Archive for the 'Living standards' Category

Predistribution or public insurance?

September 26, 2013

See here.

America’s future early education system

May 19, 2013

At some point, the United States is likely to have universal publicly-funded early education for children aged one to four. But while we led the way in establishing universal elementary and secondary schooling and in expanding access to college, on early education we lag well behind some other rich nations. We should pick up the pace.

WHY EARLY EDUCATION?

Universal early education will have two significant benefits. First, many Americans with prekindergarten children want to combine family with paid work.1 But because good-quality out-of-home care can be prohibitively expensive, too many parents settle for care that is mediocre or poor.2 Others simply forgo employment.3

Denmark and Sweden offer a good model. Beginning in the 1960s, these countries introduced and then steadily expanded paid parental leave and publicly-funded childcare and preschool. Today, Danish and Swedish parents can take a paid year off work following the birth of a child. After that, parents can put the child in a public or licensed private early education center. The quality tends to be high, as early education teachers get training and pay comparable to elementary school teachers. Parents pay a fee, but the cost is capped at less than 10% of a household’s income.4

We can see the impact in employment patterns. Among mothers whose youngest child is six to sixteen years old, and thus eligible for free K-12 schooling, the employment rate in the U.S. is just a few percentage points lower than in Denmark and Sweden. Among mothers with a child younger than six, it’s 15 percentage points lower.5

Second, evidence increasingly suggests that good-quality universal early education helps to equalize opportunity by improving the capabilities of children from less advantaged homes.

Americans are strong believers in equality of opportunity. More than 90% of us think “our society should do what is necessary to make sure that everyone has an equal opportunity to succeed.”6 But family conditions are a huge impediment. Some children have parents who read to them, instill helpful traits such as self-control and persistence, shield them from stress and physical harm, expose them to new information and learning opportunities, assist them with homework, provide connections that help them get out of trouble or into a good job, remain in a stable relationship throughout the childhood years, and so on. Other children are less fortunate.7 As a result, whereas an American born into a family in the top fifth of incomes has roughly an 80% chance of ending up in the middle fifth or higher in adulthood, an American born into the bottom fifth has only a 30% chance of reaching the middle fifth or higher.8

Schools help to offset the massive differences in capabilities caused by families. Children from poor homes tend to have much lower measurable skills than children from affluent homes at kindergarten entry. Given the huge variation in home and neighborhood circumstances, we would expect that gap to widen throughout childhood. But it doesn’t; it’s about the same size at the end of high school.9 This tells us that schools have an equalizing effect. Also, during summer vacations, when children are out of school, those from lower-income families tend to fall farther behind.10

If school began earlier in life, we could reduce some of the disparity that exists when children arrive for kindergarten. Indeed, some analysts conclude that the impact of schooling is larger before kindergarten than after.11

The effects of three high-quality early education programs — the Perry Preschool Program in Michigan in the 1960s, the Abecedarian Project in North Carolina in the 1970s, and the Child-Parent Center Education Program in Chicago in the 1970s — have been tracked into early adulthood or beyond. Each program appears to have had positive effects for low-income children that persist throughout the life course. For the Perry and Chicago Programs, gains in test scores faded away but there were long-term gains in labor market success and other outcomes. The same appears to be true for Head Start. This suggests that the key improvement is in noncognitive skills more than in cognitive ability. On the other hand, the Abecedarian Project yielded better long-term behavioral outcomes along with sustained gains in test scores. A natural experiment in Denmark also found lasting test-score gains. So early education’s benefits for children from less advantaged homes may come via both cognitive and noncognitive skills.12

Skeptics point to findings of little apparent impact of existing universal preschool programs for four-year-olds in Oklahoma and Georgia. But these programs are too new to assess long-run effects.13

The Nordic countries, particularly Denmark and Sweden, have had universal early education systems in place for a generation. This may help account for why opportunity is more equal — children’s cognitive abilities, likelihood of completing high school and college, and labor market success depend less on their parents’ education, income, and parenting practices — in these countries than in others.14

In sum, good-quality universal early education will improve work-family balance and very likely will reduce inequality of opportunity.

A possible third benefit is faster economic growth. If universal early education increases employment by mothers and improves the capabilities of Americans who grow up in less advantaged homes, it may boost the economy’s growth rate. But I’m much less confident about this outcome than the other two. Though the Nordic countries have had universal early education for several decades, their economies don’t grow more rapidly now than they used to. Nor do they (apart from oil-rich Norway) grow faster than other affluent nations. If early education does increase economic growth, its impact probably is small enough that it’s overshadowed by the myriad other determinants of national growth rates.15

WHY PUBLIC?

So the potential benefit from early education is substantial. Why does government need to step in? Can’t the market handle this?

No, not well enough. A good early education system will combine three features: accessibility, affordability, and quality. For Americans able and willing to pay a lot for childcare, our current system typically delivers all three. But for those with low to moderate incomes, getting access to affordable care too often means sacrificing quality.16 A universal system with public funding and some direct public provision would change this. It would ensure good-quality care to everyone at an affordable price.

But let’s break this down. Should government pay for early education? Yes, to make it affordable for all. That doesn’t mean it should be free, as I’ll explain in a moment, but it does mean taxpayers should bear a significant portion of the cost.

