We Won't See Mass Prosperity Until We Rebuild Manufacturing

Sep 6, 2011Jon Rynn

workers-200No matter how large a jobs effort the government puts forward, revitalizing the manufacturing sector holds the key to long-term success.

workers-200No matter how large a jobs effort the government puts forward, revitalizing the manufacturing sector holds the key to long-term success.

While there are many similarities between our time and the Great Depression, there is a crucial difference: In the late 1930s, the United States produced over one-third of the world's manufactured goods, while in 2008, the American manufacturing share was down to 18 percent after being trashed by outsourcing and imports. By increasing demand for products through government action, FDR was able to set the country up for the "Great Prosperity" from the end of WWII until the 1970s. Now, even with a large second stimulus, we will not be able to experience a new era of prosperity until we rebuild the manufacturing sector.

Recently, a crop of articles has appeared that argue that "our economy will thrive only when we make what we invent," as Susan Hockstein, President of the Massachussetts Institute of Technology, recently concluded in a New York Times op-ed. Hockstein is challenging the idea that the United States can somehow be a world-class source of innovation without actually producing the new products. As she points out, in the past, "with design and fabrication side by side, insights from the factory floor flowed back to the drawing board." She echoes the research of Professors Pisano and Shih, from an article in the Harvard Business Review, in which they wrote, "The U.S. has lost or is in the process of losing the knowledge, skilled people and supplier infrastructure needed to manufacture many of the cutting-edge products it invented." When engineers could go down to the factory floor and look at the results of their design decisions, it was much easier to create yet more innovations. A major criticism of a corporation (such as GM) used to be that the design engineers would take their designs and "throw them over the wall" to the factory floor without worrying about how the designs fared in a factory setting. Now we throw the designs over the Pacific Ocean to China.

By contrast, as John Gertner writes in the New York Times Magazine, "As the former White House economic adviser Lawrence Summers put it, America's role is to feed a global economy that's increasingly based on knowledge and services rather than on making stuff." The benefits of separating production and innovation have been accepted as conventional wisdom for the past few decades, exemplified by Summers's statement.

But reintegrating innovation -- that is, science and engineering -- with production -- skilled production workers and operations managers -- is necessary. Back in the Great Depression, the Russians bought American factories and imported American engineers to create their industrial system. (Germany also helped, much to their later regret.) Now, after decades of closing down factories, throwing engineers and skilled production workers out of work, re-orienting those professions to military work and much of the educated class to finance, the U.S. is in the position of a developing country. We must try to catch up to Europe and Asia in any way that we can.

It won't be easy. On the one hand, Hockstein points out that "to make our economy grow, sell more goods to the world and replenish the work force, we need to restore manufacturing -- not the assembly-line jobs of the past, but the high-tech advanced manufacturing of the future." On the other hand, Gertner reports that advanced electric car battery makers are forced to buy Korean companies and import Korean engineers in order to get up to speed with cutting-edge technology. A battery maker tells him, "That's where the know-how was -- it was nonexistent in the U.S."

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While the increasing recognition of the importance of manufacturing is encouraging, we are still witnessing the very beginning of the effort to tackle solutions. Hockstein calls for more research dollars from the Federal government and support for more graduates and skilled workers in advanced manufacturing fields. While these are a good start, they won't solve the underlying problem. What we need is an industrial policy, a coordinated set of initiatives that the government pursues to make up for the many market failures we are currently experiencing. But as Gertner points out, "Even now, as unemployment ravages the country, so-called industrial policy remains politically toxic. Legislators will not debate it; most will not even speak its name."

Further to the left on the political spectrum, writers such as Leo Hindery recognize that "America's manufacturing sector must be a cornerstone of the nation's economy and thus one of the essential drivers of the recovery we are still searching for." He calls for a requirement that government purchase goods made in America, a tax credit for rebuilding existing American factories, eliminating the tax credit for off-shoring factories, and enacting a temporary trade tariff, among other policies. He also advocates for a national infrastructure bank and extending various programs to help with the creation of a green energy economy. In a similar vein, Dave Johnson of the Campaign For America's Future writes about a multi-pronged set of policies to revive manufacturing: deal with the trade imbalance with China by pushing it to stop making its currency artificially weak, have the government purchase American-made goods, implement a price on carbon in order to encourage a transition to a green economy, and create an industrial policy, for instance with tax incentives and training programs. He also argues that the president could embark on many of these policies now.

While all of these proposals would be a giant step forward politically, and in fact are probably beyond the limit of feasibility in this age of rabid Republican opposition, unfortunately they only begin to put us on the path to a world-class manufacturing system. The Koreans, Chinese, and Japanese directly subsidize companies, make it easy for scientists and engineers to get degrees, aid the import of technology, help companies work together, and engage in many other techniques for building manufacturing industries. According to the New York Times, a partial cause of China's rise as a solar energy producer and the simultaneous decline of the United States comes from "free or subsidized land from local governments, extensive tax breaks and other state assistance... China has focused on building the competitiveness of the country's manufacturers." Since labor is a small part of solar panel costs, cheap labor has not been a key to success in China.

We could combine the ideas of a second stimulus, building a green infrastructure, and rebuilding the manufacturing economy by creating environmentally sustainable transportation, energy, and urban national systems, as I have argued. There are myriad examples of countries pulling themselves up the ladder of manufacturing competency, including the United States. The reality is that in order to be wealthy in the long-run, an economy must be based on manufacturing. As hard as it will be to move the politics of this country toward that reality, in the end it will be easier than making pretend that manufacturing is not important.

Jon Rynn is the author of the book Manufacturing Green Prosperity: The power to rebuild the American middle class, available from Praeger Press. He holds a Ph.D. in political science and is a Visiting Scholar at the CUNY Institute for Urban Systems.

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"Action and Action Now": America Can't Afford to Waste Its Human Resources

Sep 6, 2011David B. Woolner

Desperate times call for bold measures. President Obama need look no further than the WPA.

Desperate times call for bold measures. President Obama need look no further than the WPA.

To those who say that our expenditures for Public Works and other means for recovery are a waste that we cannot afford, I answer that no country, however rich, can afford the waste of its human resources. Demoralization caused by vast unemployment is our greatest extravagance... I stand or fall by my refusal to accept as a necessary condition of our future a permanent army of unemployed... [W]e must make it a national principle that we will not tolerate a large army of unemployed and that we will arrange our national economy to end our present unemployment as soon as we can and then to take wise measures against its return. - Franklin D. Roosevelt

With unemployment still hovering at over 9 percent nationwide, and with some economists and historians arguing that the present economic crisis should not be referred to as the "Great Recession," but as the "Great Depression II," a good deal of anticipation has arisen over what President Obama will propose in his message to Congress on Thursday. Despite widespread Republican opposition to further government spending, many economists and business leaders -- not to mention liberal members of the Democratic Party -- argue that what the country desperately needs is another stimulus package. A jobs program could provide hope and relief to the millions of long-term unemployed, restore confidence, and stem the U.S. economy's steady slide back into recession. Even the ever demure Chairman of the Federal Reserve, Ben Bernanke, has indicated that "putting people back to work" must be made a priority if the country wishes to avoid long-term damage to the economy.

