Oct 10, 2022
The media keep telling us that the economy is a losing issue for Democrats. I know that this is the Republicans' talking point, but that is not what the data show.
For tens of millions of people, there is a huge amount of good news about the economy over the last year and a half. That doesn't mean that tens of millions of people are not struggling, they are. And, that is always true in the US economy.
The fact that a country as rich as ours does not have decent welfare state provisions that can ensure people adequate housing, food, and health care is an outrage. But that is a longer-term story, not something that just happened in the last year and a half. When the media suddenly choose to emphasize the struggling population, in ways that they have not done in the past, that is a political decision on their part, not one responding to a new economic reality.
Anyhow, with that issue out of the way, I'm going to emphasize some of the positive aspects of the economy which are getting little attention from media.
People Quitting Crappy Jobs
We have heard a great deal about the bad news from a tight labor market: rapidly rising wages are creating inflationary pressures, which the Fed is combatting with its aggressive path of interest rate hikes. For some reason, the flip side of this picture has gotten much less attention.
The tight labor market has meant that millions of workers have been able to quit jobs that they don't like. In the last year, there were 51.5 million voluntary quits from jobs. That is 9.3 million more than the number of people who quit their jobs in the year before the pandemic hit. (This number is for total quits, since some people quit more than once, the actual number of people who quit jobs would be somewhat lower.)
The increase was seen most clearly in the lowest paying jobs. The quit rate in the hotel and restaurant sector, meaning the percentage of workers who quit their job each month, has averaged almost 6.0 percent in the last year. That is 25 percent higher than the 4.8 percent average in the year before the pandemic.
It is also important to remember that we had a very strong labor market in the year before the pandemic, with the lowest unemployment rates in half a century. So workers have felt far more freedom to quit jobs they don't like in the last year than has been the case for a very long time.
Rising Real Wages at the Bottom
Inflation has taken a toll on workers in the last year and a half, but the impact has been hugely exaggerated. If we look at the real average hourly wage for all workers since the start of the pandemic in February of 2020, it was down by 0.7 percent, as of August. (We don't have inflation data yet for September.)
This is bad, but hardly unprecedented. For example, real average hourly wages dropped a full 1.0 percent in the year from November 2006 to November 2007, which was before the start of the Great Recession.
The picture looks somewhat better if we look at the data for production and nonsupervisory workers, which excludes most higher end workers. This series also goes back much further, historically. As of September, the real average hourly wage was down by less than 0.1 percent from its February 2020 level. That's the wrong direction, but not exactly a crisis.
By comparison, this measure fell by 3.8 percent from January of 1980 to January of 1989, a period in which the media were touting "morning in America."
The story looks better if we look to the lowest paid workers. Real average hour earnings for production and nonsupervisory in the leisure and hospitality industry (hotels and restaurants), rose by 3.9 percent from February 2020 to August. (Arin Dube and David Autor have been doing careful analysis with the Current Population Survey documenting the sharp increase in pay for low end workers during the pandemic recovery.)
To be clear, we should want to see a better picture on wage growth, with workers across the board seeing pay hikes. But the experience in the last year and a half hardly stands out as being especially bad by any historical measure. Furthermore, we have been through a worldwide pandemic and are now seeing the largest conflict in Europe since World War II. It would be a bit nuts to think we could pass through these events without any disruption to the economy.
The Benefits of Increased Work from Home
There has been a huge surge in the number of people working from home since the start of the pandemic. During the shutdown period in the spring of 2020, this was largely because there was no alternative. However, for the most part, people working from home at present are doing it by choice. In 2021, there were roughly 19 million more people (12.7 percent of the workforce) who reported that they primarily worked from home than in 2019.
This is a huge benefit for these workers. The average amount of time spent commuting in 2019 was 27.6 minutes for a one-way trip, or 55.2 minutes for the round-trip. If we assume an eight-hour work day, time spent commuting added an average of 11.5 percent to the length of the workday. We can think of this as equivalent to an 11.5 percent reduction in the hourly pay rate, compared to a situation where no time is spent commuting.
Commuting to work doesn't just take time, it is expensive. The average commuting distance to work is more than 15 miles. That means 30 miles for the round-trip. At federal government's mileage reimbursement rate of 62.5 cents per mile, this comes $18.75 a day or almost $4,900 a year. That is 7.0 percent of the annual pay of a worker earning $70,000 a year.
It's not just travel expenses that people save by being able to work at home. They can save on paying for business clothes, dry cleaning, and buying a purchased lunch at work. For many families, working from home may also save on childcare, insofar as they are able to care for young children without seriously disrupting their work.
