percent of adults between the ages of 55 and 64 were working in April, essentially the same rate as in February 2020. That’s a more complete recovery than among most younger age groups.

“The bottom line is that older workers have gone back to work,” said Alicia Munnell, director of the Center for Retirement Research at Boston College.

For many people, retiring early was never an option. Ms. Williams spent more than 25 years in manufacturing, working for a Hershey’s plant making Almond Joy and Mounds bars. The job paid reasonably well, and offered a retirement plan and other benefits. But in 2007, Hershey’s closed the factory, moving production partly to Mexico.

Ms. Williams, then in her 40s, went back to school, earning an associate degree in hospitality and eventually finding a job as a supervisor at a local hotel. But the position paid significantly less than her factory job, and she drew down her retirement savings to cover medical expenses and other bills. When she was laid off again in June 2020, just a few weeks after her 60th birthday, Ms. Williams had little in savings.

Ms. Williams tried to change careers again, this time going back to school to train as a medical secretary. But she has been unable to find work in her new field. In January, with her savings gone, she took a job at AAA for $16.50 an hour, $2 an hour less than she earned at the factory in 2007, before accounting for inflation. She says she will have to work at least until she can start drawing her full Social Security benefits at age 67.

“If I could’ve left at 62, I would’ve left at 62, but I can’t,” she said. “Not all of us made that money where I could move down to Florida and get a $400,000 house.”

The fastest inflation in decades has added to the pressure on people of all ages to return to work. More recently, so has the turmoil in financial markets, which has taken a bite out of retirement savings.

But even some people who could retire are choosing to return to work as the pandemic ebbs.

When the Long Island fitness studio where she worked as a spinning instructor shut down early in the pandemic, Jackie Anscher lost both a job and a part of her identity. In an interview with The New York Times that summer, she described what seemed at the time like an abrupt end to her career as “a forced retirement.”

But after spending the beginning of the pandemic reorganizing her life and re-evaluating her priorities, Ms. Anscher, 60, has begun teaching spin classes again as a substitute instructor at a local gym, and she is looking for a more regular gig. Her husband is already retired — “he’s been waiting for me to go fishing,” she said — and the couple could afford for her to stop working. But she isn’t ready to hang up her cycling shoes.

“I liked what I had. I loved who I was in front of the room,” she said. “It’s about my mental health. For me, it’s about preserving me.”

Older workers weren’t any more likely than younger workers to leave the labor force early in the pandemic. But economists had reason to think they might be slower to return. Unemployed workers in their 50s and 60s typically have a harder time finding jobs than their younger counterparts, because of ageism and other factors. And unlike after the 2008-9 recession, when depressed housing prices and high debt levels left many people with little choice but to keep working, in this crisis prices of both homes and financial assets kept rising, providing a financial cushion to some people nearing retirement age.

The share of Americans reporting that they were retired did rise sharply in the spring of 2020. But retirement is not an irreversible decision. And research from the Federal Reserve Bank of Kansas City has found that at the pandemic’s onset, there was a steep drop in the number of people leaving retirement to return to work, attributable at least partly to fear of the virus and a lack of job opportunities, swelling the ranks of the retired.

As the economy has reopened and the public health situation has improved, these “unretirements” have rebounded and have recently returned roughly to their prepandemic rate, according to an analysis of government data by Nick Bunker of the Indeed Hiring Lab.

Still, the return of early retirees to the labor force is a reminder that rising wages and abundant job opportunities can draw in workers who might otherwise remain on the sidelines, Mr. Bunker said. The labor force shrank during the last recession, too, and some economists were quick to declare that workers were gone for good. But many people eventually came back during the strong job market that preceded the pandemic: It provided opportunities to people with disabilities and criminal records, to people with little formal education and to people who had taken time away from work to raise children or to care for ailing parents.

That pattern may be repeating itself, but on a much more compressed timeline.

“Don’t underestimate labor supply,” Mr. Bunker said. “Don’t count out the possibility that people want and need work. It has happened much more quickly than what we saw after the global financial crisis, but the broad principle is the same.”

When Tad Greener lost his job managing utilities for a Utah university in late 2019, he wasn’t worried at first about finding a new one — the unemployment rate, after all, was near a 50-year low. But Mr. Greener had hardly begun his search when the pandemic hit and the bottom fell out of the economy. Suddenly, he was 60 years old, unemployed and facing the worst labor market in nearly a century.

Mr. Greener eased up on his job search during the first phase of the pandemic, in part because of some health issues unrelated to the coronavirus. By spring of 2021, he was ready to work again, but he had little luck applying for jobs. He thinks many prospective employers were turned off by the combination of his age and his time out of the work force.

“It’s a daunting task to be 62 years old, to be unemployed for over a year and to try and find work,” Mr. Greener said. “There were times where I didn’t think I was ever going to be able to go back to work.”

