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The Supplemental Expenditure Poverty Measure: A New Method for Measuring Poverty

John Fitzgerald Brookings Papers on Economic Activity

Date Posted:: April 13, 2022
Is Database:: Database

A new poverty measure shows a higher rate than conventional methods, indicating 8m more Americans are considered poor.

The Supplemental Expenditure Poverty Measure (SEPM) reveals a higher poverty rate than traditional income-based methods, indicating 8m more Americans are considered poor. Unlike the Census Bureau's Supplemental Poverty Measure (SPM), which is income-based, the SEPM uses total household expenditures to assess poverty, capturing a larger mass of low-expenditure households. The SEPM's sensitivity to threshold choices results in higher poverty rates, especially for those near poverty, with a 32.6% rate compared to 25.5% for the SPM. This measure highlights the economic vulnerability of households with expenditures just above the poverty line, emphasizing the need for policy adjustments to address these disparities.

We propose a new measure of the rate of poverty we call the Supplemental Expenditure Poverty Measure, or SEPM. It is based on total current expenditure in the Consumer Expenditure survey and treats expenditures in that survey as a measure of resources available to the household to purchase the minimum bundle necessary to meet basic needs. An augmented poverty measure based on Liquid Available Resources, which adds resources available from liquid assets and accessible, but unused, borrowing, is also presented. Our expenditure poverty measure differs from conventional income poverty measures and from consumption poverty measures in both concept and measurement, and we argue it is superior to both. We find that poverty rates using what we call our Current Expenditure measure are slightly greater than those of the most preferred income-based poverty rate produced by the Census Bureau, the Supplemental Poverty Measure (SPM). However, both have trended downward at approximately the same rate for the last 10 years. But the relative levels of our SEPM poverty rates and those of the Census income-based measures are very sensitive to the choice of threshold. Our augmented poverty measure based on Liquid Available Resources shows lower poverty rates than the SPM but we are only able to present a range of estimates of the difference, not a point estimate. At maximum, we find poverty rates to be lowered by about two percentage points.But our Current Expenditure SEPM and Liquid Available Resources SEPMshow the same decline as the Census income-based SPM quite closely. There are no available consumption poverty measures that are comparable to our SEPM, so we are not able to compare our SEPM levels or trends to such a measure…. Given the dramatic differences in the way the SIPM is constructed from the Official measure, the surprise in Figure 1 is how little they differ...Consumption poverty estimates are less standardized and differ from study to study. Those show in Figure 1 are drawn from Meyer and Sullivan (2019), which updates the estimates in Meyer and Sullivan (2012)….Table 2 illustrates the importance of the threshold by showing gross and net SEPM and SIPM poverty rates for what are called, in the literature, “Deep Poverty” and “Near Poverty.” The first is calculated as the fraction of the population which is less than 50 percent of the threshold, and the latter is calculated as the fraction of the population which is less than 150 percent of the threshold. These are generally regarded as important alternatives because the threshold itself has certain arbitrary elements in its definition, and it helps to see more of what the full distribution looks like at the bottom, not just the fraction above and below one particular point. But, for our purposes, Table 2 reveals that SEPM poverty rates are lower than those for the SIPM when looking at Deep Poverty, but much higher than those for the SIPM when looking at Near Poverty. For net poverty rates, the SEPM Deep Poverty rate is 1.5 percent compared to a 4.1 rate for SIPM Deep Poverty, while the SEPM Near Poverty rate is 32.6 percent as against the 25.5 percent for SIPM Deep Poverty. The Deep Poverty rates capture more directly the effects of possible underreporting of income, while the Near Poverty rates show how many more US households have low—but not extremely low—expenditures.

John Fitzgerald and Robert Moffitt, "The Supplemental Expenditure Poverty Measure: A New Method for Measuring Poverty,"Brookings Papers On Economic Activity, March 2022, https://www.brookings.edu/wp-content/uploads/2022/03/SP22_BPEA_FitzgeraldMoffitt_conf-draft.pdf

Core Finding, "...We implement our SEPM on the Consumer Expenditure survey data from 2004 to 2019.We find that what we call gross SEPM poverty rates—based just on total household expenditures in a period—were smaller in 2019 than those estimated with income data from the CPS. However, expenditure poverty rates depend critically on exactly where the poverty line is drawn because there is a large mass of low-expenditure households whose expenditures are just below and above the most preferred threshold used by the Census Bureau. As a consequence, for example, netting out certain costs from expenditures moves more into poverty using our SEPM expenditure measure than netting those same costs out of income, making SEPM net poverty rates higher than those using income. Also, moving the poverty line up slightly to capture those households who are “almost” poor but not quite, also makes SEPM poverty rates higher than those using income. Overall, we find that there are many more low-expenditure households in the U.S. than low-income households, in percentage terms. We also assess the ability of households to escape poverty by drawing on available liquid bank balances and by using available, but unused, credit debt to finance purchases of basic goods. Many low-income households already do that, but some do not use all the potential borrowing they could. We find that bank balances are quite small and, when counted toward ability to escape poverty, make only a small 1 percentage point difference in reducing poverty rates. But we find that available credit card borrowing could potentially lower poverty rates further by up to 2 percentage points. But these estimates are highly uncertain and much more research is needed on credit cards as an available resource over a relevant time horizon before any definite conclusion can be reached….”
The Evidence

Current Expenditure SEPM Results

“…Table 1 shows the building blocks for our SEPM poverty rate using the CE and the SIPM using the CPS for 2019. The first rows present statistics on the distributions of gross CE expenditure and gross Adjusted CPS income. In the whole population, CE mean and median expenditures are much lower than those in the CPS, but this deserves little attention because it is the lower tails of each that are relevant to poverty measurement. A key result is that the income distribution in the CPS has a much longer left-hand tail than the expenditure distribution in the CE, and the difference gets larger, the lower in the distribution one goes. The best explanation for this is simple underreporting of income in the CPS but, whatever the cause, it implies that poverty rates may differ simply because of this difference…”

“.. Figure 2 shows the two distributions graphically but in dollar terms and not percentile terms. A vertical dotted line shows the average SIPM threshold we will use to calculate poverty rates as the fraction of the distribution to the left of that line. The most important difference, which as suggested by Table 1, is that expenditures are much more concentrated in a mass just above the threshold, unlike the most dispersed income distribution. Because the density curves cross and hence neither distribution first-order stochastically dominates the other, the relative poverty rates of the SEPM and SIPM will depend on where the threshold is located. In Figure 2, it is not visually apparent whether expenditures or income have a greater fraction to the left of the line. But Table 1, showing gross SEPM and SIPM poverty rates, show that the fraction of income below the threshold, 8.8 percent of income observations, is almost identical to the fraction of expenditures, 8.7 percent. Thus the differences in the distributions of income and expenditure below the poverty line essentially cancel out….”

