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Could Increasing Market Power Among Firms be Hurting Workers’ Wages?

By Ioana Marinescu·April 22, 2018
University of Pennsylvania

(Click here for a larger version of the map)

The Issue:

Wages for the typical American worker have been stagnant since the late 1970s. Increasing competition with low-wage workers abroad, automation, the decreasing power of unions, and slow productivity growth are often cited as possible explanations for this poor wage performance, particularly for less-educated workers. But another possible factor has been receiving increasing attention lately: a lack of competition for workers among firms.

The Facts:

  • People's ability to negotiate for better wages depends, in part, on competition for workers among firms. When there is high labor market concentration (a situation where there are very few firms hiring workers or there is a dominant firm in the market), workers are put in a weak negotiation position and wages are lower than would otherwise be the case.
  • The average U.S. labor market is highly concentrated. This means that a relatively small number of firms account for a large share of hiring for each occupation within many commuting zones. Larger cities generally have lower labor market concentration while labor markets are more concentrated in rural areas. Labor market concentration also varies across regions of the country, with higher concentration across a broad swath of the middle of the country (see map).
  • There is evidence that higher concentration among employers is associated with lower wages for workers. Our analysis of data from CareerBuilder.com indicates that an increase in labor market concentration is associated with a decrease in wages, even when taking into account factors like how tight the labor market is in a particular area and occupation. We estimate that, on average, a 10 percent increase in concentration is associated with a 0.3 to 1.3 percent decrease in wages. Furthermore, this effect is larger in smaller cities.
  • Given the extent of existing employer concentration in U.S. labor markets, mergers and other circumstances that reduce competition for workers among firms are likely to have a negative impact on wages.

What this Means:

New research provides compelling (albeit early stage) evidence that higher labor market concentration is associated with significantly lower posted wages for new jobs. This has implications for merger and antitrust policy. To date, no court has ever condemned a merger because of its anticompetitive effects in labor markets. This may be because it has not been clear how widespread labor market power truly is, and how much it affects wages. But mergers that increase labor market concentration should invite very close scrutiny.

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Is Financial Regulation Doing the Right Amount to Prevent Cascading Crises?

By Daniel Bergstresser·April 12, 2018
Brandeis University

(Click here for a list of systemically important financial institutions under current and proposed asset thresholds.)

The Issue:

One of the perceived causes of the severity of the 2008 financial crisis was that some institutions that failed, or came close to failing, had the potential to cause a cascade of other problems. Part of the response to the crisis, embodied in the 2010 Dodd-Frank financial reform bill, was to make efforts to guard against this type of risk by identifying systemically important financial institutions (SIFIs) and subjecting them to more regulation than institutions that are not considered systemically important. But the Dodd-Frank financial reforms have come under attack, with opponents of these reforms arguing that they impede bank activity and therefore hurt economic performance.

The Facts:

  • Systemic risk arises when stress at one financial institution directly causes difficulties at other institutions. For example, the failure of Lehman Brothers in September 2008 led to great stress throughout the financial system because of the uncertainty concerning which institutions would be adversely affected by Lehman’s inability to make good on its commitments.
  • Determining the criteria by which institutions are deemed to be systemically important is matter of debate. Under Dodd-Frank, banks with assets of $50 billion or more were designated as SIFIs, which subjects them to stricter oversight from the Federal Reserve.
  • The danger posed by systemic risk comes because financial institutions do not fully account for the effects of their decisions on others and, consequently, lack incentives to adequately guard against the possible wider adverse consequences of their actions. ”Moral hazard” is the term used for a situation where an institution engages in risky behavior because it will not fully bear the cost of a bad outcome. It is particularly likely to be a problem if an institution expects that it might be bailed out by regulators.
  • Among other provisions, Dodd-Frank required SIFIs to maintain more capital than other financial institutions. The increase in capital requirements make it more likely that losses at a financial institution will be entirely borne by the shareholders of that institution rather than taxpayers in the form of a bailout, better aligning the incentives of the institutions’ managers and owners with the goal of system-wide financial stability.
  • As the last crisis has receded in memory, banks and other financial institutions have argued that the Dodd-Frank regulations are excessively restrictive and policymakers have begun to take steps in the direction of rolling them back. In March 2018, a bipartisan majority in the Senate passed a bill that would reduce the number of institutions that are subject to SIFI regulations by raising the primary threshold from $50 billion to $250 billion in assets (see chart).

What this Means:

Some of the most important changes introduced by Dodd-Frank involved taking actions to try to limit the potential damage that one failing institution could have on broader areas of the financial system. However, these reforms come at a cost. Financial regulation involves a tradeoff between enhancing safety and stability — and limiting the costs and burdens imposed on regulated institutions and the economy as a whole. Determining where to draw the line is an area of legitimate discussion and debate. The biggest costs though, are those that come with a financial crisis like the one the United States went through in 2008 and 2009.

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Higher Gasoline Taxes and Infrastructure: An Idea Whose Time has Come?

By Dan Sichel·April 7, 2018
Wellesley College

The Issue:

President Trump recently floated the idea of raising the federal tax on motor fuels by 25 cents per gallon as a way to pay for improving the nation's roads, highways and bridges. While some business interests, such as the U.S. Chamber of Commerce currently favor raising the tax, it has faced staunch political opposition over the past decades.