Here government already is involved. The federal government funds Head Start, some special education services, and tax breaks for childcare. Some state governments fund preschool for four-year-olds and subsidize childcare for poor families. Yet this is nowhere near sufficient to ensure that everyone has access to good-quality care and preschool.

Do we also need government to provide early education? Yes. That’s the only way to guarantee universal access to preschool and care that’s above an acceptable quality threshold. But we don’t need government to be the sole provider. Denmark and Sweden allow private providers, as long as they meet quality standards. In many districts across America we allow private providers for publicly-funded K-12 schooling (charter schools). We allow private doctors and hospitals to provide medical care for Medicare and Medicaid recipients. We should do the same for early education.

What’s the ideal mix? I don’t know. Maybe it’s 25% of kids in public early education centers, or perhaps it’s 75%. This depends largely on how many private providers can combine good quality with a reasonable rate of return.

WHY UNIVERSAL?

Why should early education be universal? Why not just expand Head Start a bit?

Three reasons. First, it isn’t just low-income parents who struggle to find good-quality care that’s affordable. Middle-class parents do too. Second, family structure and parents’ traits and behaviors are key sources of disadvantage, and they don’t overlap perfectly with family income. If we target low-income households, we’ll miss many children who need help. Third, development of cognitive and especially noncognitive skills is aided by peer interaction. Children from less advantaged homes gain by mixing with kids from middle-class homes, which doesn’t happen in a program that exclusively serves the poor.17

WHY NOT BEGIN AT BIRTH?

If early education is so great, why not encourage parents to start right after birth? The reason is that research suggests children tend to fare best staying with a parent during the first year of life.18

So along with facilitating early education for kids aged one to four, we should make it possible for more parents to stay home with their children during the first year.19 Right now, we require that firms with 50 or more employees grant 12 weeks of unpaid leave to new parents.20 Some large firms offer paid leave, but that’s entirely voluntary. Here too, the Danes and Swedes have it about right. They provide tax-funded paid parental leave for roughly one year. A portion is use-it-or-lose-it for the father; if he chooses not to take any leave, the couple loses that time. Otherwise they are free to split the leave however they like.

HOW MUCH SHOULD PARENTS PAY FOR EARLY EDUCATION?

American parents with a child younger than age five in out-of-home care currently pay, on average, about $9,000 per year for that care. Childcare expenditures amount to 40% of income for families with incomes below $18,000, and 20% for those with incomes between $18,000 and $36,000.21 That’s far too much.

How much should parents pay? A sliding scale, with the user fee rising in proportion to family income and capped at around 10%, seems sensible.

Should it be free for those with low incomes? I think that would be a mistake. Early education differs from services that relatively few people opt out of, such as police protection, healthcare, and even K-12 education. Families that prefer to provide stay-at-home parental care for their young children will elect not to use it. This argues for having parents who do use it pay something — even parents with little income. The fee should be modest, but it shouldn’t be zero.

HOW MUCH WILL IT COST TAXPAYERS?

The bill to taxpayers will depend on specific details, but a rough estimate is 1% of GDP, or $160 billion, per year.

There are two ways to reach this number. First, our public spending on K-12 education is about 4% of GDP, or $600 billion.22 There are 50 million students in our public K-12 schools (the enrollment rate is 85-90%23), so public expenditures come to about $12,000 per student. There are around 16 million children aged one to four. Suppose 75% enroll in early education; that’s 12 million children. If we spend $12,000 per child, the same as for K-12 schools, total spending would be around $145 billion. We’ll want a better teacher-child ratio for early education, which will increase the cost a bit, though user fees will help cover this.

Second, public expenditure on early education in Denmark and Sweden is about 1.5% of GDP.24 We’re likely to end up with more private provision and we have a larger per capita GDP, so 1% of our GDP might well be sufficient to create a system that approximates theirs in quality and accessibility.

Note that my estimate of the cost is far higher than that of recent proposals by the Obama administration and the Center for American Progress.25 That’s because those proposals are for relatively small additions to our current system.

How much will taxes increase for individual households? If the distribution of new tax payments needed to fund early education is the same as for existing tax payments, households in the bottom fifth of incomes will pay $133 more per year, those in the lower-middle fifth $333, those in the middle fifth $666, those in the upper-middle fifth $1,266, and those in the top fifth $4,200.26 These amounts are fairly small — an advantage of spreading the bill across the population.27 And actual increases in tax payments probably would be even smaller, since we already spend some public money on early education.

Over the long run, universal early education may pay for itself via increased employment and productivity.28 Even if it doesn’t, however, it’s well worth doing in order to improve work-family balance and equality of opportunity.

SO WHAT’S NOT TO LIKE?

I see seven principal objections to universal publicly-funded early education for the United States.

First, when someone suggests borrowing a policy or institution from the Nordic countries, skeptics immediately point out that these countries are very different from America. They’re small, they’re more ethnically and racially homogenous, and their cultures and histories are quite distinct from ours. What works there, in other words, won’t necessarily work here.

