Economic Updates

Weekly Report – April 20, 2015 – A Three Part Series – Is Raising the Minimum Wage in L.A. a Good Idea?

Member Highlight: John C. Cushman, III, participated in 870 am Newsmakers program and provided listeners a great perspective on L.A.’s economy, downtown’s resurgence and being a successful business leader. Link to the broadcast: http://goo.gl/GlSYKf

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A Three Part Series – Is Raising the Minimum Wage in L.A. a Good Idea?

Please find below the beginning of a three part series that will focus on national and local economic trends that have led cities, like Seattle, San Francisco and Washington, D.C., to pass minimum wage increases. This has inspired L.A.’s political leaders to advance their own proposals to gradually increase the minimum wage within the City from $9 an hour – the current state minimum – to as much as $15.15 an hour starting in 2019. Mayor Garcetti wants to raise L.A.’ s minimum wage to around $13.50 in 2017 and by indexing it to the Consumer Price Index it could reach $15 around 2021. L.A. County Supervisors have also begun to advance a similar effort to raise the wage rate within unincorporated areas of the County.

Serious economic debate over the wisdom of minimum wages has been going on for at least the past 70 years. The reason this has become a big political issue is not that the jobs have changed; it’s that the people doing the jobs have. Historically, low-wage work tended to be done either by the young or by women looking for part-time jobs to supplement family income. Fast-food workforces, meanwhile, were dominated by teenagers. Now, though, plenty of family breadwinners are stuck in these jobs. That’s because, over the past three decades, the U.S. economy has done a poor job of creating good middle-class jobs; five of the six fastest-growing job categories today pay less than the median wage. Though the unemployment rate has decreased for the past few years, real wages for most jobs have barely budged since 2007. Indeed, the whole century so far has been tough: wages haven’t grown much since 2000.

L.A. is on the front lines of this trend. To illustrate this point, according to a recent study commissioned by the City of L.A., a wage increase in the City would benefit about 40 percent of the city’s workforce (609,000 workers) by 2019. Eighty percent of those workers would be workers of color, and they would largely come from low-income families and neighborhoods.

I will attempt to frame this issue in the following ways:

1. What drove America’s economy and workforce to experience a “Great Divergence” in the last three decades.
2. What does the City of L.A.’s labor force look, current workforce trends and the impact the wage increase would have on the economy.
3. How to grow L.A.’s economy to better address the underlying issues driving the minimum wage debate.

Part One

From 1980 to 2005, more than 80 percent of the total increase in Americans’ income went to the top 1 percent; creating a Great Divergence that continues to significantly impact the country’s working middle class, more so than any other income group.  Furthermore, though economic growth was more sluggish during the past decade, productivity increased by about 20 percent, which unfortunately did not translate into wage growth at middle and lower incomes. 

The following research below by the author and journalist Timothy Noah best highlights what he believes has helped cause the Great Divergence.

U.S. Educational System’s Various Failures (30% responsible)

• Throughout the first three-quarters of the 20th century a growing supply of better-educated workers met the demand created by new technologies. The 1944 G.I. Bill, which paid tuition for returning servicemen, played an important role; so did the Sputnik-inspired National Defense Education Act, which increased federal spending on schools at all levels and created a student-loan program for colleges.
• Since the 1970’s High school graduates have not been receiving a significantly better education, on average, than their parents did, partly because elementary, middle, and high schools are not providing an education relevant to the economy’s growing demands.
• America’s colleges and universities are also to blame, not for any educational failing (the United States is a global leader in higher education) but rather for tuition costs, which took off in the 1980s and have accelerated well in excess of general inflation ever since, making the cost of a college education increasingly prohibitive.
• These factors have resulted in our nation having the most-educated 55 year-olds in the world, and a population of 25 year-olds stuck in the middle of the pack. With a smaller pool of better-educated workers means the price of those workers (i.e., their incomes) will continue to rise faster relative to the general population.  This is great news for people with college diplomas or advanced degrees, whose limited supply bid up their salaries.
• In conclusion, the slowdown of educational attainment gains is uniquely American when compared to other industrialized nations and began at about the same time as the Great Divergence (post 1975).

