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.

Comments

[Monster Beats Studio]

As compared to the post-World War II era, Americans with high school diplomas today are much less likely to find manufacturing jobs, because there are 2-3 billion people in emerging economies with similar skills who are willing to work more cheaply in order to have a shot at attaining a middle class standard of living.

[Cheap Scarf Online]

Global demographics instruct that manufacturing job growth in nations with emerging economies will continue to outpace manufacturing job growth in America.

[Paul Smith]

Merci beaucoup pour votre article.

[truck rental]

HI there, I am just looking online for the truck rental company that can provide me truck rental service till the last of this month. Thank you.

[Paul Smith]

Merci beaucoup pour votre article.

[Reverse Mortgage]

More public projects wouldn't be such a bad idea.

[Moncler Jakke]

So fun article is! I know more from it.

[NSK ball bearing]

Encouraging greater job search by unemployed persons would only help the unemployment problem if employers had unfilled positions that remained unfilled.Great suggestions.

[fall protection]

Reducing minimum wage might sound like a solution but poses big risks. Not only will you stir up the labor sector, but you might also compromise the quality of employees you'll hire.