That’s true. But it doesn’t justify blanket skepticism about borrowing. We need to consider the particulars of the policy in question. There is no reason to think a system of publicly-funded early education centers (schools) can function effectively only in a small homogenous country. France does this, even though it’s a pretty large nation. Belgium does too, despite its diversity.29 And we do a reasonably good job ourselves with kindergartens and elementary schools. Education experts and ordinary Americans routinely profess dissatisfaction with our K-12 public schools. But recall the evidence I mentioned earlier: inequality in capabilities expands when children aren’t in school (before kindergarten and during summers), while K-12 schools hold it at bay. American schools could be better, to be sure, but for less advantaged children they are, even in their current condition, far more helpful than the likely alternative.

A second objection is that we don’t know how large the impact of early education will be in boosting the capabilities of children from less advantaged families. The expectation of a sizeable effect is compelling, and we have supportive evidence from K-12 schooling, from three high-quality early education programs, and from cross-country comparison. But that evidence is limited.30

Though this is a legitimate concern, it shouldn’t dissuade us. Equalizing opportunity is such a prized goal that even a modest improvement would be valuable. And regardless of its impact on opportunity, early education will be of considerable benefit in helping parents balance work and family.

Third, some contend that more government spending and higher taxes will hurt the economy. But the relevant evidence says otherwise. Over the past century the United States has shifted from a country with a small government to one with a medium-sized government, but our long-term rate of economic growth hasn’t slowed. And among the world’s rich nations, those with larger governments have tended to grow just as rapidly as those with smaller governments.31

Fourth, some believe government provision of services and benefits weakens families.32 If parents have access to affordable good-quality childcare and preschool, will they be less likely to stay together or get married in the first place? That’s conceivable, but the historical and comparative evidence suggests reason for skepticism. Enrollment in elementary and secondary schools grew steadily in the United States from the late 1800s until around 1960, but it was in the 1960s, after the rise in school enrollment slowed sharply, that rates of divorce and out-of-wedlock birth shot up.33 And more children grow up with both parents in Denmark, France, and Sweden, each of which has a universal early education system, than in the United States.34

Fifth, some worry about rent-seeking if a substantial amount of early education is publicly provided. Public-sector employees may be able to get above-market pay and benefits, increasing the cost to taxpayers.35 The evidence on this is mixed.36 But suppose we as a collectivity do end up paying more than we need to. The question is whether the outcome is worth it. My judgment is yes. It’s the same with our military, police protection, fire fighting, medical care, K-12 schooling, and others. These services yield immense individual and social benefits, and I’m willing to bear a slightly elevated cost in order to ensure that all Americans have access to them.

A sixth objection suggests that publicly-provided services tend to be of low quality. Yet the evidence from our public K-12 schools offers cause for optimism. While there is lots of room for improvement, they do help to equalize opportunity. They also, of course, facilitate employment by parents. Public early education will do the same.

Finally, why not just give the money to parents and let them choose whether to use it on early education or on something else? The reason is that if early education has individual and social benefits, it makes sense to require that the money be used for that and only that. The same is true of safety (military, police), infrastructure (roads, bridges), health insurance (Medicare, Medicaid), and K-12 schooling, among others. Though paternalism is a dirty word for some, a key purpose of government is precisely to help us do things we might not choose on our own.

It’s worth emphasizing that having a universal early education system doesn’t mean anyone will be forced to use it. Parents who prefer to stay home with their children during the first five years will still be able to do so.

WHAT’S IN IT FOR REPUBLICANS?

In 2012, 20 million Americans with incomes below $50,000 voted Republican in the presidential election. Many in this group who have young children can’t afford good-quality out-of-home care. These parents and their kids would benefit from universal early education. The same is true for some of the 20 million Republican voters with incomes between $50,000 and $100,000.37 Republican leaders who want to improve their constituents’ well-being ought to be interested in early education.

Moreover, many of these Americans would embrace publicly-funded early education, at least after the fact. Yes, a significant share of them dislike the idea of big government, but they nevertheless like a lot of the public insurance and public services that our government provides.38 Many of them happily send their children off to public elementary schools, middle schools, and high schools every day. They would do the same with early education. In Oklahoma, one of the reddest of red states, the enrollment rate in the public preschool program for four-year-olds is 74%.39

PATIENCE IS A VIRTUE, BUT WHY WAIT?

America is a long way from universal early education, and the difficult part is the politics. But that’s often the case. Consider healthcare. We began by creating the Veteran’s Administration after the Civil War. Tax breaks for employer contributions to private health insurance came after World War II. Medicare and Medicaid were created in the 1960s. Medicaid coverage was expanded in the 1980s and 1990s, and Medicare in the 2000s. The Affordable Care Act arrived in 2010, and even when it is fully implemented we’ll still fall short of universal access and affordable cost. Advances in our public insurance and public services tend to come incrementally, and early education may be no exception.

Yet that doesn’t mean it’s best to proceed slowly. The case for universal good-quality publicly-funded early education is strong. For America’s parents and children, sooner would be better than later.


Notes

1. Americans used to worry about mothers of young children working outside the home. In the late 1970s, 68% believed “a preschool child is likely to suffer if his or her mother works.” But by 2012, the share had shrunk to 35% (General Social Survey, variable fepresch). Indeed, nowadays support for paid work among mothers of young kids spans the political spectrum. Many conservatives favor strict time limits on receipt of government benefits in order to encourage mothers’ employment, and gender egalitarians point out that four or five years out of the work force (more if there is a second or third child) puts women at a severe disadvantage for later employment and earnings. See Ron Haskins, Work Over Welfare, Brookings Institution Press, 2007; Janet C. Gornick, Marcia K. Meyers, et al, Gender Equality, Verso, 2009.