As the economy reopened, however, many businesses struggled to hire enough workers to meet the surge in demand. That prompted employers to consider candidates they might otherwise have dismissed, or to look for ways to attract people who could work but weren’t looking.

In Mr. Greener’s case, he learned about a new “returnship” program from the State of Utah that was meant to help people who had been out of the labor force get back to work. Last fall, he was accepted into the program, landing a part-time job in the state Office of Energy Development, which quickly turned into a permanent, full-time job. Now that he is back at work, Mr. Greener says he plans to stay until he is 67, or perhaps longer if he stays healthy.

“Every day I hear about how there aren’t enough workers available,” Mr. Greener said. “There are a lot of older workers that are being written off, or at least finding it much more difficult to get back into the workplace, who have a lot of years and things to offer.”

During the nation’s job recovery (April 2020 to April 2022), the overall civilian unemployment rate fell from 14.7% to 3.6%. Payroll employment returned almost to its pre-pandemic level. The employment-to-population ratios of some noncollege-educated men and women have returned to or exceeded their pre-pandemic levels; however, this literally happened since December 2021.* For example, as the following figure shows, the employment-to-population ratio of young Black men reached 62.1%, exceeding its pre-pandemic value of 56.3% and its December 2021* level of 56.1%.3 In recent months, the ratio for young Latino men recovered to its pre-pandemic level.The next figure reports that the employment-to-population ratio of young Black women recovered to 60.0%, 7.4 percentage points above its pre-pandemic value of 52.6%. The ratios of both young white men and young white women were 2.1 percentage points and 3.2 percentage points, respectively, below their pre-pandemic values. The average employment gap—the difference between their employment-to-population ratios—between young Black men and young white men since January 2020 to March 2022 is 15.0 percentage points. Over the same period, the average employment gap between adult Black men and adult white men was 10.9 percentage points, and it was 8.6 percentage points between young Black women and young white women. The only group near parity with its white counterpart is adult Black women. The figure below shows that, throughout the jobs recovery following the COVID-19 recession, the employment gap between young Black men and young white men stayed between about 8.2 percentage points and 21.0 percentage points. The gap between adult Black men and adult white men ranged from 8.1 percentage points to 13.1 percentage points.

William Rodgers III, "Young Adults without College Education See Uneven Jobs Recovery,"Federal Reserve Bank Of St. Louis, May 17, 2022, https://www.stlouisfed.org/on-the-economy/2022/may/young-adults-without-college-see-uneven-jobs-recovery

Young Adults without College Education See Uneven Jobs Recovery

Relief and recovery investments during the pandemic have made this most recent job recovery unique relative to others in past decades. In fact, major efforts to restore the economy’s health and commitments to lessen racial inequality, combined with widespread labor shortages, have helped to create a “moment of opportunity” for young noncollege-educated adults.1 This moment is especially crucial for young noncollege-educated adults because early career opportunities are key for their long-term earnings prospects. They tend to have fewer skills and credentials and weaker job search networks, and face geographic isolation from job opportunities, making a potential toehold in the labor market all the more important to securing their economic futures. Young Black and Latino adults also face additional hurdles, such as discrimination.

The challenges are even greater for the current cohort of noncollege-educated youth who have entered the labor force during the pandemic. Research has shown that in the aftermath of a recession, youth who enter labor markets experience lower income over their lives. The COVID-19 pandemic is the latest example of a public health and economic shock that could adversely impact their futures. This blog post, the first in a two-part series, assesses how well young noncollege-educated adults, especially young Black adults and young Latino adults, are faring during the recovery.2 Simply put, their recovery is one of unevenness.

Noncollege-Educated Youth Experienced an Uneven Recovery

During the nation’s job recovery (April 2020 to April 2022), the overall civilian unemployment rate fell from 14.7% to 3.6%. Payroll employment returned almost to its pre-pandemic level. The employment-to-population ratios of some noncollege-educated men and women have returned to or exceeded their pre-pandemic levels; however, this literally happened since December 2021.* For example, as the following figure shows, the employment-to-population ratio of young Black men reached 62.1%, exceeding its pre-pandemic value of 56.3% and its December 2021* level of 56.1%.3 In recent months, the ratio for young Latino men recovered to its pre-pandemic level.

The average employment gap—the difference between their employment-to-population ratios—between young Black men and young white men since January 2020 to March 2022 is 15.0 percentage points. Over the same period, the average employment gap between adult Black men and adult white men was 10.9 percentage points, and it was 8.6 percentage points between young Black women and young white women. The only group near parity with its white counterpart is adult Black women.

These gaps are surprising because of the relative gains we would expect young Black and Latino adults to experience as a result of relief and recovery efforts (e.g., the American Rescue Plan and CARES acts) during the pandemic that were particularly impactful for families with the greatest need as well as the “Great Resignation” and its contribution to labor shortages. Furthermore, this most recent recovery is inconsistent with the historical link between overall economic conditions and outcomes for young noncollege-educated adults. In the past, strong economic recoveries have had a disproportionate positive impact on employment among young, noncollege-educated Black men.

