Inclusive Growth: The Role of Productivity, Inequality, and … · 2016-10-17 · CBO median income is extended before 1979 and after 2013 with the growth rate of Census median household

Inclusive Growth: The Role of Productivity, Inequality, and Participation

Jason FurmanChairman, Council of Economic Advisers

NYU Stern Center for Global Economy and BusinessNew York, NY

October 17, 2016

Table of Contents

1

1. Overview

2. Productivity

3. Inequality

4. Labor Force Participation

5. Policy

Table of Contents

2

1. Overview

2. Productivity

3. Inequality

4. Labor Force Participation

5. Policy

From 2014 to 2015, Real Median Household Income Increased by $2,800 (or 5.2 Percent), Fastest Annual Growth on Record

3Source: Census Bureau; CEA calculations.

-4

-2

0

2

4

6

8

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Change in Real Median Household Income, 1968-2015Percent Change from Prior Year

2015: +5.2 Percent

Income Increased for Households Across Distribution, With Largest Gains at Bottom and Middle

4Source: Census Bureau; CEA calculations.

7.9

6.35.5 5.2 5.4

4.1

2.9

0

1

2

3

4

5

6

7

8

9

10th 20th 40th 50th(Median)

60th 80th 90th

Growth in Real Household Income by Percentile, 2014-2015Percent

Middle-Class Income Growth Has Slowed in Recent Decades

5

Note: Income levels from the Census Bureau are deflated with the CPI-U-RS price index, and income levels from the Congressional Budget Office (CBO) are deflated with the personal consumption expenditures price index. CBO median income is extended before 1979 and after 2013 with the growth rate of Census median household income.Source: World Wealth and Income Database; Census Bureau; Congressional Budget Office; CEA calculations.

1948-1973 1973-2015Median Family Income

(Census Bureau) 3.0% 0.4%

Median Household Income with Benefits (CBO, adj. for household size) N/A 0.5%

Median Household Income with Gov't Transfers/Taxes

(CBO, adj. for household size)N/A 1.0%

Annual Real Middle-Class Income Growth

Drivers of Income Growth: Productivity, Inequality, and Participation

6Source: Bureau of Labor Statistics, Productivity and Costs; World Wealth and Income Database; Bureau of Labor Statistics, Current Population Survey; CEA calculations.

1948-1973 1973-2015

Income Shares

Top 1 Percent 11% → 8% 8% → 18%

Bottom 90 Percent 66% → 68% 68% → 52%Labor Force Participation Rate

Men, 16 and Older 87% → 79% 79% → 69%Women, 16 and Older 33% → 45% 45% → 57%

Determinants of Middle-Class Income Growth

Labor Productivity Growth (Annual Average) 2.8% 1.8%

Some Thought Experiments

7

Note: These thought experiments are intended to demonstrate the importance of these three factors for middle-class incomes. They do not consider second-order effects or interactive effects. The first thought experiment assumes that an increase in productivity is associated with an equal increase in the Census Bureau’s mean household income. The second thought experiment uses the Census Bureau’s mean income of the middle quintile as a proxy for median income. The third thought experiment assumes that newly-participating women will have the same average earnings as today’s working women. The first and third thought experiments assume that income gains are distributed proportionally such that mean and median incomes grow at the same rate. Dollar gains are calculated off a base of the Census Bureau’s median household income in 2013. The fourth thought experiment compounds the effects of the first three.Source: World Top Incomes Database; Census Bureau; Congressional Budget Office; Bureau of Labor Statistics, Current Population Survey; Bureau of Economic Analysis; CEA calculations.

Thought Experiment Factor Base PeriodPercentage Impact on 2015 Average

Income

Income Gain to 2015 Typical Household

Productivity Total Factor Productivity Growth 1948-1973 65% $37,000

Inequality Share of Income Earned by Middle 20% 1973 19% $10,000

Participation Female Labor Force Participation Rate 1948-1995 6% $4,000

Combined Impact All of the Above 108% $61,000

Counterfactual Scenarios for Productivity, Equality, and Participation

Table of Contents

8

1. Overview

2. Productivity

3. Inequality

4. Labor Force Participation

5. Policy

Average Annual Productivity Growth Has Slowed in All of the G-7 Economies

9Source: Conference Board, Total Economy Database; CEA calculations.

