The Region

Interview with Philip Jefferson

Swarthmore economist on poverty, declining labor share, and the importance of racial diversity in economics

Douglas Clement | Editor, The Region

Published September 12, 2018

Philip Jefferson portrait
Philip JeffersonPhotos by Peter Tenzer

A white lab coat hangs on Philip Jefferson’s office door at Swarthmore College. It’s a reminder of a brief stint as a microbiologist—he worked in the school’s genetics lab for a summer, isolating bacterial plasmids to change antibiotic resistance. For Jefferson, it was a chance to move out of his comfort zone and relearn what an experiment truly is, at its most fundamental level.

The foray was indicative of Jefferson’s passion for learning, but also his need to surpass personal limits. One of the first was becoming an economist—very few African Americans do so, a problem he discusses in this Region interview. A more recent trial was writing Poverty: A Very Short Introduction, published this year, for noneconomists. The challenge wasn’t the topic (his expertise is universally recognized), but to “disenthrall” himself from the jargon of economics, focus on basics, and expand public awareness.

Jefferson’s first job as an economist was at the Federal Reserve Board, working on fiscal analysis and monetary policy. He later taught at the University of Virginia; the University of California, Berkeley; and Columbia University. Since 1997, he’s been at Swarthmore, teaching econometrics, macroeconomics, inequality, and poverty. Teaching awards attest to his ability to inspire.

And his research has often been prescient. Years before current debates on whether raising interest rates would stifle labor markets, Jefferson created a straightforward model to analyze the quandary. Anticipating today’s discussions of declining labor share by nearly a decade, he confirmed the trend’s reality.

He doesn’t chase trending topics. Rather, he studies questions that interest him personally. Can economic factors explain hate groups? What’s the relationship between employment status and health? How do climate shocks influence economic growth in sub-Saharan Africa? He’s also explored arcane matters involving seigniorage payments, transformation parameters, and monetary neutrality. Each study is characterized by clear questions, careful technique, consideration of alternative definitions and explanations, and strong but qualified conclusions.

Ultimately, Jefferson is motivated by deep curiosity. A mentor once asked him, “Do you want to live a life of the mind?” His work is unequivocal affirmation. He is driven by, as he puts it, “passion and enjoyment of learning new things. … I love the process of discovery.”

Interview conducted July 19, 2018.

Poverty and the macroeconomy

Region: Your 2008 American Economic Review paper looked broadly at the relationship between the aggregate economy and poverty rates, and then focused on economic volatility faced by African American families and female-headed households and its relationship to declining GDP volatility.

Can you elaborate on your findings and the light they shed on aggregate growth and poverty?

Jefferson: The AER published that paper just before the financial crisis of 2008, in the spring. Prior to the crisis, macroeconomists were trying to understand the reduction in the volatility of GDP.

African Americans and female-headed households … were still facing the challenges of poverty that they had had in the past—even though society as a whole was becoming less precarious.

Region: The “Great Moderation.”

Jefferson: Right. We were trying to figure out the source and implications of the Great Moderation. In that spirit, I wanted to see if the economy’s lower volatility translated into less volatile poverty rates. I focused on poverty rates for female-headed households and African Americans.

I found that poverty rate volatility for African Americans and female-headed households did not experience the same moderation that we saw in GDP. Therefore, these groups were still facing the challenges of poverty—the reduction in well-being that they had had in the past—even though society as a whole was becoming less precarious.

Region: They were still economically fragile, even though the overall economy was robust.

Jefferson: Yes, they were still in fragility. Of course, that raises a question. Why? What is happening such that female-headed households and African American households were still experiencing fragility? Was there something about public policy or structures in the economy or the presence of barriers that made the escape from poverty more difficult?

Let me give you an example, something Yonatan Ben-Shalom, Robert Moffitt, and John Karl Scholz talk about in my [Oxford] Handbook [of the Economics of Poverty]. During the Great Moderation, public policy became more generous to households that were either close to the poverty line or just above it. At the same time, however, public policy became less generous to households that were in deep poverty.

Therefore, if female-headed households and African American households are more likely to be in deep poverty, then that weakening of the social safety net makes households farther below the poverty line more fragile. Another way of saying this is that they are going to have less help as the vicissitudes of life impinge upon them.

