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presentation
October 27, 2010
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Employment and Labor Markets
The level of employment has a direct effect on people's well-being and the government's finances. When employment is higher, incomes and federal revenues are higher, while federal outlays for income support programs are lower. CBO analyzes the causes and consequences of unemployment, the effects of the unemployment insurance program, the impact of various policy proposals that might affect employment, and other issues concerning labor markets such as people's participation in the labor force.
Full Text
- Director's Slideshow
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Supplemental Material
- Blog Post
The Economic Outlook and Fiscal Policy Choices
Highlights
This testimony reviews the Congressional Budget Office's (CBO's) recent analyses of the economic outlook and the potential impact on the economy of various fiscal policy options. It also adds to those analyses by quantifying the economic impact of extending some or all of the 2001 and 2003 tax cuts that are scheduled to expire in three months.
The Economic Outlook
CBO expectsas do most private forecastersthat the economic recovery will proceed at a modest pace during the next few years. In its projections released in August, CBO forecast that, under current laws governing federal spending and revenues, real (inflation-adjusted) gross domestic product (GDP) would increase by 2.8 percent between the fourth quarter of 2009 and the fourth quarter of 2010 and by 2.0 percent between the fourth quarters of 2010 and 2011. With economic growth so slow, the unemployment rate would remain above 8 percent until 2012 and above 6 percent until 2014. Since CBO completed that forecast, the economic data released have been weaker than the agency had expected, so if CBO was redoing the forecast today, it would project slightly slower growth in the near term.
Slides from the Director's Testimony
The Economic Outlook and Fiscal Policy Choices
View more presentations from Congressional Budget Office.
The pace of recovery since the recession ended in June 2009 and the growth that CBO projects for the next few years are anemic relative to the rate of recovery following previous deep recessions. However, the most recent recession, spurred by a financial crisis, was unlike any this country has seen for a very long time, and there is reason to expect that the country's recovery will also be different from past ones: International experience suggests that recoveries from recessions that begin with financial crises tend to be slower than average. Following such a crisis, it takes time for equity and asset markets to recover, for households to replenish their resources and boost their spending, for financial institutions to restore their capital bases, and for businesses to regain the confidence required to invest in new plant and equipment. In addition, the scheduled increases in taxes and the waning of fiscal policy measures that supported the economy earlier in this recovery will hold down spending, especially in 2011. The weak demand for goods and services resulting from those various factors is the primary constraint on economic recovery.
A weak economy has serious social consequences. In addition to the millions of Americans who are officially unemployed, many others are underemployed or have left the labor force. Moreover, the unemployment rate has risen disproportionately for men, for less-educated workers, and for people living in certain states, and long-term -unemployment has increased strikinglyto the point that the incidence of unemployment lasting longer than 26 weeks is now the highest by far in the past 60 years. Of course, losing a job often has a significant impact on workers and their families, both in the short term and in the long term.
Fiscal Policy Approaches and Long-Term Budgetary Constraints
Policymakers cannot reverse all of the effects of the housing and credit boom, the subsequent bust and financial crisis, and the deep recession. However, in CBO's judgment, there are both monetary and fiscal policy options that, if applied at a sufficient scale, would increase output and employment during the next few years. Those same fiscal policy options would, though, have longer-term economic costs. In particular, the cuts in taxes or increases in spending that would provide a short-term economic boost would also increase federal debt.
Federal debt held by the public is already larger relative to the size of the economy than it has been in more than 50 years, and it is headed higher. According to CBO's baseline projections, under current law, debt held by the public would be close to 70 percent of GDP for most of the coming decade. But other policies could result in substantially more debt. For example, if the 2001 and 2003 tax cuts were extended, the individual alternative minimum tax (or AMT) was indexed for inflation, and future annual appropriations remained the share of GDP that they are this year, the deficit in 2020 would equal about 8 percent of GDP, and debt held by the public would reach nearly 100 percent of GDP. Such a path for federal debt is clearly unsustainable. Persistent deficits and continually mounting debt would crowd out growing amounts of private investment, require rising interest payments, restrict the ability of policymakers to respond to unexpected challenges, and increase the probability of a sudden fiscal crisis.
