Lower Earnings Growth Research Articles

First- and Second-Generation Women’s Economic Assimilation: An Analysis of Longitudinal Earnings Records

Abstract Research on the economic assimilation of immigrants and their descendants has disproportionately focused on men. In this study, we examine the life-course employment and earnings trajectories of first- and second-generation women using a restricted-use dataset linking individual respondents of the Current Population Survey (CPS) to their tax earnings records. We compare the age-specific probability of employment and annual earnings of women of each immigrant generation by race and ethnicity from early to middle adulthood covering a span of 20 years. We consider alternative explanations for observed disparities including differences in the level of education and the timing and response to childbearing. Our analyses reveal distinct patterns across immigrant generations and ethnoracial groups. We find that first- and second-generation women are assimilating economically at a fast pace although significant ethnoracial differences remain. First-generation Hispanic women in particular experience low employment and earnings growth. Second-generation women have higher employment rates than later-generation Whites and avoid the dip in employment trajectories in early and middle adulthood experienced by the latter group. The higher employment rates of second-generation women cannot be fully explained by differences in educational attainment or the presence of young children.

Does Taxing Business Owners Affect Employees? Evidence From A Change in the Top Marginal Tax Rate

Abstract Debates about the taxation of business owners often center on the distributional effects of these taxes, particularly the degree to which they affect workers. Drawing on a new linked owner-firm-worker data set created from U.S. administrative tax records, I analyze how an increase in the top marginal tax rate faced by business owners affected the earnings of their employees. I use panel difference-in-differences methods to compare the earnings of workers in similar firms but whose owners were differentially exposed to the tax increase. I estimate that 11–18 cents per dollar of new business income tax liability was passed through to employee earnings. I find no change in employment in response to the tax increase. The responses were generally associated with lower earnings growth, not changes in workforce composition. The burden was not borne equally by all workers. Essentially all of the workers’ share of the burden was borne by those in the top 30% of the earnings distribution, highlighting that the ultimate distributional effects of the policy depend not only on the share of the burden borne by workers but on the shares borne by different types of workers. Furthermore, since the owners bore the majority of the burden, the policy resulted in a decrease in after-tax earnings inequality between top-bracket owners and lower-bracket workers. I discuss the implications of the findings for the mediating labor market mechanisms and for welfare analyses of income taxation using a marginal value of public funds framework.

Technological and Organizational Change and the Careers of Workers

Abstract This paper investigates the effects of technological and organizational change (T&O) on jobs and workers. We show that although T&O reduces firm demand for routine relative to abstract task-based jobs, affected workers do not face higher probability of non-employment or lower earnings growth than unaffected workers. Rather, firms that adopt T&O offer routine workers retraining opportunities to upgrade to more abstract jobs. Older workers form an important exception: T&O increases the risk that they permanently withdraw from the labor market and reduces their earnings, regardless of the tasks they performed in the firm prior to T&O.

How the earnings growth of US immigrants was underestimated

Two radically different descriptions of immigrant earnings trajectories in the USA have emerged. One asserts that immigrant men, following the 1965 Immigration and Nationality Act, have low initial earnings and high earnings growth. Another asserts that the post-1965 immigrants have low initial earnings and low earnings growth. We describe the methodological issues that create this divide and show that low earnings growth becomes high earnings growth when immigrants are followed from their initial years in the USA; earnings growth is allowed to vary with entry earnings; and—when following cohorts instead of individuals—sample restrictions commonly used by labor economists are avoided.

Does Taxing Business Owners Affect Their Employees? Evidence from a Change in the Top Marginal Tax Rate

Debates about the taxation of business owners often center around the distributional impacts of these taxes and the degree to which they affect workers. The majority of business income in the U.S. is earned by pass-through businesses and taxed subject to the personal income tax system, yet the existence and magnitude of spillovers from personal income taxation to firm behavior has been difficult to estimate. This paper uses a new linked owner-firm-employee dataset created from administrative tax records to analyze how a recent increase in the top marginal tax rate faced by pass-through business owners affected the compensation of their employees. I use panel difference-in-differences methods to compare the earnings of employees in similar firms but whose owners were differentially exposed to a recent tax increase and estimate that approximately 15 to 18 cents per dollar of new tax liability was passed through to employee earnings. This resulted from lower earnings growth among employees attached to their firms, not compositional changes in employment. These results show behavioral responses to the business income taxation embedded in the personal income tax system and imply that the incidence of the personal income tax was not fully borne by those directly subject to the tax change.

