Student debt explains why wage growth hasn’t caused inflation

The Fed has been raising interest rates because of concern that rising wages will lead to inflation. The problem with this argument is that while wages are rising, inflation, which is about 2%, is coming from higher world energy prices and from housing shortages, not from broadly higher demand for goods or services. Importantly, household survey data offers the following explanation for how wages could be going up without causing inflation: household investment in education is the cause of higher wages.

Perhaps the easiest way to see the relationship between household investment in education and higher wages is to compare growth in the overall median real wage to growth in the median real wage for workers in three educational subgroups (figure 1). From 2000 to October 2018 median real weekly wages increased by 3.6 percent overall, but fell by more than 1.5 percent in each educational subgroup. The median worker with a bachelor’s degree or more earns 2.4 percent less in the latest data than the group’s median worker did in 2000. For the group with a high school degree or less the median wage fell by 1.6 percent. For workers with some college but no degree or with an associate degree, the median wage fell by a whopping 7.7 percent.

Fig1

Since the three educational subgroups make up 100% of the total, the logical explanation for this outcome is an upward shift in the educational composition of the workforce. That is, workers have much more education in 2018 than they did in 2000. Since people with more education tend to earn more money, the result of a more educated workforce is a higher paid workforce. And while people are generally aware that education levels have risen in the US, they may be surprised to see the extent to which this is true over the past 20 years, or how rapidly the trend accelerated in response to the great recession.

In 2000, 40 percent of the full-time age 25-54 workforce had a high school degree or less, compared to 30.7 percent in the year ending October 2018 (figure 2a). Likewise, in 2000, 31.5 percent of the workforce had a bachelor’s degree or more, compared to 43 percent in 2018. The some college or associate degree group remained relatively stable in size, but shifted in it’s wage distribution towards lower wage jobs. By comparing how wages are distributed among those in each educational group between 2000 and the latest year of data, we can see that the jobs added in each educational group tend to be lower wage, while the jobs lost by each group tend to be higher wage (figure 2b). This suggests that education levels have risen faster than the corresponding availability of good new jobs.

Fig2

One intuitive interpretation of these results is that households, in general, have seen real wages fall during the relatively weak labor market from 2001 to present. Some households responded to the weak set of job opportunities by investing in education. These households generally received higher wages if they were able to get a degree and then translate the credential into a better job. Bringing this discussion back to the Fed, the obvious point here is that the educational investment was very expensive and so those higher wages are not likely to translate into more spending. The families that were able to make this investment have income that is less disposable because they now have student loan debt.

To clarify this point, imagine that the labor market had remained tight from 2001 to present and that we never had massive outsourcing of jobs or the great recession. Workers in this case could demand higher wages, and get them, without spending a fortune on education. When workers’ wage increases do not come with massive debt, the new wage money is much easier to spend on additional goods and services, which could drive up prices. However, if wage increases come with debt attached, as they do in this recent case, then the relationship between higher wages and higher prices breaks down. As a result, the Fed can worry less about a theoretical wage-price spiral and instead focus on the possibility of achieving full employment before the next recession.

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Answer to gig economy question depends on baseline

The US Bureau of Labor Statistics reported on Thursday that contingent and alternative work was occurring at about the same rate in May 2017 that it did in February 2001. Even more surprisingly, some categories of this type of work were actually occurring less frequently in 2017 than in 2005. Media coverage of the report noted the lack of growth in these categories of work and the surprise among those who expected confirmation of a growing gig economy. One take that has been missing, however, is the possibility that other changes to the labor market mean we should expect much less contingent and nonstandard work. Two indicators that nonstandard work has been falling come from regularly monthly data showing the long-term decline in self-employment and multiple job holding. Relative to this alternative baseline, the BLS report shows a labor market that has been changing in dangerous ways.

Definitions

“Contingent” work is comprised of jobs that are not expected to last, even if there is no change to the economy. In a related concept, “alternative” work arrangements include independent contracting, on-call work, and working for a temp agency or contract company while assigned to one client’s place of business. The structure of these jobs varies but they all have a nonstandard employment relationship; independent contractors may provide their labor with less intermediation than the standard worker while contract company and temp agency employees operate through more labor market intermediaries. While only some alternative work arrangements are contingent, all of these categories might be associated with a less-smooth income stream.