Despite that grim picture, there is no intrinsic contradiction between providing additional fiscal stimulus today, while the unemployment rate is high and many factories and offices are underused, and imposing fiscal restraint several years from now, when output and employment will probably be close to their potential. What does that mean in practice? If taxes were cut permanently, or government spending was increased permanently, and no other changes were made to fiscal policy, the federal budget would be on an unsustainable path, and the economy would suffer. Even if tax cuts or spending increases were temporary, the additional debt accumulated during that temporary period would weigh on the budget and the economy over time. Therefore, if policymakers wanted to achieve both short-term stimulus and long-term sustainability, a combination of policies would be required: changes in taxes and spending that would widen the deficit now but reduce it relative to current baseline projections after a few years. Developing such a combination would be feasible but not easy.
If policies that widened the deficit in the near term were enacted, observers might question whether, when, and how the difficult actions to narrow the deficit later would be carried out. The most important uncertainty facing families and businesses today is uncertainty about the path of the economy, but uncertainty about government policies is probably also a drag on businesses' hiring and investing and perhaps on consumer spending as well. The enactment of policies that improved the budget outlook beyond the next few years would help to reduce that uncertainty.
CBO's Analysis of Fiscal Policy Options
To assist policymakers in their decisions, CBO has quantified the effects that some alternative fiscal policy options would have on the economy. In a January 2010 report, CBO estimated the effects of a diverse set of temporary policy options. The agency reported the results in terms of the two-year effect on the economy per dollar of total budgetary cost, what one might informally call the bang for the buck. The overall effects of those policies on the economy would depend also on the scale at which they were implemented; making a significant difference in an economy with an annual output of nearly $15 trillion would involve a considerable budgetary cost.
CBO's key conclusions from that analysis are as follows:
- A temporary increase in aid to the unemployed would have a significant positive short-term effect on the economy per dollar of budgetary cost. Such an increase would slightly raise unemployment among the affected individuals, but it would also raise people's spending and thereby increase output and employment in the economy overall.
- A temporary reduction in payroll taxesespecially in the share of taxes paid by employerswould also have a significant positive short-term effect on the economy. This approach would boost output and employment both by increasing demand for goods and services and by providing an incentive for additional hiring.
- A number of other temporary policy options, including the expensing of business investment and providing aid to states, would have smaller positive short-term effects on output and employment.
- A temporary increase in infrastructure investment and a temporary across-the-board reduction in income taxes would have still smaller short-term effects on -output and employment per dollar of budgetary cost.
In its January study, CBO also explained that those policy actions would lead to the accumulation of additional government debt that would reduce income in the longer term unless other policies with offsetting effects on future debt were enacted. However, CBO did not quantify those future reductions in income.
At the request of the Chairman, CBO has now estimated the short-term and the longer-term effects of certain tax policy options being considered by the Congress. In particular, CBO studied the effects of extending the 2001 and 2003 tax cuts; extending the higher exemption amounts for the AMT that were in effect in 2009 (adjusted for inflation) for 2010 and subsequent years; and reinstating the estate tax, which expired completely in 2010, for 2011 and subsequent years at the rates in effect in 2009 and with the exemption amounts (adjusted for inflation) that applied in that year. CBO examined four alternative approaches to making those changes: a permanent change affecting all provisions (labeled a full permanent extension), a permanent change but without extending certain provisions that would apply only to high-income taxpayers (labeled a partial permanent extension), a change affecting all provisions but only through 2012 (full extension through 2012), and a change through 2012 but without extending certain provisions that would apply only to high-income taxpayers (partial extension through 2012).
The methodology for this analysis was quite similar to the methodology that CBO uses in analyzing the President's budget each spring. CBO used several models that make different simplifying assumptions about people's behavior. The models used to estimate the effects on the economy in 2011 and 2012 focus on the policies' impact on the demand for goods and services, because CBO expects that economic growth in the near term will be restrained by a shortfall in demand. All else being equal, lower tax payments increase demand for goods and services and thereby boost economic activity. In contrast, the models used to estimate the effects on the economy in 2020 and later years focus on the policies' impact on the supply of labor and capital, because CBO believes that economic growth over that longer horizon will be restrained by supply factors. All else being equal, lower tax revenues increase budget deficits and thereby government borrowing, which crowds out investment, while lower tax rates increase people's saving and work effort; the net effect on economic activity depends on the balance of those forces. Because the responsiveness of people's work effort to changes in their after-tax compensation is uncertain, CBO produced estimates based on alternative assumptions about such behavioral responses.
