Getting Back to Full Employment

April 19th, 2013 at 3:41 pm

Getting back to full employment—not debt, deficits, sequester, debt ceilings—is what we ought to be talking about (along with R&R, of course).  I’m happy to say, in fact, that in my travels outside this benighted town (DC), it’s the question I get asked most often (“why isn’t Washington doing anything about jobs!!??”).

What do I mean by full employment?  Well, there’s the NAIRU definition (Non-Accelerating Inflationary Rate of Unemployment)—that’s the lowest unemployment rate consistent with stable price growth, estimated to be 5.5% right now by CBO.  Is that the right number?  Probably not—we’ve historically set the NAIRU too high, a bias that worries more about high inflation than weak job growth.  Note the class bias embedded in there—high inflation hurts asset-holdings more than high unemployment, the latter of which hurts wage earners more; though spiraling inflation hurts everyone.

I’d define it—full employment—more by contemporary movements in key variables: it’s the unemployment rate consistent with broadly rising real earnings, or the rate at which resources are fully engaged in the economy such that efforts to lower unemployment further would not engage more people (or capital), it would just raise prices.

But, whatever.   I’d be perfectly happy to go with 5.5% for awhile.  So how do we get there from here?

Of course, the first thing is to get the macro policy right, and I go on about that enough about that in these parts already.  Dean Baker emphasizes dollar policy here as well: the trade deficit is a drag on growth and factory jobs, so that too is a target in the quest for full employment.

But for this post, I’d like to focus on something else, motivated by the chart below, one I’ve posted before.  It simply plots private sector job growth against productivity growth.  Up until about 15 years ago, you could have nicely employed this picture against your Luddite friends who complain about productivity killing jobs.

empprod

Source: BLS

Until then, the two lines largely grew together.  Yes, we were more productive, but growth resulted in higher demand that fed back into the economy’s job-creation function in ways that boosted job growth.  The income and wage benefits of growing productivity certainly haven’t reached very far down the income scale since the late 1970s—that’s the inequality story.  But even as inequality grew in the 1980s and 1990s, job creation largely kept pace with output per hour.

That hasn’t been the case since, and it is a matter of grave concern.  The reasons go beyond my scope here, but a prime suspect observed at the crime scene is an acceleration of labor-saving capital investment, like robotics (see Brynjolfsson and McAfee for incisive work on this question).

Here, I want to introduce a different solution, one that isn’t better fiscal and monetary policy to maximize growth.  It’s direct public job creation.  That is, if the private sector can’t be counted upon to generate the needed job opportunities to absorb our labor supply, then there is a role for government to correct this important market shortcoming.

Even in good times, disadvantaged groups of workers have very high unemployment rates, and recent research has found that the long-term unemployed, a group that became historically large in this downturn, have particular difficulty getting back into the workforce.  So even if we didn’t have the structural changes in “labor-saving technology” (sounds awfully benign when you put it that way) that I suspect are afoot, we would need to move in the direction of more publicly supported employment.

What, specifically, am I talking about?  Not so much a bunch of guys setting up camp in the woods and building stuff circa the 1930s, though that worked well at the time (this link by Johnson et al provides a very useful overview of this topic re publicly supported jobs):

…the WPA achieved remarkable scale by putting more than 3 million unemployed Americans back to work at its peak in 1938. Its most enduring legacy is found in its contributions to the nation’s infrastructure. Under the program, the nation built or reconstructed 617,000 miles of new roads, 124,000 bridges and viaducts, and 35,000 buildings. It also financed a wide array of other labor-intensive work projects, including the construction of sidewalks, street curbs, school athletic fields, parks, playgrounds, and landing fields as well as national landmarks such as the Philadelphia Art Museum and New York City’s Central Park Zoo and LaGuardia Airport.

But those days have passed, I think, and contemporary direct job creation programs are not limited to public sector jobs.  A more common model today is subsidized work, often in the private or NGO sectors.  The TANF subsidized jobs program during the Recovery Act is a good recent example of an effective, though small, program that placed over 250,000 low-income workers in 2009-10.  As Pavetti et al report, the program worked with private and government employers to create “new temporary jobs that would otherwise have not existed.”

That’s important because a worry in this context is that you’ll just displace unsubsidized workers with subsidized ones, meaning no increase in employment and an inefficient gift to employers.  The TANF program, which had wage subsidy rates up to 100%, significantly reduced hiring costs, encouraging business to “hire new workers they otherwise would not have hired.”

