Council of Economic Advisers Blog

  • Five Facts About the Gender Pay Gap:

    Over the past century, American women have made tremendous strides in increasing their labor market experience and their skills. On Equal Pay Day, however, we focus on a stubborn and troubling fact: Despite women’s gains, a large gender pay gap still exists. In 2013, the median woman working full-time all year earned 78 percent of what the median man working full-time all year earned. A new issue brief from the Council of Economic Advisers examines what we know about the pay gap.

    1. The pay gap goes beyond wages and is even greater when we look at workers’ full compensation packages. Women are less likely to have an offer of health insurance from their employer, have retirement savings plans, or have access to paid leave, and perhaps as a result, they are more likely to take leave without pay.

    These broader measures of compensation show that the pay gap is not just about differences in earnings or wages. But why do women earn less than men? Let’s break it apart so we can better understand what is driving the pay gap.

  • 4 Ways Trade Drives American Innovation

    Creating good jobs at good wages is central to the President’s strategy of middle-class economics. Trade is an integral component of that strategy. Here’s why: 

    U.S. trade agreements reduce foreign barriers to U.S. exports, increasing export opportunities for U.S. businesses. Trade also expands choice for consumers and producers, raising real wages so that American families’ budgets go further. In fact, by one estimate, reductions in U.S. tariffs since World War II have contributed an additional 7.3 percent to American incomes. And that’s just a few examples of how trade benefits our economy. As I mentioned in my speech at Brookings earlier today, values-driven trade agreements, like the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (T-TIP), will put the United States at the center of integrated trade zones making up nearly two-thirds of the world economy. 

    Supporting the middle class is more than just increasing real wages and household budgets. It’s also about increasing the productivity of American workers, or the amount of output a worker can produce per hour. Growth in productivity is profoundly important for the living standards of middle-class Americans. Consider this: If productivity had not slowed down starting around 1973, but continued growing at the rate it did between 1953 and 1973, then incomes today would be 58 percent higher, which is equivalent to a difference of roughly $30,000 per household every year. The best way to increase long-term productivity growth, and realize the tremendous benefits it brings in terms of wages and living standards, is through innovation. 

    That’s why trade is so important. Trade promotes innovation, which drives the productivity growth needed to expand U.S. businesses, create more good jobs, and boost American wages. One recent review of the evidence calls the relationship between globalization and productivity growth a "robust finding."

    And negotiating high-quality trade agreements with strong and enforceable labor standards, while adopting complementary domestic policies, can help ensure that we make these potential benefits a reality for the American people.

    Trade promotes innovation and productivity growth in two ways: by increasing the efficiency of the innovation process—helping us bring more innovations to market, faster and at lower prices—and by increasing the rewards that an innovator realizes when their new idea succeeds.    

    Increasing Innovative Productivity 

    ​1. Trade Increases the Flow of Ideas: Trade can expose both exporters and importers to new ideas and novel tools, materials, or techniques that make them more productive. Some of this learning is simply copying, as when a firm adopts pre-existing technology or know-how. At the same time, since roughly half of all U.S. imports are inputs into the production process, imports can reduce firm’s costs by making a greater variety of goods available at lower prices, and that can lead American businesses to expand production and employment. Academic research shows that what a country gains from international trade is multiplied substantially when the benefits of cheaper and more varied imported inputs are taken into account. Put differently, inputs often embody new ideas, and this helps ensure that imports represent a complement to, rather than a substitute for, American production.

    2. Trade Allows for Specialization in Research and Development (R&D): Trade can also increase innovative productivity—the amount of knowledge produced per unit of R&D investment—by allowing innovators to specialize. For example, if engineers at Company X focus on improving memory chips, and engineers at Company Y focus on improving microprocessors, the R&D productivity of each firm may be higher, leading to better and cheaper computers than if each company had to improve both components simultaneously. One recent study of R&D specialization shows that strengthening foreign intellectual property protection, as TPP would do, leads to more outward licensing from the United States, where U.S. companies allow other companies to use their ideas, products, or processes in exchange for royalty payments.

    Increasing Incentives for Innovation

    3. Trade Increases Access to Markets: International trade allows companies to access a larger market, which yields more profit for a given level of innovation, and therefore raises the incentive to innovate. For example, economic research finds that firms with experience in foreign markets have a greater probability of R&D investment.

    4. Trade Promotes Competition: Trade can also stimulate innovation by making markets more competitive. The Nobel Prize-winning economist Kenneth Arrow famously pointed out that a monopolist has less incentive to innovate than a firm in a competitive industry, because the monopolist’s innovations do not allow it to “steal” business from competitors. By bringing companies into a worldwide marketplace, trade greatly increases the incentive for a firm to innovate in order to win business from its competitors, reinforcing the market-size effects discussed above.

    Both the economic theory and the evidence demonstrate that trade has a positive impact on innovation, which would also increase long-run productivity growth. Increases in innovation and productivity growth are two key factors by which we can raise middle-class incomes. This relationship only increases the importance of negotiating trade agreements with strong and enforceable labor and environmental standards in order to capture the considerable benefits of increased innovation and productivity. TPP and T-TIP will do just that.