Just over 75 years ago, in the midst of a long-term unemployment crisis not unlike the one we face today, President Roosevelt issued Executive Order 7034 to create one of the largest federal employment programs in American history: the Works Progress Administration (WPA). Roosevelt created the WPA in part out of his conviction that when the private sector fails to provide basic economic security in the form of employment to millions of Americans, it is right and proper for the government to step in to pick up the slack. Like President Obama, FDR presided over an economy that was expanding, in fact at a much faster rate than the meager growth we see today. But the growth was not strong enough to absorb the many millions still looking for work. Even though the unemployment rate had fallen by more than five percent since his assumption of office in 1933, FDR was not content to sit on his laurels and wait for the long hoped for return to full employment. So the president did what the American people expected him to do: he took action.

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Over the course of its eight-year history, the WPA employed approximately 8.5 million people, the vast majority of whom worked on projects aimed at rebuilding America's wholly inadequate 19th century infrastructure. That infrastructure was marked by feeble bridges, unpaved roads, little or no water or sewage treatment facilities, and tens of thousands of decrepit schools and other public buildings. Thanks to this massive effort, millions of Americans (including engineers, architects, and other skilled workers) gained meaningful employment and through their labor transformed the face of the nation. In New York City alone, for example, the WPA constructed the Triborough Bridge, the Lincoln Tunnel, FDR Drive, LaGuardia Airport, and the Belt, Grand Central, and Henry Hudson Parkways. It also rebuilt the Central Park Zoo, landscaped Bryant Park and Hunter College, and built or renovated hundreds of schools throughout the city -- not to mention put thousands of unemployed city teachers back to work in the newly constructed classrooms.

As this incomplete list of projects for New York City alone shows, the WPA was no "make work" operation, but a national endeavor aimed at transforming the nation's economic infrastructure and bringing the United States into the modern world by making use of our most precious resource: human capital. By the time it was finished, the WPA had constructed nearly 600,000 miles of rural roads, 67,000 miles of urban streets, 122,000 bridges, 1,000 tunnels, 1,050 airfields, 500 water treatment plants, 1,500 sewage treatment plants, 36,900 schools, 2,552 hospitals, 2,700 firehouses, and nearly 20,000 other state, county, and local government buildings. It was also widely popular among working Americans who wrote tens of thousands of letters to the White House thanking the president for his determination to counter the demoralizing effects of unemployment.

The infrastructure built by the WPA and other New Deal agencies helped lay the basis for the massive economic expansion that took place during World War II and the post-war years. All of us have benefited immensely from this visionary effort to simultaneously rebuild America and the American workforce. But after roughly 70 years, much of this infrastructure is in desperate need of replacement or repair.

If the president and Congress are serious about meeting the worst economic crisis this nation has endured since the Great Depression, remaining competitive in the global economy, and avoiding the atrophy of skills that comes after years of an idle workforce, then they should embrace the opportunity to rebuild America and the American workforce with the same sort of bold vision that inspired an earlier generation. With infrastructure that is now ranked a dismal 23rd among the world's industrialized states, and with millions of skilled and unskilled workers in desperate need of a job, this is no time for half measures. In light of this, isn't it time for the president to establish his own jobs program -- by executive order if necessary -- and to insist that Congress provide the funds needed to support it? The American people would no doubt support such a move. They understand that the real crisis in America is a jobs crisis, exasperated by a failure of leadership in Washington and the false obsession of Republican party extremists with cutting government spending at a time when we can least afford it. They are also tired of crumbling roads, burst levees, and collapsed bridges. They have heard enough talk of cuts, cuts, cuts when, in the spirit of the New Deal, they would much rather heed a call to "build, baby, build." Surely, as FDR said in his first inaugural, the time has come for "action and action now."

David Woolner is a Senior Fellow and Hyde Park Resident Historian for the Roosevelt Institute.

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Jeff Madrick on Countdown: "The American Job Machine is Broken"

Sep 5, 2011

Friday's jobs numbers came out just in time to make today's Labor Day celebration highly depressing. We can look forward to Obama's jobs speech this week, but will he say anything to turn the situation around? Roosevelt Institute Senior Fellow Jeff Madrick joined Keith Olbermann on Countdown to discuss what needs to be done. "The country is in a mess," Jeff says. "The American job machine is broken."

Friday's jobs numbers came out just in time to make today's Labor Day celebration highly depressing. We can look forward to Obama's jobs speech this week, but will he say anything to turn the situation around? Roosevelt Institute Senior Fellow Jeff Madrick joined Keith Olbermann on Countdown to discuss what needs to be done. "The country is in a mess," Jeff says. "The American job machine is broken."

Obama's jobs speech can't just be empty campaign rhetoric with an unemployment crisis like ours. "He has to be bold," Jeff says. After months of a stagnant economy, "he can say the facts changed," Jeff points out. "As John Maynard Keynes once said, 'When the facts change, I change my mind. What do you do, sir?'"

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So what are the solutions that could help real Americans? We can invest in infrastructure -- painfully obvious after Hurricane Irene -- and clean energy, Jeff suggests. On top of that, "it can be done through an FDR Washington hiring program," he points out. "There's a lot to be done in America," and Obama could take a page from the WPA and employ Americans to get it done.

None of this will come for free, but isn't it worth spending the money to put the country back on track? "What he can tell the American people is, 'Do you want a dumb deficit, or do you want a smart deficit?'" Jeff says. "If we don't do something bold we're going to get a dumb deficit and lots of people out of work and malaise. We can get a smart deficit and get us working again." The choice seems pretty obvious when Labor Day is marred by 9 percent unemployment.

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Terrible, Horrible, No Good, Very Bad Jobs Numbers

Sep 2, 2011Mike Konczal

Will dismal jobs numbers spur action in time to change course?

Payroll data came in this morning showing zero net new jobs. Actually, it came in at +17,000 private payroll jobs, -17,000 public payroll jobs. The government continues to drop jobs, shedding around 600,000 since the beginning of the recession. This has become a major disaster that has increased the ranks of the unemployed and put downward pressure on demand at the worst possible time.

