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The Chilling Effect of Non-Compete Agreements

By Matt Marx and Ryan Nunn·May 20, 2018
Boston University and The Hamilton Project, Brookings Institution

The Issue:

American workers are often asked to sign away their right to work through non-compete clauses in employment contracts. The conditions under which workers sign the contracts are often not conducive to a true negotiation, and may be contributing to a rise in employer market power and to depressed wage growth for American workers. Moreover, non-competes can limit entrepreneurship both for individuals and at the regional level.

The Facts:

  • A non-compete is part of an employment contract in which a worker pledges not to join or found a rival firm for a fixed period of time following the termination of employment. About 16 to 18 percent of all U.S. workers are currently covered by a non-compete agreement.
  • In principle, workers could benefit from non-competes. For example, professional athletes may be willing to forfeit the right to jump from team to team in exchange for a lucrative, fixed-term contract. But evidence suggests there is little negotiation of these non-compete contracts: 70 percent of those with non-compete agreements were only asked to sign after receiving their job offer, and 47 percent were asked on or after the first day of work (see chart).
  • Non-competes lower overall job mobility. States with more stringent non-compete enforcement experience reduced dissemination of academic discoveries. Non-competes also make it more difficult both for workers to found startups and for those startups to attract employees and scale up.
  • A worker does not need to have been sued by their former employer for the non-compete to have an effect. Even the possibility of legal action by one’s ex-employer produces a “chilling effect” on job mobility. This can occur even when the particular contract the worker signed is not technically enforceable in the state.

What this Means:

If it were the case that workers made fully informed decisions about signing a non-compete and could negotiate higher compensation in exchange for doing so, these agreements could be valuable for both workers and firms. However, the actual conditions under which non-competes are used provides reason to doubt that non-competes are indeed mutually beneficial in all or most cases. Moreover, even if a non-compete could be beneficial for an individual worker and her employer, it could still be damaging to the broader economy — for instance, if overall worker mobility and information spillovers decline. Informing workers about non-competes in advance of hiring, requiring that employers provide legal consideration in exchange for signing a non-compete, and disallowing the practice of ex-post judicial modification of non-competes are all possible directions for reform. Eliminating the most damaging uses of non-competes would help workers and employers to interact on a more level playing field.

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Teacher Pension Paradox: Rising Costs and Stagnant or Declining Benefits

By Cory Koedel and Michael Podgursky·May 17, 2018
University of Missouri

The Issue:

Teachers’ strikes across the United States reflect increasing frustration with stagnant compensation and a perceived lack of sufficient funding for education. An important component of the stagnant compensation of teachers is the rising costs of funding pensions. To the extent that school revenues are diverted to pay down pension debts, fewer funds are available to raise the salaries of current teachers and to fund education.

The Facts:

  • Most teachers in the United States are covered by a public defined-benefit pension plan in which the employer agrees to provide a guaranteed payment at retirement. The employer is obliged to put aside sufficient savings to meet the expected future pension payments. But actual pension obligations can exceed the assets accumulated by the system.
  • Virtually every teacher defined-benefit pension plan in the United States has experienced an increase in unfunded liabilities since the turn of the century, and in many states the increase has been substantial.
  • When plans incur debt, the response is to raise contribution rates paid by teachers, school districts, and state governments. Since 2004, total employer contributions for teacher retirement benefits, inclusive of Social Security, have increased from 12 to almost 23 percent of salaries on average nationally.
  • Recent rate increases to plans nationally are needed to pay down debt and do not pay for improved benefits for teachers. In fact, new hires in many states have experienced benefit reductions. The disconnect between rising pension costs and stagnant (or declining) pension benefits likely contributes to general discontent around teacher compensation in the U.S.

What this Means:

Rising pension costs without corresponding increases in benefits have created a large and growing wedge between the cost of employing teachers and teacher compensation. Absent fundamental reforms, short-term increases in contributions that fail to address the underlying problems with teacher plans will all but assure a repeat of recent unrest in the future.

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What Does the Stock Market Tell us About Politics?

By Raymond Fisman and Eric Zitzewitz·May 14, 2018
Boston University and Dartmouth College

The Issue:

Politicians often take credit for a rise in the stock market, which is viewed as an indicator of a robust economy. But politics has a much more limited effect on the overall economy than on particular industries, or even particular companies, whose fortunes rise or fall with changes in tax, trade or regulatory policies. Tracking changes in the stock prices of companies or industries that are likely to be impacted by specific government policies can provide a more fine-tuned gauge of the market's expectations that the policies will be implemented.

The Facts:

  • Following the surprise results of the 2016 U.S. presidential election, companies and investors had to adjust their expectations of which types of policies were likely to be pursued by the federal government. Financial services saw particularly strong gains, on expectations of financial deregulation. Oil stocks did well, while share prices for renewable energy companies suffered. Companies that paid relatively high tax rates saw relatively strong gains, indicating investor expectations of a tax cut. Companies facing stiff import competition also did well, under the expectation of more restrictive import policies.
  • Tracking the stocks of companies that saw big changes in response to the election can provide information of the market's evolving perception of the Trump administration’s expected success in executing its policies. In that spirit, we construct an index that is the difference between stock prices of companies whose share prices rose and those whose share prices fell on November 9th, 2016, as markets reacted to the previous evening’s surprise that Donald Trump, rather than Hilary Clinton, would be the next president (see chart).
  • The index declined in the period during which the Trump administration and the Republican-controlled Congress attempted and failed to achieve the repeal of the Affordable Care Act (also known as Obamacare). In contrast, the passage of tax reform led to higher returns for companies that had faced relatively high tax rates. It also led to an increase in the value of companies that had performed well on Election Day (even those that didn’t have especially high tax rates), perhaps indicating that investors saw the success in tax reform as indicative of President Trump’s ability to act on his other campaign promises.
  • Movements in the index also reflect political events that raised questions about the Trump administration’s longevity and its political capital as it faced questions about Russian interference in the campaign as well as the possible obstruction of justice by the President and his staff.