Region: An eloquent expression, but a harsh reality.

Alternative measures of poverty

Region: In the Handbook and elsewhere, you discuss alternative measures of poverty, such as consumption-based metrics.

Can you elaborate on alternative measures—their utility and their effect on economic theory and practice?

Jefferson: A lot of credit for this goes to Bruce Meyer at [University of] Chicago and James Sullivan at [University of] Notre Dame. Over the past two decades, they have tried to make us aware of the difference between income and consumption when thinking about poverty status. For people at the lower end of the scale, income is difficult to measure and does not necessarily closely track what people are able to consume.

Region: Difficult to measure because it can be from informal sources?

Jefferson: Exactly. People can earn income in the informal sector of society.

Region: And it is not reported on W-2s.

Jefferson: Right. Not on W-2s, and people are not going to report that income in surveys. One way we get information about households is by asking them to fill out surveys on their income. Sometimes people at the lower end of the income distribution and, I should say, at the upper end, too, do not have the paperwork, let us say, to report their income, or they might not want to report it because reporting could affect other things in their lives.

Philip Jefferson portrait
Philip Jefferson

In that case, documented income can be one stream, but their consumption can be very different. Another reason their consumption can be different is transfers from extended family. If a household hits a rough patch, they may reach out to Aunt Betty in another state and say, “Aunt Betty, we’re having really rough times. Could you send us $500?” They are still able to consume, even though there is no matching income flow.

Meyer and Sullivan emphasize that not only do those type of transfers take place, but also that low-income households sometimes get in-kind services, transfers, in the form of health care or food. That, too, would count as consumption, but there is no corresponding income flow. Therefore, if we want to talk about well-being, we have to look at consumption.

Region: Inflation also plays a role.

Jefferson: Inflation matters very much because the U.S. government adjusts the official poverty thresholds each year using the consumer price index for urban consumers. Research has shown, however, that the CPI is upwardly biased. Among other things, it does not take into account the ability of households to substitute away from high-priced to lower-priced goods.

The traditional CPI also does not capture fully product quality improvements. Therefore, as the government adjusts poverty thresholds, they are artificially inflated, and more people qualify as being in poverty than would otherwise be the case.

Region: So using alternative measures might give us a more accurate sense of economic well-being?

Jefferson: Right. In the Handbook, Kunhee Kim and I document the relationship between macroeconomic variables and alternative measures of poverty. That way the reader can choose for himself or herself which indicator they want to focus on. We show baseline results for the relationship between these alternative poverty measures and measures such as median income, unemployment, inflation—macro variables that are thought to be important for determining the poverty rate.

Influence of monetary policy on unemployment rates

Region: I’d like to ask you about a paper the AER published 2005, but very germane now. In it, you point out that there are two schools of thought on the impact of monetary policy on unemployment. The “high-pressure economy” hypothesis is the idea that monetary policy that boosts economic activity will improve job markets by, for example, loosening hiring practices. We may be seeing some of that now, as employers hunt for workers. Arthur Okun was a proponent of that view. Rebecca Blank is a more contemporary advocate.

However, there’s also the view that lowering interest rates to boost the economy can encourage people to invest in technology and innovation that may have an adverse effect on hiring, especially for low-skilled workers. Princeton’s Alan Krueger, chair of the Council of Economic Advisers under President Obama, has argued that position.

You investigated this with a quantitative assessment of monetary policy shocks and unemployment, controlling for supply shocks and technological innovation. Your findings supported the high-pressure economy position.

Jefferson: Yes.

Region: Can you summarize that disagreement a bit better than I just did and elaborate on your findings? And what perspective do your results provide for our current macroeconomy?

Jefferson: I wrote that paper a long time ago, simply because I wanted to. I have always been very interested in the high-pressure economy hypothesis and in whether I believed it. People have come to me very recently and asked me about that paper, particularly people in the Federal Reserve.

Philip Jefferson portrait
Philip Jefferson

I think they are trying to sort out, “OK, how does this hypothesis help us understand the current moment, and what does it say in terms of policy?” My research is a good example of how it is important to do what you are interested in. Hopefully, at some point, people will come around to see the value of it. You just have to do your work and see what happens.

To your question, however, you have characterized it quite well. There is a tension between two hypotheses. Given that both are plausible in terms of logical consistency, it is an empirical question as to how you would sort between them.