Will dismal jobs numbers spur action in time to change course?

Payroll data came in this morning showing zero net new jobs. Actually, it came in at +17,000 private payroll jobs, -17,000 public payroll jobs. The government continues to drop jobs, shedding around 600,000 since the beginning of the recession. This has become a major disaster that has increased the ranks of the unemployed and put downward pressure on demand at the worst possible time.

The terrible private payroll jobs numbers need to be taken into account along with two other worrisome signs. Firstly, in the previous two months job numbers were revised down, making the anemic recovery even worse. June dropped from 46,000 to 20,000 jobs created, and July went from 117,000 down to 85,000. The labor market is even weaker than we thought.

The second sign is that major indicators surrounding those who do have a job are weak. Let's look at the total amount of hours worked in the economy, production and non-supervisory hours. The Bureau of Labor Statistics adds up all the hours worked in the economy and plots them on a graph, divided by a previous year to set a baseline. This is total hours worked in the entire economy, not hours per employee or anything like that. And that number declined in August:

We haven't seen such a small number of hours worked since November 2004 or March 1999. And as you can see (if you squint), it dropped during August, as it did for total aggregate weekly payrolls.

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Average weekly earnings and average weekly hours both dropped slightly. We need these numbers to be taking off, not holding steady or declining. So the economy isn't working even for those with a job. Also, declining weekly earnings mean there are going to be even less inflationary pressures in the economy than we thought.

Meanwhile, the average duration of unemployment has dropped while the median has increased. It's too early to tell, but that's a troubling sign with weak job growth -- it means that we are likely seeing more and more unemployed people simply dropping out of the labor force instead of finding a job. This will continue to make the unemployment rate a less important indicator than the employment-to-population ratio.

One thing terrible jobs numbers could do is galvanize public and elite opinion in a way that weak jobs numbers wouldn't. In the next few weeks, there could be movement in the three major initiatives needed for recovery. President Obama is going to lay out an agenda for fiscal stimulus, the Federal Reserve is having a two-day meeting to determine monetary stimulus, and numerous things appear to be underway in the housing market, including FHFA suing the major banks and several attorneys general breaking from the cover-up-like proposed settlement to investigate foreclosure fraud. We'll see if it is all too little, too late for the economy as it is.

Mike Konczal is a Research Fellow at the Roosevelt Institute.

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Is Work-Life Balance An Economic Necessity?

Sep 2, 2011Joan Williams

women-and-moneyWhen given an ultimatum between children and career, many women go with the latter.

In the debate over work-life balance, there's one argument we can't seem to move past: Women have made a choice to have kids. Now they have to live with their decision and all of its consequences.

women-and-moneyWhen given an ultimatum between children and career, many women go with the latter.

In the debate over work-life balance, there's one argument we can't seem to move past: Women have made a choice to have kids. Now they have to live with their decision and all of its consequences.

But this argument rests on an underlying assumption that, when challenged, just doesn't hold up. If faced with a stark choice between work and family, the Jack Welches of the world seem to think women are going to choose family, while men are going to choose work. Otherwise the idea of a workforce that doesn't need time off for childbearing doesn't make sense. Kids need to come from somewhere. It follows, therefore, that the expectation is that women will "opt out" to raise families rather than pursue a career. (We're not even going to talk about the opt-out debate in this post, as Joan's been over that already.)

But what happens if women don't choose family? What happens if they choose career? The cover story in this week's Economist illustrates what happens when women are given a stark choice between having children and a having a successful career. It turns out -- surprise! -- that a lot of them don't choose children.

The article, titled "The Flight from Marriage," documents a trend among Asian women who marry and have children later in life -- or not at all. The article indicates that non-marriage rates for women in their mid-thirties are pushing 20 percent in the wealthiest countries in Asia, including Japan, Taiwan, and Singapore. And unsurprisingly, the non-marriage rate rises with education level. In Thailand, 13 percent of women with a high school education are still single by age 40, compared with 20 percent of university graduates.

The decline in marriage rates has also led to a dramatic dip in the fertility rate, to as low as 1.1 in Hong Kong -- fully half of the replacement rate. (Unlike in, say, Scandinavia, very few Asian births take place out of wedlock.) The overall fertility rate in East Asia has fallen from 5.3 in 1960 to 1.6 today. That's obviously not sustainable, and many of the countries affected are scrambling to offer incentives to persuade women to have children. Among the benefits being offered? Better work-life balance, including subsidized childcare and parental leave for both mothers and fathers. As the Wall Street Journal noted a few months ago, affordable child care has a significant effect on a country's fertility.

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See that, Mr. Welch? That's work-life balance -- as an economic necessity. If it comes down to it, career women in the United States could always pull a Lysistrata and stop having babies until the men come around. But come on. We shouldn't need to get to that point.

Now, the reasons for the low marriage and birthrates in Asia are manifold, as the article describes, and include not only poor work-family polices but also inflexible divorce laws and rigid adherence to traditional social roles. (According to the article, the average Japanese woman does 30 hours of housework to a man's three -- talk about Chore Wars!) Because the tradition is for Asian women to "marry up," it's more difficult for educated and successful women to find a husband whose status matches or exceeds her own.

But the relationship between work-life policy and birthrate holds elsewhere as well. Take a look at Europe. The countries with the worst work-family policies are also, by and large, the countries with the lowest birthrates. Germany, for example, has notoriously bad work-life policies -- and a birthrate around 1.41 children per woman. Those countries with the highest birthrates, including Norway, Sweden, and France, tend to provide parents with the most support.

Business in a capitalist society has one goal and one goal only: to make money. This is often given as a justification for denying the value of policies that help employees achieve (or even attempt) work-life balance. But fertility trends show that this attitude is hugely shortsighted. There's no question that a career is now an option for most women. And the trends show that, when given an all-or-nothing choice between career and family, many women will choose career.

An aging population is a huge financial burden. It makes no sense to disincentivize reproduction. We simply can't afford to.

Joan Williams is the author of Reshaping the Work-Family Debate and Unbending Gender. She and Rachel Dempsey are co-writing an upcoming book about gender bias against professional women.

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Did Stimulus Projects Hire the Unemployed or Just Shift Jobs Around?

Sep 1, 2011Mike Konczal

Some new research claims that the Recovery Act didn't create jobs, but a different reading shows just the opposite.

Some new research claims that the Recovery Act didn't create jobs, but a different reading shows just the opposite.