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

UnitedStates

Canada Japan Germany France UnitedKingdom

Italy

1995-2005 2005-2015

Labor Productivity Growth, G-7 CountriesPercent, Annual Rate

Largest Contributor to Recent Low Productivity Growth: Declining Capital Intensity per Worker

10Source: Bureau of Labor Statistics, Productivity and Costs; CEA calculations.

Capital IntensityLabor

Productivity

Total Factor Productivity

2015

-2

-1

0

1

2

3

4

5

6

1950 1960 1970 1980 1990 2000 2010 2020

Labor Productivity and Major Components, 1950–2015Percent Change, Annual Rate (Five-Year Trailing Average)

Inadequate Demand Has Contributed to a Shortfall in Investment

11

Note: The figure shows the deviation of investment between 2008 and 2014 from forecasts made in the spring of 2007. Black diamonds indicate the average percent deviation of total investment. Colored segments show the contribution of the components of investment—business, residential, and public—to the deviation. Public-sector contributions to residential and nonresidential investment are excluded from these categories when data for these contributions are available. Peripheral Euro Area category includes Greece, Ireland, Italy, Portugal, and Spain. Core Euro Area category includes Austria, Estonia, Finland, France, Germany, Latvia, Luxembourg, Malta, the Netherlands, Slovakia, and Slovenia.Source: International Monetary Fund, Fiscal Monitor Database; Consensus Economics; national sources via Haver Analytics.

-35

-30

-25

-20

-15

-10

-5

0

5

AdvancedEconomies

UnitedStates

UnitedKingdom

Japan PeripheralEuro Area

CoreEuro Area

Other

PublicResidentialBusinessTotal

Decomposition of the Investment Slowdown, 2008-2014Average Percent Deviation from IMF Spring 2007 Forecasts

Demography Boosted Productivity Growth from 1985 to 2005 and Has Been a Headwind Since, But Should Level Out in Coming Decades

12Source: Bureau of Labor Statistics, Current Population Survey; International Labor Organization; CEA calculations.

40-49

55-64

60+

0

5

10

15

20

25

30

1985 1990 1995 2000 2005 2010 2015 2020 2025

Actual and Projected Labor Force by AgePercent of Labor Force, Projected After 2015

Over the Last 35+ Years, Firm Exit Has Remained Relatively Steady But the Firm Entry Rate Has Decreased Substantially

13Source: Longitudinal Business Database, 1977-2013.

Firm Exit Rate

2013

Firm Entry Rate

6

8

10

12

14

16

1975 1980 1985 1990 1995 2000 2005 2010

Firm Dynamism, 1977-2013Percent

Table of Contents

14

1. Overview

2. Productivity

3. Inequality

4. Labor Force Participation

5. Policy

The United States Has Seen Faster Growth and Higher Levels of Income Inequality Than Other Major Advanced Economies

15Source: World Wealth and Income Database.

2015

4

6

8

10

12

14

16

18

20

1975 1980 1985 1990 1995 2000 2005 2010 2015

United States United KingdomCanada FranceItaly JapanGermany

Share of Income Earned by Top 1 Percent, 1975-2015Percent

Competitive Explanation: Increased Demand for Skills

16

Note: Ratio of median annual earnings of full-time, full-year workers over age 25 with a bachelor’s degree only to median annual earnings of full-time, full-year workers over age 25 with a high school degree only. Prior to 1992, bachelor’s degree is defined as four years of college.Source: Bureau of Labor Statistics, Current Population Survey (Annual Social and Economic Supplement); CEA calculations.

2015

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1975 1980 1985 1990 1995 2000 2005 2010 2015

College Earnings Premium, 1975-2015Earnings Ratio

Competitive Explanation: Slowdown in the Growth of the Supply of Skills

17Source: Calculations by Claudia Goldin and Lawrence Katz.