The reasoning is sound. If the Fed cuts interest rates, we know from any macro model that is going to stimulate investment. Investment in new capital goods and equipment in this current age is going to stimulate technology adoption, and some of the technologies that firms adopt will substitute for labor. This is particularly true for low-skill labor. A robot can do any routinized job. Thus, there is a possibility that stimulating investment will displace low-skilled workers.

Region: That was Alan Krueger’s argument.

Jefferson: Right. However, then there is the Okun hypothesis that interest rate cuts will stimulate consumption and that, for any given level of labor supply, as consumption picks up, firms will respond by wanting to expand employment. Of course, that seems to be where we are today. We hear firms saying, “We can’t find enough workers.” In their view, there are labor shortages.

In this paper, I consider a simple framework that allows us to sort out these two hypotheses. This involves looking at unemployment rates by skill levels—that is, different levels of education. To take an example, the unemployment rate of people with a high school diploma relative to the unemployment rate of those with a college degree.

Region: That’s what you refer to as “relative educational unemployment.”

Jefferson: Yes. The empirical question is simply, What macroeconomic variables explain variation in that ratio? The competing hypotheses predict that different factors explain it.

The implication is that cuts in interest rates … lower the unemployment rate of unskilled people relative to that of the skilled people, because unskilled people benefit most from a tight labor market.

In that paper, I find that if you formulate a very simple model where both factors can theoretically be important, the data show that the high-pressure economy mechanism seems to dominate the technological change mechanism.

The implication, then, is that cuts in interest rates by the Federal Reserve—and I model these by looking at innovations in the federal funds rate—lower the unemployment rate of unskilled people relative to that of the skilled people, because unskilled people benefit most from a tight labor market. These are the people searching for jobs who do not have the same level of skill as someone with a college education. My findings suggest that opportunities start to open up for them as the labor market gets tight.

Now, these findings feed into the current deliberations within the Federal Reserve System in favor of those who would not slow the economy too soon.

Region: It would be fascinating to rerun the model with current data.

Jefferson: That is definitely an interesting idea.

Labor share: Constant?

Region: Let’s move on to an issue—also quite topical—that you address in a 2010 paper with Frederic Pryor: labor’s share of GDP.

It was long a given in economics that two-thirds of national income goes to labor, with the remaining third to capital, and that those shares are constant over time—as fixed as the speed of light. John Maynard Keynes famously referred to the ratio’s constancy as “a bit of a miracle,” while Robert Solow later suggested, “Like most miracles, this one may be an optical illusion.”

Your paper examined new data and some alternative measures of labor share, using data from 1948 to 2006, and your analysis supports Solow’s skepticism.

Why are factor shares an important issue in economics, especially for questions of income distribution? Could you elaborate on your findings from that paper?

Jefferson: Actually, this issue goes back in the history of political economy. David Ricardo, one of the founding fathers of economics, was concerned about the “functional distribution of income”— the share of national income that goes to capitalists, workers, and landlords. In his world, people fell into one of these three distinct classes. The question of distribution was one of the principal topics for the new discipline of economics to sort out: Who got what?

Ricardo thought that in the long run, given that the supply of land was fixed, eventually landlords would accumulate vast wealth. Therefore, this issue of factor shares, or labor share, has always been extremely important.

Region: It comes up still—in Thomas Piketty’s recent book, Capital in the Twenty-First Century, for example.

Jefferson: Oh, absolutely. It is huge there because Piketty is, in some sense, extending a lineage. It certainly starts with Adam Smith. It runs through Ricardo to Karl Marx. Marx thought that the working class would become impoverished because landlords would extract increasingly larger rents.

Region: “Immiseration of the proletariat.”

Jefferson: Immiseration. Right. Eventually, in Marx’s view, the working class would revolt against the capitalist system.

The question of stability of labor share is very important. We show that it has structural breaks in it so, by definition, it is not constant. Labor share does vary with business cycle activity and multifactor productivity.

Piketty is picking up from where Marx was and saying that we need to reconsider some of these arguments. Piketty’s work is a modern version of a classical line of thought and a valuable extension.

The question of stability of labor share is very important in the context of modern macroeconomics. Our mathematical formulations often assume a constant share of labor income. Therefore, it is important to see if that bears out empirically.