The Meracatus Center recently published a study by Garrett Jones and Daniel Rothschild titled, "Did Stimulus Dollars Hire the Unemployed?" It uses surveys and seeks to point out flaws in the achievements of the ARRA, or Obama's stimulus program. Matt YglesiasKevin Drum, and Jon Chait have already commented on it, pointing out that the results of the study seem to look like a major win for the stimulus.

Specifically, the major debate is over this data point: stimulus-funded projects hired 42.1 percent from the pool of unemployed people. The authors of the paper argue that this is a problem, as it is similar to the rates of hiring from the unemployed that have been observed from the 1990s-2000s. Let's take a look at their argument (my bold, numbering):

Worker responses

Did stimulus-funded projects hire the unemployed or the already employed? Our surveys indicate a near-tie on this question. Of the 277 respondents hired after January 31, 2009, 42.1 percent had been unemployed immediately beforehand and 47.3 percent had come directly from another job. Of the rest, 4.1 percent had been out of the labor force, and 6.5 percent had been in school. Thus, the weight of the evidence suggests that ARRA did an enormous amount of “job shifting” rather than “job creating.” There is evidence of the latter, but, under Keynesian reasoning, every worker hired away from another job reflects some weakening of the stimulus.

We saw this “worker poaching” tendency in our interviews as well. [1] This is similar to the amount of job shifting that goes on in relatively normal economic times. Eva Nagypal (2008, p.1) notes that “employer-to-employer transitions…ma[de] up 49 percent of all separations from employers” in the decade prior to her study. Robert Hall (2005) finds a similar number, roughly 40 percent. [2] Since on average separations equal hires (the minor factor of net job growth aside), there is little difference between the recent U.S. average and our sample average. In other words, we find little evidence that stimulus spending was particularly effective at moving the unemployed into work. During the worst recession in generations, the ARRA receiving organizations in our sample hired away employed workers at roughly the same rate as in normal economic times.

Firstly, from [1] it is clear that they compare the ARRA job hires to the job hiring environment from studies that look at the pre-recession environment, roughly 1994-2007. They justify this by [2], which says that separations roughly equal hires during the relative time periods, so there should be "little difference" between the two samples.

That second point is clearly false. A quick random search found this graph from this site using JOLTS:



During 2008-2009, or one of the time periods in question, separations were significantly higher than hires, which should require us to re-estimate what a "normal" hiring distribution looks like. And that baseline should look like the rest of the economy in the depressed state during 2008-2009.

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The flows between unemployment and employment and within the two themselves are distorted relative to any reasonable baseline, and as such a direct comparison isn't trivial. I'm not going to re-estimate a baseline here, but I have two clues that indicate what should be expected. First, transitions from Unemployed to Employed have plummeted:

This recession is characterized by a major increase in the difficulty the unemployed have in finding a job. If the stimulus is associated with a pre-recession rate of hiring from the unemployed, we should consider that a major win.

What about the rate at which those already employed find a job? This is harder to track, but this graph from The Labor Market and the Great Recession (April 2010) by Elsby, Hobijn, and Sahin sheds some light:

This is complicated, so let me take a second to explain. The separation rate is the rate at which people quit their jobs or suffer a layoff. The inflow rate is the rate at which they enter unemployment (flow into the unemployment category from the employed category). The layoff separation and inflow rate are almost identical in the recession: quits decline, and the rate at which quits flow into unemployment decline even faster.

This last part makes sense -- you aren't going to quit your job in a labor market with 10 percent unemployment and a unemployment to vacancy ratio of 6-to-1 unless you are absolutely sure you have the next job lined up. As such, my initial reaction to this graph is that the amount of hiring from Employed -> Employed should go up -- the gap between the separation and inflow line have increased slightly, it seems.

These are looking at different spaces within the labor market, so comparisons between these two data points and the Jones/Rothschild study aren't simple. However, there has been a major change in the movement between categories here and my initial reaction is that keeping a consistent ratio of hiring the unemployed at a time characterized by a plummeting Unemployed -> Employed rate should be a major win, no? That's before a probable increase in employed people separating only when they have new jobs and the new quirk of a massive increase in the 'Not in the Labor Force' population (which hasn't been conclusively studied in the past). At the very least, a relatively full employment market, like that of the 1990s-2000s, can't serve as a benchmark.

That's my reaction; what do labor market readers see in this study?

Mike Konczal is a Research Fellow at the Roosevelt Institute.

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Minimum Wage Laws and the Labor Market: What Have We Learned Since Card and Krueger's Book Myth and Measurement?

Sep 1, 2011Arindrajit Dube

alan-kruegerAlan Krueger's work with David Card was seminal when it first came out, but it has also stood the test of time.

alan-kruegerAlan Krueger's work with David Card was seminal when it first came out, but it has also stood the test of time.

Alan Krueger's recent appointment to head the Council of Economic Advisers has led to renewed interest in his book on minimum wages, coauthored with David Card, called Myth and Measurement. In that book, published in 1995, the authors forcefully argued that the evidence showing minimum wage increases killed jobs was fragile. Their own case study comparing fast food restaurants in New Jersey and Pennsylvania after a minimum wage increase in New Jersey showed that if anything, employment rose in New Jersey following the legislated hike.

Myth and Measurement went on to argue that the totality of evidence pointed towards the inadequacy of the simple supply-and-demand model for understanding the labor market for low-wage workers. Instead, they argued employers have some power to choose wage polices: paying a little bit more would attract more workers to a company and reduce the number leaving the company because of a better offer, but would mean higher labor costs due to paying more to those who would have stayed at the firm anyway -- the "inframarginal" workers. Card and Krueger called this the "dynamic monopsony" model, and they argued that it accorded with the data much better than the canonical supply and demand model.

The reaction to the book was unforgettable, even for those of us who were mere undergraduates at the time. Mixed in with praise for the authors' clear-headed (if brave) analysis was scathing commentary from established labor economists who considered Myth and Measurement nothing short of heresy. In his 1995 review of the book in Industrial and Labor Relations Review, Daniel Hammermesh scolded the authors that "[a] wonderful world of reduced inequality through higher wage minima with no loss of jobs is regrettably not an option." It has been an eventful 16 years since the publication of that book, so it seems a good time to take stock of how the authors' central theses have stood the test of time. Writing a retrospective review of Myth and Measurement is particularly tempting, since I just finished a review of the more recently published book Minimum Wages by David Neumark and William Wascher for the Journal of Economic Literature, which should be coming out in September. (For the uninitiated, Neumark and Wascher have staked out a position in the minimum wage debate arguing that minimum wages reduce jobs and increase poverty, and therefore implementing them is generally an undesirable policy.)

