In his 2014 State of the Union address, President Barack Obama painted two pictures of the United States. One was necessarily optimistic, forward looking and forward thinking, a vision of America working at full potential to capitalize on the opportunities presented it. The other showed a nation crippled by economic crisis, the glass half empty and leaking what was left through cracks in the system. “The cold, hard fact is that even in the midst of recovery, too many Americans are working more than ever just to get by — let alone get ahead,” the president said. “And too many still aren’t working at all.”
The data are there for everyone to see, but it can sometimes be hard to interpret. At 6.6 percent, headline unemployment was as low in January 2014 as it was in November 2008, just as the financial crisis began spilling over into the labor market. However, at 63 percent, the labor force participation rate is down 2.9 percentage points over the same period. Total payroll employment is up 1.5 percent over that time frame but is still below its pre-crisis peak. In absolute terms, fewer Americans are employed now than they were before the crisis.
Putting Americans back to work has been and will continue to be one of the biggest challenges facing policymakers and business leaders. Earlier in February, the Congressional Budget Office reported that “To a large degree, the slow recovery of the labor market reflects the slow growth in the demand for goods and services.” Unemployment naturally reduces income, which reduces consumer spending power, which reduces business income. When business income is low and demand is stagnant, they can’t grow. When businesses can’t grow, they can’t hire people. It’s a destructive cycle that has plagued the recovery.
The effect is measurable and significant. The CBO estimates that gross domestic product fell to 7.5 percent below potential at the end of the recession. By the end of 2013, about four years after the fact, less than half of the output gap had been closed. “With output growing so slowly, payrolls have increased slowly as well — and the slack in the labor market that can be seen in the elevated unemployment rate and part of the reduction in the rate of labor force participation mirrors the gap between actual and potential GDP,” said the CBO.
Assuming no major economic shocks or policy changes come in the next few years, the CBO estimates that the U.S. economy will return to a state of relative normalcy (relative to historic norms) by about 2018, but this seems unlikely. The government, for better or worse, has taken a decidedly activist approach to the recovery, and there are at least two significant pieces of legislation that could have an enormous impact on the labor market: the Affordable Care Act and a proposed increase in the federal minimum wage.
The CBO has commented on both of these issues, but the situation is still opaque. Clarity of insight is clouded behind politics and a bitter ideological divide over which is the best way to repair America’s dilapidated economy. Most of the data and analysis presented by the CBO — or any other organization, partisan or not — appears to instantaneously be sucked into the black hole of confirmation bias. As a result, the CBO reports have served more as munitions for political trench warfare than as tools to move the conversation meaningfully and productively forward.
The CBO estimates that the ACA “will reduce the total number of hours worked, on net, by about 1.5 percent to 2.0 percent during the period from 2017 to 2024, almost entirely because workers will choose to supply less labor — given the new taxes and other incentives they will face and the financial benefits some will receive.” In addition, the CBO estimates that aggregate labor compensation — not just wages, but total compensation, which includes benefits — will fall by approximately 1 percent.
Here’s where the report threw fuel on the fire — or, at least, a short-sighted and partisan interpretation of the report fueled political vitriol: “The reduction in CBO’s projections of hours worked represents a decline in the number of full-time-equivalent workers of about 2.0 million in 2017, rising to about 2.5 million in 2024.” This, despite what some attack ads released shortly after the CBO report was released suggest, does not equate to lost jobs.
Here’s CBO Director Douglas W. Elmendorf giving congressional testimony on the subject — you know, because the report turned into such a shit storm: “The reason that we don’t use the term ‘lost jobs’ is there’s a critical difference between people who like to work and can’t find a job or have a job that was lost for reasons beyond their control and people who choose not to work.” The CBO asserts that the impact on the labor market will primarily be a result of the amount of labor that workers are willing to supply, not in the amount of labor that employers demand.
There are still several legitimate ways to frame this, but the wanton destruction of millions of jobs is not accurate. Democrats have generally framed the CBO’s conclusion as evidence that the ACA will reduce job lock, a phenomenon in which people keep working a job they would otherwise quit out of a necessity, such as a healthcare plan. ACA subsidies will ostensibly encourage job-locked employees and allow them the freedom they need to leave and, perhaps, pursue entrepreneurial activities.
The jury is also out on Obama’s proposed increase in the federal minimum wage. In his State of the Union address, the president called on Congress and lawmakers across the country to increase the minimum wage as high as $10.10 over the course of three years and index it to inflation. “Today, the federal minimum wage is worth about 20 percent less than it was when Ronald Reagan first stood here,” he said.
Obama threw his support behind a bill sponsored by Sen. Tom Harkin (D-Iowa) and Rep. George Miller (D-Calif.). When the CBO examined the economic impact of this proposal, it came to some conclusions that unfortunately served to deepen the divide between parties on the issue.
“Increasing the minimum wage would have two principal effects on low-wage workers,” the CBO wrote. “Most of them would receive higher pay that would increase their family’s income, and some of those families would see their income rise above the federal poverty threshold. But some jobs for low-wage workers would probably be eliminated, the income of most workers who became jobless would fall substantially, and the share of low-wage workers who were employed would probably fall slightly.”
Along with the $10.10 option, the CBO examined a $9 option. Here’s a breakdown of what the effect on employment could be. Note that each central estimate is contextualized with a likely range, reflecting inherent uncertainty about what would actually happen if the minimum wage were increased at the federal level.
With these employment estimates in mind, the CBO projects the following for the $10.10 scenario:
- “Once the increases and decreases in income for all workers are taken into account, overall real income would rise by $2 billion.
- Real income would increase, on net, by $5 billion for families whose income will be below the poverty threshold under current law, boosting their average family income by about 3 percent and moving about 900,000 people, on net, above the poverty threshold (out of the roughly 45 million people who are projected to be below that threshold under current law).
- Families whose income would have been between one and three times the poverty threshold would receive, on net, $12 billion in additional real income. About $2 billion, on net, would go to families whose income would have been between three and six times the poverty threshold.
- Real income would decrease, on net, by $17 billion for families whose income would otherwise have been six times the poverty threshold or more, lowering their average family income by 0.4 percent.