2. Deborah Lowe Vandell and Barbara Wolfe, “Child Care Quality: Does It Matter and Does It Need to Be Improved?” Special Report 78, Institute for Research on Poverty, University of Wisconsin-Madison, 2000; Jane Waldfogel, What Children Need, Harvard University Press, 2006; W. Steven Barnett et al, The State of Preschool 2012, National Institute for Early Education Research; Jonathan Cohn, “The Hell of American Day Care,” The New Republic, 2013.

3. The labor force participation rate of mothers with children younger than six is just 65%. Bureau of Labor Statistics, “Employment Characteristics of Families — 2012,” using Current Population Survey data.

4. OECD, Starting Strong II: Early Childhood Education and Care, 2006; OECD, Doing Better for Families, 2011; Miriam Nordfors, “Sweden Solves Two Problems at Once,” New York Times: Room for Debate, 2013.

5. OECD, Doing Better for Families, figure 1.9. There is additional U.S.-specific evidence suggesting the employment rate among mothers with young children would be higher if good-quality early education were more accessible; see, for instance, Janice Compton and Robert A. Pollak, “Family Proximity, Childcare, and Women’s Labor Force Attachment,” Working Paper 17678, National Bureau of Economic Research, 2011. Timothy Bartik concludes that the employment benefits of early education are not just in the quantity of jobs but also their quality. See Bartik, Investing in Kids: Early Childhood Programs and Local Economic Development, W.E. Upjohn Institute for Employment Research, 2011.

6. Pew Research Center, 1987-2012.

7. Greg J. Duncan and Richard J. Murnane, eds., Whither Opportunity? Rising Inequality, Schools, and Children’s Life Chances, Russell Sage Foundation and Spencer Foundation, 2011; Annette Lareau, Unequal Childhoods, 2nd edition, University of California Press, 2011.

8. Economic Mobility Project, “Pursuing the American Dream: Economic Mobility Across Generations,” Pew Charitable Trusts, 2012. These numbers are for Americans born between the mid-1960s and the mid-1980s. In a society with perfectly equal opportunity, every person would have a 20% chance of landing on each of the five rungs of the income ladder and a 60% chance of landing on the middle rung or a higher one.

9. James J. Heckman, “Schools, Skills, and Synapses,” Working Paper 14064, National Bureau of Economic Research, 2008; Sean F. Reardon, “The Widening Academic-Achievement Gap Between the Rich and the Poor: New Evidence and Possible Explanations,” in Whither Opportunity?, figure 5.5; John Ermisch, Markus Jäntti, and Timothy Smeeding, eds., From Parents to Children: The Intergenerational Transmission of Advantage, Russell Sage Foundation, 2012, pp. 465-468.

10. Douglas B. Downey, Paul T. von Hippel, and Beckett A. Broh, “Are Schools the Great Equalizer? Cognitive Inequality during the Summer Months and the School Year,” American Sociological Review, 2004; Karl L. Alexander, Doris R. Entwisle, and Linda Steffel Olson, “Lasting Consequences of the Summer Learning Gap,” American Sociological Review, 2007. For discussion of additional findings from natural experiments in which children go without schooling, see Richard E. Nisbett, Intelligence and How to Get It, W.W. Norton, 2009, ch. 3.

11. Jeanne Brooks-Gunn, “What We Can Expect from Early Childhood Intervention Programs,” Society for Research in Child Development, 2003; Heckman, “Schools, Skills, and Synapses”; Douglas Almond and Janet Currie, “Human Capital Development Before Age Five,” Working Paper 15827, National Bureau of Economic Research, 2010.

12. Heckman, “Schools, Skills, and Synapses”; David Deming, “Early Childhood Intervention and Life-Cycle Skill Development: Evidence from Head Start,” American Economic Journal: Applied Economics, 2009; Arthur J. Reynolds et al, “Age 26 Cost-Benefit Analysis of the Child-Parent Center Early Education Program,” Child Development, 2011; Gøsta Esping-Andersen, Irwin Garfinkel, Wen-Jui Han, Katherine Magnuson, Sander Wagner, and Jane Waldfogel, “Child Care and School Performance in Denmark and the United States,” Children and Youth Services Review, 2012; Greg J. Duncan and Katherine Magnuson, “Investing in Preschool Programs,” Journal of Economic Perspectives, 2013.

13. Duncan and Magnuson, “Investing in Preschool Programs.” See also W. Steven Barnett, “Getting the Facts Right on Pre-K,” National Institute for Early Education Research, 2013.

14. Tarjei Havnes and Magne Mogstad, “Is Universal Child Care Leveling the Playing Field?,” IZA Discussion Paper 4978, 2010; Smeeding, Erickson, and Jäntti, eds., From Parents to Children; Gøsta Esping-Andersen, The Incomplete Revolution, Polity, 2009, ch. 4.