1982

6789

1011121314151617

1875 1890 1905 1920 1935 1950 1965 1980

Mean Years of Schooling at Age 30, U.S. Native-Born, by Year of Birth, 1876-1982

Mean Years of Schooling Completed

Year of Birth

1876-1951Trend

1951-1982 Trend

Noncompetitive Explanation: Worker Bargaining Power Has Been Reduced

18

Note: Total employment from 1901 to 1947 is derived from estimates in Weir (1992). For 1948 to 2015, employment data are annual averages from the monthly Current Population Survey. Minimum wage adjusted for inflation using the CPI-U-RS.Source: Troy and Sheflin (1985); Bureau of Labor Statistics, Current Population Survey; Weir (1992); World Wealth and Income Database; Department of Labor; Bureau of Labor Statistics, Consumer Prices; CEA calculations.

2015

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

1960 1970 1980 1990 2000 2010

Real Value of the Federal Minimum Wage, 1960–20152015 Dollars

Troy and Sheflin (1985) CPS:

Membership

0

10

20

30

40

50

60

70

80

1915 1925 1935 1945 1955 1965 1975 1985 1995 2005 2015

Union Membership as a Share of Total Employment and Bottom 90 Percent Income Share, 1915-2015

Percent

Bottom 90 Percent Share of Income

2015

Noncompetitive Explanation: Labor Share of IncomeHas Fallen Since Around 2000

19Notes: Shading denotes recession.Source: Bureau of Labor Statistics, Productivity and Costs.

54

56

58

60

62

64

66

68

1948 1958 1968 1978 1988 1998 2008

Labor Share of Income, Nonfarm Business Sector, 1948-2016Percent

2016:Q2

Noncompetitive Explanation: Increasing Dispersion in Returns to Invested Capital Across Firms

20

Note: The return on invested capital definition is based on Koller, Goedhart, and Wessels (2015), and the data presented here are updated and augmented versions of the figures presented in Chapter 6 of that volume. The McKinsey data includes McKinsey analysis of Standard & Poor’s data and exclude financial firms from the analysis because of the practical complexities of computing returns on invested capital for such firms.Source: Koller, Goedhart, and Wessels (2015); McKinsey & Company; Furman and Orszag (2015).

Median

90th Percentile

2014

75th Percentile

25th Percentile0

20

40

60

80

100

120

1965 1975 1985 1995 2005 2015

Return on Invested Capital Excluding Goodwill, U.S. Publicly-Traded Nonfinancial Firms

Percent

Noncompetitive Explanation: Increasing Wage Inequality Across, But Not Within, Firms

21

Note: Only firms and individuals in firms with at least 20 employees are included. Only full-time individuals aged 20 to 60 are included in all statistics, where full-time is defined as earning the equivalent of minimum wage for 40 hours per week in 13 weeks. Individuals and firms in public administration or educational services are not included. Firm statistics are based on the average of mean log earnings at the firms for individuals in that percentile of earnings in each year. Data on individuals/their firms are based on individual log earnings minus firm mean log earnings for individuals in that percentile of earnings in each year. All values are adjusted for inflation using the PCE price index.Source: Song et al. (2016).

25th Percentile50th Percentile

90th Percentile

99th Percentile

-0.1

0.0

0.1

0.2

0.3

0.4

0.5

0.6

1978 1982 1986 1990 1994 1998 2002 2006 2010 2014

Within Firms: Change in Wage Structure Since 1981Change in Log Real Annual Wage

2013

25th Percentile

50th Percentile

90th Percentile

99th Percentile

-0.1

0.0

0.1

0.2

0.3

0.4

0.5

0.6

1978 1982 1986 1990 1994 1998 2002 2006 2010 2014

Between Firms: Change in Wage Structure Since 1981Change in Log Real Annual Wage

2013

Labor Market Dynamism Has Been Declining for Decades

22Source: Longitudinal Business Database, 1977-2013.

Job Creation

2013

Job Destruction

10

12

14

16

18

20

22

1975 1982 1989 1996 2003 2010

Labor Market Dynamism, 1977-2013Rate (Percent)

Table of Contents

23

1. Overview

2. Productivity

3. Inequality

4. Labor Force Participation

5. Policy

The Labor Force Participation Rate Peaked in 2000 and Has Declined Since (Though Has Been Stable Since 2013:Q4)

24Note: Shading denotes recession.Source: Bureau of Labor Statistics, Current Population Survey.