What this Means:

The evolution of an index distinguishing between Election Day winners and losers offers insights into perceptions of the ability of the Trump administration to enact its policies, both because of legislative victories or defeats and because of the threats to the administration of ongoing investigations. The analysis here illustrates in a stark way in which politics affects the distribution of gains and losses across companies and industries.

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Race and Ethnicity Within Widening Income Inequality in the United States

By Randall Akee·May 10, 2018
UCLA

(A a ratio of 1 means representation in the top 10 percent is commensurate with a group's representation in the overall labor force. A ratio greater than 1 represents an overrepresentation of that group in the top decile and a ratio of less than 1 represents an underrepresentation).

The Issue:

Is widening income inequality in the United States exacerbating the income differences between racial and ethnic groups? Are some groups seeing better outcomes than others?

The Facts:

  • The richest 10 percent of the population earn over 40 percent of total annual earnings in the United States. The poorest 10 percent receive about 1 percent of national income. The divergence in the concentration of income has been increasing over the past few decades.
  • While there have been ample studies of U.S income inequality, data limitations have made it difficult to consider how racial and ethnic characteristics factor in the picture. This is especially true for some of the most economically marginalized populations of the United States, such as American Indians and Pacific Islanders. My co-authors and I were able to link information from the U.S. Census — which contains racial and ethnic information for individuals — with their income information available in tax records in a recent study.
  • One simple measure that gives a sense of the relative standing of different racial and ethnic groups in the national income distribution is looking at whether the share of each group at the top and bottom of the earnings distribution is proportionate to the group's share in the total population. For example, Whites accounted for almost 90 percent of income earners at the top 10 percent of the income distribution in 2000, but made up only about 75 percent of the overall labor force that year, a ratio of 1.2 (see chart above). Whites have been, and continue to be, disproportionately represented among the wealthiest 10 percent of the population.  But, between 2000 and 2014, Asians significantly increased their representation in the top 10 percent of the income distribution. In 2014, the "Other Race" category also received more income than its proportionate share among the top 10 percent.
  • All racial and ethnic minority groups are disproportionately represented in the bottom 10 percent of the income distribution. The degree of overrepresentation increased for almost all the groups between 2000 and 2014 (indicated by the fact that the ratios moved further away from 1, see chart below).
(A a ratio of 1 means representation in the bottom 10 percent is commensurate with a group's representation in the overall labor force. A ratio greater than 1 represents an overrepresentation of that group in the bottom decile and a ratio of less than 1 represents an underrepresentation).

What this Means:

Not only are disproportionately large amounts of income accruing to the top end of the income distribution, it is also accruing disproportionately to a few race groups. Overall, there is significant variation in the representation at the top and bottom of the income distribution across racial and ethnic groups. The statistics presented here cannot address the sources of these differences across racial and ethnic groups and, therefore, the role of factors such as education, experience or changing industrial and occupational labor demand. Nevertheless, these statistics demonstrate stark differences across racial and ethnic groups and may point to sources of disparity beyond strictly economic ones.

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Learning from Hurricane Sandy? Rising Seas and Housing Values in New York

By Francesc Ortega and Suleyman Taspinar·May 2, 2018
Queens College, City University of New York

(click here for a larger version of the map)

The Issue:

The chance of large-scale coastal flooding episodes is increasing. Looking at what happened to property values in New York City after Hurricane Sandy gives us a first look at how those on the front lines may be responding.

The Facts:

  • Past research has found the response of homebuyers towards the threat of climate-related hazards to be short-lived—very often vanishing completely within five years. Flood insurance take-up rates, for instance, have tended to spike the year after a flood and then gradually decline to the levels that prevailed before.
  • When Hurricane Sandy hit New York on October 29, 2012, it was the largest Atlantic hurricane on record and the second costliest in U.S. history, flooding 17 percent of New York City (or nearly 90,000 buildings).
 
  • Prior to Sandy, housing values were essentially the same for properties located on the flood zone and similar properties elsewhere in the city. After the hurricane, we find robust evidence of a negative impact of Sandy on the price trajectories of houses in New York’s flood zone (see map and chart). We estimate a persistent price discount of about 8 percent that, 5 years after the hurricane, shows no signs of vanishing.
  • Our findings are in line with those of a recent study using national data, which estimates a 7 percent price discount for properties exposed to rising sea levels. Similarly, a new study of Miami-Dade County, Florida, finds that prices for properties that are closer to sea level — and hence more subject to flooding risks — are appreciating more slowly than properties at higher elevations.

What this Means:

A timely revision of beliefs about the risks entailed by climate change is important to remain optimistic about the adoption of policies and innovations to help coastal cities adjust. Our findings suggest that, in some cases, catastrophic events — and the economic disruption they bring forth — may be needed to create awareness regarding the changing risks associated with climate change.

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