Unfortunately, as of March 2022, these conditions did not lead to a narrowing in racial and ethnic employment gaps, and Black and Latino people have experienced persistent disadvantages. The figure below shows that, throughout the jobs recovery following the COVID-19 recession, the employment gap between young Black men and young white men stayed between about 8.2 percentage points and 21.0 percentage points. The gap between adult Black men and adult white men ranged from 8.1 percentage points to 13.1 percentage points.

The second part of this blog series will explore how strong the macroeconomy must be to improve not only the absolute but also the relative economic status of noncollege-educated youth. The post will also discuss ways to narrow the employment gap.

*Editor's Note: This article was updated to correct the year.

Notes and References

1 These young adults are 16- to 24-year-olds who are not enrolled in school, have no more than a high school degree and have no more than 10 years of potential labor market experience. Potential labor market experience equals age minus years of schooling minus 6.

2 This series is published as part of the vulnerable workers initiative from the Institute for Economic Equity. The initiative examines the challenges facing vulnerable workers during the recovery and discusses potential ways to improve their economic security and resiliency in an economy reshaped by the pandemic.

3 These estimates are through March 2022 because the micro data from which these estimates are calculated are only publicly available through March 2022 and not April 2022.

Core Findings

First, “…we develop an instrument that exploits variation in the proximity of districts to coal power plants and year-to-year fluctuations in power production at these plants, as in Duque and Gilraine (2020). Specifically, we instrument for air quality using the yearly coalbased energy production occurring within 60km of a school district. The choice of 60km is informed by prior research which finds a strong relationship between coal power production and PM2.5 concentrations only for locations within roughly 40-60km of the plant (Levy et al., 2002; Clay et al., 2016). We confirm this relationship, showing that increased power production within 60km of a school district significantly raises PM2.5 concentrations and correspondingly lowers student test scores; increased power production located further than 60km away has limited impacts on air quality and no effect on test scores. Our IV estimates indicate that each microgram per cubic meter (μg/m3) increase in PM2.5 concentrations causes a 0.02 standard deviation decline in test scores. These estimates are larger in magnitude compared to our OLS estimates, as expected given we suspect OLS regressions will feature severe attenuation bias in this context….”

We combine satellite-based pollution data and test scores from over 10,000 U.S. school districts to estimate the relationship between air pollution and test scores. To deal with potential endogeneity we instrument for air quality using (i) year-to-year coal production variation and (ii) a shift-share instrument that interacts fuel shares used for nearby power production with national growth rates. We find that each one-unit increase in particulate pollution reduces test scores by 0.02 standard deviations. Our findings indicate that declines in particulate pollution exposure raised test scores and reduced the black-white test score gap by 0.06 and 0.01 standard deviations, respectively….Figure 2(a) displays the PM2.5 concentrations among low- (dashed line) and high-coal (solid line) districts over time. As expected, there is a large drop in PM2.5 concentration in 2011-12 for high- relative to low-coal districts, which coincides with the significant decrease in U.S. coal production that year….Our two empirical strategies indicate that each µg/m3 reduction in PM2.5 increases test scores by 0.02 standard deviations. Panel A of Table 2 places these estimates into perspective by reporting the PM2.5 exposure an average student in the United States faced in 2002-03, 2010-11, and 2018-19. We see a large decline in pollution exposure over the last two decades: the average student saw their PM2.5 exposure drop a full 3µg/m3 from 2002-03 to 2018-19. Our estimates therefore indicate that air quality improvements raised test scores nationwide by a full 0.06 standard deviations. This nationwide test score impact is large; in comparison a nationwide policy that releases the bottom 5% of teachers according to value-added would only raise test scores by 0.02-0.025 standard deviations. Given that the decline in pollution exposure over the past two decades has disproportionately benefited areas where African Americans reside...it is also natural to wonder whether test score equity has also been impacted. Panel B reports PM2.5 exposure for the average white and black student in the United States. From 2002-03 to 2018-19 the black-white PM2.5 exposure gap declined by 0.50µg/m3. This suggests that changes in pollution exposure decreased the black-white test score gap by 0.01 standard deviations, or 6 percent of the 0.18 standard deviations decline in the black-white test score gap over this period. Using instrumental variables that leverage exposure to nearby power production, we find that air pollution significantly lowers student test scores. Given that, the large 3µg/m3 drop in PM2.5 concentrations experienced by the average student materially raised test scores nationwide. Substantial improvements to student performance and equity through cleaner air are still possible, however. For example, decreasing average PM2.5 to that of the first quartile district would raise nationwide test scores by 0.036 and completely eliminating black-white differences in particulate exposure would further decrease the black-white test score gap by 0.024 standard deviations.