Trends, 2004-2019

“…Trends in Gross and Net SIPM and SEPM poverty rates from 2004 to 2019 are shown in Figure 4. We show both Net and Gross since there are some differences between them, as there were in 2019. The Gross SEPM poverty rate was approximately 11 percent in 2004, fell to about 8 percent in 2007, then rose through 2010 to about 12 percent (no doubt because of the Great Recession), and then began a gradual decline to its 2019 value of 8.7 percent (the decline coinciding with a general economic growth period in the country).The Gross SIPM poverty rate shows lower values in the 2004-2007 period, a somewhat sharper rise from 2007 to 2011, and then a sharper fall through 2019, ending at its final value of 8.8 percent, almost identical to that for the SEPM. We view these results as altering to some extent the 2019 results, for at least over the last 10 years the Gross SEPM has been below the SIPM for almost all of that period, even though both have fallen from the Great Recession peaks. When moving to the Net Poverty rates, both the SEPM and SIPM shift upward, as already discussed, and the shift upward results in a somewhat similar pattern of time trends of each over the entire 2004-2019 period. Both continue to have declined since the Great Recession, for example. However, as in 2019, the Net SEPM is above the Net SIPM, and for all years since 2009. Once again, the reason is the larger mass of expenditures just above the poverty threshold than the fraction of income observations there, so that reductions in both increase expenditure poverty rates more than income poverty rates….”

“…Figure 1 shows current estimates of the level and trend of poverty using three different measures from 1990 to 2018.The Official measure compares cash income before taxes and transfers to a threshold defined in 1963 estimated as the amount of income needed for a minimum level of food expenditure. It is held constant in real CPI-U dollars since then. It omits in-kind transfers from income, makes no adjustment for cross-area differences in the cost of living, and uses a non-standard equivalence scale. The interesting aspect of the trend in Official poverty is how little it has changed over time, despite the expectation that poverty rates should eventually decline for any absolute poverty measure. While there are clear business cycle effects, the last value is only slightly lower than that in 1990. In part this reflects the growth in wage inequality and the associated slow rate of growth of wages for unskilled workers. But its omission of taxes and transfers and in-kind benefits programs makes its poverty rates too high (taxes have declined for the low income families and transfers have grown). The Supplemental Poverty Measure which we denote as the SIPM bases its threshold on a minimum bundle composed of food, clothing, shelter, and utilities, and on a measure of how much is spent on those four goods in the lower part of its distribution. The threshold is updated over time as expenditures on those goods rise in that lower section, intended to represent changing social norms for where households are relative to others in ability to purchase that bundle. This obviates the need for a price index because the threshold is defined in nominal dollars. The income measure subtracts from gross money income an estimate of net taxes paid, which can be negative because of federal and state tax credits to lower income families, and it includes estimates of in-kind transfers received by each family (SNAP plus four others noted below). The SIPM also considers working families to incur work-related expenses, which are subtracted from income, as are child care expenses and any child support paid to a child caregiver outside the family. Somewhat more controversially, it subtracts from income a measure of medical out-of-pocket expenses, including health insurance premiums paid plus medical costs not reimbursed by insurance (Medicaid is otherwise ignored in the SIPM).8 The SIPM also deals with homeowning by using a separate threshold for homeowners with mortgages, without mortgages, and renters, on the assumption that homeowner with mortgages need more income to purchase the rest of the minimum bundle and those without mortgages need less. It also adjusts the thresholds for a state- and metro-area level price index. Given the dramatic differences in the way the SIPM is constructed from the Official measure, the surprise in Figure 1 is how little they differ. The SIPM is slightly higher in level, which is not so much because of differences in the thresholds (Fox et al., 2015) but because the subtractions from income outweigh the addition of tax credits and in-kind transfers. The two follow similar trends over time……The dramatically different shape of the consumption poverty level and trend in Figure 1 is at least partially explained by two factors. One is that the authors do not take a position on what the threshold should be and hence do not simply compare their estimates of consumption to either the Official threshold or the SPM threshold. Instead, they “anchor” their poverty measure by finding a consumption threshold that would yield the same poverty rate as the Official measure would; in figure 1, their anchoring at 2015 is shown. They update that threshold forward and backward for prices alone, thereby constructing a absolute poverty measure rate. The other is that the authors use the CPI-U-RS, which shows a lower rate of inflation than the CPI-U, and they also subtract 0.8 percentage points from it every year on the argument that the CPI-U-RS.This leads to a greater decline of poverty over time than would result from using the CPI-U or the CPI-U-RS, ceteris paribus. This measure of consumption poverty is not comparable to either the Official measure or the SIPM, nor to our measure discussed next….Our Current Resources SEPM poverty measure uses consumer expenditure from the CE as the basic building block of available resources. We do not exclude any items that might be regarded as investment or saving because those could have been used, instead, to buy the minimum bundle and hence should be included in resources. We also include all down payments on durables in our expenditure measure, because the household could have chosen not to purchase the durable and apply that expenditure toward the minimum bundle instead. We also include debt payments to the extent we can with the CE data, on the grounds that those are cash payments and are therefore liquid. We recognize that their inclusion could be objected to on liquidity grounds but, unlike service flows, they represent actual cash outlays that could in principle have been redirected toward the purchase of the minimum bundle if the debt had not been incurred in the first place.9 As we noted in the Introduction, our expenditure measure includes that made with credit cards and any drawdown of assets, but the CE does not ask the source of expenditures or whether either of those methods were used for purchases….…Because we want to make the SIPM our main poverty measure of comparison, we adopt all other methods used in that measure. We use the same thresholds as the SIPM, the same differentiation of those thresholds by homeowner and mortgage status, the same type of geographic cost-of-living adjustments, and the same family size equivalency scale. We also add to our expenditure total estimated amounts of the four in-kind transfers other than SNAP which the SPM adds to income: implicit rent subsidies to those in government subsidized housing who pay below-market rents, lunch subsidies received by school children, transfers in federal nutrition programs for pregnant women and mothers of young children, and energy assistance. We recognize that liquidity issues can be raised with these estimates as well. Finally, we also, like the SIPM does for income, deduct from our expenditures work-related expenses and child care, child support paid, and capped medical out-of-pocket expenses, though all necessarily computed with CE data instead of the CPS. These “adjustments” are an important feature of the SPM poverty measure. With all these methods, we intend for our Current Resources SEPM and the SIPM to differ as much as possible only from the use of expenditures instead of income….”