The Facts:

  • U.S. federal taxes are currently 18.4 cents per gallon of gasoline and 24.4 cents per gallon of diesel. While U.S. consumers pay on average about 50 cents per gallon in combined federal and state taxes, people in many European countries pay over $3 in taxes per gallon of gasoline.
  • Federal taxes on motor fuels have not changed since 1993 so, adjusting for inflation, the level of the federal gasoline tax has trended down steadily since 1993 and is well below its 1960 value (see chart).
  • Revenues from these taxes have been an important source of funding for highways and mass transit. As this source of revenue has gone less and less far, Congress has had to transfer a total of about $143 billion to the Highway Trust Fund since 2008 to cover shortfalls.
  • There is widespread agreement that the U.S. surface transportation infrastructure is in need of renewed investment. The oldest portions of the Interstate Highway System are approaching 60 years of age, and 10 percent of the nation's bridges were rated as structurally deficient in 2015.
  • Beyond meeting infrastructure needs, a sound economic case can be made for raising taxes on gasoline. The use of motor fuels creates negative externalities – costs imposed on others that are not reflected in the pump price. These negative externalities include both environmental costs of pollution, that contribute to adverse-health outcomes and climate change, as well as congested roadways. Raising these taxes would bring the cost of a gallon of fuel at the pump into better alignment with the true costs of using a gallon of gasoline and inform consumer choices.

What this Means:

Additional infrastructure spending, if well targeted, likely could boost economic growth and improve Americans’ quality of life. If the U.S. is serious about closing its infrastructure gap, dedicated additional resources will be needed. Higher federal taxes on motor fuels could contribute importantly to that goal. Higher gasoline taxes may well be an idea whose time has come.

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Proposed Immigration Rules and the Safety Net

By Tara Watson·April 3, 2018
Williams College

The Issue:

Current law prevents people who are deemed likely to become a "public charge," that is, dependent upon government support, from becoming legal permanent residents of the United States. The Department of Homeland Security is reportedly proposing to expand the definition and determination of who is a public charge in a way that would make requirements for permanent legal immigration to the United States more stringent. The proposed changes could have important adverse impacts on the lives of legal immigrants and the many U.S. citizens who are part of their families.

The Facts:

  • As drafted, the proposal changes current law to go beyond the receipt of public cash assistance and consider someone as a public charge if he or she has participated in non-cash programs like government-subsidized health insurance and food assistance. The proposal also changes the law by emphasizing the consideration of factors that may make someone likely to use such services in the future, rather than relying mainly on the person’s history. Furthermore, it allows legal non-citizens to be considered a public charge if their dependents use benefits, and this includes many of the 11.5 million U.S.-citizen children in “mixed-citizenship” households (that is, households that include at least one citizen and at least one non-citizen)
  • The proposed change in rules is potentially relevant for about 14 percent of the United States population, including 23 million non-citizens living in the United States and another 21 million citizens who live in mixed-citizenship households.
  • The cash-based safety net has weakened since 1996, while non-cash programs such as food assistance and public health insurance have been expanded. Consequently, non-cash benefits such as Medicaid and SNAP are much more commonly accessed than cash benefits, such as Temporary Assistance for Needy Families (TANF), by both citizens and non-citizens alike. Roughly one in six children who are a U.S. citizen live in a mixed-citizenship household (i.e., a household with at least one citizen and one non-citizen). A significant fraction of children in mixed citizenship households receive non-cash safety net benefits (see figure).

What this Means:

The draft of the administration's proposal, if enacted, would represent a substantial change in the way non-citizens legally living in the United States are considered for permanent residency under the “public charge” doctrine. Legal immigrants who participated in food assistance programs or whose children received public health insurance, for example, could face a roadblock to acquiring permanent legal resident status. The rule likely would have a chilling effect on use of public programs by non-citizens and their citizen children. A substantial fraction of the 33 percent of non-citizen children and 49 percent of citizen children in mixed-citizenship households who currently rely on the Medicaid program for health insurance are likely to go uninsured if the draft proposed rule takes effect.

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Going Away to College? School Distance as a Barrier to Higher Education

By Abigail Wozniak·March 22, 2018
University of Notre Dame

The Issue:

Geographic location is an important factor in determining not just where, but whether, a high school senior goes on to college. About one in six American high school seniors lack access to a nearby college, at either the two- or four-year level. However, the role of geography is overlooked in many higher education funding decisions.

The Facts:

  • The share of students who attend college close to home is large and has increased over the past quarter century. The majority — 56.2 percent — of public four-year college students attend an institution under an hour’s drive away, and nearly 70 percent attend within two hours of their home, according to the latest Higher Education Research Institute’s CIRP survey (see chart).
  • An important share, about 1 in 6, high school seniors lack a nearby college. By one measure, 58 percent of counties — containing 14 percent of the U.S. population — lack local college access.
  • Several studies show that the presence of a college in a person's county of residence is strongly related to college attendance. For instance, when California’s public university systems added four new universities between 1995 and 2005, enrollment in these new universities came predominantly from new enrollments from high schools within 25 miles of a new campus. System enrollment from other high schools was essentially unchanged. This suggests that for some students, the presence of a local college is key to their attendance.
  • Many people are reluctant to move over long distances even when there are large financial benefits to doing so. Despite these large implied costs of moving, most loan and grant programs that seek to expand access to education give the greatest emphasis to covering tuition and other direct costs but do not factor in the differential costs that students face depending on where they live.

What this Means:

When determinants of college attendance are unrelated to ultimate college success, this can lead to underinvestment in higher education. If some students who would equal or outperform their peers simply never attend college, then this is a loss for both those students and our wider society. Such barriers can be addressed in two ways. The first approach is to reduce the impact of barriers by subsidizing college attendance for those without good geographic access. The second approach is to enhance access by building new colleges or college system branches in underserved areas. The first approach is likely to be substantially cheaper, but the second entails potential spillovers to affected communities that might nevertheless make it a cost-beneficial strategy as well.

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