July 24, 2011
What to Do about Unemployment in the Short Term?
What to Do about Unemployment in the Short Term?—Posner
Becker is pessimistic that much can be done in the short term to stimulate employment. That is doubtless correct in a realistic sense, but I think it worth pointing out that if politics were not what they are much could probably be done and at low net cost and possibly even with net cost savings.
The simplest short-term (but also long-term) stimulant to employment would be to reduce the minimum wage, which has risen greatly in recent years. This would reduce the cost of labor to employers and hence encourage the substitution of labor for capital inputs. The minimum-wage appears to have its greatest disemployment effects among blacks and teenagers, moreover, and those are two of the groups with the highest unemployment rates.
True, the reduction of the minimum wage would reduce some incomes by increasing the supply of labor, and reduced incomes would result in reduced consumption which could in turn reduce production and therefore employment. But this effect would probably be offset by the effect of lower labor costs in stimulating production.
The Fair Labor Standards Act, which imposes the federal minimum wage, also requires that overtime wages be at least 50 percent higher than the employer's normal hourly wage for the workers asked to work overtime. The reason for the rule (a Depression measure) is to discourage overtime and thus spread the available work among more employees. If this is the effect, it is an argument for making the overtime wage an even higher percentage of the normal wage than the current 150 percent. The counterargument is that regular pay would fall to compensate an increase in the overtime wage, so employers would not hire additional workers.
A simple way to stimulate employment would be suspension of the Davis-Bacon Act, which requires federal government contractors to pay "prevailing wages" often tied to inflated union-negotiated pay scales. And along with that, reversal of efforts by the Democratic-controlled National Labor Relations Board to enourage unionization, which by driving up wages reduces the demand for labor. Unionization also reduces the efficiency with which labor is employed by imposing the restrictions typically found in collective bargaining contracts, such as requiring that layoffs be in reverse order of seniority and limiting employers' authority to switch workers between jobs.
Unemployment benefits, which normally last for only six months, have been progressively extended during the current depression (I do not accept the proposition that the financial crisis of 2008 merely triggered a "recession" that ended two years ago when GDP stopped falling in nominal terms) to almost two years. The longer the benefits period (and the higher the benefits), the slower are unemployed workers to obtain new employment; and the longer they are out of work the less likely they are ever to return to work, because their work skills and attitudes erode over time. With so many two-income households nowadays, the decision of one spouse to give up on looking for a market job and instead becoming a full-time household producer ("housewife" or "house husband") becomes an attractive option.
Cuts in the size of unemployment benefits, and of other subsidy programs attractive to the unemployed, such as food stamps and Medicaid, would similarly encourage greater job search by unemployed persons.
A recent study by the economist Steve Davis, and his colleagues, finds that the vigor of job search by the unemployed is currently much lower than in previous economic downturns, though this may be due in part to realistic pessimism about the posibility of finding work.
All these measures would be costless to the government. A new stimulus (that is, deficit spending intended to stimulate the economy) would not be, but if well designed and implemented (tremendous ifs!) could be effective in increasing employment, and if so pay for itself. This is the Keynesian remedy, which has become discredited not because it is unsound but because the $800 billion-plus stimulus enacted in February 2009 was so poorly designed and implemented. (And because of the disastrous prediction by Christina Romer, the incoming chairwoman of the Council of Economic Advisers, in January 2009 that without a stimulus the unemployment rate might rise above 8 percent. It rose to 10 percent. and now is above 9 percent, with the stimulus. What made the prediction reckless, as well as politically disastrous when it turned out to be false, was that no one could predict in January 2009 what the unemployment rate would be at any date in the future.)
Much of the stimulus consisted of transfer payments to individuals, for example in the form of tax credits. Such transfers are not effective in stimulating employment. They are transitory boosts in income and a large percentage of such boosts is saved rather than spent and what is spent has only an indirect future impact on employment: a slight rise in consumer spending may have negligible effects on production if sellers have a lot of inventory, and even if they increase production they may do so by squeezing more work ouf of their existing workforce rather than by hiring additional workers.
A more intelligent part of the stimulus was the transfers to state governments. They enabled the states that were on the brink of insolvency and may therefore have had difficulty borrowing to retain a number of teachers and other public employees whom they would otherwise have had to lay off. The transfers thus forestalled an increase in unemployment.
Best of all—and the core of Keynesian depression remedies—was—in theory—the modest part of the stimulus allocated for public works, particularly roadbuilding and –repair and other construction-related projects (such as insulating houses, and painting and otherwise refurbishing public buildings). Because of the collapse of the housing market, unemployment was (and remains) very high among construction workers. If the government hires construction companies for new projects, the effect on the employment of construction workers should be positive and immediate.
But here is where failure of implementation was critical. Although American roads, bridges, and other infrastructure are in poor shape, the government proved incapable of laumching new construction projects in timely fashion. For rather than placing a tough-minded, experienced business executive in charge and telling him to cut through bureaucratic red tape (as the Administration had done successfully with regard to the government takeover of General Motors and Chrysler), the President placed the Vice President in charge of administering the stimulus. He had neither the time nor the business and managerial background required for such an assignment, or the interest or temperament
Nevertheless the stimulus doubtless had some positive effect on employment, since it did inject more than $800 billion into the economy in a short period, most of which would otherwise have remained in rather inert savings. But as with many issues in macroeconomics this one cannot be resolved with any confidence. But if government expenditures were reduced in ways that did not significantly increase unemployment, and the savings allocated to a stimulus program focused entirely on creating labor-intensive public projects promptly implemented, there would be a positive effect on employment with no net increase in government spending.