The Impacts of Covid-19 Illnesses on Workers

Evan Soltas National Bureau of Economic Research

Date Posted:: September 15, 2022
Is Database:: Database

Covid-19 illnesses have reduced the US labor force by ~500,000 workers by June 2022, with an annual loss of $62bn in forgone earnings.

Covid-19 illnesses have significantly impacted the U.S. labor force, reducing it by approximately 500,000 workers by June 2022. This reduction is attributed to a persistent increase in health-related absences, which rose from six to ten per thousand workers weekly during the pandemic. These absences correlate with reported Covid-19 cases and are more prevalent in high-exposure occupations. Workers missing a week due to Covid-19 are 7% less likely to remain in the labor force a year later, contributing to a 0.2 percentage point drop in the labor force participation rate. The economic cost of these absences is substantial, with an average loss of $9,000 in forgone earnings per absence, totaling an annual loss of $62bn. This impact is comparable to an additional year of U.S. population aging, highlighting the significant macroeconomic implications of Covid-19 on labor supply.

“…This paper studies the impacts of Covid-19 illnesses on the labor supply of U.S. workers using longitudinal data from the Current Population Survey (CPS). We first document that the rate of week-long health-related absences has been substantially elevated during the pandemic relative to pre-pandemic seasonal patterns, and that these excess absences appear to reflect Covid-19 illnesses. In a typical pandemic week, about ten workers per thousand missed an entire week of work due to their own health problems, as compared to six health-related absences per thousand workers in an average week from 2010 to 2019.Excess absences covary with reported Covid-19 cases both in the national time-series and a state panel, and are higher among occupations with higher Covid-19 exposure. Second, we show that health-related absences generate persistent reductions in labor supply. Using an event study, we find that workers who miss an entire week due to probable Covid-19 illnesses are approximately 7 percentage points less likely to be in the labor force one year after their absence compared to otherwise-similar workers who do not miss work for health reasons. These estimates appear representative for Covid-19 illnesses specifically, not only as an average over myriad health issues, and they are about the same as the average effects of pre-pandemic health-related absences. One reason why Covid-19 illnesses reduce labor supply is that they push older workers into retirement. Our results are thus best interpreted as identifying not “long Covid” in isolation but rather the overall labor-supply adjustment, across mechanisms, induced by Covid- 19 illnesses. We next use our results to assess the aggregate impacts of Covid-19 illnesses on the U.S. labor force participation rate. Combining our event-study results with the excess rate of health-related absences, we estimate that Covid-19 illnesses have reduced the labor force participation rate by 0.2 percentage points, or by approximately 500,000 workers, through June 2022. This point-in- time impact is near our estimates of the steady-state impact of Covid-19 illnesses at the average rate of health-related absences in 2021. These losses fundamentally reflect an overall increase in the health-related absence rate with no change in the average long-run impact of an absence. We also discuss additional considerations that would increase or reduce the total effect of Covid-19 illnesses on labor supply relative to our preferred estimate. Overall, the loss in U.S. labor supply from Covid-19 illnesses appears substantial, comparable to an additional year of U.S. population aging at its current pace.Finally, we calculate the average cost of a Covid-19 absence in forgone labor earnings through fourteen months after the absence, including both extensive and intensive margins of adjustment. The average Covid-19 absence results in forgone earnings of at least $9,000, about 90 percent of which is due to persistent labor-supply reduction beyond the week-long absence itself. This economic cost can be viewed as a revealed-preference measure of the medium-term health impact of Covid-19 illnesses. In aggregate, we calculate that the per-year value of the lost labor supply is approximately $62 billion, which is about half of estimated losses from cancer or diabetes….”

Evidence of Covid Impact on LFP

“…We find that Covid-19 illnesses have likely become, over the last two years, an important contributor to the net change in the participation rate. By June 2022, Covid-19 illnesses reduced the participation rate by 0.18 percentage points, with a range of 0.13 to 0.22 percentage points, as we show in Appendix Figure A21. These reductions in the participation rate imply that approximately 500,000 adults are neither working nor actively looking for work due to the persistent effects of Covid-19 illnesses, with a range of 340,000 to 590,000 adults. This point-in-time participation-rate loss is near the steady-state loss associated with the 2021-average rate of health-related absences. That is, if the health-related absence rate remains near its 2021 level, and if the impacts of Covid- 19 absences are unchanged, then our estimates suggest the participation rate will be persistently reduced by approximately 0.2 percentage points….”

Gopi Shah Goda and Evan Soltas, "The Impacts of Covid-19 Illnesses on Workers,"National Bureau Of Economic Research, September 2022, https://www.nber.org/papers/w30435

The 55-and-Older Labor Market Exodus Is a Statistical Mirage

Justin Fox Bloomberg

Date Posted:: September 15, 2022
Is Database:: Database

Restoring prime-age male labor force participation to 1970 levels would add 4.5mm workers to the US labor force, according to @JustinFox at @Bloomberg.

Despite perceptions of a labor market exodus among older Americans, the real issue lies with prime-age male labor force participation, which has significantly declined since the 1970s. While the labor force participation rate for men aged 55-64 is below mid-1970s levels, returning it to the August 1970 rate of 82.6% could add 2m workers. More crucially, restoring the participation rate for prime-age men (25-54) to 1970 levels would introduce an additional 4.5m workers into the US labor force. Addressing this decline could be pivotal in bolstering the American workforce, as reversing these long-term trends presents a significant challenge but also a potential opportunity for economic growth.

“…Then again, there is another composition effect at work in these statistics that I haven’t discussed. While women’s labor-force participation rates rose from the 1950s through 1990s, men’s fell. So while the current labor-force participation rate for all Americans in their late 50s and early 60s is near an all-time high, for men it’s well below the rates that prevailed before the mid-1970sThe puzzle of why labor-force participation fell so much among US men of all ages was a major topic of economic discussion in the 2010s that’s probably due for a revival. For those in their late 50s and early 60s the decline wasn’t all bad news, as generous early retirement packages surely drove some of it. Those are less common than they used to be, whileboosting male 55-64 labor force participation back to, say, the August 1970 rate of 82.6% would add 2 million would-be workers to the US job market. Bringing the participation rate for so-called prime-age men (25-54) back to 1970 levels would add another 4.5 million.Reversing changes that happened half a century ago is surely a lot harder than reversing those of the past couple of years. But maybe it’s the next frontier….”

