·January 7, 2019
Texas A&M University
Debates on the minimum wage tend to be about whether raising it leads to a reduction in employment, typically focusing on job losses soon after the minimum wage is raised. What often gets lost in this debate is the multifaceted nature of work, and the many types of adjustments that can, and do, occur in the workplace in response to an increase in the minimum wage.
- There are a number of ways that the nature of a job can change in response to a higher minimum wage, including the effort expected from a worker, a point that has been known for over a century. The workplace environment can change in other ways as well. Hours of work can be reduced. Employers may also cut benefits to offset higher wage costs. Jeffrey Clemens, Lisa Kahn, and I find that reductions in the provision of employer health insurance offset at least 10 percent of wage gains for low-wage workers.
- An increase in the minimum wage can also alter the types of individuals hired. Evidence shows that employers tend to shift towards workers who are older and more credentialed when the minimum wage is raised. Even among teenagers, research finds that employers substitute towards those from more affluent and educated families when the minimum wage is higher.
- While there is little evidence that firings increase in response to an increase in the minimum wage, there is evidence that the rate of hiring falls and the rate of job growth is reduced over a period of several years.
Policymakers and many economists focus on the short-term impacts of the minimum wage on employment in large part because it is the most obvious and easily quantifiable response to examine. But a growing body of evidence suggests that the effects may be on other aspects of the employer-employee relationship and that longer-run impacts are larger.
State and Local Finance
State and Local Finance
·December 19, 2018
Brandeis University and Stanford University
Unfunded pension liabilities represent a significant challenge to the finances of many state and local governments. The extent of pension underfunding varies from place to place around the country. So too do the ways in which state and local governments are trying to deal with the issue. Unfortunately some of the proposed solutions to address these problems, such as the use of pension obligation bonds, have considerable downsides.
- Many cities and states are experiencing financial stress that stems from unfunded pension obligations. Combining state and local obligations, Illinois is a standout case (see chart). The Federal Reserve estimated aggregate pension liabilities in the U.S. to amount to $8.4 trillion in total and to be underfunded by over $4 trillion, according to September, 2018 estimates.
- There is an ongoing debate as to how the value of pension liabilities should be estimated in today's dollars. Public pensions can use the rate of return they expect to generate on their investments in order to discount their liabilities. The problem is that pensions must be paid regardless of the performance of the assets chosen by the pension system. Investments such as stocks, private equity stakes, real estate investments, and hedge funds almost always have some risk.
- If state and local governments discount their pension liabilities using lower discount rates consistent with the returns on lower-risk assets (such as U.S. Treasury bonds), this means that they would need to set aside a higher share of their current budgets to service future pension obligations. This can strain budgets in the short run and lead to higher taxes or expenditures diverted away from current services. On the other hand, using a higher discount rate based on an expected market return can be the equivalent of a transfer from future taxpayers to today's taxpayers if the targeted return is not realized and the taxpayers of the future are forced to foot the bill.
- One approach to dealing with these unfunded pension liabilities is to use pension obligation bonds (POBs), which are a bonds issued by a state or locality whose proceeds are directed to the pension funds. In substance, the issuance of a taxable pension obligation bond amounts to a gamble that the assets in the pension fund will outperform the cost of the bond issued. So a pension obligation bond transaction amounts to borrowing even more money to invest in the stock market. Failing to achieve the targeted rate of return would mean that the issuer would have to pay both the debt service requirements of the taxable bonds and also the unfunded pension liabilities that would remain unmet.
Fixes that offer seemingly painless solutions, such as pension obligation bonds, carry a high degree of risk, and often amount to passing the problem to future taxpayers. Confronting the burden of pension obligations will necessarily involve taking painful steps. The set of people who will have to take the hit is some subset of taxpayers, people who depend on public services, retirees and bondholders — but exactly the way in which the pain is allocated across those people will be the outcome of a political process that is difficult to predict. If you add up the total amount of suffering it is going to be a lot — it is just not clear how it is going to be allocated.
Crime and Criminal Justice
Crime and Criminal Justice
·December 18, 2018
University of California, Los Angeles
for a larger version of the graph.)
When it comes to putting people behind bars, the United States is an outlier. Maintaining a high rate of incarceration comes at a high cost to taxpayers, as well as to those who go through the system and their families. While there have been bipartisan shows of support for prison reform over the past several years, the issue has been stalled. The "First Step Act" represents a new opportunity to address criminal justice reform.
- The “First Step Act” includes several measures that would reduce over-incarceration in the U.S. and introduces new incentives for rehabilitation of incarcerated individuals, with the goal of reducing recidivism rates after release. While the measure will only affect the federal prison population, which represents 8 percent of the individuals incarcerated in the U.S., this legislation may serve as a catalyst for future federal, state and local incarceration reforms.
- With more than 2.1 million individuals serving sentences in jails and prisons, the U.S. has a higher incarceration rate than any other country (see chart). In 2013, U.S. spending on incarceration was over $82 billion, or more than $260 per capita. People who have been incarcerated face barriers to employment, low earnings, and their families are at increased risk of poverty.
- The “First Step Act” includes provisions that reduce sentences for incarcerated individuals who are deemed low-risk. Shortening sentences for these individuals is unlikely to have adverse effects on crime. Some research finds that longer sentences reduce re-offending rates after release, but these reductions do not always outweigh the cost of detention. And new research finds that longer sentences can cause an increase in re-offending, due to social or emotional harm from incarceration, allowing offenders to build criminal expertise, or by causing labor market skills to atrophy while an individual is incarcerated.
The case is mounting for fair-minded and common-sense reforms to the overly punitive and expensive system of incarceration in the United States. A growing body of economic research supports the bipartisan case for prison reform, through developing sensible and proportional sanctions and investing in rehabilitation for offenders. The “First Step Act” represents a positive move in this direction.
Editor's note: This post updates "The Economic Case for Sentencing Reform", originally published on May 19, 2017.