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What Does the Seattle Experience Teach Us About Minimum Wages?

By Jesse Rothstein and Diane Schanzenbach·August 7
University of California, Berkeley and Northwestern University

The Issue:

The federal minimum wage is $7.25, well below historical levels in inflation adjusted terms. Both California and New York State, along with several cities, are scheduled to raise their minimum wages to $15 per hour in coming years. A new study of recent Seattle minimum wage increases, to as high as $13 per hour for some workers, finds much larger employment losses than does the previous literature. Some have taken this as evidence supporting the view that higher minimum wages have much more negative employment effects than are seen for lower wage floors, and thus that the new wave of increases is ill-advised.

The Facts:

  • The new study, by a team of scholars at the University of Washington, finds that hours worked by low-wage workers in Seattle fell by 9 percent following the minimum wage increase. The study also finds that the increased minimum lifted average wages in these jobs by only 3 percent, implying that the average income of individuals who would have had low-wage jobs in the absence of the increase fell by $125 per month.
  • While Seattle's $13 minimum wage is high by historical experience, in practice the raise received by many workers was below this rate because the increase was lower at smaller firms and for workers that receive tip income or health benefits.
  • The study excluded employers with multiple locations such as retail chains, which tend to be high employers of low-wage workers.
  • The Seattle economy was booming during the period covered by the study, which might have been expected to reduce low-wage employment as employers offer higher wages to attract scarce workers. Determining which changes in Seattle can be attributed to the minimum wage hike requires finding a comparable location that is subject to all of the same market forces, but did not institute a minimum wage increase. The study used other areas in Washington state as a comparison. However, these areas did not see similar growth in high-wage employment.

What this Means:

It is an important and unresolved question whether minimum wages at the levels that will be reached in many cities and states in coming years—and that have been proposed at the federal level—will lead to meaningful reductions in employment, even where the evidence points to few or no such effects for lower minimum wages. Unfortunately, the Seattle study does little to resolve this question. We cannot be confident that it has uncovered the causal effect of the Seattle minimum wage increase, which took effect in an economy that was already booming. Moreover, its estimates are not directly relevant for considering the effects of higher minimum wages than estimates from past research since the Seattle study pertains primarily to workers facing minimum wages well below $13 per hour.

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What’s the Problem with Low Inflation?

By Michael W. Klein·August 6
Fletcher School, Tufts University

The Issue:

The Federal Reserve has persistently undershot its inflation target of 2 percent since 2012 raising concerns by the persistence of inflation below this target level. These recent concerns stand in stark contrast to the experience of the 1970s when high inflation was widely viewed as the most pressing problem facing the nation. What are the sources of concern today that inflation is too low?

The Facts:

  • The U.S. inflation rate peaked at over 10 percent in 1974, and then again reached this point in 1980, but declined during the recession of the early 1980s and has remained low since. The Federal Reserve set an inflation target of 2 percent as a policy goal in 2012, but the inflation rate has been almost always below this level since the policy was instituted (see chart).
  • Low inflation can be a signal of economic problems because it may be associated with weakness in the economy. It is striking that this recovery has not been accompanied by increasing inflation, even with unemployment rates of 4.3 percent in June and July, the lowest string of two-month unemployment rates in more than 15 years.
  • Persistently low inflation can limit the scope for monetary policy because interest rates decrease as expected inflation declines. Low interest rates, along with the fact that interest cannot go below zero (or, at least, not by much), limit the scope for the Federal Reserve to further lower interest rates when the economy is weak. Low inflation can also potentially impact the functioning of the financial system.

What this Means:

The fact that inflation has been below the Federal Reserve's target even as unemployment has reached levels consistent with an economy functioning at full employment is somewhat of a mystery. It may be that inflation is responding slowly to economic circumstances and that as the labor market continues to tighten, wages will start increasing and prices will follow. On the other hand, low inflation could reflect an economy weaker than what the unemployment rate would lead us to believe. While economists do not fully know why inflation has been so quiescent, they do understand some of the potential challenges of this outcome.

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A Public Pension Time-Bomb?

By Daniel Bergstresser·August 2
Brandeis University

The Issue:

Underfunded pension liabilities have been an important element of most of the recent high-profile public sector defaults, and represent an important challenge for state and local finances. Fully funding state and local pension commitments will, in many places, place significant strains on state and municipal finances. Many states and localities will need to undertake some combination of raising taxes and cutting spending on government services like schools, public safety, and infrastructure.