So what have we learned from -- and since -- Myth and Measurement? Let me highlight three things. First, it is useful to understand the methodological contribution of Card and Krueger's work. The idea of using "natural experiments" -- where there is a sudden change in policy -- was a hallmark of their work and since then has become a standard device in the empirical economist's toolkit. Additionally, the idea that geographical proximity is a good way to construct a control group has been strongly vindicated by many studies, including ones looking at minimum wage impacts. Indeed, today there is a plethora of studies using border discontinuity designs. While there were problems with their case study when it came to properly accounting for statistical power (something that I take up below), overall Card and Krueger's work has made a lasting (and positive) methodological contribution.

Second, Card and Krueger's own follow-up work (Card and Krueger 2000), as well as subsequent studies, largely validated the claim that fast food employment does not drop in any meaningful way in response to the kind of minimum wage increases that we have seen in this country. While critics typically focused on the fact that they found sizeable positive effects on jobs in some cases, the more policy relevant point of the book was that minimum wages do not seem to "kill jobs" while they raise wages at the bottom. This point has been firmly borne out by careful follow up research.

And finally, the idea that search frictions may mediate minimum wage impacts has been taken up by numerous papers since Myth and Measurement -- and has become much less controversial than at the time it was proposed. All in all, I would consider that a pretty good track record for any book in economics.

Findings on Employment

Let's begin with the book's core empirical findings about the impact of minimum wages on jobs in the fast food industry. What most stirred up the profession was that in some of Card and Krueger's specifications, employment in New Jersey actually rose in response to the mandated wage increase in a statistically significant fashion. The positive effect was inconsistent with the competitive model, but was consistent with a monopsonistic model where employers have some wage setting power.

However, the authors pointed out that in other specifications (especially those that were not weighted by firm size), the estimates were much less precise. They argued that "at a minimum, we believe that our estimates call into question the prediction that an increase in the minimum wage will lead to significant employment losses at affected firms. In particular, even our least precise estimates reject the hypothesis that the elasticity of demand for labor by fast-food employers is greater than 0.3 in absolute value."

Subsequent research that built on Myth and Measurement has found that while the sizeable positive effects in some of their specifications were likely due to chance, the lack of job loss was very much a robust finding. Card and Krueger's own subsequent analysis in 2000 using Unemployment Insurance filings by firms (which was closer to the universe of firms in the two states than their original sample) over a longer period already moved towards this view, as the employment elasticities, while still positive, were smaller in magnitude and not statistically distinguishable from zero.(1) My own work with William Lester and Michael Reich (2010) demonstrated this point by comparing contiguous counties across state borders and pooling over 64 different border segments with minimum wage differences over a 17-year period (1990-2006). It's like doing 64 different NJ-PA "experiments" and pooling them together. In the figure below, the dark line shows the distribution of the measured employment elasticity across the 64 "experiments." The four vertical lines are four different published estimates from individual case studies in the literature.

card-and-krueger-graph

Local areas are buffeted by all kinds of economic shocks, and even if these are not correlated with minimum wage increases on average, they lead to clustering in the data, leaving us with less statistical variation than may be apparent at first glance. Such clustering was not accounted for in Card and Krueger's work or virtually in any work during that time, which explains why a sizeable positive effect could be found by chance alone. Since then, we have learned that computing standard errors without accounting for such clustering can lead to false precision. At the end of the day, however, our key conclusions were similar to Card and Krueger's, as the implied labor demand elasticity was effectively zero, and "statistical bounds (at the 95% confidence level) around our contiguous county estimates of the labor demand elasticity as identified from a change in the minimum wage rule out anything above 0.48 in magnitude." (The labor demand elasticitity measures the proportional change in employment for a group of workers in response to a proportional change in their wages.) Importantly, although one of the common criticisms of Myth and Measurement was that it only considered short-run responses, we also showed that was not a fatal flaw. Even when we considered long-term effects using a 17-year panel, the finding of no disemployment effect remained.

What about other research since Myth and Measurement that has looked at the effect of minimum wages on jobs in the U.S.? The most common since the 1990s has been the "state panel" approach pioneered by David Neumark and William Wascher. Like the individual case study, it uses only differences in minimum wages across states to form inference. However, instead of comparing two areas that may be similar based on, say, proximity, the "state panel" studies effectively compare all states to all states, while accounting for possible differences by including statistical controls. The state panel approach has tended to find negative effects, especially when considering a high impact demographic group such as teenagers.(2) For example, in their 2008 book titled Minimum Wages, Neumark and Wascher review 10 state panel studies following up on the initial controversy; nine out of 10 of these studies find evidence for jobs loss.

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There are some obvious virtues for the state panel approach, since it uses a lot more variation than an individual case study. However, it also assumes that we can find enough control variables to include in our regression that will make Texas look like Massachusetts. As it turns out, this is a heroic assumption that badly biases the results.

In a series of papers (Allegretto Dube Reich 2009, 2010; Dube Lester and Reich 2010, 2011) we show the nature of bias in the state panel studies. The kind of states that have tended to have higher minimum wage in the past 20 years have been quite different from those who have tended to have lower minimum wages. As an example, today 11 states plus DC have a local minimum wage of at least $0.25 above the federally mandated minimum of $0.25/hour. Eight of these 11 states are either in New England or on the West Coast. (The remaining three are Illinois, New Mexico, and Nevada.)

In other words, there is a very strong regional component to the minimum wage variation. This can lead to very misleading inference if we compare teen employment growth in, say, Texas and Massachusetts. Given factors such as climate, proximity to Mexico, and others that are usually not fully accounted for in state panel approaches, we might expect very different trends in employment in those states quite apart from minimum wages. Similarly, the growth rate in low-wage jobs has been quite different in states like Texas, North Dakota, and Indiana even thought these states have had the same binding minimum wage (i.e., the federal) over the past two decades. Unless one controls for the "unobserved" (or more accurately "not directly observed") sources of heterogeneity in the growth prospects across areas, conclusions may be badly flawed. A telltale sign of this flaw that our studies revealed is that in the state panel model, the job losses occur substantially prior to the actual change in policy.

So what are some ways of correcting the deficiencies of the state panel approach? One fruitful way is to recognize the core insight of Card and Krueger's research design that compared areas across the NJ-PA border. When comparing places directly across a border, many other (potentially unobservable) confounding factors are roughly similar. We implemented this strategy in numerous papers using a variety of data sets (QCEW, QWI, CPS, Census). The results were unambiguous: whatever group we considered -- restaurant workers, teenagers, teenagers of disadvantaged backgrounds -- the state panel approach always produced an erroneous negative estimate when it came to employment. Once we accounted for the regional heterogeneity, there was no employment loss to speak of. Other authors who have accounted for such heterogeneity largely confirm that employment effects from minimum wage increases in the US have been close to zero or even positive (e.g., Addison et al., 2009, 2011).

