Inspecting the structure of labor markets Presentation prepared for the Georgia Partnership for Excellence in Education Atlanta, GA November 17, 2016

Payroll growth is slowing modestly, but not to levels inconsistent with further tightening of labor markets. Average change in nonfarm payrolls: 1 – month change 161,000 3 - month change 176,000 year-to-date change 196,000

U-6 – which captures “involuntarily” part-time workers, remains elevated relative to pre-crisis levels. U6 4.6 ppt. U3 3.7 ppt.

Can we at least convert more part-timers to full-timers?

Despite improving labor market conditions, the probability of a PTER worker transitioning to FT is declining. Source: Peter Diamond, Discussion of “Where have all the workers gone?”, 60th Economic Conference, Federal Reserve Bank of Boston

Unemployment rate measures improved some in October, but have been generally flat over the year…

Labor Force Participation Rate … while, contrary to expectations, labor force participation has picked up over the past year– and therein lies a story. Labor Force Participation Rate Percent, Seasonally Adjusted Unemployment rate, 10/15: 5.0% Unemployment rate, 10/16: 4.9% Source: Bureau of Labor Statistics through October 2016

With a strong enough pull, can draw more people into the labor force?

Changes in labor force participation are a two-way street. OUT The difference in these two gross flows will determine the net change in the labor force participation rate.

Probability of nonparticipants entering the labor force (RHS) LFP has risen over the past year because fewer people are leaving (not because more are entering). Percentage points, 3-month moving average Percentage points, 3-month moving average Probability of labor force participants dropping out of the labor force (LHS) Probability of nonparticipants entering the labor force (RHS) Source: Bureau of Labor Statistics. through Sep. 2016

What’s the deal with prime-age males?

The decline in prime-age male participation is nothing new.

Percent self-reporting as in Fair or Poor Health* Inactive prime-age males are “structurally” different than labor market participants. Percent self-reporting as in Fair or Poor Health* Employed 11.9 Unemployed 16.2 Not in Labor Force 42.7 * Based on pooled survey results from 2010, 2012, and 2013 Source: Alan Krueger, “Where have all the workers gone?”, presentation, 60th Economic Conference, Federal Reserve Bank of Boston

Are we really providing the right incentives?

Alan Auerbach, Laurence Kotlikoff, and Darryl Koehler: Calculate net remaining lifetime tax rates taking into account “all major federal and state tax and transfer programs, including the federal personal income tax, the FICA payroll tax, state income taxes, state sales taxes, the federal corporate income tax, the federal estate tax, TANF welfare benefits, Food Stamps, Supplemental Security Income , Social Security retirement and auxiliary… benefits, Social Security disability benefits, Medicaid benefits, Medicare benefits, and Medicare Part B premiums.” http://jec.senate.gov/_files/Sept16UpdateonEffectsofKatrina.pdf Source: “U.S. Inequality, Fiscal Progressivity, and Work Disincentives,” NBER Working Paper 22032, , Feb. 2016: http://www.ncpa.org/pdfs/U.S.%20Inequality,%20Fiscal%20Progressivity,%20and%20Marginal%20Taxation%203-14-16_NBER%20version.pdf

From the vantage point of average tax rates, the U. S From the vantage point of average tax rates, the U.S. tax and transfer system looks quite progressive… Dispersion in Current-Year Net Marginal Tax Rates, Ages 40-49 Average Current Year Net Tax Rate Lowest Quintile -26.1% Second Quintile 17.0% Third Quintile 24.2% Fourth Quintile 27.9% Highest Quintile 37.4% Source: “U.S. Inequality, Fiscal Progressivity, and Work Disincentives,” NBER Working Paper 22032, , Feb. 2016: http://www.ncpa.org/pdfs/U.S.%20Inequality,%20Fiscal%20Progressivity,%20and%20Marginal%20Taxation%203-14-16_NBER%20version.pdf

… and even more so if we focus on lifetime tax burdens. Dispersion in Current-Year Net Marginal Tax Rates, Ages 40-49 Average Current Year Net Tax Rate Average Lifetime Net Tax Rate Lowest Quintile -26.1% -40.6% Second Quintile 17.0% 4.2% Third Quintile 24.2% 11.9% Fourth Quintile 27.9% 19.2% Highest Quintile 37.4% 32.2% Source: “U.S. Inequality, Fiscal Progressivity, and Work Disincentives,” NBER Working Paper 22032, , Feb. 2016: http://www.ncpa.org/pdfs/U.S.%20Inequality,%20Fiscal%20Progressivity,%20and%20Marginal%20Taxation%203-14-16_NBER%20version.pdf