What did they do?

…the majority of the subsidized jobs provided through the TANF EF programs were provided by private-sector businesses, although many programs provided both public- and private-sector job opportunities to unemployed individuals. The positions in the private sector in which individuals were placed were extremely diverse, including administrative, sales, construction, customer service, food service, and health care.

In addition, nonprofit service agencies that faced unprecedented demand for their services were able to use subsidized employees to assist more people. Some human service agencies were able to use subsidized employees to help meet the increased demand for assistance…For example, San Francisco worked with their local unions to develop a paid, temporary government trainee position that allowed participants to build their skills for the future. Alabama worked closely with the Department of Corrections to provide temporary staff for that agency.

There’s obviously a ton to be done, both in terms of infrastructure (upgrading and repairing public goods) and services, and while displacement must be prohibited and monitored (and punished, when it’s exposed), research suggests that a lot of what happens here is you pull forward a hire that might have happened later or nudge an employer at the margin of a hiring decision to go ahead and pull the trigger.

I’ll have a lot more to say about this in coming weeks and yes, I know it’s way outside the current political box.  But this relatively new gap between employment and productivity will only exacerbate the old gap between income and productivity unless we begin to think and act outside that box on ways to achieve full employment.  Direct job creation is part of the answer.

 

 

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18 comments in reply to "Getting Back to Full Employment"

  1. Pablo says:

    Sounds like you are trying to decrease the gap by lowering productivity.


  2. Fed Up says:

    “I’d define it—full employment—more by contemporary movements in key variables: it’s the unemployment rate consistent with broadly rising real earnings, or the rate at which resources are fully engaged in the economy such that lower unemployment would not engage more people (or capital), it would just raise prices.”

    Are you assuming real aggregate demand (AD) is unlimited (the most common definition of econoomics)? If not, what about the retirement market?

    “Until then, the two lines largely grew together. Yes, we were more productive, but growth resulted in higher demand that fed back into the economy’s job-creation function in ways that boosted job growth. The income and wage benefits of growing productivity certainly haven’t reached very far down the income scale since the late 1970s—that’s the inequality story. But even as inequality grew in the 1980s and 1990s, job creation largely kept pace with output per hour.”

    When supply constrained, positive productivity growth goes into increased output, while when demand constrained, positive productivity growth goes into declining employment?

    “Here, I want to introduce a different solution, one that isn’t better fiscal and monetary policy to maximize growth. It’s direct, public job creation. That is, if the private sector can’t be counted upon to generate the needed job opportunities to absorb our labor supply, then there is a role for government to correct this important market shortcoming.”

    What about putting more peope into retirement and funding it correctly?


    • Nathan Kerr says:

      Sir, I greatly admire your point of view. I am currently slowly but steadily reviewing one of your books at my blog MBAissues.com and want to add my two cents. First and foremost, our tax code and medical insurance platform incentivize automation. We (the people) saddle the worker with income taxes and fees (Medicare, FICA etc.) and then make employers add to their contributions. In addition, employers are forced to pay for medical care. Meanwhile, they search for ways to automate because they not only relieve themselves of massive taxes, Insurance (medical, workmen’s comp, unemployment etc.) costs, but they actually get a depreciation tax-shield on the robot replacing the human! Yes- we incentives automation and penalize human capital.

      In addition, your book calls for 32 hour work weeks being the way to force more hiring. The ACA “Obamacare” actually did just that. But now employers are cutting workers to 31 hours. But the same politician and his party are encouraging legalizing 12-15 million new workers further flooding the already flooded job market.

      At my blog, I repeatedly call for a consumption tax and VAT in exchange for ending income taxes. Further, require all employees be given a health savings account that would create price competition at the primary care level and discourage ER use. Catastrophic/ chronic illness insurance would be single payer at the state level. We must encourage marriage (actually civil unions for all as government should get out of religious rites) with welfare reform favoring two parent homes. Studies show two parent homes (gay ones included) reduces the workforce in America causing wage increase.

      With smarter governance, we can bring manufacturing back to the USA and regain full employment. http://www.MBAissues.com


  3. Fed Up says:

    EDIT: “econoomics” TO: “economics”


  4. Tom Cantlon says:

    “…such that lower unemployment would not engage more people…”. Que?


  5. PJR says:

    Good posting. If you limit yourself to what you judge to be in the “political box,” you will not be serving the American people, or their elected representatives, to the best of your ability. It’s their job to decide what’s in the box. They need your expertise to help them to make those decision, not merely to choose something that’s already in the box.