15. A fourth potential benefit is higher fertility. Families that know having a child won’t severely interrupt the work career of either the father or mother are more likely to have the number of children they desire. If we look across Europe, countries with universal early education tend to have higher fertility rates; see Francis G. Castles, “The World Turned Upside Down: Below Replacement Fertility, Changing Preferences, and Family-Friendly Public Policy in 21 OECD Countries,” Journal of European Public Policy, 2003; OECD, Doing Better for Families, ch. 3; Esping-Andersen, The Incomplete Revolution. But this doesn’t seem to be a significant barrier to fertility in the United States.

16. See note 2.

17. Eric A. Hanushek, John F. Kain, Jacob M. Markman, and Steven G. Rivkin, “Does Peer Ability Affect Student Achievement?” Working Paper 8502, National Bureau of Economic Research, 2001; Heckman, “Schools, Skills, and Synapses”; Robert Bauchmüller, Mette Gørtz and Astrid Würtz Rasmussen, “Long-Run Benefits from Universal High-Quality Preschooling,” AKF Working Paper, 2011; Barnett, “Getting the Facts Right on Pre-K.”

18. Waldfogel, What Children Need, ch. 2; Jeanne Brooks-Gunn, Wen-Jui Han, and Jane Waldfogel, “First-Year Maternal Employment and Child Development in the First Seven Years,” Monographs of the Society for Research in Child Development, 2010; Maria del Carmen Huerta et al, “Early Maternal Employment and Child Development in Five OECD Countries,” OECD Social, Employment, and Migration Working Paper 118, 2011.

19. The apparent impact of California’s paid leave program is encouraging. See Maya Rossin-Slater, Christopher J. Ruhm, and Jane Waldfogel, “The Effects of California’s Paid Family Leave Program on Mothers’ Leave-Taking and Subsequent Labor Market Outcomes,” Journal of Public Policy Analysis and Management, 2013.

20. The 1993 Family and Medical Leave Act.

21. Lynda Laughlin, “Who’s Minding the Kids? Child Care Arrangements: Spring 2011,” U.S. Census Bureau, 2013, table 6, using data from the Survey of Income and Program Participation (SIPP). See also Ajay Chaudry et al, “Child Care Choices of Low-Income Working Families,” Urban Institute, 2011; ChildCare Aware of America, “Parents and the High Cost of Child Care,” 2012.

22. OECD, Education at a Glance 2012, table B2.3.

23. The other 10-15% are in private schools, home school, or dropped out.

24. OECD, Doing Better for Families, figure 1.11.

25. Obama Administration 2014 Budget Proposal; Cynthia G. Brown, Donna Cooper, Juliana Herman, Melissa Lazarín, Michael Linden, Sasha Post, and Neera Tanden, “Investing in Our Children: A Plan to Expand Access to Preschool and Child Care,” Center for American Progress, 2013.

26. According to Citizens for Tax Justice (“America’s Tax System Is Not as Progressive as You Think,” 2011), if we take all types of taxes into account — federal, state, and local (personal and corporate income, payroll, property, sales, excise, estate, etc.) — households in the bottom fifth of incomes pay about 2% of the taxes, those in the lower-middle fifth pay 5%, those in the middle fifth pay 10%, those in the upper-middle fifth pay 19%, and those in the top fifth pay 63%. Each fifth has about 24 million households. The amount paid by households in the bottom fifth is calculated as $160 billion (the total tax revenue needed) multiplied by .02 (this group will account for 2% of the revenues) divided by 24 million (the number of households in this group) = $133. The calculation is analogous for the other four groups.

27. The $4,200 tab for those in the top fifth might seem large, but that’s the average for this group. We can break this down further. Those between the 80th and 90th percentiles would pay $2,000 more per year, those between the 90th and 95th percentiles $2,933, those between the 95th and 99th percentiles $5,333, and those in the top 1 percent (average income above $1 million) $29,333.

28. Heckman, “Schools, Skills, and Synapses”; Esping-Andersen, The Incomplete Revolution.

29. Barbara R. Bergmann, Saving Our Children from Poverty: What the United States Can Learn from France, Russell Sage Foundation, 1996; Janet C. Gornick and Marcia K. Meyers, Families That Work, Russell Sage Foundation, 2003; OECD, Doing Better for Families; Claire Lundberg, “Maybe Working Moms Can Have It All — in France,” Slate, 2012.

30. Charles Murray, “Response to Heckman: Weighing the Evidence,” Boston Review, 2012; Grover J. “Russ” Whitehurst, “Can We Be Hard-Headed About Preschool? A Look at Universal and Targeted Pre-K,” Brookings Institution, 2013; Will Wilkinson, “Does Subsidized Preschool Pay Off?” The Economist: Democracy in America, 2013.

31. Lane Kenworthy, Social Democratic America, Oxford University Press, forthcoming 2014.

32. Mary Eberstadt, “The Post-Welfare State Family,” The Weekly Standard, 2013.

33. Claudia Goldin and Lawrence F. Katz, The Race between Education and Technology, Harvard University Press, 2008, figure 6.1; Census Bureau; National Center for Health Statistics.

34. OECD, “SF1.3: Living Arrangements of Children,” OECD Family Database.

35. Reihan Salam, “The House Budget Committee on the Inequality Landscape,” National Review Online: The Agenda, 2011.

36. Controlling for education and other relevant factors, federal government employees have higher compensation (wages and benefits) than their private-sector counterparts but state and local government employees don’t. Jeffrey Keefe, “Debunking the Myth of the Overcompensated Public Employee: The Evidence,” Economic Policy Institute, 2010; Philipp Bewerunge and Harvey S. Rosen, “Wages, Pensions, and Public-Private Sector Compensation Differentials,” Working Paper 227, Griswold Center for Economic Policy Studies, 2012; Congressional Budget Office, “Comparing the Compensation of Federal and Private-Sector Employees,” 2012.