Justin Fox, "The 55-and-Older Labor Market Exodus Is a Statistical Mirage,"Bloomberg, September 9, 2022, https://www.bloomberg.com/opinion/articles/2022-09-09/americans-older-than-55-haven-t-given-up-working

The 55-and-Older Labor Market Exodus Is a Statistical Mirage

I’m in my late 50s and I’m on the job. So are more than 70% of Americans aged 55 through 59, according to the Bureau of Labor Statistics. In fact, my age group’s labor-force participation rate was approaching record levels earlier this year before undergoing its usual summer decline.

The 55-and-Older Labor Market Exodus Is a Statistical Mirage: Extended Excerpt Image 1

As a result, I tend to bristle a little whenever I read about the big drop in labor-force participation among Americans 55 and older and its supposed adverse effects on the labor market and the economy. It is true that, as of August, the labor-force participation rate for the entire 55-plus age group was, at a seasonally adjusted 38.6%, down 1.7 percentage points from just before the pandemic in February 2020 and near its lowest level in 15 years. But as I’ve already demonstrated, those of us in our late 50s aren’t the problem. We’re still working at record rates!

Americans in their early 60s are pretty close to record labor-force participation, too. The big declines are all among those 65 and older. But — and here’s where things get really weird — those declines are still smaller in percentage-point terms than those for the 55-and-older group overall. This strange data quirk is the result of so-called composition effects, caused by the shifting age distribution within the age group, which I’ll discuss a little later. First, though, let’s get around the strange quirk by looking at labor market changes for smaller age groups.

The reason the 55-and-older numbers get so much attention is that it’s the one of the few age groups for which the BLS provides seasonally adjusted labor market data. The unadjusted numbers come with big seasonal swings and, especially when you’re looking at narrow age groups such as 55 through 59, a fair amount of month-to-month statistical noise. Still, there are ways to deal with both, such as comparing three-month averages from this summer with those from before the pandemic in 2019.

The 55-and-Older Labor Market Exodus Is a Statistical Mirage: Extended Excerpt Image 2

The labor-force participation rate is the estimated number of Americans who have paid jobs (not counting active-duty military) or are looking for work, divided by the civilian, non-institutionalized working-age population. Another key metric, the employment-population ratio, is those with paid jobs divided by population, also excluding active-duty military and the institutionalized. Both are expressed as percentages, so why one is called a rate and the other a ratio is a mystery to me. After this chart I’ll just refer to both as rates.

The 55-and-Older Labor Market Exodus Is a Statistical Mirage: Extended Excerpt Image 3

One thing that stands out here is the apparently limited labor market impact of Long Covid. Lingering effects of Covid-19 are real, and may afflict millions of Americans, but the fact that every under-60 age group but two has higher labor-force participation and employment rates than before the pandemic seems to indicate that Long Covid isn’t keeping significant numbers of working-age Americans out of the workforce.

As for the two under-60 age groups that haven’t returned to or surpassed their summer 2019 participation and employment rates, those in their early 20s may be staying in college longer to make up for pandemic gap years and other delays, or still struggling to recover from the many disruptions to the job market and society in general in 2020. For those in their late 30s child-care complications could be a culprit, although curiously, women in that age group are back to pre-pandemic levels while men are not.

For workers 60 and older, who in the decades before the pandemic had been experiencing steady gains in labor-force participation and employment, it makes sense that a disease that was far deadlier for the elderly drove many out of the labor force — because of either fear of catching Covid-19 or struggles with Long-Covid complications after catching it. The remarkable performance of stocks and other assets in 2020 and 2021 may also have led some affluent older workers to retire earlier than planned.

But again, members of the 60-to-64 age group left only briefly. Their labor-force participation rate hit an all-time high in March 2020, when low response rates amid lockdowns may have skewed the data, and came close to that again last November. (“All-time” for these numbers only goes back to June 1976, but statistics available back to 1948 for the broader 55-to-64 age group indicate that recent rates are the highest over that period too.)

The 55-and-Older Labor Market Exodus Is a Statistical Mirage: Extended Excerpt Image 4

Participation among those 60 through 64 was down this summer relative to summer 2019, but that could be evidence of changing seasonal hiring patterns rather than a sustained decline in labor-force attachment. Teenage labor-force participation collapsed in the 2000s, leading traditional teen employers such as McDonald’s to recruit senior citizens for summer jobs. Now hordes of 16-and-17-year-olds are entering the labor force, reducing the need for such efforts.

Those 65 and older have in fact seen a clear drop in labor-force participation after decades of gains. But 65-plussers made up only 6.6% of the labor force in August, compared with the 16.4% share accounted for by those 55 through 64. Their 1.1 percentage point labor-force participation decline since summer 2019 works out to 626,835 missing would-be workers — not nothing, but also not that huge a deal in a labor force of almost 165 million.

The labor-force participation decline for the broad 55-and-older category is 1.7 percentage points whether measured in seasonally adjusted data from February 2020 or in unadjusted summer-2019-to-summer-2022 comparisons, as I did with the other age groups. How can this be bigger than the decline for those 65 and older, not to mention those in their late 50s and early 60s? Well, the youngest baby boomers are turning 58 this year, meaning that the younger end of the 55-and-older group is now being replenished with the less-numerous members of Generation X.

Because of this, the average age of Americans in the 55 and older category rose even through the ravages of Covid-19 and will continue doing so. 1 Meanwhile, labor-force participation tends to peak around age 40, and decline as people age beyond that. So with each passing year, the 55-plus labor-force participation rate will drop even if the rates for every year of age within the group remain the same. The reverse transpired as the baby boomers began to enter the age group two decades ago, as will also be the case for the 75-plus age group that they started joining last year.

The 55-and-Older Labor Market Exodus Is a Statistical Mirage: Extended Excerpt Image 5

The aging of the baby boomers and the US population in general is real and will have a lot of economic consequences, but the seeming mass exodus of 55-and-older workers during the pandemic is to some extent a statistical mirage. That is, many older Americans did leave the workforce, but the irreversible process of aging was as much to blame as the possibly reversible consequences of the pandemic. Those looking to bring more people into the labor market should probably focus on solving the problems that are keeping away would-be workers in their early 20s and late 30s rather than worrying about the oldsters.