Sep-16

56

58

60

62

64

66

68

1948 1958 1968 1978 1988 1998 2008

Labor Force Participation Rate, 1948-2016Percent

A Troubling Trend: Declining Prime-Age Labor Force Participation

25Source: Bureau of Labor Statistics, Current Population Survey; CEA calculations.

86

88

90

92

94

96

98

100

1948 1958 1968 1978 1988 1998 2008

Percent

1948-2007Trend

Sep-16

Prime-Age Male Labor Force Participation Rate

30

40

50

60

70

80

90

100

1948 1958 1968 1978 1988 1998 2008

Percent

1948-2007Trend

2000-2007Trend

Sep-16

Prime-Age Female Labor Force Participation Rate

Declining Prime-Age Male Participation Has Been Concentrated Among Men with Less Educational Attainment

26Source: Bureau of Labor Statistics, Current Population Survey (Annual Social and Economic Supplement); CEA calculations.

High School or Less Some College

Bachelor's or Higher2016

80

82

84

86

88

90

92

94

96

98

100

1964 1974 1984 1994 2004 2014

Prime-Age Male Labor Force Participation Rate by Educational Attainment, 1964-2016

Percent

Despite Flexible Labor Markets, the United States Ranks Towards the Bottom of the OECD in the Share of Prime-Age Men and Women in the Labor Force

27Source: Organisation for Economic Co-operation and Development.

70

75

80

85

90

95

100

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Hung

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Prime-Age Male Labor Force Participation RatePercent of Population

30

40

50

60

70

80

90

100

Slov

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2015 1990

Prime-Age Female Labor Force Participation RatePercent of Population

U.S. Labor Market Has High Flexibility But Low Supportiveness According to OECD’s Going for Growth Indicators

28Source: Organisation for Economic Co-operation and Development, Going for Growth 2016; CEA calculations.

Percentile Rank (100 = Most Flexible/Most

Supportive)Measures of Labor Market Flexibility

Overall Labor Market Regulation (2014) 100Employment Protection for Regular Employment (2013) 100Minimum Cost of Labor (2014) 96Coverage of Collective Bargaining Agreements (2013) 94

Measures of Institutional Labor Market SupportExpenditure on Active Labor Market Policies per Unemployed (2013) 6Net Childcare Costs, Couples (2012) 10Implicit Tax on Returning to Work, Second Earner (2012) 10

OECD Going for Growth Indicators

Table of Contents

29

1. Overview

2. Productivity

3. Inequality

4. Labor Force Participation

5. Policy

Selected Policies for Faster Productivity Growth

30

• Investing in infrastructure and research

• Promoting innovation via trade• Passing the Trans-Pacific Partnership (TPP)

• Reforming the business tax code to reduce distortions

• Promoting high-skilled immigration

Some Policies to Address Inequality

31

• Promoting equality of opportunity• Investing in high-quality early learning and preschool programs• Investing in higher education, job training, and apprenticeship

programs• Income support for low-income households

• Reducing concentration of market power and rent-seeking behavior• Raising the minimum wage• Supporting collective bargaining and other forms of worker voice• Carefully administering existing regulations that fight rent-seeking• Reforming patent rules• Making wireless spectrum more broadly available• Reforming occupational licensing and land-use restrictions

Some Policies to Increase Labor Force Participation

32

• Expanding aggregate demand

• Investing in education

• Reforming occupational licensing

• Deepening “connective tissue” in labor markets• Job-search assistance as part of unemployment insurance system• Wage insurance

• Greater access to child care and paid leave for working families

• Criminal justice reform

• Comprehensive immigration reform

Some Policies to Increase Resilience and Sustainability

33

• Continuing to implement Wall Street Reform

• Improving automatic stabilizers and making more active use of fiscal policy

• Reducing the long-run deficit with a combination of reforms to entitlements and increased revenue

• Addressing climate change

Inclusive Growth: The Role of Productivity, Inequality, and Participation

Jason FurmanChairman, Council of Economic Advisers

NYU Stern Center for Global Economy and BusinessNew York, NY

October 17, 2016