Inadequacy of the Simple Supply and Demand Model of the Labor Market

Another important part of Myth and Measurement argued for the inadequacy of the simple supply-and-demand model in thinking about the low-wage labor market. Card and Krueger's primary evidence for this view was that employment didn't fall, and may have risen, in response to a minimum wage increase. A simple model of "monopsony" is a firm that has some wage setting power due to search frictions. Employees say to themselves, "If my employer doesn't give me the raise I was promised I might look for other jobs, but there is no guarantee I'll find one to my liking immediately." Conversely, raising the wages a little won't immediately lead to a crush of workers outside the office, since only a fraction of potential workers may find out about it.

In Card and Krueger's dynamic monospony model, separation and recruitment rates are functions of the wage rate and so the model allows positive firm-level labor supply elasticities. They argue that empirically plausible magnitudes of the labor supply elasticities facing a firm are consistent with small positive or zero effects of a minimum wage increase on employment levels. Why? Because firms do not fully internalize the gains from paying a slightly higher wage. A higher wage reduces quits and increases recruitment among "marginal workers," thereby increasing employment. But a higher wage also means paying more to those who would have stuck around anyway -- the "inframarginal workers." This logic means firms don't raise wages as high as is "efficient" from a societal, as opposed to a profit maximization, perspective. When a minimum wage hike raises the bottom wage, it leads to fewer quits and more recruitment, and hence greater employment. Of course eventually, if the wage is raised enough, the firm may simply go out of business. But over a range, the effect of increasing jobs at some firms may dominate the reduction of jobs from firms not producing at all.

So how has subsequent research spoken to the issue of "dynamic monopsony" or "search friction"? One piece of evidence comes from this year's Nobel Prize in Economics to Professors Peter Diamond, Dale Mortensen and Christopher Pissarides "for their analysis of markets with search frictions." In other words, thinking about the labor market in terms of search frictions has become eminently respectable. Indeed, Dale Mortensen's paper (with Kenneth Burdett) in 1998 formalized the dynamic monopsony model in an equilibrium context with search frictions and competition. Such a model can help us understand a variety of facts about the low wage labor market: why similar workers are paid differently, why there is so much job-to-job mobility, and -- wait for it -- why minimum wage policies could have little in the way of disemployment effects. Indeed, in some cases, by compressing the wage distribution, minimum wage increases may actually improve the functioning of the labor market.

In recent work with Michael Reich and William Lester (2011), we estimated the effect of minimum wages on separations and new hires, along with the effects on employment and wages. We find a striking pattern when we consider either a high-impact demographic group (teens) or a high-impact sector (restaurants): while the effect of minimum wages on employment is close to zero, both separations and new hires fall sharply in response to a minimum wage hike. As we then go on to show, this "trifecta" of results -- strong positive wage effect, close to zero employment effect, and strong negative turnover effect -- are a signature of a Burdett-Mortensen type model with a sizeable amount of search frictions. We estimate that the "labor supply elasticity" facing the firm falls in the 4 to 10 range, suggesting wages are about 10-20 percent lower due to employers' market power. While quantitatively our estimates of labor market power are in the lower range of Card and Krueger's suggestions, the qualitative importance of search frictions is borne out in the data with more careful work. And more recent firm-level studies, such as those surveyed by Ashenfelter, Farber and Ransom (2010) in an entire volume of the Journal of Labor Economics devoted to the issue of monopsony, have indeed found labor supply elasticities consistent with substantial wage setting power.

Today, thankfully, we do not need a large positive minimum wage effect on employment to motivate the use of more realistic models of the labor market. The importance of frictions is borne out through many other types of empirical evidence -- including the extent of wage dispersion, especially for similar workers, or how turnover responds to minimum wage policies, to name a few. Many papers (e.g., Flinn 2006, Giuliano 2007 ) have looked at how minimum wage effects may vary when the labor market is characterized by search or information frictions. The fourth volume of Handbook of Labor Economics has an entire chapter by Alan Manning on "Imperfect Competition in the Labor Market." In that sense, Myth and Measurement was a harbinger of things to come.

Standing the test of time is a challenge for any work, but especially so for a book that has elicited such vitriol from some corners of our profession. In another review of the book in Industrial and Labor Relations Review, labor economist Finish Welch had this to say: "I question David Card and Alan Krueger's models and how they do empirical research. Although the notoriety surrounding Myth suggests important conclusions that challenge economists' fundamental assumptions, I am convinced that the book's long-run impact will instead be to spur, by negative example, a much-needed consideration of standards we should institute for the collection, analysis, and release of primary data." Sixteen years later, it is safe to say that the book's long-run impact has not been on standards for collection, analysis and release of primary data. Instead, what has happened is that today, writing a paper arguing that moderate increases in minimum wage do not have any appreciable effect on jobs because the labor market exhibits search friction is not a conversation stopper or a career ender. On that count alone, Myth and Measurement should be considered a success.

(1) Neumark and Wascher (2000) evaluated payroll records from restaurants from a sample that was in large part collected by the restaurant industry-funded organization Employment Policies Institute and found that the policy clearly reduced employment. However, as shown in Card and Krueger (2000) who used administrative UI records, this was likely driven by the selective nature of that payroll data.

(2) The reason labor economists studying minimum wages have focused so much on teens is not because we think that the impact on teens is especially important from a policy perspective. Rather, the reason is because such a high fraction of teens (around a quarter) earn the minimum wage, making them the canary in the coalmine when it comes to detecting minimum wage effects. A similar logic applies to studying restaurant workers.

Arindrajit Dube is an Assistant Professor in the Department of Economics at the University of Massachusetts Amherst.

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Alan Krueger: Obama Finally Picks a Leader

Sep 1, 2011Bo Cutter

He brings strong personality, new thinking, and policymaking know-how to a struggling economic team.

Alan Krueger is a great appointment to Obama's economic team. He is a heavyweight in the economics profession, deeply experienced in policy making, and an innovative, often contrarian thinker. A professor at Princeton, former chief economist of the Department of Labor, and former assistant secretary for economy policy at Treasury, Alan is exactly what the Obama administration needs right now for several reasons.

He brings strong personality, new thinking, and policymaking know-how to a struggling economic team.

Alan Krueger is a great appointment to Obama's economic team. He is a heavyweight in the economics profession, deeply experienced in policy making, and an innovative, often contrarian thinker. A professor at Princeton, former chief economist of the Department of Labor, and former assistant secretary for economy policy at Treasury, Alan is exactly what the Obama administration needs right now for several reasons.

