Labor income and labor force recovery is a constant discussion in the US. Investors dissect labor force data for clues to Federal Reserve (Fed) policy change. The Fed follows and publicizes numerous indicators in an attempt to judge weaknesses and strengths within the labor force. We wonder if there is another force that needs consideration.
A thoughtful contribution to this discussion was made by Chris Arnold of National Public Radio and Paul Kiel of ProPublica in their piece titled, “Millions of Americans’ Wages Seized over Credit Card and Medical Debt.” Here is the link. That release has not received a lot of attention. Perhaps we can advance a discussion with this commentary. The journalists reported on wage garnishment. They noted how much there is and which population cohorts are impacted.
They then added a second element, “With Debt Collection, Your Bank Account Could Be at Risk,” which discusses debt collection and bank account seizures. Here’s the link. This report also discusses the 1968 law, the landmark Consumer Credit Protection Act, that set the maximum percentage allowed for wage garnishments. Since the law determines maximum wage garnishment but does not mention bank seizures, it allows collectors access to all funds in accounts where a person deposits a paycheck.
A review of national data finds little information in the way of bank account seizures. Chris Arnold suggests, “It would be great to find a bank willing to run the numbers on this, looking at their customer accounts to see how much is happening.” Maybe the banking regulators and the Fed have statistics that could be revealed on this subject.
Let’s get back to wage garnishment. The statistical base on labor and labor income deals with gross wages, taxes, payroll taxes, and the dissection of those elements by occupational categories. The net take-home pay, the real disposable income from labor after all those deductions, is meaningfully impacted by the garnishment of wages. We now know from the ADP Research Institute report that one out of ten Americans ages 35 to 44 is undergoing a garnishment against their paycheck. The ADP research report is linked here. ADP has contributed to the discussion in meaningful ways.
The ADP report notes the ongoing controversy about unpaid student loan debt. It also reflects on the impact of divorce rates and child support payments that are eventually the targets of legal action that lead to garnishments.
This is an issue of concern to Cumberland Advisors and our clients. Getting a sense of the true level of Americans’ disposable personal income is important in gauging the rate of change in the US economic recovery.
As a society, we need to think about garnishment rules and account seizures. What are the macro effects if wage garnishment is added to state and federal taxes, FICA, and other withholding? Is net take-home pay so sharply reduced that it discourages work? Add to that the risk of seizure of the bank account where the net check is sent, and the impact on job and income growth may be more severe than we think. The data currently cannot say with certainty. It is easy to have political structures that “make them pay what they owe.” It is harder to observe the impacts of such policies – how they slow the economic recovery and how they dissuade labor income from rising in certain cohorts. And it is harder to determine whether or not policies at both federal and state levels may deserve a re-examination.
We think Chris Arnold and Paul Kiel have done a public service in exposing this issue. We compliment the ADP Research Institute for using its data to help demonstrate the severity of the problem.
This is new turf for us. We are digesting what the reality of wage garnishment means to the US economy. We are posing the question to our economist friends and others. What are the implications to net real disposable personal income, and how should we re-examine our statistical series?
BY David R. Kotok