But all these are pipe dreams, because of the politics of U.S. economic policy. The government is likely to do anything to stimulate employment. Eventually the economy will recover on its own, as consumers dissave and thus increase consumption, and with the increased consumption will come increased production and hence increased employment.
The Abysmal Recovery in Employment- Becker
Job recovery in America has been disturbingly slow during the two years since the official end of the 2007-09 Great Recession. Unemployment has declined by only a single percentage point to 9.2% from its peak of 10.2% in 2009, while the percent of the adult population that is working is even lower than it was at the end of the recession. To put these figures in perspective, two years after the end of the severe recession of 1981-82, the unemployment rate was down by 3,6 percentage points from its peak of 10.8%, while the fraction working was up by 2,5 percentage points.
To be sure, while the recession of 1981-82 was the sharpest since the end of World War II prior to the Great Recession, it did not have as deep a financial crisis as the one that started in 2007. Although recoveries from financial crises are notoriously slow and erratic, the slowness of the current employment (and output) recovery is still obviously of great concern. The data on the duration of unemployment spells adds to the uneasiness. The great majority of workers can handle an unemployment spell of a few months since they can draw down savings, borrow from family members, live off a spouse's earnings, and often qualify for unemployment compensation, Medicaid, and other government assistance programs. Unfortunately, however, many of the unemployed have been out of work for more than just a few months: over 40% have not had a regular job for at least 6 months, and almost one-third of the unemployed had not had a regular job for over a year.
Economists, political leaders, and public intellectuals have put forward various and conflicting ideas about how to improve the employment and unemployment picture. Some economists advocate further large fiscal stimulus packages in order to compensate for what is considered insufficient aggregate demand for goods and services by consumers and investors. Yet we already had close to a trillion dollar badly designed stimulus package, tax credits for first time homebuyers, a senseless "cash for clunkers" program, and other federal programs that have not had any clear sustained effect on moving the economy forward.
It is obvious now that forecasts by some economists in President Obama's administration that these programs would reduce unemployment to under 8% were far too optimistic. Although little consensus exists on what in fact was achieved by the major $800 billion stimulus package, I do not know of convincing evidence that it accomplished a lot in reducing unemployment and raising employment. So it is hard to be optimistic that an additional stimulus package would be designed better or work any better, and of course, it would add to an already large fiscal deficit.
Other proposals to increase employment operate not by trying to stimulate aggregate demand for goods, but by directly encouraging employers to raise employment. One simple proposal is to give employers a subsidy for each worker employed, such as a subsidy equal to 10% of wages paid. This approach is simple but it would be expensive, and it would be inefficient since the vast majority of employees would have jobs without any subsidy. Even if the wage subsidy increased employment by 10 percentage points-which would be huge- 90% of the subsidy would be spent on workers who would have been employed anyway. At a 10% wage subsidy per worker, this means about 9% of the aggregate wage bill, which amounts to trillions of dollars, would simply be a transfer from taxpayers to employers. Such an expensive and inefficient program is hardly politically or economically attractive when the current political debate is over how far to cut, not increase, federal spending.
Recognizing the waste of such an overall wage subsidy, another approach subsidizes new hires only. This approach does avoid subsidizing all employment, but it fails to appreciate the magnitude of new hires even during bad times. The JOLTS data published by the federal government indicate that over 4 million persons are newly hired each month even during the current post recession period. Therefore, subsidizing new hires would pay subsidies for about 50 million new hires annually. If the subsidy per hire were $3000 (about 10% of their annual earnings), this would cost some $150 billion per year.
This is not chicken feed even for the federal government. Moreover, employers would try to game the system by laying off some workers so they can hire other workers and gain the new-hire subsidy. The result would be an increase in the number of persons becoming unemployed along with greater exits from the unemployment state. The net effect on employment would probably be positive and overall unemployment would tend to decrease, but the employment bang for the substantial bucks involved would be quite small.
Aside from the depth of the financial crisis, I believe the main source of slow hiring initially were the many anti-business proposals voiced by some members of Congress and even by the president. Many of these were discarded or tamed down, but Obamacare (the Patient Protection and Affordable Care Act) and the Dodd-Frank Wall Street Reform and Consumer Protection Act have raised the prospects of higher and less certain health care costs for businesses, and greater regulation and more uncertainty about government policy in the financial and consumer areas. Neither Act gives employers an incentive to expand their payrolls.
Adding to this is the huge uncertainty about what Democrats and Republicans can agree to on taming the large fiscal deficits, the looming entitlement crisis, and the exploding debt. No wonder that businesses are playing it close to their chests by keeping their payrolls down, and by their reluctance to commit to long-term investments.
The analysis in this post to me implies that the most effective solution to the weak recovery is not further stimulus packages, nor subsidies to employment or hiring, but an agreement between Congress and the president to cut trillions of dollars from federal spending during the next decade, and to reform the tax system toward a much broader and much flatter personal and corporate tax structure. The report of Obama's National Commission on Fiscal Responsibility and Reform is a starting point, and Representative Ryan's Roadmap also has excellent proposals on how to do this.