37. 127 million Americans voted. According to exit polls, 41% had incomes below $50,000, and 39% of them voted Republican; 31% had incomes between $50,000 and $100,000, with 52% of them voting Republican.

38. Lane Kenworthy, “What Do Americans Want?” 2013.

39. Barnett et al, The State of Preschool 2012, table 2.

Can we get wages rising?

April 18, 2013

In the United States, wages for people in middle-paying jobs and below have been flat for more than three decades. This has gone on for so long now that we should see it as the new normal, rather than a temporary aberration. There are a host of causes: intense product market competition (whether global or domestic), shareholders obsessed with short-term profits, mechanization, the shift from manufacturing to services, firms’ ability to offshore, “pay for performance,” immigration, stagnant educational attainment, weak unions, and a flat minimum wage.

I suspect (here, here) that some of the left’s chief strategies for solving this problem — reviving manufacturing, strengthening unions, and full employment — aren’t likely to be achievable. Indeed, I don’t see any reason for optimism about wage growth for the lower half going forward. I therefore think it’s worth exploring alternative ways to ensure that household incomes and living standards can keep pace with economic growth.

Jared Bernstein has some characteristically thoughtful comments. His main point is that we shouldn’t give up on rising wages. He thinks in particular that there’s a reasonable chance we can get the labor market tight enough to push wages up, as happened in the late 1990s. He and I agree that much hinges on the Fed’s approach. Here’s Jared:

The monetary authorities will pursue full employment but the question is how will they define it? If they set it too high (i.e., if they assume a NAIRU that’s too high), we’ll fail to create the wage pressure Lane cites above. But remember, the Federal Reserve is not a “structural trend” like the shifting of manufacturing output from advanced to emergent economies. They are a policy making body and are not immutable nor impervious to change. For Keynes’ sake, it was Greenspan of all people who presided over—in fact, accommodated—the full employment period of the latter 1990s. And post-crash, Bernanke and Yellen have been, in word and deed, acting quite differently than Lane’s post-crash supposition above. So Lane might be right but I wouldn’t make that assumption and progressives should fight back hard on this one.

I agree we should try to get the Fed to take more seriously its full employment mandate. That would be an enormously beneficial policy shift. But it’s a difficult battle, even if Janet Yellen becomes the next Fed chair. And what the Fed has done in this crisis isn’t necessarily a signal of what it will do if and when the economy gets close to full employment. There, I think our best guide is the past. The late 1990s, when Greenspan chose to keep interest rates low despite an unemployment rate that reached below 4%, was very much the exception rather than the rule.

Let me put in this way: Given that we’ve had a labor market tight enough to push wages up in only a few of the past 30-plus years, is it wise to see this as a likely solution to wage stagnation?

Ultimately, though, I think any disagreement between Jared and me here is one of emphasis. Jared wants us to keep seeking ways to get wages rising again. I do too, but I’d like to see more exploration of non-wage paths to rising incomes and living standards.

How to achieve shared prosperity even if wages aren’t rising

April 13, 2013

See here. This is a framing essay I prepared for a conference on progressive governance organized by Policy Network and Global Progress. The full set of conference essays is here.

Gaining from growth

October 31, 2012

A key challenge for America and other affluent countries going forward is to figure out how to ensure that more of the benefits of economic growth reach households in the middle and below. In the U.K., the Resolution Foundation, a London think tank, set up a Commission on Living Standards a year and a half ago to look into this. The Commission has produced a number of helpful studies and reports. Today it released its final summary report: Gaining from Growth. Well worth a read.

Seven links

August 4, 2012

Three recent short pieces of mine:

“America’s struggling lower half,” Roosevelt Institute

“Five myths about the middle class,” Washington Post

“How to make sure a growing U.S. economy helps the poor,” Scholars Strategy Network

Four longer ones not by me:

From Parents to Children, edited by John Ermisch, Markus Jantti, and Tim Smeeding

“Inequality of Income and Consumption,” by Jonathan Fisher, David Johnson, and Tim Smeeding

Affluence and Influence, by Martin Gilens (more here)

“Prosperity Economics,” by Jacob Hacker and John Loewentheil

Wage stagnation isn’t due to a compositional shift

July 31, 2012

From the mid-1940s through the mid-1970s, inflation-adjusted wages for Americans in the middle and below rose in sync with the economy. Since then, the median wage has barely budged. Steve Landsburg suggests that worry about this is misplaced, because what looks like wage stagnation actually is an artifact of a compositional shift in our labor force: “There’s been a great influx of lower income groups — women and nonwhites — into the workforce. This creates the illusion that nobody’s progressing when in fact everybody’s progressing.”

It’s true that employment of women and nonwhites has increased relative to that of white males. But that didn’t begin in the late 1970s. It’s been going on for a long time. Here is the trend in the white male share of total employment since the early 1950s:

A compositional shift in employment isn’t what distinguishes the era of wage stagnation from the earlier period of rising wages.

