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In which the government can play an active but limited role
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Editor’s note: This article originally appeared in the June 3, 2013 issue of National Review.
The most pressing problem facing the United States today is not the federal budget deficit, the national debt, or excessive federal spending. It is the labor market. Yes, the United States does have a deficit problem, but we have a much more serious labor-market problem. In fact, for many workers, it’s a labor-market crisis. According to the Congressional Budget Office, the federal budget deficit is projected to remain more or less stable over the next ten years, fluctuating between 2.4 and 3.8 percent of GDP. (The 2012 deficit was 7 percent of GDP.) Of course, a deficit of 3.8 percent of GDP needs to be trimmed as the economy recovers. But it doesn’t need to be trimmed all the way to zero, and certainly not over the next ten years.
Our real and serious debt problem will be driven not by the next decade’s budgetary spending, but by projected spending on entitlements stretching beyond 2023. We must enact structural changes to our entitlement programs that will decrease future spending, but we should not — as the new House Republican budget does — make reducing the amount of federal spending set to occur in the next several years a higher priority than helping Americans get back to work.
One broad measure of unemployment, which includes workers marginally attached to the labor force and workers who want a full-time job but have to settle for part-time employment, stands at 13.9 percent — significantly higher than its pre-crisis level of a little over 8 percent. The economy has 2.6 million fewer jobs than it had when the Great Recession began. Just 64.4 percent of working-age men are working — the lowest level, by far, since the Great Depression, and a whopping five percentage points lower than at the beginning of the current downturn. Only 58.6 percent of the overall working-age population is currently employed. To find a previous figure that low, you have to go back to the early 1980s. Don’t be deceived by our recently steady (but too slow) job growth — the labor market is treading water and remains very badly damaged.
“In particular, the job market for the long-term unemployed is a national crisis. A staggering 4.4 million workers have been unemployed for 27 weeks or longer.” -Michael R. Strain
In particular, the job market for the long-term unemployed is a national crisis. A staggering 4.4 million workers have been unemployed for 27 weeks or longer. This downturn has set the post–World War II record for both the number of long-term unemployed and the share of total unemployed made up of long-term unemployed.
When a worker is unemployed for such a long time, his skill level falls below that of his employed peers and his professional network weakens. Evidence suggests that employers are extremely reluctant to hire people who have been out of work for a long time. Some of the long-term unemployed end up on disability insurance, effectively ending their careers. Our labor-market crisis represents an enormous loss of economic potential — one that will linger for quite some time even while the economy improves — with millions of capable people who want to work tragically sidelined.
The labor market for low-skilled workers is also in crisis. Some 12 percent of adult workers without a high-school diploma are unemployed. The unemployment rate for white teenagers is 21.8 percent; for black teenagers, it’s 40.5 percent. Many of these young workers are trying to gain skills and climb the employment ladder. The current state of the labor market is significantly disrupting their ability to do so, with consequences that will ripple through their careers for many years.
This is a human crisis as much as it is an economic crisis. The ranks of our unemployed are made up of millions of people who are unable to realize their full potential, to thrive, to earn their own success, to pursue happiness. It is our moral obligation to help them get back to work.
What policies should the GOP advocate to help them? Let’s discuss a few. One simple reform would make life easier for employers who don’t want to fire anyone but need to reduce their expenditures. If a firm wants to cut its wage costs by 20 percent, it can fire one-fifth of its workers, or it can tell all its workers to stay home on Fridays without pay. In the latter case, under an option called work-sharing that is available in many places but remains little used, workers would be eligible to receive one-fifth of their unemployment-insurance (UI) benefit. The cost to taxpayers would be the same under the two scenarios. In most cases, the UI benefit would be less than the lost wages, typically around half, so work-sharing would amount to a pay cut (in this case, one of around 10 percent), but workers would stay employed and retain their benefits.
Work-sharing reduces what economists call “inefficient separations.” It allows firms to weather a lull in demand without losing the firm-specific expertise present in their existing work forces; it spares firms the time and expense of hiring and training new workers when demand picks back up; and it prevents workers from losing or failing to acquire skills during a period of unemployment. Unfortunately, in many cases employers do not even consider work-sharing because they have never heard of it. A limited but active program to keep Americans working might include expanding, supporting, and publicizing work-sharing UI programs.
Another policy to consider would be temporarily lowering the minimum wage for young and inexperienced workers. This would enable firms to hire low-skilled workers who are currently too expensive for them. Lowering the minimum wage in this way would allow the hiring of workers whose contributions to the production of goods and services would be fairly small. This would give them the opportunity to begin a résumé, learn occupational skills (including the soft skills of professionalism, punctuality, and dealing with a boss), and build a professional network, all of which could lead to better jobs.
We should also consider lowering the minimum wage for the long-term unemployed, many of whom may be attempting to switch industries or occupations, or whose perceived riskiness makes firms reluctant to hire them at a high wage.