Then again, there is another composition effect at work in these statistics that I haven’t discussed. While women’s labor-force participation rates rose from the 1950s through 1990s, men’s fell. So while the current labor-force participation rate for all Americans in their late 50s and early 60s is near an all-time high, for men it’s well below the rates that prevailed before the mid-1970s

The 55-and-Older Labor Market Exodus Is a Statistical Mirage: Extended Excerpt Image 6

The puzzle of why labor-force participation fell so much among US men of all ages was a major topic of economic discussion in the 2010s that’s probably due for a revival. For those in their late 50s and early 60s the decline wasn’t all bad news, as generous early retirement packages surely drove some of it. Those are less common than they used to be, while boosting male 55-64 labor force participation back to, say, the August 1970 rate of 82.6% would add 2 million would-be workers to the US job market. Bringing the participation rate for so-called prime-age men (25-54) back to 1970 levels would add another 4.5 million. Reversing changes that happened half a century ago is surely a lot harder than reversing those of the past couple of years. But maybe it’s the next frontier.

The booming economy, not the 2017 tax act, is fueling corporate tax receipts

William G. Gale Brookings Institution

Date Posted:: June 3, 2022
Is Database:: Database

Corporate tax revenues surged in 2021, reaching 1.7% of GDP, driven by robust economic growth, high inflation, and fiscal expansion, not the 2017 TCJA. Strong profits, not business investment, fueled higher corporate tax receipts.

Corporate tax revenues surged in 2021, reaching 1.7% of GDP, surpassing the CBO's 2018 forecast, driven by robust economic growth, high inflation, and fiscal expansion rather than the 2017 TCJA [Tax Cuts and Jobs Act]. The economy expanded at its fastest rate in three decades, while inflation hit a four-decade high, fueled by over $5tn in fiscal stimulus and accommodative monetary policy. This environment increased demand for goods and services, leading to higher corporate profits, which rose to 12.2% of GDP in 2021, up from an 11.1% average between 2017-2019. Despite some tax legislation effects, such as timing changes in income reporting, the primary drivers were economic recovery and pandemic-related fiscal measures. The rate of return on assets for nonfinancial corporations also increased from 7.8% in 2020 to 9.4% in 2021, indicating that higher profits were not due to increased business investment but rather economic conditions.

Corporate tax revenues boomed in 2021 and some supporters of the 2017 Tax Cuts and Jobs Act (TCJA)argue that the big tax reductions in the bill deserve the credit But there is a much better explanation: Last year’s strong economic growth, high inflation, and pandemic-related relief legislation increased both corporate profits and the taxes business paid. Soon after the TCJA was passed, the Congressional Budget Office (CBO) forecast corporate tax receipts would fall from 1.5 percent of Gross Domestic Product (GDP) in 2017 to 1.2 percent in 2018 and 1.3 percent in 2019 and remain below the 2017 share until 2022 (Figure 1). Actual corporate tax receipts fell even farther to 1.0 percent of GDP in 2018 and 1.1 percent in 2019. The onset of the pandemic in early 2020 drove the economy into recession and kept corporate tax receipts low. In 2021, corporate tax receipts grew dramatically to 1.7 percent of GDP, higher than CBO’s 2018 forecast. For 2022, CBO now forecasts corporate tax receipts will remain strong but fall to 1.6 percent of GDP, only slightly higher than it predicted in 2018. The reasons are pretty clear: In 2021, the economy grew at its fastest pace in three decades and inflation rose at its highest rate in four decades. Fiscal stimulus and easy money raised the demand for goods and services much faster than they increased output, which was restricted by pandemic-related supply constraints. Together, those factors drove prices higher. In general, higher demand translates into higher profits for corporations and higher compensation for workers. Profits increase despite the higher compensation largely because prices of goods tend to respond more quickly to increased demand than wages. Higher corporate profits translate into higher corporate taxes. Profits rose to an average of 12.2 percent of GDP in 2021, more than a percentage point higher than the 11.1 percent average between 2017 and 2019 (Figure 2). Some have suggested that the higher profits were the result of strong business investment. However, this is inconsistent with the data on rate of return for corporations. As profits rose from 2020 to 2021, the rate of return on assets for nonfinancial corporations increased from 7.8 percent to 9.4 percent, higher than the average of 8.4 percent over 2017 and 2019. If higher investment boosted U.S. corporate assets during that period, the pre-tax rate of return on corporate assets would have fallen—not increase, as it did.

William G. Gale, Kyle Pomerleau, and Steven M. Rosenthal, "The booming economy, not the 2017 tax act, is fueling corporate tax receipts,"Brookings Institution, June 3, 2022, https://www.brookings.edu/blog/up-front/2022/06/03/the-booming-economy-not-the-2017-tax-act-is-fueling-corporate-tax-receipts/

The booming economy, not the 2017 tax act, is fueling corporate tax receipts

Corporate tax revenues boomed in 2021 and some supporters of the 2017 Tax Cuts and Jobs Act (TCJA) argue that the big tax reductions in the bill deserve the credit (Wall Street Journal, Goodspeed and Hassett). But there is a much better explanation: Last year’s strong economic growth, high inflation, and pandemic-related relief legislation increased both corporate profits and the taxes business paid.

Soon after the TCJA was passed, the Congressional Budget Office (CBO) forecast corporate tax receipts would fall from 1.5 percent of Gross Domestic Product (GDP) in 2017 to 1.2 percent in 2018 and 1.3 percent in 2019 and remain below the 2017 share until 2022 (Figure 1). Actual corporate tax receipts fell even farther to 1.0 percent of GDP in 2018 and 1.1 percent in 2019. The onset of the pandemic in early 2020 drove the economy into recession and kept corporate tax receipts low.

The booming economy, not the 2017 tax act, is fueling corporate tax receipts: Extended Excerpt Image 1

In 2021, corporate tax receipts grew dramatically to 1.7 percent of GDP, higher than CBO’s 2018 forecast. For 2022, CBO now forecasts corporate tax receipts will remain strong but fall to 1.6 percent of GDP, only slightly higher than it predicted in 2018.

The reasons are pretty clear: In 2021, the economy grew at its fastest pace in three decades and inflation rose at its highest rate in four decades. From early 2020 to early 2021, Congress passed multiple bills designed both to cushion the economic and public health impact of the pandemic and help the economy recover.

