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Posts Tagged ‘Income’

Health insurance is not just a health issue. It’s also a jobs issue. Why? Because about 60% of non-elderly Americans get their health insurance through an employer or a labor union. As a result, health insurance and employment are closely related.

As lawmakers consider changes to our system of health insurance, they should therefore keep an eye on the potential implications for jobs and wages. To help them do so, the Congressional Budget Office yesterday released a very helpful brief (see also the accompanying blog entry) that discusses many of the linkages between health insurance and the labor market.

Among other things, CBO reiterates a point I’ve made previously: that the costs of health insurance are ultimately born by workers through lower wages and salaries:

Although employers directly pay most of the costs of their workers’ health insurance, the available evidence indicates that active workers—as a group—ultimately bear those costs. Employers’ payments for health insurance are one form of compensation, along with wages, pension contributions, and other benefits. Firms decide how much labor to employ on the basis of the total cost of compensation and choose the composition of that compensation on the basis of what their workers generally prefer. Employers who offer to pay for health insurance thus pay less in wages and other forms of compensation than they otherwise would, keeping total compensation about the same.

CBO then goes on to discuss a range of potential policies, including ones that would impose new costs on employers. Such policies might require employers to provide health insurance to their workers (an employer mandate), for example, or might levy a fee on employers who don’t provide health insurance (play or pay). CBO concludes that, consistent with the argument above, employers would generally pass the costs of such measures on to their employees through lower wages and salaries. Such adjustments won’t happen instantly, so there may be some short-term effect on employment, but over time the cost will primarily be born by workers through lower compensation.

One exception, however, would be workers who currently earn low wages. As noted on the blog:

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Many economists, myself included, refer to the recent boom and bust in house prices as a bubble, whose foundation lay in a combination of credit market excesses and human imperfections. Fundamentals certainly played a role as well, but bubble forces were particularly important.

In a short paper recently published by the New York Federal Reserve, Jim Kahn makes a very different argument: that the boom and bust in house prices can largely be explained by a boom and bust in productivity growth:

The housing boom and bust of the last decade, often attributed to “bubbles” and credit market irregularities, may owe much to shifts in economic fundamentals. A resurgence in productivity that began in the mid-1990s contributed to a sense of optimism about future income that likely encouraged many consumers to pay high prices for housing. The optimism continued until 2007, when accumulating evidence of a slowdown in productivity helped dash expectations of further income growth and stifle the boom in residential real estate.

Jim’s argument depends on several related lines of reasoning:

  • First, he notes that productivity drives long-term income growth and that incomes determine how much families can pay for homes. He then argues that the demand and supply for housing are inelastic and, as a result, rising incomes imply rising house prices. Putting these pieces together, he concludes that faster productivity growth implies faster house price appreciation.
  • Second, he notes that productivity growth accelerated in the mid-to-late 1990s and then slowed around 2004. The productivity acceleration thus began shortly before house price took off, and the productivity slowdown began shortly before house prices began to collapse.

Kahn Productivity 1

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A few weeks ago, I posted some charts showing that Americans are increasingly reliant on government transfers as a source of income. Friday’s data on personal income for May confirmed that the trend is continuing.  Government transfers made up a record 18% of personal income in May:

Transfers thru May 2009 In interpreting this increase, it’s important to keep several points in mind:

  • May’s increase was driven entirely by the recent stimulus act. The act provided for one-time payments of $250 to a range of Americans who are beneficiaries of various other programs, including Social Security, SSI, and veterans’ benefits. Those payments more than account for the increase in transfers from 16.9% of personal income in April to 18.0% in May. (more…)

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This morning, the Wall Street Journal editorial page questioned the oft-alleged link between health care costs and the competitiveness of American business. Echoing Council of Economic Advisers Chair Christina Romer, it referred to that argument as “schlock.” At the same time, everyone interested in health policy is still absorbing the trillion-dollar price tag that the Congressional Budget Office (CBO) put on the Kennedy health bill.

I’d like to point out that these two issues – any link between health care and competitiveness and the estimated cost of health reform – are closely related. The way that CBO estimated the budget impacts of the Kennedy bill implies that health care has little effect on competitiveness. If you take the contrary view, that health care is a big deal for American competitiveness, then you should also believe that CBO has underestimated the difficulty of paying for health reform.

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It’s no surprise that Americans have been cutting back in the face of job losses, pay reductions, and shrunken retirement accounts. One result has been a sharp increase in the saving rate, which has averaged more than 4.5% this year after flirting with 0% in recent years.

A second result is a rebound in doing-it-yourself.  Home-cooking has replaced some restaurant visits, for example, and more Americans are picking up a hammer rather than calling a handyman.

This morning’s Washington Post provides another example of such rising home production — a boom in vegetable gardening:

Seed producers and merchants across the United States are reporting the same phenomenon of crazy demand and even some shortages, especially of staples like beans, potatoes and lettuces. Sales of seed packets picked up last year and have grown significantly again this season, which runs from January to June.

Industry observers attribute the boost in sales to a concern for food safety following outbreaks of E. coli and salmonella poisonings and a desire by consumers to be a part of the local food movement. Michelle Obama’s new vegetable garden at the White House may also be inspiring people, they said.

But the primary reasons, they speculate, are the recession, income loss and the need for people to lower their grocery bills by growing their own. (my emphasis)

Anecdotes like this have a number of larger implications:

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I’ve received several emails today about a story posted last night by USA Today.  The story points out that government transfers now make up more than one-sixth of American incomes, the highest ever.  Naturally, some observers welcome this development, while others denounce it.

I thought it would be useful to side-step that debate and instead provide some historical context.  To begin, the following chart shows the ratio of government transfers to personal income from January 1959 through April 2009 (the most recent data):

Government Transfers 0 (more…)

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