Opportunities and Risks in Individual Tax Reform: Testimony Before the US Senate Committee on Finance

This testimony before the US Senate Committee on Finance on individual tax reform makes five main points. First, the current tax reform effort is occurring at a time when low- and middle-income families are facing deep financial challenges. Economic disparities are vast and have been widening for decades. The US also has one of the lowest levels of economic mobility relative to our competitors. Our debt as a share of GDP is projected to grow to unprecedented levels in coming decades, largely because of the retirement of the Baby Boom and increasing life expectancy. This growth in debt will be a drag on economic growth. For all these reasons, tax reform should increase revenues and enhance progressivity. Doing so would boost economic growth and make the tax code fairer at the same time. At a bare minimum, tax reform should maintain the current level of revenues and progressivity—and these both should be measured consistently and without resort to budget gimmicks like a “current policy” baseline. Second, individual tax reform should focus on leveling the playing field for the next generation and supporting work. Doing so would blunt economic inequality, broaden opportunity, and increase productivity by ensuring that jobs are awarded more often based on effort and talent, and less based on connections and the luck of one’s birth. Some worthwhile proposals that would advance these goals are expanding the EITC, especially for workers without dependents; increasing refundability of the child tax credit, particularly for young children in the poorest families; and restructuring child care benefits so they provide the largest benefits to those spending the largest share of their income on child care. These proposals could make significant headway in offsetting the much lower earnings growth that low- and middle-income families have experienced over the past few decades compared to those who are more fortunate. They should be paid for by raising taxes on the wealthy, including by strengthening, not repealing, wealth transfer taxes. Third, individual tax reform should focus on reducing transactional complexity, which arises from taxpayers reorganizing their affairs to minimize taxes. Doing so would accomplish the trifecta of tax reform: it would make the code fairer, more efficient, and simpler. To further this goal, Congress should consider proposals like rationalizing the NIIT and SECA taxes so all labor and capital income are subject to the Medicare tax on high incomes in some form, repealing stepped-up basis, narrowing the gap between the tax rates on ordinary income and capital gains, and taxing carried interest as ordinary income. Fourth, individual tax reform should seek to make tax incentives more efficient and fair, generally by restructuring them into refundable credits, and leveraging the empirical insights of behavioral economics. Doing so could generate more social benefits at a lower cost. One particularly promising area for reform is tax incentives for retirement savings. Finally, the first principle of tax reform should be to do no harm. Unfortunately the tax plans offered so far by the President and in the House Republican Blueprint do just that. They lose massive amounts of revenue. The corresponding increase in debt would depress economic growth substantially over time. They are both sharply regressive, providing vast tax cuts to the wealthy and a pittance to everyone else. They create a giant new loophole for the wealthy in the form of a special rate cap on pass-through business income, which tax experts on the left and right agree is a terrible idea. And, to the extent that they include any proposals intended to support low- and middle-income households, they do so in relatively ineffective ways. Sooner or later, these plans’ massive tax cuts will have to be paid for, and low- and middle-income families are likely to be left footing the bill.

Labor market consequences of growing up with a sibling with type 1-diabetes

Economic research on child health and future labor market outcomes has mainly focused on children with impaired health themselves, and only recently begun to assess spillover effects for siblings. Yet, the challenge to accommodate a family's routines within the requirements of a complex and time-consuming disease is most likely to spillover on siblings. While the burden of ill health and managing a disease may have adverse effects, living with a disease may still give families useful experiences and skills that favor future labor market outcomes. Therefore, the potential labor market impacts of growing up with a sick sibling could be both positive and negative. This study investigates differences in the progression of annual labor earnings between siblings of children with type 1-diabetes and population controls. The data is based on detailed Swedish longitudinal registers, covering annual labor earnings in the years 1990–2010 for 764 siblings of 764 children with diabetes and 5506 population controls born in 1962–1971, and follow individuals between ages 19–48. The results indicate that brothers of children with type 1-diabetes have lower earnings growth than controls, while sisters' earnings growth appears unaffected. Consequently, spillovers from one family member to another might differ within a family.