These measures will pump more than $5 trillion into the economy over their respective 10-year budget horizons compared to the TCJA that totaled $1.9 trillion. The Fed’s accommodative monetary policy also stimulated the economy.

Fiscal stimulus and easy money raised the demand for goods and services much faster than they increased output, which was restricted by pandemic-related supply constraints. Together, those factors drove prices higher. In general, higher demand translates into higher profits for corporations and higher compensation for workers. Profits increase despite the higher compensation largely because prices of goods tend to respond more quickly to increased demand than wages.

Higher corporate profits translate into higher corporate taxes. Profits rose to an average of 12.2 percent of GDP in 2021, more than a percentage point higher than the 11.1 percent average between 2017 and 2019 (Figure 2).

The booming economy, not the 2017 tax act, is fueling corporate tax receipts: Extended Excerpt Image 2

Tax legislation also played a role in raising corporate tax receipts in 2021. But much of that was due to timing changes in reporting income. For example, the TCJA accelerated deductions for business investments, which reduced taxes early but increased them later. The 2020 CARES Act permitted business to use that year’s losses to reduce prior year taxes. As a result, some corporations accelerated deductions to 2020 and delayed income from 2020 until 2021—all intended to create or increase 2020 losses. In addition, corporations had an incentive to accelerate income into 2021 and delay deductions until after 2021 to avoid proposed tax increases under the Build Back Better Act.

Some have suggested that the higher profits were the result of strong business investment. However, this is inconsistent with the data on rate of return for corporations. As profits rose from 2020 to 2021, the rate of return on assets for nonfinancial corporations increased from 7.8 percent to 9.4 percent, higher than the average of 8.4 percent over 2017 and 2019. If higher investment boosted U.S. corporate assets during that period, the pre-tax rate of return on corporate assets would have fallen—not increase, as it did.

The booming economy, not the 2017 tax act, is fueling corporate tax receipts: Extended Excerpt Image 3

When Congress passed the TCJA at the end of 2017, official scorekeepers expected corporate tax receipts would decline over the following decade. However, after collapsing during the pandemic, they increased significantly in 2021. A law as comprehensive as TCJA is bound to impact the economy and federal government finances, but TCJA is not a plausible explanation for the large recent increase in corporate tax receipts. Instead, just look to the economic recovery, higher prices from supply and demand imbalances, the aftermath of pandemic relief legislation, and monetary accommodation.

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

Ben Casselman New York Times

Date Posted:: May 25, 2022
Is Database:: Database

Employment for adults 55-64 fully rebounds to pre-pandemic levels as ‘unretirements’ surge, driven by rising wages and job opportunities. By contrast, employment among those 65+ remains lower, reflecting health concerns and accelerated retirement.

Nearly 64% of adults aged 55-64 were working in April, matching the rate from February 2020, indicating a full recovery for this age group compared to younger cohorts. The pandemic initially led to a sharp rise in retirements, but as the economy reopened and public health improved, "unretirements" have rebounded to prepandemic levels. This trend is concentrated among those in their late 50s and early 60s, who were still years from retirement when COVID-19 began. The employment rate for those 65+ fell more sharply and has been slower to recover, suggesting accelerated retirement plans due to health risks. Rising wages and job opportunities are drawing early retirees back into the labor force, echoing patterns seen after the last recession but on a faster timeline. This underscores the resilience of labor supply and the potential for older workers to re-enter the workforce despite initial setbacks.

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.

I Had to Go Back: Over 55, and Not Retired After All: Extended Excerpt Image 1

The rapid rebound has surprised many economists, who thought that fear of the virus — which is far deadlier for older people — would contribute to a wave of early retirements, especially because many people’s savings had been fattened by years of market gains. But there is increasing evidence that the early-retirement narrative was overblown.

“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.

I Had to Go Back: Over 55, and Not Retired After All: Extended Excerpt Image 2

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.

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.”

The U.S. Economy Is Desperately Seeking Workers

Justin Lahart Wall Street Journal

Date Posted:: May 11, 2022
Is Database:: Database

US labor market faces a significant challenge with LFP at 62.2% in April 2022, down from 63.4% pre-pandemic. @JustinLahart/.

Despite the unemployment rate hovering near a 50-year low at 3.6%, the U.S. labor market faces a significant challenge with the Labor Force Participation [LFP] rate at 62.2% in April 2022, down from 63.4% pre-pandemic. This decline represents a shortfall of 1.2m jobs compared to February 2020, exacerbated by population growth. The Federal Reserve aims to cool the job market to control inflation, but with 1.9 job openings per unemployed worker, employers are struggling to fill positions. The Fed hopes for increased workforce participation as pandemic concerns ease and savings dwindle, but if this doesn't materialize, it may need to raise interest rates more aggressively, risking a potential recession.

Even though the unemployment rate is barely higher than the 50-year low of 3.5% it registered in February 2020, just before the Covid-19 crisis struck, there were 1.2 million fewer jobs than there were back then. Throw in population growth and the shortfall from prepandemic levels is even larger. The labor-force participation rate—the share of workers with a job or actively looking for one—was 62.2% last month versus 63.4% in February 2020.

Justin Lahart, "The U.S. Economy Is Desperately Seeking Workers,"Wall Street Journal, May 6, 2022, https://www.wsj.com/articles/desperately-seeking-workers-11651851566

The U.S. Economy Is Desperately Seeking Workers

There are two ways for the job market to cool off. One is for hiring to slow considerably. The other is for more people to enter the labor force. The latter is obviously preferable, but it isn’t clear how much of the latter the U.S. is going to get.

The Labor Department on Friday reported that the economy added a seasonally adjusted 428,000 jobs in April—equal with March’s gain and showing employment is growing at a heady clip. The unemployment rate, which is based off a separate survey, held at a very low 3.6%.

The U.S. Economy Is Desperately Seeking Workers: Extended Excerpt Image 1

The Federal Reserve now wants to cool the job market down. The shallower the supply of workers gets, the more wages rise and the harder it will be to bring inflation back under control. But hiring isn’t a switch the central bank can simply turn on and off. It will take time for its interest-rate increases to work their way into an economy in which underlying demand remains strong. And employers are so desperate for workers, with the Labor Department reporting earlier this week that as of March there were a record 1.9 job openings for each unemployed worker, that even slower demand growth might not soon put a dent in the job market.