Our paper that you cited—and, of course, there is a vast literature on this—first looks at the aggregate labor share. We show that it has structural breaks in it so, by definition, it is not constant.

Then we offer three other ways of measuring labor share, because if you find a break in one measure, someone can easily say, “Well, Jefferson and Pryor, you have the wrong gauge; you are not measuring labor share correctly.”

To anticipate that criticism, we look at various ways of measuring labor share. “You do not like the traditional measure of labor share? We are going to give you three other measures that the literature discusses. Moreover, we are going to document that no matter which one you choose, there are structural breaks in those measures of labor share.”

We also analyze how these different interpretations of labor share vary over the business cycle and relate them to macroeconomic activity. Now, if labor share were constant, then you wouldn’t think that it would vary with the level of macroeconomic activity. We show that labor share does vary with business cycle activity and multifactor productivity.

Labor share’s current decline

Region: Much recent research has documented that labor share has been declining for decades in Europe and since the 2000s in the United States. What are your thoughts on the causes of that? What does it imply for income distribution?

Jefferson: This is one impact of globalization. Workers in the United States compete with workers all over the world. It is difficult to win wage gains when your competition is not just across the state or even on the other side of the country, but—because of the mobility of capital and finance—in a country in another part of the world. It could be China; it could be India.

In the United States, profits are well up, and now we are back to a question of political economy: How does society divide the pie? … Does it go [to] labor, or … [to] profits? That is where bargaining power comes into play.

Therefore, it is extremely difficult to sustain wage increases that would allow the labor share in the United States to stay stable or even rise. Your employer is in a situation where if labor compensation locally is burdensome, he or she can move those jobs to where the labor force would not ask for such a burdensome share.

Moreover, with the decline of unions in the United States, the worker is very much on his or her own. There is not the collective power for workers to have advocates. That weakens the case for saying, “Look, productivity is going up. Why am I not seeing increases in my pay?” Management just replies, “You are not seeing increases in your pay because I don’t have to raise wages. Raising wages would make it difficult for me to maintain the firm.”

The complicating factor, though, is corporate profitability. In the United States, profits are well up, and now we are back to a question of political economy: How does society divide the pie? When there are increases in productivity, there is always a choice. Does it go into labor, or does it go into profits? That is where bargaining power comes into play.

Region: And currently we’re seeing that wages are not rising, even though there’s an increasing demand for labor.

Jefferson: Exactly. I read an amazing quote in the New York Times not three days ago, from Neel Kashkari, the president of the Federal Reserve Bank of Minneapolis.

He said that businesses in his district have complained to him that there is a shortage of labor. They asked him about possible solutions. President Kashkari’s response, which I think was quite eloquent and accurate was, “Why don’t you raise wages?” That was spot on. Because if you are not raising wages, as he said, “You’re just whining.”

That is the question of the day. We believe that higher wages will attract more labor. Of course, firms say, “Look, I cannot just raise my wage bill because I will not be able to raise prices. I will not be able to pass wage raises through to customers in the form of higher prices, because I have to compete globally.”

Pessimistic on ending poverty?

Region: Your new book, published just this month, Poverty: A Very Short Introduction, and your 2012 book, the Oxford Handbook of the Economics of Poverty, both distilled massive bodies of scholarship into coherent guides to a very difficult, divisive field in terms of both economics and politics, yet you achieved relative harmony. I think that was a major accomplishment, very impressive. And I learned a great deal from each book.

I felt that your recent book, the Introduction, ended on a somewhat pessimistic note. Near the end you write, “In the year 2030, there will still be people living in poverty. There will be need for another poverty eradication initiative. It may be far harder to make progress.”

Jefferson: Yes.

Region: All of that is entirely credible, of course, but the tone seems somewhat negative. Am I interpreting that correctly? Are you somewhat pessimistic about future progress on poverty?

Jefferson: I am being sober. Am I pessimistic? No, by nature I am an optimistic person. What I hope to demonstrate in the book is that the news is good. Over time, societies have lifted billions of people out of poverty. We have done a good job at that. Now, our progress is not as fast as anybody would like because we still have three-quarters of a billion people in extreme poverty.

Eradicating poverty is not going to come down to expertise. It is going to come down to will. … We know how to reduce and eliminate poverty. What we may not have is the will to get it done.