Current-period net marginal tax rates for 40-49 year olds, broadly defined, show little progressivity. Dispersion in Current-Year Net Marginal Tax Rates, Ages 40-49 Median Marginal Current Year Net Tax Rate Minimum Marginal Current Year Net Tax Rate Maximum Marginal Current Year Net Tax Rate Lowest Quintile 33.3% Second Quintile 31.4% Third Quintile 32.3% Fourth Quintile 40.0% Highest Quintile 38.2% Source: “U.S. Inequality, Fiscal Progressivity, and Work Disincentives,” NBER Working Paper 22032, , Feb. 2016: http://www.ncpa.org/pdfs/U.S.%20Inequality,%20Fiscal%20Progressivity,%20and%20Marginal%20Taxation%203-14-16_NBER%20version.pdf

Net tax rates at the individual level show enormous dispersion, and are prohibitive at the high end. Dispersion in Current-Year Net Marginal Tax Rates, Ages 40-49 Median Marginal Current Year Net Tax Rate Minimum Marginal Current Year Net Tax Rate Maximum Marginal Current Year Net Tax Rate Lowest Quintile 33.3% -22.6% 934.6% Second Quintile 31.4% 2.8% 506.9% Third Quintile 32.3% Fourth Quintile 40.0% Highest Quintile 38.2% Source: “U.S. Inequality, Fiscal Progressivity, and Work Disincentives,” NBER Working Paper 22032, , Feb. 2016: http://www.ncpa.org/pdfs/U.S.%20Inequality,%20Fiscal%20Progressivity,%20and%20Marginal%20Taxation%203-14-16_NBER%20version.pdf

Dispersion in net tax rates is most dramatic for the least wealthy. Dispersion in Current-Year Net Marginal Tax Rates, Ages 40-49 Median Marginal Current Year Net Tax Rate Minimum Marginal Current Year Net Tax Rate Maximum Marginal Current Year Net Tax Rate Lowest Quintile 33.3% -22.6% 934.6% Second Quintile 31.4% 2.8% 506.9% Third Quintile 32.3% -37.6% 46.2% Fourth Quintile 40.0% 16.6% 55.1% Highest Quintile 38.2% 3.0% 69.0% Source: “U.S. Inequality, Fiscal Progressivity, and Work Disincentives,” NBER Working Paper 22032, , Feb. 2016: http://www.ncpa.org/pdfs/U.S.%20Inequality,%20Fiscal%20Progressivity,%20and%20Marginal%20Taxation%203-14-16_NBER%20version.pdf

Can a hot enough economy propel structural change?

A well-known fact: Minority unemployment rates are higher than white unemployment rates. Jan 2000-Aug 2016, 3mma Source: Bureau of Labor Statistics.

Do “high pressure” economies improve broader labor market performance? “High Pressure” Period Gap between African-American and White unemployment rates 1978Q2-1979Q4 -0.8 1987Q4-1990Q3 -0.3 1997Q2 -2001Q3 -1.8 2005Q4-2007Q4 -0.9 Note: “High pressure” periods are defined as periods when the unemployment rate falls below the Congressional Budget Office’s estimate of the “natural” rate of unemployment. Sources: Bureau of Labor Statistics; Congressional Budget Office (CBO); BEA; Federal Reserve Bank of Atlanta

The U.S. has experienced 6 of these periods since 1964 -- they tended (eventually) to end in recession. 1978:Q2 1971:Q4 1987:Q3 1964:Q3 1997:Q1 2005:Q4 Sources: Bureau of Labor Statistics; Congressional Budget Office (CBO); BEA; Federal Reserve Board

African-Americans on average clearly fair worse that White-Americans during recessions. Source: Bureau of Labor Statistics through September 2016

Does education play a role?

Education helps to close unemployment gaps, but not completely Smallest African-American to White unemployment gap is for those with a bachelor’s degree, but still stands at 50% higher rate. Education shrinks disparities in labor market outcomes, but other factors involved as well

Questions Does the current education system produce some of these disparities? What can be expected of educational institutions – primary, secondary, and postsecondary – in terms of eliminating gaps in opportunity, prosperity, and (ultimately) growth? Where do other organizations and institutions have to get involved?

Inspecting the structure of labor markets