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The Income Gap Began To Narrow Under Obama

This is In Real Terms, a weekly column analyzing the latest economic news. Comments? Criticisms? Ideas for future columns? Email me, or drop a note in the comments.


Hillary Clinton and Donald Trump don’t agree on much. But there’s one theme that’s central to both of their campaigns: The U.S. economy too often benefits the powerful few over the struggling many. Trump has pledged to be the “voice” of the masses fighting against a “rigged” system. Clinton, though less fiery in her rhetoric than either Trump or Bernie Sanders, her former Democratic rival, has pledged to make the “super-rich” start paying “their fair share.” As I wrote last month, the 2016 election has marked a distinct shift in the political message of both parties, away from promises to grow the economic pie and toward discussions of how to divide it up more fairly.

To all of which President Obama responds, in effect: “What do you think I’ve been doing for the past eight years?”

In a report released Friday, the president’s Council of Economic Advisers argued that the Obama administration’s policies on taxes, health care and other issues were responsible for “a historic achievement in reducing inequality.”

“Everyone talks about income inequality these days,” CEA Chairman Jason Furman, one of the president’s top economic advisers, wrote in an op-ed article accompanying the report’s release. “President Obama has actually done something about it.”

In recent years, inequality has shifted from being an issue that mostly concerns the political left to one that worries even mainstream economists. Groups such as the International Monetary Fund and the OECD have released reports arguing that a greater concentration of wealth among the rich leads to slower overall economic growth. And while economists disagree about the causes and consequences of rising inequality (and, even more, what to do about it), there is relatively widespread agreement that the recent trend of explosive income growth among top earners and minimal gains for everyone else is unhealthy for the economy.

The CEA report argues that Obama has fought inequality in three main ways. First, the administration’s actions during the recession — extending unemployment benefits, temporarily cutting payroll taxes to stimulate growth and bailing out the auto industry, among others — kept unemployment lower than it would otherwise have been. Since recessions tend to hit the lowest-earning workers hardest, policies that mitigate their impact will tend to reduce inequality. Second, the CEA argues that the Affordable Care Act, by making health insurance more affordable for and accessible to low-income workers, has greatly reduced disparities in health care. And third, the CEA argues that the administration’s tax policies — which raised taxes on the rich, cut them for the middle class and expanded programs such as the Earned Income Tax Credit that help poor families — made the tax code more progressive. All told, the CEA estimates that the poorest fifth of American households will earn 18 percent more in 2017 than they would have without the administration’s policies.

There is room to argue with all of these claims. The Federal Reserve, which Obama doesn’t directly control, probably did more to revive the economy than the administration’s stimulus package, the effectiveness of which remains hotly debated. The impact of Obamacare is similarly disputed: There is no question that the law increased insurance coverage, and there is evidence that it has reduced medical debt, but there are also mounting concerns that many of the insurance plans offered under the law are so limited that they provide little practical access to health care. And while it is true that Obama has raised taxes on the richest Americans, a 2015 analysis by experts at the Brookings Institution found that even a dramatic increase in taxes on the wealthy would have an “exceedingly modest” impact on overall levels of inequality.

Still, independent evidence supports the notion that inequality has fallen — or at least risen more slowly — in recent years. The Census Bureau’s recent report on household income showed that most measures of inequality were flat or slightly down in 2015 and that incomes rose fastest for the lowest earners. Other sources likewise indicate that earnings are rising fastest for low-wage workers, due in part to increases in the minimum wage at the state and local level.

It’s too soon to say whether the recent progress on inequality represents a long-term shift or a temporary blip. And even if the gains are real, they have made at best a modest dent in the long-term rise in inequality. According to the Congressional Budget Office, the share of income going to the top 1 percent increased from 7.4 percent in 1979 to 16.7 percent in 2007, before Obama took office; the CEA report estimates that the administration’s policies have reversed roughly one-tenth of that increase.

But even if progress has been limited, the trend line has shifted. That’s significant. The incessant increase in the income gap in recent decades often made it seem like inequality could go in only one direction: up. The recent trend suggests that’s not the case. It will fall to Trump or Clinton to try to build on that progress.

Quitting time

Good news: Americans are changing jobs more often.

As of January, the typical American worker had been with the same employer for 4.2 years, according to data released this week by the Bureau of Labor Statistics. That’s down from 4.6 years in 2014.

That might not sound like good news. After all, companies and workers alike often complain about the disappearance of stable careers with the same employer. But while it’s true that long-term employment relationships — those of 10 or 20 years or more — have declined significantly since the 1980s, Americans are changing jobs less frequently overall than they used to. In 1983, the typical male worker had been with his employer for 4.1 years; in 2014, that measure, known as median tenure, had risen to 4.7 years. The increase was even more dramatic for women, who saw their median tenure rise from 3.1 years in 1983 to 4.5 years in 2014.

The long-term rise in tenure is partly due to the aging of the U.S. population — older workers tend to have been in their jobs for longer. But other evidence also suggests that Americans are switching employers less often. That’s especially true for younger workers, who despite their “job-hopper” reputation, are changing jobs less than past generations.

That decline worries economists because employee turnover helps make the economy more efficient. Workers, particularly early in their career, often change jobs frequently in order to find the right fit for their skills. And on an economy-wide basis, turnover helps match the best companies with the best workers, improving overall productivity. Other, related measures of economic dynamism, such as the rate of entrepreneurship, have also fallen in recent decades, amplifying economists concerns.

The latest data, then, is a welcome sign that the improving economy could be giving workers the confidence they need to take risks again. As Ben Leubsdorf noted in The Wall Street Journal, other measures of turnover, such as the number of people who voluntarily quit their jobs, are also rising, while layoffs — a less encouraging type of turnover — remain near historic lows. Federal Reserve Board Chair Janet Yellen has cited rising quits as a sign that the job market is improving. A bit more job-hopping would be a welcome sign.

Oh, the humanities

New research from economists at the Federal Reserve Bank of New York this week confirmed the worst fears of every parent of a theater major: College graduates with degrees in engineering, science and similar fields are finding good jobs straight out of college, the researchers found. But many liberal-arts majors struggle to find decent-paying jobs until well into their 20s.

College students picking a major this fall would do well to meet the new research with some skepticism, however. The researchers used data from the American Community Survey, which asks respondents what they majored in but not, crucially, where they went to school. That means they can’t distinguish between a history major at Harvard and one at a regional public university. Nor does the survey include any information about graduates’ upbringing — how much money their parents made, for example, or where they were raised. Without that information, there’s no way to know how much to expect graduates to earn, making it hard to measure the impact of their degree.

Moreover, as George Anders recently wrote in The Wall Street Journal, liberal-arts majors often earn less straight out of college but go on to make more later in their careers. Those English majors serving lattes today could well be running companies in 20 years.

Elsewhere

Data from Uber is giving economists unprecedented insight into how consumers respond to higher prices, Adam Creighton reports in The Wall Street Journal.

Immigrants aren’t taking Americans’ jobs and are good for the economy as a whole, according to a new report from the National Academies of Sciences, Engineering and Medicine. But as Julia Preston writes in The New York Times, the report found mixed results in terms of immigrants’ effect on government budgets and on the wages of low-skilled American workers.

Economist Jed Kolko dives deep into the weeds of two new reports on household income.

Years after the recession ended, millions of Americans are finally being lifted out of poverty, Patricia Cohen writes in The New York Times.

Ben Casselman is a senior editor and the chief economics writer for FiveThirtyEight.

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