Is decoupling real?

March 11, 2012

Since the 1970s, income growth for middle-class American households has become decoupled from growth of the economy. The chart below offers one way to see this. It shows trends in GDP per capita and median family income, with each series displayed as an index set to equal 1 in the initial year. From the late 1940s through the mid-to-late 1970s, the two moved in lockstep. After that, GDP per capita continued its steady upward march (through 2007), but median income rose much less rapidly.

This is disappointing, but seemingly not surprising. After all, income inequality increased sharply during these years. The share of income going to the top 1% of households jumped from 8% in 1979 to 17% in 2007. With a larger and larger portion of economic growth going to those at the top, a divorce between growth of the economy and growth of middle-class incomes is exactly what we would expect to see.

But according to some (here, here, here, here), this picture may significantly overstate the degree of decoupling.

One objection is that the price deflator typically used to adjust GDP per capita for inflation differs from the deflator used for median family income. I’ve addressed that here by using the same deflator for both.

A second concern has to do with GDP per capita as an indicator of economic advance. Since the 1970s a larger portion of GDP has gone to replace old capital equipment and therefore can’t go to household income. Also, the number of persons has increased less rapidly than the number of households, so a per capita (per person) measure of GDP could mislead.

A third worry is that the income measure used to calculate median family income is too thin. If a growing portion of GDP has gone to employer benefits, that would help middle-class households, but it wouldn’t show up in these income data.

To address these second and third concerns, we can turn to a more encompassing measure of household income. The data are from the Congressional Budget Office (CBO). The measure includes all sources of cash income. It adds in-kind income (employer-paid health insurance premiums, food stamps, Medicare and Medicaid benefits), employee contributions to 401(k) retirement plans, and employer-paid payroll taxes. Tax payments are subtracted.

We can use average household income in these data as a substitute for GDP per capita. The CBO data set doesn’t tell us the median income, but it provides something quite similar: the average income of households in the middle quintile of the distribution (from the 40th percentile to the 60th). The following chart adds these two series. The story is virtually identical.

Decoupling is real and sizable.

Should income growth over the life course lessen concern about the great decoupling?

March 1, 2012

Since the 1970s, the incomes of Americans in the lower half have risen very slowly. That’s not because economic growth has been slow. Instead, as this chart shows, it’s because growth of incomes has lagged well behind growth of the economy.

This isn’t good. In a growing economy, the benefits of growth should accrue not just to those in the upper half (or in the upper 5% or 1% or 0.1%), but to everyone. The income gains needn’t be spread perfectly equally, but those in the bottom half ought to get more than a crumble.

Yet is the story conveyed by this graph misleading? The income data are from the Current Population Survey. Each year a representative sample of American adults is asked what their income was in the previous year. But each year the sample consists of a new group; the survey doesn’t track the same people as they move through the life course. If we interpret the above chart as showing what happens to typical American households over the life course, we’ll conclude that they see very little increase in income as they age. That’s not correct. In any given year, some of the people with below-median income are young. Their wages and income are low because they are in the early stage of the work career and/or because they’re single. Over time many of them will in fact experience a significant income rise. They’ll get pay increases; or they’ll partner with someone who also has earnings; or both. The chart above misses this income growth over the life course (absolute intragenerational income mobility).

The following chart offers one way to see this. The lower line shows median income among families with a “head” age 25 to 34. (As in the first chart, I use families instead of households in order to be able to go back farther in time; data for households aren’t available prior to 1967.) The top line shows median income among the same cohort of families twenty years later, when their heads are age 45 to 54.

To clarify, consider the year 1979. The lower line tells us that in 1979 the median income of families with a 25-to-34-year-old head was about $54,000 (in 2010 dollars). The data point for 1979 in the top line tells us the median income of that same group of families twenty years later, in 1999. They’re now 45 to 54 years old, which is the peak earning stage for most people. The median income in this group is now about $85,000.

In each year the gap between the two lines is roughly $30,000. This tells us that the incomes of middle-class Americans tend to increase substantially as they move from the early years of the work career to the peak years.

Should this reduce our concern about the over-time pattern shown in the first chart above? No, it shouldn’t. Look again at the second chart. Between the mid-1940s and the mid-1970s, the median income of families in early adulthood (the lower line) rose steadily. Median income for these young families was around $25,000 in the mid-1940s. By the mid-1970s it had doubled to $50,000. Americans during this period experienced income gains over the life course, but they also tended to have higher incomes than their predecessors, both in their early work years and in their peak years. That’s because the economy was growing at a healthy clip and the economic growth was trickling down to Americans in the middle. (Though I don’t show it here, the same was true below the median.) After the mid-1970s, this steady gain disappeared. From the mid-1970s to 2007 the median income of families with a 25-to-34-year-old head was essentially flat. Each cohort continued to achieve income gains during the life course. (Actually, we don’t yet know about those who started out in the 1990s and 2000s, as they’re just now beginning to reach age 45 to 54. The question marks in the second chart show what their incomes will be if the historical trajectory holds true.) But the improvement across cohorts that had characterized the period from World War II through the 1970s — each cohort starting higher and ending higher than earlier ones — disappeared.