Leverage, Volatile Future Earnings Growth and Expected Stock Returns

We provide theory and evidence to complement Choi's [RFS, 2013] important new insights on the returns to equity in 'value' firms. We show that higher future earnings growth ameliorates the value-reducing effect of leverage and, because the market for earnings is incomplete, reduces the earnings-risk sensitivity of the default option. Ceteris paribus, a levered firm with low (high) earnings growth is more sensitive to the first (second) of these effects thus generating higher (lower) expected returns. We demonstrate this by modelling equity as an Asian-style call option on net earnings and find significant empirical support for our hypotheses.

Underinvestment and the design of performance-sensitive debt

This paper examines the investment decision of a firm that uses performance-sensitive debt (PSD) financing. Using a real-option model of investment, we show that PSD can mitigate the well-known underinvestment problem (Myers, 1977) because of its risk-compensating nature. We also show how to design the PSD so that the underinvestment incentive is completely eliminated, thus reducing the “underinvestment” agency cost to zero. Finally, we show how to identify the optimal leverage ratio with PSD financing. Because of the complexity of the model, the results are illustrated with numerical solutions. However, the results are quite robust, and are consistent over a wide range of parameter values. The main results are (i) the “optimal” performance-sensitivity level (i.e., that eliminates underinvestment) can be significantly larger than zero, which implies that PSD is superior to the traditional fixed-coupon debt and thus provides a rationale for the use of PSD; (ii) using PSD rather than fixed-coupon financing can increase shareholder wealth by economically significant amounts; and (iii) the optimal performance-sensitivity level is an increasing function of debt level and a decreasing function of earnings growth rate and investment cost, hence firms/projects with high debt level and low earnings growth rate and investment cost are more likely to benefit from using PSD rather than the traditional fixed-coupon debt.

The Empirical Relationship Between Earnings Information and Stock Returns

:The objective of this study was to examine, using a vector autoregressive model, whether the difference in earnings growth rates caused different reaction speeds in stock prices. Monthly returns of stocks listed in the Taiwan stock market from May 2003 to April 2013 were used as empirical data in this study. The analytical results showed that the returns of portfolios with higher earnings growth rates significantly led those portfolios with lower earnings growth rates when size, trading volume, institutional ownership ratio, and revenue factors were controlled, respectively. This paper finds that the earnings growth rate is a significant determinant of the lead-lag patterns observed in monthly stock returns.

The Unobserved Returns from Entrepreneurship

This paper is an empirical study of the risk-return trade-off faced by entrepreneurs. It calls into question a longstanding empirical puzzle: that most entrepreneurs preserve despite persistently low earnings and earnings growth. I find that entrepreneurial earnings are severely mismeasured and opt instead to use household expenditure and wealth as income proxies. Using 38 years of longitudinal data, I find that while individuals (mis)report earning on average 26.2% less in self-employment, their household expenditures are in fact 4.5% higher. This expenditure premium accrues over time with longer experience in self-employment, and is not offset by lower savings or higher uncertainty.

Saving for Retirement: Wage Growth and Unexpected Events

We found that there is a perception of 'under-saving' for retirement among many individuals. Individuals who perceive they have saved inadequately attribute this mainly to having insufficient income. Under a lifecycle model of consumption with a known income path this is not a reasonable answer. Those with low income today who fail to save will have even lower consumption levels in the future and could increase lifetime utility by reallocating consumption from pre-retirement to post-retirement. Unexpected outcomes in earnings, however, may cause households that planned to reach retirement with adequate savings, not to realize their plans. The decline in real wages that began in 1973 suggests a compelling explanation for low wealth levels: individuals were surprised by low earnings growth and thus under-saved relative to their lifetime incomes. We find that the hypothesis fits the data for those with extreme outcomes but does not explain large wealth differences for individuals on average.

Do Price-Earnings Ratios Drive Stock Values?

Does a high price-earnings ratio indicate high or low earnings growth or higher or lower future stock prices? Data for the S&P 500, the MSCI World Index, the Europe Index, and the EAFE are examined using regression analysis. The results suggest that subsequent prices rise but subsequent yields decline with high P/E ratios. Adjusted for statistical issues such as autocorrelation, heteroscedasticity, unit roots, and non-stationarity, the findings suggest that P/E ratios may not have as great an impact on prices as once expected, and that they have no impact whatsoever on subsequent yields.