In short, the option to work from home can mean large savings in time and money. Also avoiding traffic jams may mean a major quality of life improvement. It is true that the option to work from home is available primarily to the top half of earners, and especially the top fifth, but this is still a very large number that extends far beyond just the rich.
Also, these higher paid workers have on average not seen their pay keep pace with inflation since the start of the pandemic. Insofar as they are able to save time and money by working from home, many are still likely coming out well ahead of where they were before the pandemic, if they can work from home at least part of the time.
While the Fed's rate hikes have pretty much put an end to the refinancing boom we saw in 2020 and 2021, this boom has meant much more money in the pockets of tens of millions of homeowners. More than 17 million homeowners refinanced their mortgages in 2020 and 2021 combined. The average amount of money in a refinance mortgage was close to $250,000. If people refinancing saved an average of 1.0 percentage points on their interest rate, this would imply savings of $2,500 a year.
Savings of this magnitude go a long way towards covering the increases in the price of milk and meat. For some reason, there is very little mention of the money saved by refinancing in media discussions of economic well-being during the pandemic recovery.
While homeownership, like the option to work from home, also skews towards the higher end of the income distribution, it goes much further down. Nearly two-thirds of households are homeowners. Furthermore, those most likely in a situation to benefit from refinancing are younger families, as older homeowners have likely paid off most or all of their mortgage. This means that a large share of very middle-income families are likely to be among the group that has benefitted from refinancing a mortgage at a lower interest rate in the last two and a half years.
There has been a huge surge in telemedicine since the start of the pandemic which will likely continue going forward. According to a recent survey by the Department of Health and Human Services, almost one-in-four adults reported having a remote appointment with a health care professional in the four weeks prior to the survey.
While telemedicine will never completely replace in-person visits, it can provide enormous benefits to patients. It saves the time and expense that are involved in physically visiting a doctor or other health care professional. This is an especially big deal for patients who are in bad health, who are the ones most likely to be having appointments with health care professionals.
Telemedicine also radically increases the access of patients to specialists who may be in other parts of the country. A person with a rare condition, can use telemedicine to have an appointment with a leading expert on the other side of the country, rather than undertaking an expensive and exhausting trip to visit them in person.
It is likely that we will see increased use of remote services in a wide variety of areas going forward, saving large amounts of time and money on in-person visits. Also, the remote provision of many of these services, such as college classes, is likely to improve through time as better technologies are developed and people become more accustomed to using these tools.
The Score on Living Standards
If we try to get a fuller picture of the economic situation it is hard to find the dismal economy that is front and center in economic reporting. As noted, the lowest paid workers have seen pay gains that have exceeded inflation since the start of the pandemic, so the story of increased suffering among this group is not accurate, based on the data we have.
Tens of millions of more middle-income workers have seen their pay slightly lag inflation, but this is not a phenomenon unique to the Biden presidency. There have been many periods in the last half century where the typical worker's pay has not kept pace with prices, most notably the eight years of the Reagan presidency, which are often described as the "Reagan boom."
In addition, millions of middle-income workers have been able to save thousands of dollars in annual interest payments by refinancing their mortgages at the low rates available in 2020 and 2021. A large share of the people in the top 40 percent of wage earners have also benefited by the explosion in remote work. These people have been able to save a large amount of time and money on commuting costs.
It is worth pointing out an oddity in our economic accounting. The money that workers save on commuting by working from home does not appear as a reduction in the cost of living in the consumer price index or other measures of inflation. For purposes of accounting, the money people spend on their drive to and from work is treated no differently than the money spent on items that actually provide direct benefit, like food, clothing, or shelter.
If a worker can save $4,000 a year on expenses associated with working in an office, this does not show up as a benefit anywhere in our accounts. Similarly, if a patient can substitute a remote video conference for a three-day cross-country trip to visit a specialist, this does not appear as any sort of gain. Tens of millions of people are experiencing these benefits as a result of changes brought on by the pandemic, but they are not picked up in our usual measures of living standards.
Just to go back to a point made the beginning, there are tens of millions of people who are struggling in today's economy. Almost 12.0 percent of the population is living below the poverty line, that translates into almost 40 million people. We can add in people living at less than twice the poverty line and get more than 80 million people who are facing serious hardship.
But the point is that this is always true. With the poor quality of its welfare state, and its large number of low-paying jobs, the United States will always have a huge number of people struggling to get by even in the best of times. The decision made by the media to put these struggling people at the center of the economic story during Biden's presidency is a political decision, not one driven by economic reality.
© 2023 The World in Transition (CEPR)
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