Notwithstanding CBO's use of alternative models and assumptions, the actual effects of the policy options studied could fall above or below the estimates that CBO reports. With that caveat, the key findings are these:
- All four of the options for extending the expiring income tax cuts would raise output, income, and employment during the next two years, relative to what would occur under current law. A full permanent extension or partial permanent extension would provide a larger boost to income and employment in the next two years than would a temporary extension, and a full extension would provide a larger boost than would the corresponding partial extension.
- But the effects of those policy options on the economy in the longer term would be very different from their effects during the next two years. For some of the options, the estimates based on different models and assumptions cover a broad range. Still, the estimates indicate that all four of the options would probably reduce income relative to what would otherwise occur in 2020. Beyond 2020, and again relative to what would occur under current law, the reductions in income from all four of the policy options would become larger. Either a full or a partial extension of the tax cuts through 2012 would reduce income by much less than would a full or partial permanent extension.
In sum, and as CBO has reported before, permanently or temporarily extending all or part of the expiring income tax cuts would boost income and employment in the next few years relative to what would occur under current law. However, even a temporary extension would add to federal debt and reduce future income if it was not accompanied by other changes in policy. A permanent extension of all of those tax cuts without future increases in taxes or reductions in federal spending would roughly double the projected budget deficit in 2020; a permanent extension of those cuts except for certain provisions that would apply only to high-income taxpayers would increase the budget deficit by roughly three-quarters to four-fifths as much. As a result, if policymakers then wanted to balance the budget in 2020, the required increases in taxes or reductions in spending would amount to a substantial share of the budgetand without significant changes of that sort, federal debt would be on an unsustainable path that would ultimately reduce income. Similarly, even temporary increases in government spending would add to federal debt and reduce future income, and permanent large increases in spending that were not accompanied by other spending reductions or tax increases would put federal debt on an unsustainable path. Compared with the options examined here for extending the expiring tax cuts, various other options for temporarily reducing taxes or increasing government spending would provide a bigger boost to the economy per dollar of cost to the federal government.
Estimated Impact of the American Recovery and Reinvestment Act on Employment and Economic Output From April 2010 Through June 2010
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The Role of Immigrants in the U.S. Labor Market: An Update
Abstract
People born in other countries are a growing presence in the U.S. labor force. In 1994, 1 in 10 people in the U.S. labor force was born elsewhere, but in 2009, 1 in 7 was foreign born. About 40 percent of the foreign-born labor force in 2009 was from Mexico and Central America, and more than 25 percent was from Asia.
This document updates the Congressional Budget Offices (CBOs) November 2005 paper The Role of Immigrants in the U.S. Labor Market. That earlier report included data through 2004; this update, the first of several on various aspects of immigration, incorporates data through 2009. It focuses on the growing number of foreign-born workers, the countries from which they have come, their educational attainment, the types of jobs they hold, and their earnings. In keeping with CBOs mandate to provide objective, nonpartisan analysis, this report makes no recommendations.
Highlights
People born in other countries represent a substantial and growing segment of the U.S. labor forcethat is, people with a job or looking for one. In 2009, 24 million members of the labor forcemore than one in sevenwere foreign born, up from 21 million in 2004. However, the growth of the foreign-born labor force was much slower between 2004 and 2009 than between 1994 and 2004. In that earlier period, the size of the foreign-born labor force grew at an average annual rate of more than 5 percent, whereas from 2004 to 2009, the rate was about 2 percent. As a share of the total, the foreign-born labor force grew from 10.0 percent in 1994 to 14.5 percent in 2004 and to 15.5 percent in 2009.
Among members of the foreign-born labor force in the United States in 2009, about half came to this country before 1994. In 2009, 40 percent of the foreign-born labor force was from Mexico and Central America, and more than 25 percent was from Asia.
The Role of Immigrants in the U.S. Labor Market: An Update
View more presentations from Congressional Budget Office
In 2009, over half of the foreign-born workers from Mexico and Central America did not have a high school diploma or GED credential, as compared with just 6 percent of native-born workers. In contrast, nearly half of the foreign-born workers from places other than Mexico and Central America had at least a bachelors degree, as compared with 35 percent of native-born workers.
Over time, participants in the U.S. labor force from Mexico and Central America have become more educated. In 2009, they had completed an average of 9.8 years of schooling up from 9.5 years in 2004; 55 percent lacked a high school diploma or GED credential down from 59 percent in 2004; and among 16- to 24-year-olds, 50 percent were not in school and were not high school graduates down from 60 percent in 2004. Nevertheless, those born in Mexico and Central America are constituting an increasingly large share of the least educated portions of the labor force. For example, in 2009 they made up 64 percent of labor force participants with at most an 8th grade education a figure that was 58 percent in 2004.