Wall Street & Corporate Boards (30% responsible)

• Today’s high earners are overwhelmingly jobholders who derive most of their income from their wages; though the wage structure itself is grossly misshapen, as reflected in the share of national income going to the top 1 percent, which more than doubled during the Great Divergence, and now stands at about 21 percent.
• The share of national income going to the top 0.1 percent had increased nearly fourfold during the Great Divergence.
• Relatively few of these high-earners are immigrants, relatively few make their fortunes through trade with China or Mexico, and they enjoy much higher incomes than most people at educational levels as high or higher then them.
• Some economists suggest that inequality was created largely by a growth in corporate lobbying that influenced both Republicans and Democrats to deregulate the finance industry.
• The finance sector saw its share of corporate profits rise from less than 10 percent in 1979 to more than 40 percent in the aughts and its incentive structure simply went berserk starting in the 1980s with the development of ever-more-complex financial instruments increasingly divorced from traditional notions of value.
• Other winners include corporate and entertainment sectors that are often beneficiaries of the Winner Take All phenomenon (Kaus calls it the “Hollywood Effect”), in which those deemed best in their field are, thanks to improved technology, able to disseminate praise for their work across a broader geographic area and sell their services to many more people than they ever could in the past.
• Pay for top executives declined sharply during World War II, increased modestly from the mid-1940s to the mid-1970s, and took off like a rocket during the 1980s and 1990s.

Labor’s Decline (20% responsible) 

• The Great Divergence coincided with a dramatic decline in the power of organized labor.  Union members now account for about 12 percent of the workforce, down from about 20 percent in 1983. When you exclude public-employee unions (whose membership has been growing), union membership has dropped to a mere 7.5 percent of the private-sector workforce.
• Union membership has been declining more precipitously for workers at lower incomes.
• The Taft-Hartley Act was the principal cause of the American labor movement’s eventual steep decline.
• Taft-Hartley halted labor’s growth and then, over many decades, enabled management to roll back its previous gains. Big manufacturing’s desire to do so grew more urgent in the 1970s as inflation spun out of control, productivity fell, and the steel and auto industries faced stiffer competition from abroad. Even before Ronald Reagan’s election, Levin and Temin write, the Senate signaled the federal government was rapidly losing interest in enforcing Truman’s 1945 pact when it killed off, by filibuster, a pro-labor reform bill aimed at easing union organizing in the South.
• The U.S. and the UK smashed the unions, in the belief that they had to compete on cost. The result? They quickly ended up wrecking their industrial base, unlike, Sweden, France and Germany.
• For example, government policy in Germany is much more supportive of labor; for example, during the recession it paid businesses to keep workers employed (something the United States was willing to do only for state government workers).
• The idea that pro-labor policies can produce an economy that’s both more egalitarian and more robust—as occurred under the Treaty of Detroit—has, regrettably, become unfashionable.

Trade (10 % responsible)

• Some leading economists argue that international trade played a much smaller role in U.S. manufacturing’s decline than had domestic considerations.  For example, the U.S. manufacturing sector’s own efficiency, had lowered prices (Between 1970 and 1990, the prices of U.S. goods relative to services had fallen by nearly one-quarter) on consumer products and therefore on the proportion of U.S. spending on goods (TVs, refrigerators, groceries) as opposed to services (CT scans, legal advice, college tuition).
• Today one leading economist says that the United States had in 2006 crossed “an important watershed: we now import more manufactured goods from the third world than from other advanced economies.”  These imports of manufactured goods that come from less-developed nations have more than doubled as a percentage of gross domestic product, from 2.5 percent in 1990 to 6 percent in 2006.
• The wage levels in the countries ramping up U.S. trade the fastest— Mexico and China—were considerably lower than the wage levels in the countries whose increased U.S. trade had created worry in the 1990s—South Korea, Taiwan, Hong Kong, Singapore. The Southeast Asian nations had, in 1990, paid workers about 25 percent of what U.S. workers received. By 1995 they paid 39 percent—demonstrating, reassuringly, that low- wage developing countries that undergo rapid economic growth don’t stay low-wage for long. But as of 2005, Mexico and China paid 11 percent and 3 percent, respectively.  It’s likely that the rapid growth of trade since the early 1990s has had significant distributional effects.
• Where does that leave us? Trade does not appear to have contributed much to the Great Divergence through the mid-1990s. Since then, it may have contributed to it more significantly, though we don’t yet have the data to quantify it.