Importantly, despite the popularity of treating “contingent”, “alternative”, and “gig” work as synonymous, BLS defines gig work very narrowly as only those jobs that include work found and paid for through a website or mobile app. BLS has not yet released any estimate of gig work, but plans to do so by September 30, in a Monthly Labor Review article. The gig work questions ask people whether they have done ANY gig work, whereas the contingent and alternative work questions focus on the main job.

Interpreting the survey results relative to an alternative baseline

With lots of discussion about Uber drivers, shortened job tenure, and the fissured workplace, analysts were expecting to see a growing share of US workers employed in contingent and alternative work arrangements. However, this expectation seems to forget major demographic changes since 2005. The overall employment rate has fallen since 2001, particularly among young people and students, who are traditionally disproportionately “contingent” workers. Simultaneously, people are now much more likely to have a college degree. Since contingent workers tend to be younger, and those with college degrees tend to have more stable employment, a baseline assumption about the labor force, based on demographics alone, would suggest that nonstandard work arrangements become less common, not more common.

Two indicators that show this changing baseline are the incidence of unincorporated self-employed workers and the rate of multiple jobholding. Both measures are proxies of contingent and alternative work and have fallen by a third or more since the first contingent worker supplement was conducted in February 1995.

Fewer unincorporated self-employed

It’s important to remember that the analysis released by BLS on Thursday came from a one-time supplement to a survey that is conducted every month. If, during the week before one of the monthly interviews, someone drove for Uber, provided labor through Task Rabbit, or worked one of many non-gig independent contractor jobs, as either their first or second job, they will show up as “self-employed, unincorporated.” As expected by demographics, the share of the population that is classified this way has fallen since 1995 for both those age 25 to 54 and for those age 55 or older (figure 1).

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In 1995, 7.3 percent of the age 25 to 54 population was unincorporated self employed, compared to 6.3 percent in 2001, 6.2 percent in 2005, and 4.8 percent in the year ending May 2018. The share of those over age 55 who are self employed and unincorporated has also fallen, from 5.1 percent in 2005 to 4.3 percent over the past year.

Since my calculation above includes those who are self employed as their second job, it helps to rule out the possibility that the contingent and alternative workforce numbers are misleadingly low because they do not capture the second job. Additionally, using a moving annual average of the data helps to smooth out the volatility that is possible when looking at any single month of CPS data.

Falling multiple jobholder rate

A second indicator supporting a lower baseline for comparison of recent BLS estimates comes from the fall in the share of workers with more than one job (figure 2).

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The share of employed with more than one job has fallen from 6.6 percent in 1995 to 5.3 percent in 2005 and to 4.7 percent in the year ending May 2018. Among women, the trend is less pronounced, with 6.4 percent of female jobholders reporting more than one job in 1995, compared to 5.7 percent in 2005, 5.6 percent in 2017, and 5.4 percent over the past year. Since some explanation of the lower-than-expected BLS estimates has focused on concerns over measurement, and specifically that second jobs are not captured, it is worth pointing out how much less common second jobs now are in the CPS, compared to the period when the earlier survey supplements were conducted.

Policy should focus on people not work

When adjusting for increased education, an aging workforce, and changes to overall employment rates, incidence of contingent and alternative work actually seems to have grown relative to its 2001 rate. In age and education, those who are currently working are more demographically similar to those who traditionally hold standard jobs, with the potential exception of some independent contractor jobs. When compared to a baseline where, all else equal, contingent and alternative work should actually have fallen over the past 12 years, it is concerning to see this type of work retain its share of the labor market.

One explanation for the relative persistence of nonstandard work is that many of the jobs that used to be temporary or unstable have been either outsourced, automated, or lost to the housing bubble, while jobs that used to be stable and standard are being destabilized. The influence that companies in places like Silicon Valley have over labor policy has grown, and these companies seem to be using their influence to try to make otherwise unprofitable ventures profitable, at the expense of workers. Partially as a result of corporate influence, and in the context of other changes in the US labor market, the main difference between the 2001 and 2017 contingent worker supplement results may be that the less stable jobs of today take a lot more student debt to get.

Perhaps more importantly, though, it is off-target to focus on the share of the economy currently claimed by contingent and alternative work. Financial statements already show that many of the new labor market intermediaries are not profitable. The focus should instead be on policy that tries to protect and improve job quality and to prevent gaps in unemployment insurance from needlessly putting people in poverty during the next economic downturn. The ACA, as one relevant policy example, may have been blessed by the 2017 survey data: health insurance among contingent and alternative workers is now much more common.