The U.S. Economy: Above 2, Below 5, and 4 P's
IMF Blog, June 22, 2016
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- The U.S. Economy: Above 2, Below 5, and 4 P's
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- Authors: Christine Lagarde
- Published: June 22, 2016
Overview and headline numbers
- Growth is above 2 percent: 2.2 percent in 2016 and 2.5 percent in 2017.
- Unemployment is well below 5 percent; in the past year an average of 200,000 new jobs were created every month, and household incomes are rising.
- Four forces (the “four P’s”) threaten future growth: declining labor force participation, falling productivity growth, polarization in the distribution of income and wealth, and high levels of poverty.
The Four P’s — findings and implications
- Participation
- The U.S. population is aging, and a smaller share of the population will be active in the labor force in the coming years.
- Mitigating the effects of population aging on labor supply and demand should be a priority to support the workforce, the backbone of the U.S. economy.
- Productivity
- Productivity growth has fallen from 1.7 percent in the decade prior to 2007 to 0.4 percent in the past five years.
- Much of the pre-crisis gains in average per capita incomes were from productivity, innovation, and efficiency; the recent fall in productivity growth appears linked to falling dynamism in labor markets and in the formation of new and productive enterprises.
- Polarization
- Since 2000 around one quarter of a percent of the population has moved from earning close to the median income to earning 1.5 or more times the median.
- More than 3 percent of the population has moved into the group that earns less than half of the median income, experiencing economic insecurity and flat or declining real incomes.
- Calculations suggest that since 1999 this polarization has knocked around 3½ percent off of badly needed consumer demand—equivalent to around one year’s consumption over a period of 15 years.
- Poverty
- The latest official poverty measure shows almost 15 percent of Americans—or 46.7 million people—living in poverty.
- Measured by the supplemental poverty measure, which takes into account effects of government programs like the Supplemental Nutrition Assistance Program and the Earned Income Tax Credit, the poverty rate is even higher.
- Poverty is higher than average for certain minority groups; for single parent (and particularly female-headed) households; for children; and for those with disabilities.
- Poverty reduces labor force participation, undermines investment in education and health, and reinforces inter-generational persistence of poverty.
Policy recommendations and priorities
- Support lower-income households
- Consider a higher federal minimum wage.
- Expand the earned income tax credit.
- Upgrade social programs for the nonworking poor.
- Improve benefits and support that raise labor supply and incentives for work
- Provide paid family leave to care for a child or a parent.
- Expand childcare assistance.
- Improve the disability insurance program.
- Note: the U.S. is the only country among advanced economies without paid maternity leave at the national level and U.S. female labor force participation is 12 percent lower than that for men.
- Sensible skills-based immigration reform could raise labor supply and boost productivity.
- Boost productivity through policy levers that support private-sector-led gains
- A better tax system.
- Efforts toward more trade integration.
- Better infrastructure.
- A stronger and more vocationally oriented education system.
Conclusion
- The IMF assessment: growth should be 2.2 percent in 2016 and higher in 2017; unemployment is below 5 percent; and by countering the four forces—participation, productivity, polarization, and poverty—the United States can remain on the frontier of innovation and opportunity.
Christine Lagarde, June 22, 2016
Content in this bundle
- The Supplemental Poverty Measure: 2014