  • The Employment Situation in March

    The March employment report reflects a pace of monthly job growth below the recent trend, coming on the heels of February’s strong report. The unemployment rate was stable, broader measures of unemployment fell, and hourly earnings continued their rise. A range of factors including the weather and the global economic slowdown have affected economic data for the first quarter. The President has been clear that he will continue to push for policies including investments in infrastructure and relief from the sequester that would help ensure the strong underlying longer-term trends persist.

    FIVE KEY POINTS IN TODAY’S REPORT FROM THE BUREAU OF LABOR STATISTICS

    1. The private sector has added 12.1 million jobs over 61 straight months of job growth, extending the longest streak on record. Today we learned that total nonfarm payroll employment rose by 126,000 in March, driven by a 129,000 increase in private-sector employment. This particular month’s job gains were below the recent trend, as job growth in a number of industries slowed somewhat (see point 5). Over the past twelve months, the private sector has added 3.1 million jobs, nearly the highest year-over-year growth in the recovery so far.

  • The Economic Benefits of the Affordable Care Act

    Earlier today, I spoke at the Center for American Progress about the major benefits that the Affordable Care Act is generating for our economy by expanding access to affordable insurance coverage and reforming our health care delivery system to reduce costs and improve quality. This blog post briefly summarizes my remarks, which are available in full here.

    Benefits of the Historic Coverage Expansion for Labor Markets and the Macroeconomy

    Since the Affordable Care Act’s main coverage provisions took effect at the beginning of 2014, we have seen a precipitous decline in the uninsured rate unlike anything since the decade following the creation of Medicare and Medicaid, and the nation’s uninsured rate now stands at its lowest level ever. A recent analysis by the Department of Health and Human Services indicated that, as of the early months of 2015, an estimated 16.4 million people have gained coverage, including both people who have gained coverage since the end of 2013 and young adults who gained coverage before 2014 due to the law’s option to remain on a parent’s plan until age 26.

  • Third Estimate of GDP for the Fourth Quarter of 2014

    Overall, today’s GDP report is consistent with a wide range of indicators showing continued labor market strengthening and improvement in household and corporate balance sheets. This estimate of fourth-quarter GDP affirms the robust underlying growth of the largest and most stable components of economic output, while the same volatile factors that increased growth in the third quarter subtracted from it in the fourth. Indeed, the sum of private consumption and fixed investment rose at the fastest pace in four years, despite the lower rate of overall growth. Personal consumption expenditures, which account for more than two thirds of output, grew 4.4 percent at an annual rate in the fourth quarter—the fastest single quarter since 2006. Despite the solid trend, the economy faces headwinds from weak growth abroad—as well as the lingering effects of winter weather—that economists generally expect to reduce GDP growth temporarily in the first quarter of 2015. There is more work to do to ensure that the recovery’s strong underlying trend is sustained and shared across a broad range of households. The President’s FY2016 Budget lays out a strategy to strengthen our middle class and help America's hard-working families get ahead.

    FIVE KEY POINTS IN TODAY’S REPORT FROM THE BUREAU OF ECONOMIC ANALYSIS

    1. Real gross domestic product (GDP) grew 2.2 percent at an annual rate in the fourth quarter of 2014, according to the third estimate from the Bureau of Economic Analysis. The report reflects especially fast growth in personal consumption expenditures (revised further upward in the final release) and continued strong increases in residential and business fixed investment. At the same time, the large third-quarter increases in Federal defense spending and net exports retreated somewhat in the fourth quarter. Despite the recent volatility of such transitory componentsand though headwinds from abroad and winter weather may slow growth in the first quarter of 2015the solid underlying trend of strong consumption and investment growth persists (see point 5).

  • Continuing the Affordable Care Act’s Progress on Delivery System Reform Is an Economic Imperative

    Yesterday marked the fifth anniversary of the Affordable Care Act. Over the five years since the law passed, our health care system has seen considerable progress: a dramatic expansion of health insurance coverage that has pushed the nation’s uninsured rate to its lowest level ever; historically slow growth in health care costs that has saved billions for workers, businesses, and governments; and striking improvements in the quality of patient care that have avoided tens of thousands of patient deaths. But much remains to be done.

    Notably, despite major progress facilitated by the Affordable Care Act, our health care system remains dominated by “fee-for-service” payment systems that pay doctors and hospitals based on the quantity of care they provide, not the outcomes they achieve for patients. Economists broadly agree that traditional fee-for-service payment systems increase costs and reduce the quality of care patients receive, and recent evidence has bolstered the case that alternative ways of paying providers that reward quality and efficiency can generate substantial improvements in care.

    Indeed, facilitating the deployment of new payment models, like bundled payments and Accountable Care Organizations, may be the best tool we have to ensure that the exceptionally slow growth in health costs we have seen in recent years continues in the years ahead. And if deploying such models does allow us to sustain the recent slow growth in health costs, the economic gains could be immense. To illustrate that fact, consider: