Think NC First recently released a report by economic researcher John Quinterno about the lack of evidence of a real Carolina Comeback. Think spoke with Quinterno, one of the principals at South by North Strategies Ltd, to discuss his findings.
There are a lot of distressing numbers in this report. In your opinion, what’s the takeaway?
No one would be surprised if you said that household incomes fell during the contraction part of the Great Recession. That makes sense. But what is surprising is the extent to which household incomes have continued to fall during the recovery that began in 2009. That is not what most people think should happen during a recovery. And the problem of falling income is not just confined to a few types of households. On the contrary, income has fallen for most every type of household in North Carolina. Seen that way, the recovery really is leaving most North Carolinians behind.
Won’t the economic problems you discuss correct themselves as the economy continues to recover?
I don’t think so. The declines in incomes are driven by falling labor earnings, which are the result of a labor market that is not working like it should. Seven years after the onset of the downturn, it is obvious that the labor market is not mending itself on its own, or at least, it is not mending itself well enough or quickly enough to generate higher wages and incomes. Household living standards are unlikely to improve absent help from public policy.
The conventional wisdom is that the state economy is at the mercy of the national or world economy. Is there a role for state government to address problems of this scope?
Absolutely. When it comes to public policy, the federal government doubtlessly is best positioned to address the negative fallout from the “Great Recession,” due to the national scope of the problems and the greater variety of policy tools available to national officials. But that in no way implies that state leaders are powerless to create a policy structure conducive to robust, equitable growth. Doing so is a choice, however, just as the decision to do nothing is a choice to accept the status quo.
So where do we start?
There are several policy levers on which the state could pull to boost wages and incomes all along the income distribution. At the lower end, North Carolina could follow the lead of 29 states and raise the state’s minimum wage above the federal rate of $7.25. We could complement this policy by reinstating a refundable earned income tax credit pegged at a certain percentage of the federal tax credit as part of the state’s personal income tax code. Combining these policies would boost wages, raise incomes, foster economic security, and reduce inequities in the tax system for households in the bottom portion of the income distribution.
Another policy, one that would help workers closer to the middle of the income distribution, would be to strengthen the unemployment insurance system. A defining characteristic of the “Great Recession” was a spike in mass, long-term unemployment, and in 2012, almost half of all unemployed North Carolinians were out of work for more than 26 weeks. Yet the state legislature responded by making the unemployment insurance less responsive to today’s labor market realities by, among other things, reducing weekly benefit amounts, cutting the maximum number of compensable weeks, and restricting eligibility. Such changes have stripped the insurance system of its abilities to protect the incomes of jobless workers, stabilize local economies, and promote efficient job matching. As a result, people who lose jobs will see their incomes fall farther before hitting a floor, if they are lucky enough to even have a floor to hit, while for many others, the floor has been taken away entirely.
The altered system also serves to push down wages and incomes by pushing claimants to take any job—often one that pays less than the prior job—rather than one that matches their skills. This results in downward mobility for workers and also distorts the larger labor market.
What would you do next?
Contrary to popular thinking, wages are determined by more than the textbook dynamics of supply and demand. Business practices, labor laws, and labor market structures—all of these shape the ways in which workers and employers bargain and determine wages. That is why the enforcement of existing labor laws is so important. When the choice is made by state officials and regulators to turn a blind eye, that choice helps to undercut wages for everyone. So, North Carolina needs to improve its enforcement of existing labor laws. Lax enforcement of the laws has freed unscrupulous firms to pursue a wide variety of illegal or legally dodgy practices that undercut the wages of workers across the income spectrum. The misclassification of employees as independent contractors, for one, reduces the compensation of affected workers and allows firms to avoid paying various taxes.
A 2014 investigative report by the News & Observer estimated that misclassification in the construction industry alone costs North Carolina $467 million a year in foregone state and federal tax revenues; perversely, misbehaving firms often are rewarded when the low bids they can submit by ignoring labor laws enable them to win public construction contracts.
At a minimum, North Carolina should ensure that the resources exist to enforce existing labor laws and that regulators are allowed actually to enforce existing laws. Additionally, state and local governments should review and alter public procurement processes to ensure that firms engaging in illegal behaviors are not rewarded with public contracts won by undercutting honest businesses that follow the law.
You mentioned that the labor market has changed a great deal since the “Great Recession.” Are new policies needed to address the new realities?
Very much so. North Carolina’s labor market was changing for a mix of economic, social, and demographic reasons long before the recession, but the recession made the extent of the changes much more visible. Many existing labor laws were designed for an earlier era, however, so in addition to enforcing existing labor laws more vigorously, North Carolina should update those laws to match current realities.
An example of the disconnect between labor market realities and labor laws is the lack of paid sick leave by almost half of the state’s private-sector workforce. Creating a framework that allows workers to earn paid leave that can be used to care for themselves, their spouses, their children, and, increasingly, their elderly parents would be a welcome change. Similarly, increasing access to health insurance by expanding the Medicaid program would improve the well being of individuals employed in fields that pay very low wages and offer no health insurance coverage.
You note in the report that the distribution of income in North Carolina grew more unequal during the business cycle. What role does tax policy play in exacerbating such inequalities?
One reason why the incomes of the households at the top of the income distribution have pulled away from everyone else’s is the implementation of tax policies, at the federal and state levels, that treat their incomes more favorably. This preferential treatment exacerbates income inequality by requiring households of modest means to devote, on average, higher shares of their incomes to taxes. In North Carolina, the overhaul of the state’s tax system that took effect in 2014 has contributed to such a shifting in tax responsibilities and the associated increase an after-tax income inequality.
In the process, the new system is proving unable to generate adequate revenues for much needed public investment. Without adequate revenues, North Carolina will find itself unable to finance the investments that foster long-term growth, such as infrastructure; assist workers displaced by economic shocks, such as community college programs; fund improvements to existing services, such as improved child care services; and provide opportunities for future generations, such as quality public education.
Thank you John. And thanks for sharing your expertise with Think NC First.