So yes, for many Americans income rises during the life course. And yes, this is hidden by charts such as the first one here. But that shouldn’t lessen concern about the decoupling between economic growth and household income growth that has occurred over the past generation. We should want healthy income growth not just within cohorts (over the life course) but also across them.

How rich countries lift up the poor

December 11, 2011

That’s the title of a short article of mine in the current Pathways magazine. Pathways ought to be on the reading list of anyone interested in living standards, poverty, inequality, and mobility. And it’s free.

A few other worthwhile recent reads on these topics:

Jared Bernstein’s blog

CBO, Trends in the distribution of household income

Center on Budget and Policy Priorities, A guide to statistics on historical trends in income inequality

OECD, Divided we stand: why inequality keeps rising

Scott Winship, Mobility impaired

Miles Corak, The decline of the American dream

Reihan Salam, Understanding America’s income mobility problem

Mike Brewer and Liam Wren-Lewis, Why did Britain’s households get richer?

James Plunkett, The potential for female employment to raise living standards in low to middle income Britain

Winner-take-all financial incentives, Steve Jobs, and the living standards of ordinary Americans

December 3, 2011

I’ve just finished Walter Isaacson’s fascinating book on Steve Jobs’ fascinating life. Among the many intriguing things about Jobs’ story is that it may shed some light on a particular interpretation of America’s economic performance over the past generation.

Between 1979 and 2007, inflation-adjusted hourly wages for Americans at the median and below were essentially flat. Household incomes in the lower half increased, but not very much. Both wages and incomes for many ordinary Americans trailed far behind growth of the economy. At the same time, the earnings and incomes of those at the top exploded (see here, here, here, here).

One story sometimes told about the 1980s, 1990s, and pre-crash 2000s links these two developments to offer an optimistic verdict on the evolution of living standards for America’s lower half. The story goes something like this: A winner-take-all economy reduces income growth for low-to-middle Americans. But it nevertheless produces a substantial rise in living standards for them. It does so by increasing financial incentives for inventiveness and hard work, which yields leaps in consumption that aren’t reflected in the price data used to measure changes in the cost of living.

To put it more precisely, the story has four parts:

1. Returns to success soared in fields such as entertainment, athletics, finance, and high tech, as well as for CEOs. These markets became “winner-take-all,” and the amounts reaped by the winners mushroomed.

2. For those with a shot at being the best in their field, this increased the financial incentive to work harder or longer or to be more creative.

3. This rise in financial incentives produced a rise in excellence — new products and services and enhanced quality.

4. These improvements haven’t been satisfactorily captured in the price index by which we assess changes in the cost of living. Watching Michael Jordan or LeBron James play basketball is a qualitatively superior experience relative to what came before in a way that isn’t reflected in the price of a ticket or of a cable TV subscription. Similarly, the Macintosh, iPod, iTunes, iPhone, and iPad are so different from and superior to anything that preceded them that what they add to living standards isn’t likely to be adequately measured.

I think there’s a good bit of truth to parts 1, 2, and 4 of this story. But I’m skeptical about part 3.

This brings me to Steve Jobs. Apple and its delightful, user-friendly, (eventually) affordable gadgets play a key role in this story. The question is: Would Jobs and his teams of engineers, designers, and others at Apple have worked as hard as they did to create these new products and bring them to market in the absence of massive winner-take-all financial incentives?

In the things-have-improved-more-than-the-income-data-make-it-seem story, the answer is no. The financial incentive is the critical spur to inventiveness and hard work.

But I don’t find anything in Isaacson’s account of Jobs that supports this view. Jobs himself seems to have been driven mainly by a passion for the products, for winning the competitive battle, and perhaps for status among peers. The satisfaction of achieving excellence and of beating one’s opponents appears to have been far more important than monetary compensation. Excellence and victory were their own reward, rather than a means to the end of financial riches. In this respect Jobs was little different from scores of inventors and entrepreneurs over the ages, or for that matter from Bill Russell, Larry Bird, and Michael Jordan.

The rise of winner-take-all compensation occurred simultaneously with surges in innovation and productivity in certain fields, but that doesn’t mean it was the cause of those surges.

When does economic growth benefit people on low to middle incomes — and why?

November 21, 2011

That’s the title of a report (here) I’ve prepared for the Resolution Foundation’s Commission on Living Standards. The Resolution Foundation is a U.K. think tank that’s been doing some very interesting work on living standards of households below the median but above the bottom ten percent.

The report was released today in conjunction with this event in London.

What can we do about lack of wage growth?

October 4, 2011

A condensed version of my current thinking is here.

Progress for the poor

October 1, 2011

That’s the title of my new book. In it I try to answer the following questions:

How much does economic growth benefit the poor? When and why does growth fail to trickle down?

How can social policy help? Is more social spending better for the poor?

Can a country have a sizeable low-wage sector yet few poor households?

Are universal programs better than targeted ones?

What role can public services play in antipoverty efforts?

What is the best tax mix?

Does improvement in the living standards of the least well-off require a sacrifice of other desirable outcomes?

Low wages in Germany

August 26, 2011

This New York Times story has it right: the German labor market now includes a sizable low-wage segment. This book has a very helpful comparison of developments in Germany with those in Denmark, France, the Netherlands, the United Kingdom, and the United States. My take on what this implies for incomes, poverty, and policy is here.

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