The Facts:

  • Many of the workers employed by state and local governments participate in state-sponsored defined benefit pension plans. A defined benefit pension plan promises workers a stream of post-retirement benefits that are determined by years of service, the wages or salary that the employee earned while working, and possibly other factors such as age at retirement. This means that the employer will be responsible for making up any shortfall between promised benefits and the resources available in the pension fund.
  • Public-sector Defined Benefit pension plans appear to be underfunded by over $1 trillion, meaning that the value of the pension liabilities was more than $1 trillion greater than the value of plan assets, when these liabilities are valued following the accounting rules of the Governmental Accounting Standards Board (GASB). But many economists believe this estimate is low relative to the true extent of the underfunding.
  • There is wide variation among states and localities in their public sector's ability to meet pension obligations. The legal ability of state and local governments to cut defined pension benefits also varies from state to state and plan to plan. In many states, pension benefits, once earned, enjoy constitutional protection.

What this Means:

Dealing with the state and local pension crisis will require that pain be distributed among taxpayers, local residents, current and former state and local employees, and those holding state or municipal bonds. The precise mix of who will feel this pain, and in what amounts, will depend on jurisdiction; on factors such as the size of pension shortfalls, demographic factors, and the legal status of pensions in a given state; and on political considerations. These adjustments will be a key component of both the evolution of the municipal bond market and local political environment over the coming decades.

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Does Increased Access to Medicaid Stimulate Job Mobility?

By Adriana Kugler·July 31
Georgetown University

The Issue:

Does employer-provided health insurance keep workers in jobs they would otherwise choose to leave, just so they can maintain access to health insurance?  If so, this would represent an important restriction in labor markets, keeping workers from moving from job to job, or from changing occupations, in a way that benefits both them and the overall economy.

The Facts:

  • Unlike most other developed countries, health insurance in the United States has been primarily provided by employers, covering about half of the U.S. population in 2015.
  • Since workers can't typically take their existing coverage with them, factors such as loss of coverage due to a pre-existing condition, the cost of paying for coverage between jobs, and disruption in the continuity of care with their healthcare providers can play a role in the decision of whether to change jobs.
  • There is consistent evidence that those who have access to health insurance outside of their jobs are more likely to move jobs. Several studies find that employees who have a spouse with health insurance are more likely to move jobs than those who depend on their own employment for health insurance.
  • And, outside insurance might make it easier for people to make employment changes that lead to a better match for their skills. Ammar Farooq and I find that the expansion of Medicaid during the 1990s and 2000s enabled workers to move to new occupations that had higher educational requirements and paid better. States that expanded Medicaid coverage by making it available to people with higher levels of income, saw a higher percentage of workers changing occupations towards better-paid matches (see chart).

What this Means:

The labor market consequences of changes to our health insurance system have not figured prominently in the debates regarding the Affordable Care Act or cutbacks to Medicaid. However, these effects merit greater attention especially when millions of workers could potentially lose their health insurance. The ability of workers to move to new jobs, and to change occupations, has been a key to the recovery of the labor market since the depths of the downturn of the 2008 Great Recession. Medicaid is key to the health of workers, and it is also key to the healthy working of the job market.

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Do Immigrants Cost Native-Born Taxpayers Money?

By Francine Blau and Gretchen Donehower·July 26
Cornell University and University of California at Berkeley

The Issue:

Those in favor of less immigration argue that immigrants cost more in government-provided benefits than they pay in taxes. But are immigrants costly to native-born taxpayers?

The Facts:

  • The United States is a nation that runs budget deficits. This means that, on average, everyone receives more in public expenditures than they pay in taxes. Whether this is more pronounced in the case of immigrants is the more relevant question.
  • At any given point in time, the biggest determinant of the net fiscal impact (taxes paid less benefits received) of any individual is their age. In the working ages, immigrants are less fiscally beneficial than native-born working age persons because they earn less on average and thus pay less in taxes. The working-age children of immigrants (the 2nd generation) on the other hand, are the highest net taxpayers of all. In the older ages, immigrants and their children are less expensive as they age than native-born elderly, mostly because they get less in old-age benefits (see chart).
  • Because a person's fiscal impact varies across their lifetime and carries on to the next generation, it makes sense to look at the fiscal costs and benefits of immigration over a longer time horizon. The fiscal impact over the next 75 years of an additional immigrant, including the costs and benefits of his or her descendants, is strongly positive: with the government accruing an estimated net present value of $173,000 to $259,000, according to a 2017 report of the National Academies of Science.

What this Means:

Estimates of the fiscal impacts of immigrants are complex and depend on the time horizon chosen for the analysis. Over the long horizon such estimates, under the most likely scenarios, generally find that immigrants are not a significant fiscal drain. We do see, however, that there is a disconnect in the level of government that bears the greatest costs of immigration (state and local governments) versus the level which reaps the greatest tax rewards (federal). One way to address this is through greater transfers of funds from the federal government to those states with large immigrant populations.

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