  6. Smith says:

    This is a silly argument to make. Robots and automation are nothing new. Look at the reduction in the number of coal miners, longshoremen, or farmers over the last century. If those more significant changes to production did not result in permanent higher levels of unemployment according to your graph, then continued automation and use of robots won’t either.

    Why would anyone suggest permanent government wage subsidies instead of strengthening labor? Corporations have tons of money in the bank. Who do you think a worker would rather ask for a raise, his boss? Or the federal department of wage subsidies? (There’s a reason public employees join unions)

    Finally, automation and less work is a good thing. Workers just need the legal means to demand a share of the benefits of capital. To suggest otherwise is to create two classes, rich capitalists, and the poor proletariat dependent on government handouts.


    • Nathan Kerr says:

      Workers do have a legal means to ask for a piece of the income. It is called investing in the company through stocks. It is the true personal hedge to automation and outsourcing.


  7. The OutSourced One says:

    At one time most of the workforce in the US was involved in the production and distribution of agricultural products. Mechanization of agriculture reduced the demand for these workers but the concomitant industrialization of the economy and the introduction of the (then) modern factory with its labor-hungry assembly lines served to more than soak up the available supply of labor driving higher labor’s share of the wealth produced by the investment in capital equipment.

    Over time, automation of manufacturing, along with its globalization due to lower wages offshore and lower tariffs, reduced the demand for US-based industrial workers just as jobs in the new service economy appeared for “Knowledge Workers”. However as the costs of the physical capital equipment used by these Knowledge Workers (i.e. computer power and communication bandwith) falls the relative value of the intellectual or human capital, the asset that goes down the elevator at the end of the day, becomes more valuable.

    Around 1995 (when Internet Explorer was released) the open communication protocols of the Internet began to be widely adapted by businesses allowing for far greater levels of connectivity and global integration that was ever possible before. At the same time the response to the looming, but temporary, Y2K problem gave the offshore outsourcing industry its toehold into corporate America.

    The popping of the Internet bubble on March 10, 2000 (see the chart of the NASDAQ index) lead to the collapse in the price of bandwith on multiple brand new and never used, as well as preexisting, global undersea communication cables just as hoards of experienced, newly unemployed, Y2K and Internet workers hit the job market. Soon after then the Bush administration’s labor policies, and its liberal interpretation of the US’s work visa rules, lead to the explosion of visas being granted for the purpose of outsourcing US-based work to lower cost locations around the world.

    The kink in the graph around the year 2000 is fully explained by these events. US firms are hiring and employing just as many as they ever did, they are just not hiring many here in the US, and many of those that they do hire are on visas coordinating the work done by “Knowledge Workers” offshore.

    As more and more of the added value to productivity growth comes from the human capital of “Knowledge Workers” the more valuable the fully trained engineer (who paid only $4,000 USD for his or her bachelor degree in a STEM field) is to US corporations.


  8. Bill Gatliff says:

    Does the definition of “productivity” include value created by rising stock values and related intangibles? If so, then could the break in 2001 be a relative effect caused by our economy suddenly creating wealth from thin air rather than e.g. manufacturing?

    Maybe the per-worker gains in the graph were driven by explosive growth in incomes of a very few individuals which, when you averaged it across a declining workforce (demographics like aging, etc.) causes the graph to look skewed? As in a Silicon Valley bubble due to tech advancements which created paper wealth and also initiated a lot of overseas manufacturing…

    I don’t see how simple automation in American factories could bend the graph so drastically and so quickly; seems more likely that we were moving manufacturing out of the country entirely, which would kind of double the effect since you’d (a) lose jobs domestically, and (b) bump the wealth of the company transferring products back from their overseas factories.


  9. Kevin Rica says:

    Interesting how this ties together with Jared’s post, The Reinhart/Rogoff Mistake and Economic Epistemology, and the debate over immigration.

    I’m a little skeptical about “skill-biased technical change,” or SBTC. Lots of industries haven’t dramatically automated away their unskilled labor forces in recent decades: retail, restaurant, landscaping, and janitorial services. In fact, computers have probably made engineers and accountants far more productive today than they were in the days of slide rules and adding machines. Most professions have become more productive as a result of computerization (with the possible exception of the professorate who just waste time.) And even though word processing has virtually eliminated traditional secretaries, it takes more university administrators and back office staff to do the same job they did 40 years ago. But janitors and grounds keepers’ jobs are probably not much changed on campus. And there were no such things as UPS and Fedex and call centers which take lots of labor at a variety of skill levels.