What would help the situation a lot is for more people to come back into the workforce. Even though the unemployment rate is barely higher than the 50-year low of 3.5% it registered in February 2020, just before the Covid-19 crisis struck, there were 1.2 million fewer jobs than there were back then. Throw in population growth and the shortfall from prepandemic levels is even larger.

The reason the unemployment rate is low despite reduced employment levels is that, to be counted as unemployed, one must be actively seeking work. A lot of people aren’t doing that. The labor-force participation rate—the share of workers with a job or actively looking for one—was 62.2% last month versus 63.4% in February 2020. That is, of course, much better than it was during the worst of the pandemic, but a lot of the things that seemed like they might draw even more people back into the labor force, such as the availability of vaccines, the easing of Covid-19 concerns and the ending of extra benefits for the unemployed, didn’t have as much of an effect as economists hoped.

Maybe with the advent of warmer weather, the continued easing of Covid-19 worries and the stockpiles of savings many Americans built up during the pandemic starting to diminish, more people will go on the job hunt. That is certainly what the Fed is looking for: In his press conference Wednesday following the Fed’s meeting, Chairman Jerome Powell said that he and other members of the central bank’s rate-setting committee “generally expect that we’ll get some additional participation.”

If that increase doesn’t come, however, the Fed will be put in a position where it will feel it needs to bring job growth down sooner rather than later. To do that, it will need to lift rates more quickly, raising the odds that it goes too far and sends the economy into a recession.

We Have a Chance to End America's Great Employment Failure

Joseph Politano Apricitas Economics

Date Posted:: May 11, 2022
Is Database:: Database

The US has a chance to address its employment challenges, particularly in the prime-age demographic, where employment rates have lagged behind peer nations.

The US has a chance to address its employment challenges, particularly in the prime-age (25-54) demographic, where employment rates have lagged behind peer nations. In the 1990s, the US led in employment levels, but the 2001 and 2008 recessions caused significant setbacks. Currently, the US prime-age employment-population ratio hovers near 80%, below the 82% achieved at the millennium's turn. Countries like Portugal and Japan have surpassed the US with 85% prime-age employment rates. Despite a low unemployment rate of 3.6%, many potential workers remain outside the labor force, representing a large pool for employment growth. Nearly 3/4 of employment flows during boom times come from outside the labor force, highlighting the potential for rapid employment growth. Addressing this could end America's employment failure and enhance economic prosperity by drawing millions into the workforce, thus boosting productivity and economic output.

America is increasingly falling behind its peer nations. In the 1990s, America was a leader in employment levels thanks to its strong economy and relative accessibility to working women. The 2001 recession and the “jobless recovery” that followed knocked America back down to a level more in line with its peer nations—and then the 2008 recession knocked America far behind. Today, Italy—a nation notorious for its perennially broken labor market—is the only member of the G7 with lower prime age employment levels. Countries like Portugal and Japan—which have by no means experienced surges of dynamism or explosive economic growth over the last two decades—have managed to beat out the US and achieve 85% prime age employment rates. Male employment has been declining across advanced economies as men spend more time raising children and employment transitions away from traditionally male-dominated industries like manufacturing. Still, in few countries has the decline been as stark and as dramatic as in the US. Male prime-age employment rates in the US were nearly 10% off all-time-highs in 2009, and still remain 5% below their high-water mark.the majority of flows into employment every month do not come from unemployment but rather from outside the labor force.This is true during all but the very worst recessions (i.e., early 2020), butduring boom times nearly 3/4 of all flows into employment come from outside the labor force. Granted, that’s partially because the number of Americans outside the labor force is just so large (about 100 million people compared to about five million people in unemployment), but it also reveals how rapid growth in employment numbers can occur despite low unemployment numbers. American economic policymaking and punditry has a horrible history of presuming that workers outside the labor force are lost forever. In the 2010s drops in employment for non-college educated people were blamed on a “skills gap”. Drops in employment for young people were blamed on their laziness. Drops in employment for men were blamed on video games. By the late 2010s employment rates had basically recovered to pre-recession levels for all of these groups, proving that it was artificially weak labor demand keeping them out of the workforce.

Joseph Politano, "We Have a Chance to End America's Great Employment Failure,"Apricitas Economics, May 7, 2022, https://apricitas.substack.com/p/we-have-a-chance-to-end-americas

We Have a Chance to End America's Great Employment Failure

Regular readers of Apricitas will know that I focus heavily on the labor market as both an indicator for the state of the US economy and a goal for policymakers to influence. I believe—with good reason—that wages, work, and employment are the most important parts of economic well-being. The labor market is the market of markets—businesses depend on labor for basic function, workers depend on labor income for their consumption, investments require labor to make them valuable, and governments require labor to ensure the functioning of the state. Nearly every firm and household must, at some point, engage with the labor market. So much of prosperity at an individual and household level comes down to your employment, job security, and wages. Indeed, the most powerful countries in the modern world are not the ones with the largest natural resource reserves or the biggest armies but those with the best and most productive workforces.

That is why the last 25 years have been modern history’s biggest tragedy. A series of poor macroeconomic policy choices have resulted in decades of shrinking employment and lost wages across many high income countries—but especially in America. During the late 1990s, America’s labor market was arguably the strongest in the world. The 2001 and 2008 recessions left it permanently scarred—and now America significantly lags many of its peer countries.

For the sake of America’s workers, it must lead again.

We Have a Chance to End America's Great Employment Failure: Extended Excerpt Image 1

Yesterday’s jobs report showed the unemployment rate holding steady at 3.6%, approaching the lowest rate in 50 years. This represents an exceptionally fast recovery from the high of nearly 15% set in April 2020, especially considering that America did not employ the kind of job retention schemes that protected employment in other high-income nations. We truly have returned to the strong labor market of late 2019, but we also have an incredible opportunity to finally push for something greater.

America’s Great Employment Failure

We Have a Chance to End America's Great Employment Failure: Extended Excerpt Image 2

Unemployment rates are the headline-grabbing parts of jobs day, but it is employment rates that are actually the better indicator of labor market health. Workers outside the labor force are not counted as unemployed, but many of these people want a job but have given up searching (especially in recessions). The prime-age (25-54) employment-population ratio measures the percent of working age people who have a job, so it accounts for both age and labor force composition biases. That number has hovered near 80% for the last two months, close to the pre-pandemic level but well below the 82% achieved at the turn of the millennium. America is still lagging its past achievements.