First, he is a modern labor economist, fully attuned to several new waves of thinking about labor, jobs, work, and incomes in the U.S. economy. The country and the Obama administration both need a profoundly different approach to the whole jobs issue, and Alan brings the capacity to design that approach.

Second, he brings gravity, presence, and personality to the public face of the administration's economic policy. In its almost principled avoidance of a clear economic story, this administration reminds me of the high school football team down 49 to 0 whose coach keeps yelling across the field, "Give Tommy the ball." After a few minutes, a voice from the field yells back, "Tommy don't want the ball." Alan Krueger will take the ball, and, if allowed, will become a respected and trusted public presence for an administration badly in need of one.

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Finally, Alan knows how to "do" public policy. When I worked with him in the Clinton administration, he had ideas -- but everyone in and around a White House has ideas. He knew how to formulate a broad policy, debate it civilly, accommodate the views of others, and come out with something real.

As I said, this is a very good choice and I think we can credit it to Chief of Staff Bill Daley's insistence that the administration not just settle, but look hard for a leader.

Roosevelt Institute Senior Fellow Bo Cutter is formerly a managing partner of Warburg Pincus, a major global private equity firm. Recently, he served as the leader of President Obama’s Office of Management and Budget (OMB) transition team. He has also served in senior roles in the White Houses of two Democratic Presidents.

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What’s “Perfect” About Perfect Competition? A Prosperous Economy Needs Innovators

Sep 1, 2011William Lazonick

workers-200In the latest installment of his “Breaking Through the Jobless Recovery” series, economist William Lazonick explains why pushing big corporations to transform their products is just what our economy needs.

workers-200In the latest installment of his “Breaking Through the Jobless Recovery” series, economist William Lazonick explains why pushing big corporations to transform their products is just what our economy needs.

To claim that something is "perfect" is to say that it cannot be done better. With the start of another academic year, hundreds of thousands of college students who take introductory microeconomics courses will learn from their professors that the best possible allocation of society's resources occurs when "perfect competition" characterizes the organization of industry.

It is a well worked out theory that has been around for over a century. Unfortunately, the theory of perfect competition is nonsensical when applied to an economy such as the United States, dominated as it is by large corporations. The theory of perfect competition enables economists to ignore the conditions under which, through innovation, business enterprises grow large and often come to dominate their industries. As a result, these economists lack a theory of how government policy should respond when the top executives of the large corporations, upon which we rely for our prosperity, fail to invest in innovation and job creation in the United States.

The theory of perfect competition can be found in any conventional economics textbook. In a nutshell, households, who work and consume, maximize "utility" (their satisfaction) in supplying paid labor services and capital (their savings) on input markets as well as in demanding goods and services on output markets. Firms, which buy inputs to produce outputs, maximize profits on the basis of cost structures -- a combination of technologies and input prices -- available to all firms that want to participate in the industry. "Perfect competition" is achieved when, in a particular industry, all firms have exactly the same cost structures and there are a sufficiently large number of these identical firms so that the output decision of any one firm has no discernible impact on the price at which its product is sold.

The basic problem with the theory of perfect competition is that as consumers and workers, not to mention as taxpayers, we want some firms in an industry to transform technologies to generate higher quality, lower cost products than their competitors. We do not want firms to maximize profits subject to given technological conditions. Firms that can achieve these technological transformations are innovative enterprises that drive a society's economic growth.

By creating new sources of value (embodied in higher quality, lower cost products), the innovative enterprise makes it possible (but by no means inevitable) that, simultaneously, all participants in the economy can share in the gains of innovation. Employees may get higher pay and better work conditions, creditors more secure paper, shareholders higher dividends and stock prices, governments more tax revenues, and the innovative firm a stronger balance sheet, even as consumers get higher quality, lower cost products. Indeed, from this perspective, a key issue for economic analysis is the relation between the generation of innovation and the distribution of its gains among participants in the economy.

There are countless examples of innovative enterprise in the history of the U.S. economy. Think of, to mention only a few prominent ones, General Electric's innovations in electrical power systems and light bulbs in the first decades of the 20th century, General Motors' closed car in the 1920s, Du Pont's nylon in the 1930s, Boeing and Douglas in the modern aircraft in the 1930s, RCA in television in the 1940s and 1950s, IBM in computers in the 1950s and 1960s, Intel in microprocessors in the 1970s and 1980s, Cisco Systems in Internet routers in the 1990s, Amazon in electronic retailing in the late 1990s and 2000s, Google in Internet search engines in the 2000s, and Apple in digital devices in the 2000s.

Today, many of these companies remain substantial resource allocators in the U.S. economy. They are innovative enterprises, not "perfect" competitors. To be sure, there are always small firms in the economy, but through innovation the best among them can quickly become very large. For a few well-known examples, Cisco Systems, founded in 1984, grew from 254 employees in 1990 to 34,000 in 2000; Amazon, founded in 1995, had 33,700 employees in 2010; while Google, founded in 1998, had 24,400 employees in 2010.

More generally, large corporations, some dating back to the 19th century, dominate the economy. In 2010, the top 500 U.S. corporations by revenues had combined sales of $10.8 trillion, profits of $702 billion, and employment of 24.9 million people worldwide. That's a per company average of $21.6 billion in sales, $1.4 billion in profits, and almost 50,000 employees. The operation and performance of these corporations, not "perfect competition," need to be at the center of economic analysis.

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That large corporations dominate the US economy is hardly news (except perhaps to the economics professors who write the conventional microeconomics texts). In 1977, business historian Alfred D. Chandler Jr. published a Pulitzer Prize-winning book, aptly entitled The Visible Hand, in which he documented that already by the beginning of the 1920s, the "managerial revolution in American business" was complete. The innovative investment strategies of these corporations drove the consumer durable boom of the 1920s. At the same time, sectors such as textiles, coal mining, and agriculture that were characterized by large numbers of perpetually small firms were known as "sick industries" precisely because of the inability of a few firms to set themselves apart from the rest through innovation.

Today, in my view, the greatest economic policy challenge is how to keep major business corporations innovative. Once they have become successful, the executives who run these mammoth companies may choose to allocate resources in ways that live off the past rather than invest for the future. Indeed, justified by the free market ideology of "maximizing shareholder value," in the United States we reward top executives with unindexed stock options that give them strong personal incentives to do massive stock buybacks to jack up their companies' stock prices even as they eschew investments in innovation.