Immigration (5% responsible)

• When economists look at actual labor markets, most find little evidence that immigration harms the economic interests of native-born Americans, and much evidence that it stimulates the economy.
• Immigrants accounted for one-third of the U.S. population growth between 1908 and 2007.  Since 1970, the foreign-born share of the U.S. population (legal and illegal) has risen from 4.8 percent to 11 percent. More than half of U.S. immigrants now come from Mexico, Central and South America, and the Caribbean.
• A large minority of immigrants are highly skilled; but for most immigrants, incomes and educational attainment are significantly lower than for the native-born.
• From 1980 to 2000, immigration had reduced the average annual income of native-born high-school dropouts (“who roughly correspond to the poorest tenth of the workforce”) by 7.4 percent.
• In a subsequent 2006 study with Harvard economist Lawrence Katz, this one focusing solely on immigration from Mexico, Borjas calculated that from 1980 to 2000, Mexican immigrants reduced annual income for native-born high-school dropouts by 8.2 percent.
• In conclusion, immigration clearly imposes hardships on the poorest U.S. workers, but its impact on the moderately-skilled middle class—the group whose vanishing job opportunities largely define the Great Divergence—is much smaller.

Tax Policy (5% responsible)

• Taxation is the most logical government activity to focus on, because it is literally redistribution: taking money from one group of people (through taxes) and handing it over to another group (through government benefits and appropriations).
• Another compelling reason to focus on taxation is that income-tax policy has changed very dramatically during the last 30 years.
• Current tax rates at the federal level are a whisker under 40 percent (up from 35), which means that the top bracket would remain 30 to 50 percentage points below what it was under Presidents Eisenhower, Nixon, and Ford. That’s how much Reagan changed the debate.
• Reagan lowered top marginal tax rates a lot, but he lowered top effective tax rates much less—and certainly not enough to make income-tax policy a major cause of the Great Divergence.
• No one can really demonstrate that U.S. tax policy had a large impact on the three-decade income inequality trend one-way or the other. The inequality trend for pre-tax income during this period was much more dramatic. That’s why academics concluded that government policy didn’t affect U.S. income distribution very much.
• Some economists have shown evidence that contrasting policy choices of Democratic and Republican presidents are at play. Under Republican administrations, real income growth for the lower- and middle-classes has consistently lagged well behind the income growth rate for the rich—and well behind the income growth rate for the lower and middle classes themselves under Democratic administrations.

Computers:  A Transformative Technology (0%)

• Computers are eliminating jobs, but they’re also creating jobs. The problem is that the kinds of jobs computers tend to eliminate are those that require some thinking but not a lot—precisely the niche previously occupied by moderately skilled middle-class laborers.
• Computerization eliminated many moderately skilled jobs, and it increased demand for workers with a college or graduate-level education.  According to some economists this accounts for two- thirds of the increase in income inequality during the Great Divergence.
• This transformation from a less manufacturing-based economy to a knowledge-based economy produces more of an upper class and a lower class, but not much of a middle class.
• We know that computers put a premium on more highly educated workers, but no one can really demonstrate that computers caused the Great Divergence.

Race & Gender & Single Parenthood (0% responsible)

• To contribute to the growth in income inequality over the past three decades, the income gaps between women and men, and between blacks and whites, would have grown. They didn’t.
• But the male-female income gap will continue to narrow in the future, if only because in the U.S. women are now better educated than men.
• Ever since the late 1990s female students have outnumbered male students at colleges and universities.  The female-male ration is currently 57 to 43, and the U.S. Department of Education expects that disparity to increase over the next decade.
• But women have been much more likely than men to shift upward into higher skilled jobs—from information technology engineer and personnel manager on up through various high-paying professions that require graduate degrees (doctor, lawyer, etc.).