We Have a Chance to End America's Great Employment Failure: Extended Excerpt Image 3

Not only that, but America is increasingly falling behind its peer nations. In the 1990s, America was a leader in employment levels thanks to its strong economy and relative accessibility to working women. The 2001 recession and the “jobless recovery” that followed knocked America back down to a level more in line with its peer nations—and then the 2008 recession knocked America far behind. Today, Italy—a nation notorious for its perennially broken labor market—is the only member of the G7 with lower prime age employment levels. Countries like Portugal and Japan—which have by no means experienced surges of dynamism or explosive economic growth over the last two decades—have managed to beat out the US and achieve 85% prime age employment rates.

We Have a Chance to End America's Great Employment Failure: Extended Excerpt Image 4

Focusing on the nations most similar in legal and economic policies shows how badly the 2001 and 2008 recessions scarred America. America lead all of its closest peer nations throughout the 1990s, but fell to the middle of the pack by the mid-2000s. The 2008 recession wrecked the American labor market, sending it to the bottom of the pack—where it remains stuck today.

We Have a Chance to End America's Great Employment Failure: Extended Excerpt Image 5

In the 1990s America was a relative leader in terms of female employment. The 2001 recession forced many women out of the workforce and allowed the US to slide behind some of the other leaders. Then the 2008 recession devastated female employment, sending it below 1990 levels until the late 2010s. Japan—a country that used to be infamous for its low female employment rates and hostility towards working women—surpassed America in female employment rates around 2012 and has since vastly exceeded even America’s 2001 highs.

We Have a Chance to End America's Great Employment Failure: Extended Excerpt Image 6

Male employment has been declining across advanced economies as men spend more time raising children and employment transitions away from traditionally male-dominated industries like manufacturing. Still, in few countries has the decline been as stark and as dramatic as in the US. Male prime-age employment rates in the US were nearly 10% off all-time-highs in 2009, and still remain 5% below their high-water mark.

Fundamentally, America lacks the institutionalized employment protections that many high-income nations have. When the pandemic struck, countries across Europe used the government’s tab to institute furlough and job retention schemes to keep workers in place despite the economic slowdown. The US has no such capabilities (hence the scramble to implement enhanced unemployment benefits at the start of the pandemic). The end result is that recessions in the US manifest as massive declines in the workforce. Couple that with the relatively weak policy responses to the 2001 and 2008 recessions and you have a situation where labor demand and employment remain artificially low for more than two decades. The good news is that the COVID recession saw by far the strongest and swiftest policy response in American history, allowing employment to recover to pre-pandemic levels in two short years. Still, there are millions of people who could be brought into employment in the next stage of the economic expansion. It will be to America’s great benefit if these people are brought into the workforce.

Idle Hands

We Have a Chance to End America's Great Employment Failure: Extended Excerpt Image 7

Early in the pandemic, a wave of temporary layoffs caused employment to surge as the entire country entered lockdown. Over the course of 2020, the vast majority of those temporarily laid off either returned to work or became permanent job losers. By late 2020 those permanent job losers made up the majority of the unemployed—and the number of permanent job losers exceeded the height of the 2001 recession. The good news is that the much stronger response from fiscal and monetary policymakers reduced unemployment to pre-pandemic levels. With unemployment so low, some believe that the labor market has achieved full employment. After all, where could additional workers come from if not the unemployed population?

We Have a Chance to End America's Great Employment Failure: Extended Excerpt Image 8

The answer is workers outside the labor force. Unemployment, at least in the official statistical sense, is a lot less clear cut that most would initially suspect. In order to be counted as unemployed a person must

Not have a job
Have actively looked for work in the last four weeks
and be currently available for work

Unsurprisingly these qualifications mean that many people who want to work are not counted as unemployed. About five million people are not in the labor force but say they want a job today, and these people are not counted as officially unemployed even though by any colloquial definition they would be considered unemployed. That’s another massive pool of possible workers that could be drawn into employment if labor demand remains strong.

We Have a Chance to End America's Great Employment Failure: Extended Excerpt Image 9

In fact, the majority of flows into employment every month do not come from unemployment but rather from outside the labor force. This is true during all but the very worst recessions (i.e., early 2020), but during boom times nearly 3/4 of all flows into employment come from outside the labor force. Granted, that’s partially because the number of Americans outside the labor force is just so large (about 100 million people compared to about five million people in unemployment), but it also reveals how rapid growth in employment numbers can occur despite low unemployment numbers.

American economic policymaking and punditry has a horrible history of presuming that workers outside the labor force are lost forever. In the 2010s drops in employment for non-college educated people were blamed on a “skills gap”. Drops in employment for young people were blamed on their laziness. Drops in employment for men were blamed on video games. By the late 2010s employment rates had basically recovered to pre-recession levels for all of these groups, proving that it was artificially weak labor demand keeping them out of the workforce. When companies increased their hiring intensity and wages began rising, many of these workers were drawn back into employment. During the pandemic we saw a microcosm of this regarding workers who were pushed into early retirement due to COVID. Policymakers and forecasters worried that these workers were out of the labor market for good, but as COVID abated and labor demand recovered many of these workers have since reentered the workforce. We shouldn’t discount the possibility of future employment gains just because those workers would come from outside the labor force instead of unemployment.

What Could You Do With An Extra $9,600 a Year?

In 2019 Americans earned, on average, about $9,600 less than they would have if growth had continued at the pre-Great Recession pace. Matt Klein puts it best: “Americans have been living below their means—producing, consuming, and investing less than they otherwise could have—for 15 years.” Much of that drop in earnings came from an inability or unwillingness from policymakers in Congress and the Federal Reserve to pursue the kind of aggressively stimulative monetary and fiscal policies that caused the post-COVID employment recovery to be so rapid. Think about all the buildings that went unbuilt, the skills that went undeveloped, and the inventions that went uninvented because America chose to idle tens of millions of workers—its most valuable resources—for decades.

Inflation has, understandably, taken center stage in today’s macroeconomic policy debate. As the Federal Reserve tightens monetary policy to reduce inflation, it is likely that the rate of employment growth will also slow. Truth be told, the rate of employment growth was always bound to slow at this point simply because the vast majority of previously-employed people have returned to work. The key remains to balance the need to combat inflation with the need to expand and strengthen America’s workforce. We have an opportunity to end America’s decades long employment failure, and it’s an opportunity we simply can’t afford to pass up.