The short answer to your question is no, I am not pessimistic. What I conclude, however, is that what remains is the most difficult piece. I would say that I am concerned as opposed to pessimistic.

The point is that eradicating poverty is not going to come down to expertise. It is going to come down to will. There is a difference. We know how to reduce and eliminate poverty. What we may not have is the will to get it done. That is my question. I am challenging the reader, and the political establishment, to think about that.

Why do I say the will? Because there is going to be a time when people will have to choose prosperity over poverty. The only way to achieve prosperity is with the establishment of peace, justice, and reconciliation. We see this playing out in our world today in Syria and Yemen, for example. Warring factions just signed another peace agreement in South Sudan, which is wonderful.

Philip Jefferson portrait
Philip Jefferson

Now we have situations in Venezuela and Nicaragua. The actors in these areas are not going to allow the institutions to take hold that would facilitate infrastructure development and expansion of basic health care. The same is true for access to education that would allow people who are well prepared and positioned to build prosperous communities.

“Expert” advisers cannot say to people, “Lift yourself up by your bootstraps” when there is chaos. So society has to get to a point where our humanitarian impulses dominate our political ambitions. We are not there yet.

Why did you become an economist?

Region: What led you to become an economist? As you are well aware, there are very few African Americans in this field. I’ve read that out of 500 economics Ph.D.s granted in the United States in 2014, there were just 42 African Americans, Hispanics, and Native Americans. In that sense, it was an unusual choice of profession.

Can you share your thoughts on just why did you choose it?

Jefferson: Well, the real story is I wanted to be a banker when I was young. I think it had to do with the fact that my father always used to watch the news—it was the late 1970s—and I would sit down and watch with him. A lot was going on in the economy. I thought being a banker—though I really did not know what that entailed—might be a way to be part of that.

Then I attended Vassar, a liberal arts college. There was no business program or banking program. The closest thing to it at Vassar was economics. Therefore, the first semester I took Econ 1, and I thought, “This is really interesting.” I ended up sticking with it.

To see two African American men teaching economics blew my mind. It opened up possibilities for me. It said to me, “Wow, this is something that I could do!”

You know what made the case for me in terms of being an economist? It was going to the American Economic Association’s summer program at Yale University in the summer of 1982. The three professors teaching that program were Don Brown, Gerald Jaynes, and Jennifer Roback. Having Don Brown and Gerald Jaynes—both African American economists—teaching economics to a group of around 25 African American students at Yale University, and Jennifer Roback being there also, was wonderful!

It was my first exposure to that environment. To see two African American men teaching economics blew my mind. It opened up possibilities for me. It said to me, “Wow, this is something that I could do!”

I was very idealistic about pursuing economics until one day at lunch, we were sitting around a table with Don Brown and someone asked him, “Professor Brown, out of the 25 or 30 students in this room, how many of us do you think will get Ph.D.s?”

We were all undergrads. Well, I do not know if you know him, but Don Brown is a very intimidating guy. The nicest guy in the world, but he is very intimidating. He paused, and he looked around the room, took 30 seconds, and said, “Maybe one or two of you.” I said, “You’re kidding!” He said, “Two would be a great outcome.”

He was right! The only other person from that class that I know who got a Ph.D. was Darrell Gaskin, who is now at Johns Hopkins. He was in the class with me.

When I heard Don Brown’s response—well, I was very passionate about econ—I left that lunch devastated. I took his response as a challenge, however. I thought, “The odds are not good here,” but that program inspired me to say, “This is what I want to do.” That inspiration has sustained me through all of this.

Discrimination?

Region: You say, “All of this.” At an individual professional level, have you found it difficult to be in the minority? Have you faced discrimination?

Jefferson: Yes and yes. I mean, put it like this: In graduate school at the University of Virginia, I was the only African American in the program the entire time there. I have never been in an economics department with another African American economist. Never.

Region: No one else here at Swarthmore?

Jefferson: No one here. I was at Columbia. No one there. I was at Berkeley. No one there, not African American. Therefore, it has been a long, lonely road professionally.

Let me be very clear about this because I have had great colleagues, and I have made many friends in the profession. Moreover, the fact that I stayed in economics means that it has been a wonderful ride. I have great colleagues here.