To a considerable extent, educational attainment determines the role of foreign-born workers in the labor market. In 2009, 70 percent of workers born in Mexico and Central America were employed in occupations that have minimal educational requirements, such as construction laborer and dishwasher; only 23 percent of native-born workers held such jobs. On average, the weekly earnings of men from Mexico and Central America who worked full time were just over half those of native-born men; women from Mexico and Central America earned about three-fifths of the average weekly earnings of native-born women.
Foreign-born workers who came to the United States from places other than Mexico and Central America were employed in a much broader range of occupations. They were more than twice as likely as native-born workers to be in fields such as computer and mathematical sciences, which generally require at least a college education. Their average weekly earnings were similar to those of native-born men and women.
The information on immigration in this report comes from the Current Population Survey, a survey of U.S. households conducted monthly by the Census Bureau. The survey asks respondents where they and their parents were born. Those who were born in another country are asked when they came to the United States to stay and if they have become a U.S. citizen by naturalization. They are not asked about their legal immigration status.
monthly archive
- May 2013 (2)
- April 2013 (14)
- March 2013 (22)
- February 2013 (10)
- January 2013 (11)
- December 2012 (4)
- November 2012 (10)
- October 2012 (4)
- September 2012 (6)
- August 2012 (5)
- July 2012 (11)
- June 2012 (8)
Social Security Disability Insurance: Participation Trends and Their Fiscal Implications
Highlights
The Social Security Disability Insurance (DI) program pays cash benefits to nonelderly adults (those younger than age 66) who are judged to be unable to perform substantial work because of a disability but who have worked in the past; the program also pays benefits to some of those adults dependents. In 2009, the Disability Insurance program paid benefits to almost 8 million disabled beneficiaries and about 2 million of those beneficiaries spouses and children.
Between 1970 and 2009, the number of people receiving DI benefits more than tripled, from 2.7 million to 9.7 million (unless otherwise specified, all years are calendar years). That jump, which significantly outpaced the increase in the working-age population during that period, is attributable to several changesin characteristics of that population, in federal policy, and in opportunities for employment. In addition, during those years, the average inflation-adjusted cost per person receiving DI benefits rose from about $6,900 to about $12,800 (in 2010 dollars). As a result, inflation-adjusted expenditures for the DI program, including administrative costs, increased nearly sevenfold between 1970 and 2009, climbing from $18 billion to $124 billion (in 2010 dollars). Most DI beneficiaries, after a two-year waiting period, are also eligible for Medicare; the cost of those benefits in fiscal year 2009 totaled about $70 billion.
Under current law, the DI program is not financially sustainable. Its expenditures are drawn from the Disability Insurance Trust Fund, which is financed primarily through a payroll tax of 1.8 percent; the fund had a balance of $204 billion at the end of 2009. The Congressional Budget Office (CBO) projects that by 2015, the number of people receiving DI benefits will increase to 11.4 million and total expenditures will climb to $147 billion (in 2010 dollars; see Figure 1). However, tax receipts credited to the DI trust fund will be about 20 percent less than those expenditures, and three years later, in 2018, the trust fund will be exhausted, according to CBOs estimates. Without legislative action to reduce the DI programs outlays, increase its dedicated federal revenues, or transfer other federal funds to it, the Social Security Administration will not have the legal authority to pay full DI benefits beyond that point.
A number of changes could be implemented to address the trust funds projected exhaustion. Some would increase revenues dedicated to the program; others would reduce outlays. One approach to reducing expenditures on DI benefits would be to establish policies that would make work a more viable option for people with disabilities. However, little evidence is available on the effectiveness of such policies, and their costs might more than offset any savings from reductions in DI benefits.
Estimated Impact of the American Recovery and Reinvestment Act on Employment and Economic Output from January 2010 Through March 2010
Abstract
The American Recovery and Reinvestment Act of 2009 (ARRA) contains a variety of provisions intended to boost economic activity and employment in the United States. Section 1512(e) of the law requires the Congressional Budget Office (CBO) to comment on the reports filed by certain recipients of funding under ARRA that detail how many jobs were created or retained through funded activities. This CBO report fulfills that requirement. It also provides CBOs estimates of ARRAs overall impact on employment and economic output in the first quarter of calendar year 2010. Those estimateswhich CBO considers more comprehensive than the recipients reportsare based on evidence from similar policies enacted in the past and on the results of various economic models.