Here's an example that has recently been in the news. Hewlett-Packard (HP), the world's largest information technology company and an icon of  U.S. business, announced that it intends to exit the personal computer industry, including the rapidly expanding smartphone and tablet segments. HP's top executives deem that the investments required to compete with the likes of Apple pose too great a burden on HP's cash flow. But that's because HP's executives decided to squander $11 billion on stock buybacks in 2010 and another $7.3 billion in the first half of 2011. During the same 18 months, HP spent only $4.6 billion on R&D, just 25 percent of what it forked out to manipulate its stock price through buybacks. Over the past decade, HP has wasted 118 percent of its net income on buybacks. HP was once a great technology company, but in the 2000s it expended only 4.2 percent of sales on R&D, compared with 7.6 percent in the 1990s and 10.5 percent in the 1980s. In 2010, HP's R&D as a percent of sales was a meager 2.3 percent, the lowest in the company's 62-year history.

What determines whether a company invests for the future or lives off the past? Our college students won't find any answers to this crucial question in the conventional economics textbooks. In a world of "perfect competition," there is no room for innovative enterprise. By the same token, the textbooks make the pretense of analyzing "big business" through the theory of monopoly, put forth as the proof of the superiority of perfect competition. The argument is that compared with perfect competition, a firm that has a monopoly restricts output and raises prices to consumers.

To get this result, however, it is assumed that the monopolist firm maximizes profits subject to the same cost functions as perfectly competitive firms. This comparison entails an amazing leap of illogic, ironic for an academic profession that claims to be rigorously scientific: If it is possible for perfectly competitive firms to exist, how did the monopolist get to be a monopolist?

In contrast, in the theory of innovative enterprise a firm can become dominant by transforming its cost structures, gaining competitive advantage over firms that do not. In the process, the innovating firm generally contributes to an expansion of industry output and a reduction of product prices -- just the opposite of what the textbook theory of monopoly predicts.

That the illogical argument of the superiority of "perfect" competition has been ensconced in the microeconomics textbooks for over six decades attests to the failure of orthodox economists to come to grips with an economy dominated by large corporations. Applied to such an economy -- and the United States has been one for over a century -- perfect competition is perfect nonsense.

What then accounts for the persistence of the theory of perfect competition as a linchpin of economics erudition? In brief, there are two mutually reinforcing explanations for what I have called "the myth of the market economy": the ignorance among economists about how the actual economy functions and the ideology that "free markets" can solve all our economic problems. It is about time that we got rid of both.

William Lazonick is director of the UMass Center for Industrial Competitiveness and president of The Academic-Industry Research Network. His book, Sustainable Prosperity in the New Economy? Business Organization and High-Tech Employment in the United States (Upjohn Institute 2009) was awarded the 2010 Schumpeter Prize.

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Unemployed and Taking on Debt to Stay Afloat? Don’t Expect to Get a Job

Aug 31, 2011Bryce Covert

Anyone can lose their job and fall behind on bills in this economy. But now that may keep them from finding new employment.

This week's credit check: Six out of 10 employers use credit reports to vet job applicants. More than 20 million Americans may have material errors on their credit reports.

Anyone can lose their job and fall behind on bills in this economy. But now that may keep them from finding new employment.

This week's credit check: Six out of 10 employers use credit reports to vet job applicants. More than 20 million Americans may have material errors on their credit reports.

There are about 14 million people unemployed in this country, and 6.2 million of them have been unemployed for more than 27 weeks. Where should they turn when they've lost a steady paycheck, but still have to keep up with bills such as mortgage payments, student loans, and the basics like rent and food? With no money coming in, many understandably have to turn to debt.

But taking on debt -- and being unable to pay it back, or pay back any of the debt they may have took on when things looked better and they had a job -- could be the exact thing that keeps the unemployed from becoming re-employed. In a massive Catch-22, many employers are looking to credit reports when they do background checks on prospective employees, and a bad mark due to an unpaid medical bill or lapsed student loan payment could make the difference in getting the job. In 2010, The Wall Street Journal reported that more employers are relying on these checks before making hires. Nothing has changed in the intervening year -- except perhaps that the problem is getting worse. Marketplace recently told the story of Sarah Sholar, just one of those employees with bad credit who has been turned down by prospective employers. "I can't pay my student loans because I don't have a job," she told them. "I can't get a job because I can't pay my student loans."

The companies in charge of reporting on consumer credit records are extremely opaque and have little oversight. Some studies found that 25 percent of credit scores -- based on credit reports -- have errors in them. More than 20 million Americans may have material errors on their credit reports. And good luck trying to fix errors -- or to even figure out how these scores are calculated. Both will lead you down a labyrinthine path.

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But it's not just consumers who get suckered by reporting agencies. As Amy Traub wrote in The American Prospect, "Credit checks have been aggressively marketed to employers by for-profit credit bureaus," but "[t]he only available rigorous study of employment credit checks concluded that there's no correlation between credit history and job performance." Even those who are concerned about whether to trust a new employee with fiduciary responsibilities may not learn much from a credit report when trying economic times have landed even the most responsible people in difficulty. On top of this, because African Americans and Hispanics, for a variety of reasons, disproportionately have low credit scores, they can be excluded from jobs that run credit checks, leaving the door open for discrimination charges. In fact, as Traub points out, Bank of America was found to have discriminated against African Americans in just this manner in 2010, and there's such a case pending against Kaplan Higher Education Corporation.

So why have the credit reporting agencies pushed employers so hard to use this information? There's good money in credit reporting, and the business segment growing fastest is consumer reporting. About 600 credit reporting agencies, along with 4,500 credit collections agencies, generate annual revenue of $20 billion in the U.S. The top four reporting agencies -- Equifax, TransUnion, FICO, and Experian -- bring in $1.8 billion, $1.2 billion, $744 million, and $282 million in annual sales, respectively.

But the larger problem with this practice is that it is based off the tired assumption that getting into debt is a reflection of bad character, not the inevitable result of a bad economy coupled with tricks and traps employed by banks to keep consumers in debt. The WSJ article explains that the rise in employers who check credit reports for prospective employees is due to concerns "about rising rates of employee theft and fiduciary issues" and that "[c]ompanies say the financial information can offer insight into a candidate's level of responsibility." But in reality, anyone can lose their job these days and fall behind on bills. Many people were seduced into subprime products before the boom without fully understanding the traps they were getting into. And long before that, wages were falling for the past three decades, so families have had less and less to spend on basics like food and shelter -- leading to the need to take on debt to plug the gaps.

The stigma around being in debt is unfair at any time, but is even more distressing when the economy has landed so many in financial disaster. If these very financial difficulties then keep people from getting the jobs that can help pull them out of the morass, there will be no lifeline left.

Bryce Covert is Assistant Editor at New Deal 2.0.

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