In some sense, I had to inure myself to isolation in order to deal with it. I knew what I was signing up for.

Here is the thing. Other people much smarter than me, who could do very well as a Ph.D. economist, chose to do other things. They are very sensible people. They went to business school or law school or medical school. They have tremendously rewarding careers. Life is good for them. They make a lot more money, and they are more likely to have colleagues who look like them.

In some sense, I am the oddball because, well, why would you do this when you could do that? The reason I do this is that I love learning tremendously. I have always liked school. I just never left.

Don Brown would say, “The real issue is, do you want to live a life of the mind?” That really connected and resonated with me because I am a very curious person, and I love the process of discovery. The feeling I get when I learn something new is—it’s something in my chemistry—something happens. It is very exciting to me.

Region: So regardless of the isolation you have felt as one of the few African Americans in this field, that sense of excitement compensates?

Jefferson: Yes. My passion and enjoyment of learning new things, of writing and having a voice in different conversations, compensates me for the absence of colleagues who look like me.

Nevertheless, there is a price to be paid. That is true no matter what we do, right? Therefore, I am not unique in that regard. There is a price to be paid.

More minorities in economics

Region: Do you think that is something that should change? Should there be more African Americans and other minorities in economics?

Jefferson: It is incredibly important that there be more. People are working to try to make that happen. When you are a person who represents diversity, and you are engaged in the conversation, it changes the nature of the conversation. We need to be sitting around the table. I think it is crucially important for public policy that we hear voices that represent diversity.

It is incredibly important that there be more [diversity in economics]. … We need to be sitting around the table. I think it is crucially important for public policy that we hear voices that represent diversity.

And not only for public policy—I am discovering that it is important to have well-informed journalists, pundits, and others who influence and shape opinions. Today, many people get their information from such writers and speakers. They do not take time to read the scholarship. They rely on people translating for them.

In fact, this point relates to the way I wrote my latest book. It was hard for me to write for a general audience. I had to divorce myself from the book that I would have written in order to impress my colleagues, my dissertation adviser, and my teachers. I had to resist the temptation to write a formal academic book. It took me some time to disenthrall myself.

I had to remember that in this introduction to poverty, I am communicating very important ideas and concepts to a different audience, an audience that might not otherwise have access to this area. Therefore, my responsibility in the new book was really one of accessible communication. That is the challenge I address in this book.

Fulfilling that responsibility took some work. It is a small book but, well, put it like this—it took me just as long to produce that little book [149 pages] as it did that big Handbook [849 pages].

The Institute

Region: We are grateful and honored to have you on the advisory board of the Opportunity & Inclusive Growth Institute, and we appreciate your participation and insight at our conferences.

What do you view as the key contributions the Institute can make? What roles does it have, and what can it do better?

Jefferson: First, I want to thank and acknowledge Neel Kashkari for giving me the opportunity to serve on the board. It is a fantastic idea, and I think it is very important. In the past, the Fed, because of its mandate to be mindful of labor market conditions and inflation, has not paid as much attention to the disparate effects of monetary policy across different demographic groups.

One of the important roles of the Institute is to make policymakers, scholars, and the public more aware of how macroeconomic policy does not affect everyone in exactly the same way. Only by analyzing these disparate impacts can we start to re-evaluate our policies in light of whom they particularly help and whom they might disproportionately harm.

One of the important roles of the Institute is to [raise awareness] of how macroeconomic policy does not affect everyone in exactly the same way. Only by analyzing these disparate impacts can we start to re-evaluate our policies in light of whom they particularly help and … disproportionately harm.

This is not to say that we should lose focus on the overall economy, which is the System’s responsibility. Rather, we should be aware of asymmetric or disproportionate effects because that knowledge allows us to re-evaluate a policy that we might otherwise do without such considerations.

In my visits to the Minneapolis Fed and in my consultations with the people involved with the Institute, I have seen an openness to alternative ways of thinking. I like very much that the Institute takes an interdisciplinary approach in terms of having sociologists, lawyers, political scientists, and even a few economists around the table. This interdisciplinary approach leads to additional insight and understanding.

I think the Institute has an important role within the Federal Reserve System. I am very hopeful for its growth and development. I look forward to being a part of that.

For further background on Philip Jefferson, visit his website.

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