    What has happened to wages is that we are bringing in more workers — immigrants – legal and illegal — to do jobs that are supposedly disappearing! And, as we are constantly told by our betters, we have a shortage of people to do such jobs. It’s a key component of the new immigration bill.

    And it is interesting that the cited article from the Atlantic about jobs losses and falling wages – never mentions immigration. It would seem unavoidable, unless the only honest answers are ideologically unacceptable to the editors of The Atlantic.

    This is not unlike the misbegotten Reinhart & Rogoff article. As Paul Krugman pointed out yesterday in his column, The Excel Depression:

    “Ms. Reinhart and Mr. Rogoff have acknowledged the coding error, defended their other decisions and claimed that they never asserted that debt necessarily causes slow growth. That’s a bit disingenuous because they repeatedly insinuated that proposition even if they avoided saying it outright. But, in any case, what really matters isn’t what they meant to say, it’s how their work was read.”

    http://www.nytimes.com/2013/04/19/opinion/krugman-the-excel-depression.html?emc=eta1&_r=1&

    It is the same thing with this SBTC argument. It has great potential for abuse. SBTC and increased trade have both been used to argue that immigration is not responsible wage losses in recent years.

    I have to admit that I was so shocked the first time I heard the argument that it took me a while to comprehend the full and breathtaking extent of the logical error. It was so ridiculous that I assumed that it was just dishonest.

    After all, when we teach freshman the standard supply-demand model, we assume that increasing productivity increases, not reduces, the demand for labor. If you know Jared’s “Jaws of the Snake” diagram, this correlation between labor productivity and wages is well documented from 1947 to 1970. After 1970, the two decoupled. What happened in 1970? I doubt that it was a coincidence that at the same time a nearly half-century decline in immigration suddenly and sharply reversed. (and, of course, technological change, unlike immigration policy – is not a policy.)

    Of course, since the beginning of modern (classical) economics, the benefits of trade have been at the center of economic theory. True, H-O and Stolper-Samuelson admit the possibility that trade can reduce the relative income of the scarce factor (labor in the U.S. case), but the effect on the absolute level of real wages is ambiguous since workers can benefit from the gains to trade (poor people get cheap imports at Walmart).

    But I’m going to be charitable. It’s possible that people who accept these “alternative explanations” make an honest mistake, although its logical magnitude would have to be registered on the upper end of the Richter scale.

    The mistake is assuming that trade and productivity are mutually exclusive, alternative explanations of the wage losses created by mass, unskilled immigration. Mutually exclusive in the sense:

    If you are born in Hawaii, you can’t be born in Keyna.

    If n is less that 7, it cannot simultaneously be greater than 7.

    And if you are born to hang, you can’t drown!

    These “alternative” explanations are not mutually exclusive. They are additive. And they are probably nonlinear in their sum. This means, if trade and SBTC are killing the jobs of the less-skilled, mass immigration makes it even worse – a lot worse.

    In fact, what the trade and SBTC arguments do, if true, is explain why mass immigration was UNNECESSARY IN THE FIRST PLACE. There was never any “labor shortage” to begin with, whatever the Chamber of Commerce said when justifying more low-wage immigration.

    So the rebuttal to the argument “Immigration is not depressing wages, it’s the jobs losses from SBTC and trade” is an “a fortiori” argument. That conclusion is not logically imputes from those premises – even if the premises are true. In fact, ESPECIALLY IF THE PREMISES ARE TRUE. If the premises are true, the American economy doesn’t need and can’t absorb immigrant labor.

    And labor shortages are a good thing. They raise wages and living standards.

    Those who want to discuss SBTC should do so. It’s always good to think these things through. But those who talk about SBTC shouldn’t allow their arguments to be abused the way Reinhart and Rogoff did.


    • Jared Bernstein says:

      I’ve been meaning to raise this with you. Like I always say, I agree with your labor supply point up to a point, though I think there are a lot more moving parts than just the labor supply curve. But if immigration explicitly replaces domestic workers (and thus puts downward pressure on wages) doesn’t global trade implicitly do the same thing? Isn’t that pure Stolper-Samuelson, at least regarding our “scarce factor” which is less skilled labor (ie, less-skilled labor is a larger share of China, Mex, etc. workforce than it is of ours)?