In order to ensure a basic standard of living for all working families, we should couple these two policies with a permanent expansion of the Earned Income Tax Credit. This would make the public, rather than the businesses that hire people, pay for ensuring that working Americans don’t live in poverty.
Unemployment rates vary significantly among the states. In 2012, the average unemployment rate for North Dakota was 3.1 percent. In Nebraska it was 3.9 percent; in South Dakota, 4.4 percent. Vermont, Iowa, Oklahoma, and Wyoming all had unemployment rates below 5.5 percent. Compare that with North Carolina, New Jersey, Rhode Island, California, and Nevada, with 9.5, 9.5, 10.4, 10.5, and 11.1 percent unemployment.
Needless to say, it would be significantly easier for many workers to get a job in North Dakota than in Nevada. But many unemployed Nevadans may lack the financial resources to pick up and move. An employment program should include a relocation subsidy to help the long-term unemployed move from high-unemployment areas to low-unemployment areas, as suggested by economist Enrico Moretti and others.
A program like this already exists under the Trade Adjustment Assistance program. Certain workers who have secured employment in a new city can receive a relocation allowance of up to 90 percent of the “reasonable and necessary expenses” of moving, plus an additional lump-sum payment of up to $1,250. The unemployment-insurance system could create a similar program for the long-term unemployed, possibly financed by letting them take an advance on their UI benefits.
While we’re modifying the UI system, we should provide UI-funded lump-sum bonuses to unemployed workers when they get a job, as an incentive for them to search harder and more efficiently. Surprising as it may seem, there is a lot of evidence in the economics literature that little nudges like this can have large effects on people’s choices.
“Speaking of entrepreneurship, research suggests that skilled immigrants are 30 percent more likely to start a business than U.S. natives — and new businesses create jobs.” -Michael R. Strain
We should also consider taking advantage of low interest rates to offer assistance to those long-term-unemployed workers who want to start businesses. Government can take on risks that private banks cannot, and given the stigma facing the long-term unemployed in the labor market, banks may be wary of lending to them due to their lengthy unemployment spell.
Speaking of entrepreneurship, research suggests that skilled immigrants are 30 percent more likely to start a business than U.S. natives — and new businesses create jobs. One-quarter of engineering- and technology-related businesses founded between 1995 and 2005 were started at least in part by an immigrant. The United States should encourage these potential job creators to bring their talents and energy to our shores. At a minimum, we should stop sending away thousands of high-skilled immigrants who are educated at top American universities and who want to stay after completing their studies. If a comprehensive immigration-reform package is to be agreed to, it must include an increase in high-skilled immigration. If none can be, such an increase should be enacted independently as a jobs plan.
A conservative program to help the unemployed should also include a push for more states to adopt right-to-work laws. These weaken the power of labor unions by eliminating the requirement that workers pay fees to a union as a condition of employment. If the power of unions is restricted, firms may hire more workers; the economics literature suggests that by increasing the cost of wages and benefits for workers, unions reduce employment growth.
Obamacare’s requirement that firms with 50 or more full-time workers provide their employees with health insurance should be delayed until the labor market is much closer to its pre-crisis state. This requirement provides an incentive for firms to keep their payrolls at 49 or fewer employees. At a time of extremely low employment, encouraging firms not to hire is unwise.
The Obamacare rule takes effect in 2014 but covers firms averaging more than 50 employees in 2013. Since we’re only four and a half months into 2013, it is hard to find clear evidence as to whether Obamacare is suppressing employment. But there are hints in the data that Obamacare is slowing employment growth, and the news is filled with stories that businesses are planning around the impending cutoff at 50 workers.
We should also reduce the paperwork, licensing, and administrative barriers facing would-be entrepreneurs. Encouraging domestic energy production by, among other things, allowing for more exploration on federal lands and reducing regulatory-compliance burdens should be part of the program. We should consider temporarily eliminating the capital-gains tax on new businesses’ investments because doing so might help would-be entrepreneurs to attract capital. And we should discuss permanently reducing the payroll tax — which, in theory, would lead to more hiring — by, say, increasing the eligibility ages for Medicare and Social Security.
None of these policies are incompatible with the reasonable and correct conservative opposition to massive government programs and to inefficient, poorly designed, and cronyist stimulus packages. But if the GOP wants to enact them, it will have to embrace — or at least acknowledge — the power of active but limited government to do good for society.
Republicans need to be more than the party of the heroic entrepreneur, more than the party of ever-lower marginal income-tax rates, more than the party of balancing budgets and maximizing economic liberty by minimizing government. They need to show that they care about the poor, the struggling, the vulnerable — and that they are willing to pitch in and help. A great place to start would be tackling the most serious economic problem facing the country today, by championing creative, genuinely conservative public policies to decrease unemployment.
– Mr. Strain is a research fellow at the American Enterprise Institute.
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