Educational Mismatches and Earnings: Extensions of Occupational Mobility Theory and Evidence of Human Capital Depreciation

Using a human capital theory framework, this study examines the impact of educational mismatches on earnings and occupational mobility. Occupational mobility theory suggests that overeducated workers observe greater upward occupational mobility and undereducated workers observe lower upward occupational mobility. By extension, this leads to relatively high earnings growth for overeducated workers and relatively low earnings growth for undereducated workers. Moreover, overeducated workers are probably transient relative to their undereducated counterparts, so employers have few incentives to invest in their human capital. Accordingly, their experience will be rewarded at lower rates. These results may also occur if the unused human capital of overeducated workers depreciates with nonuse. The data verify these predictions. Insights on the link between experience and educational mismatches are also examined.

The family gap in pay in Europe: a cross-country study

In this paper we present estimates of the penalty in pay associated with motherhood for 11 European countries. Firstly, analysis of the European Community Household Panel Survey (ECHP) reveals that significant penalties in pay exist within Germany, Denmark, the United Kingdom, Ireland, Spain and Portugal. Analysis for Germany (using the German Socio-Economic Panel) and the UK (using the British Household Panel Survey) reveals that career breaks contribute towards lower earnings growth. While periods of family formation are associated with lower earnings growth in Germany, in the UK completed spells of family formation are associated with a recovery in earnings growth.

Male-female earnings differentials among lawyers in Britain: a legacy of the law or a current practice?

On average, female solicitors earn only 56 per cent as much as men. An historical underrepresentation of women in the profession, differences in preferences and discrimination are the most frequently quoted explanations. The data cover private practice solicitors in Britain and are unusual in two respects: hours of work are distinguished by whether or not they are billed to clients and periods of parental leave are recorded. We find that a significant part of the pay-gap is due to women's limited access to partnership status and lower earnings growth once promoted. Fewer hours worked and billed and lower postqualification experience are also important. The results presented are consistent with labour market models that emphasise end-load compensation incentive systems where the extent to which compensation is deferred is greater for women.

Value versus growth stocks in Singapore

This study examines value and growth stocks in Singapore. Specifically, we examine the value premium up to 5 years after the value and growth portfolio formation. We also examine if growth (value) stocks really indicate higher (lower) company profits in the later years, whether analysts’ forecasts are overly optimistic/pessimistic, and if earnings and earnings growth exhibit mean reversion. Our findings are, first, there is a value premium for Singapore stocks, but the premium is concentrated in the first 2 years after the portfolio formation. Second, value (growth) stocks do indicate low (high) earnings growth rates and low (high) return on equity (ROE) in the following years. Third, earnings growth is significantly overestimated for growth stocks but it is not underestimated for value stocks, indicating a one-way over-reaction. Finally, there is some evidence of mean reversion for excess ROE but not for excess earnings growth rates.

Does Entrepreneurship Pay? An Empirical Analysis of the Returns to Self‐Employment

Possible explanations for earnings differentials in self-employment and paid employment are investigated. The empirical results suggest that the nonpecuniary benefits of self-employment are substantial: Most entrepreneurs enter and persist in business despite the fact that they have both lower initial earnings and lower earnings growth than in paid employment, implying a median earnings differential of 35 percent for individuals in business for 10 years. The differential cannot be explained by the selection of low-ability employees into self-employment and is similar for three alternative measures of self-employment earnings and across industries. Furthermore, the estimated earnings differentials may understate the differences in compensation across sectors since fringe benefits are not included in the measure of employee compensation.

At a Glance …

•The budget was expansionary, bringing about a cumulative fiscal loosening of 1.5-2 per cent of GDP over the next four years.•As a consequence, the pound and long-term interest rates will be higher, while immediate pressure to raise short-term rates is reduced.•After a further quarter point increase in the repo rate to 6.25 per cent, we expect a pause in monetary tightening for the rest of the year.•Sterling's strength will hit manufacturing which will grow by only 1.2 per cent in 2000, compared with overall GDP growth of 2.8 per cent.•Despite continuing low claimant unemployment and earnings growth of 5.5 per cent in 2000, the labour market is not over-stretched.

The Great American Job Creation Machine in Comparative Perspective

Job creation is mainly a product of demographic changes and changes in social structure, particularly an increased supply of young and/or cheap labor. It is unrelated to unemployment rates or other measures of economic performance and their causes; it results in lower earnings growth and slower long-run productivity gains. If job creation is little affected by demand policies, the appropriate response is less boasting about employment gains and more attention to reshaping the supply and quality of labor.