      Why do you not inveigh against trade at least half as much as immigration, dude?


      • Kevin Rica says:

        Jared,

        I’m going to be briefer this time — Time constraints.

        What “moving parts than just the labor supply curve?” I hope it’s not that silly Card article. (I’ve been waiting in a crouch – but you are too smart to take the bait.) That thing makes Reinhart and Rogoff look objective by comparison. Actually, it makes Lysenko look good.

        As far as trade goes —

        1. I think that you misinterpret what an “a fortiori” argument is. The fact that I was willing to assume that trade cause the loss of low-skilled jobs does not mean that I believe it was true. I assumed it is true to show that my conclusion holds even given the most unfavorable assumptions.

        2. I like balanced trade. The problem is imbalanced trade and I’m on about all the time. I keep trying to get people to read:

        http://press.princeton.edu/titles/9936.html

        and

        http://www.worldeconomics.com/Communist%20China%E2%80%99s%20Capitalism.details?AID=455

        Again, as I said above:

        True, H-O and Stolper-Samuelson admit the possibility that trade can reduce the relative income of the scarce factor (labor in the U.S. case), but the effect on the absolute level of real wages is ambiguous since workers can benefit from the gains from trade (poor people get cheap imports at Walmart).

        Even within the confined of HO and Stolper-Samuelson, it’s not clear that America’s laboring poor lose. But they benefit from many grains from trade, including those described by inter alia, SmithRicardo, and Krugman, and trade is probably the most effective anti-trust mechanism available.

        And I CARE about what happens to the welfare of people from the developing world even though I don’t accept mass immigration to the U.S. as a remedy for all their ills. But trade has lifted far more people (100 times as many?) out of poverty than immigration ever could. (I also believe in immigration, just not what we are doing now.)

        In fact, the only immigration that can benefit the U.S. (skilled immigration) is harmful to the countries of origin. Why do my parents live in a facility with more African nurses that many African countries? Shameful! America has the facilities to train its own nurses.

        But in both trade and immigration, the benefits come from doing it right.


  10. The OutSourced One says:

    Per Adam Smith “If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage.” This is the well known theory of comparative advantage. It is the basis for the arguments for trade and the idea that a rising tide lifts all boats, on average at least.

    However, the US has now gotten itself into a place where we are at a comparative DISADVANTAGE in the market of providing the educational services required to produce the Knowledge Worker that the multi-national corporations (MNCs) want to hire. It appears that the main “produce of our own industry … in which we have some advantage”, in the words of Smith, are simply US Treasury securities which are denominated in what is, for now at least, the global reserve currency. In other words, we export our debt and import trained workers.

    The reason for this is simple, our colleges and universities cost far too much for the value they add when compared to their counterparts in the developing world. Firms in the US would much rather hire the indentured visa holder with no educational debt (or a debt that can be paid off in the first quarter of their employment in the US) than the job-hopping student educated in America who may take ten years to pay off his or her debt – if ever.

    Rather than to pass the current immigration bill (which appears to be a conglomeration of favors to various special interest groups) and risk further deterioration of labor’s share of the productive output of those MNCs with operations in the US, why not look to how we can improve our nation’s comparative advantage in providing these coveted Knowledge Workers?

    With our nations’ seemingly insatiable desire to increase military spending perhaps the best place to do this is through the National Labs – with their existing affiliation to the military industrial complex. We could model this National Lab higher educational initiative after; 1) the interstate highway system (the real name of which is the “Dwight D. Eisenhower National System of Interstate and Defense Highways”), 2) the California Master Plan for Higher Education from 1960 (which provided a free university education to the state’s top 12.5% of high school graduates), and 3) the Indian Institutes of Technology (IITs) (which test all students in the country and admit slightly less than the top 2%.)


  11. the buckaroo says:

    It is hard to exaggerate how fundamental is the idea of resource allocation in the theory and application of economics. If competition or unimpeded international trade or mobility of capital and labor are good things this is so, we are given to understand, because they are conducive to allocative efficiency.

    For opposite reasons monopoly, tariffs, price controls, and most kind of taxes are bad. And if these judgments have been attacked the attack has not been leveled at the allocative principles on their own ground so to speak. Rather, the relevance of these principles to the real world, the world of uncertainty, flux, and growth, that has been brought into question.


  12. Robert Bostick says:

    Jared,

    Your new book needs to address these issues.

    http://moslereconomics.com/2013/11/19/comments-on-bakerbernstein-book/


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