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Creating New Jobs Rather Than Sharing Old Ones

by | November 23rd, 2009 | 04:51 pm
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Before heading to Asia in November, President Obama announced that a White House “jobs forum” will be held in December on jobs and economic growth.1 The president called for “openness to any demonstrably good idea to supplement the steps already taken to put American back to work,” while simultaneously warning against any “ill-considered decisions—even with the best intentions—particularly at a time of limited resources.”

This is welcome news, but it is also surprisingly late in the game for a Democratic administration to formulate an official employment policy response to the worst labor market depression since the 1930s. A quick look at the historical data easily attests to this.

Figure 1 Employment ratio 16 years or older January 1948–October 2009

Figure 1

Source: BLS CES Data.

Figure 1 shows how the US employment rate has declined at an unprecedented rate to just 58.5 percent, a level not seen since September 1983 when the women’s labor force participation rate was still rising. Unemployment is now below the level at the start of Reagan’s presidency in January 1981.

Figure 2 Long-term unemployment rate, six months or longer, share civilian labor force January 1948–October 2009

Figure 2

Source: BLS CPS Data.

Figure 2 illustrates the historically unprecedented level of long-term unemployment in the United States, indicating that American human capital is being lost at an unprecedented rate (this is what Larry Summers and Olivier Blanchard identified as a “hysteresis effect,” where the equilibrium unemployment rate rises with increases in the actual unemployment rate 2).

Figure 3 Index of aggregate weekly payrolls (SA), total non-farm production workers, January 1964–Oct 2009

Figure 3

Note: Aggregate payrolls include pay before deductions for Social Security, unemployment insurance, group insurance, withholding tax, salary reduction plans, bonds, and union dues. The payroll figures also include overtime pay, shift premiums, and payments for holidays, vacations, sick leave, and other leave made directly by the employer to employees for the pay period reported. Payrolls exclude bonuses, commissions, and other lump-sum payments (unless earned and paid regularly each pay period or month), or other pay not earned in the pay period (such as retroactive pay). Tips and the value of free rent, fuel, meals, or other payments in kind are not included.

Source: BLS CES; NBER.

Meanwhile figure 3 illustrates that even if you are holding onto your job in today’s labor market, you have likely been hit by a combination of stagnant wages and lower hours, yielding a historically unprecedented slide in aggregate weekly US payrolls. Earlier US recessions have tended to cause only a temporary stagnation in aggregate payrolls.

Figure 4 Total quarterly gross private job gains and losses Q2 1992–Q4 2008, percent of total private payroll employment

Figure 4

Source: BLS BED Survey.

And finally, figure 4 illustrates how the current US labor market emergency represents a rapid deterioration in a longer-term decline in US job creation. Gross US job creation averaged about 8 percent of private payroll employment each quarter during the 1990s. This fell to about 7 percent after 2001, while the latest available data from Q4 2008 puts it at a historical low of just 6 percent. Only a substantial increase in gross US job creation will prevent another jobless recovery.

Now, when thinking about—as President Obama said—”demonstrably good ideas” for job creation in America, it is initially informative to look around the world and see how other countries’ labor markets have fared during this crisis. It is particularly illuminating to look at the recent experiences in Europe—a continent that has been rightly lambasted by economists for decades over its sclerotic and over-regulated labor markets.3

The current economic crisis has been unprecedented in its global and, as illustrated in figure 5, transatlantic synchronization.

Figure 5 Industrial production, August 2007–August 2009, August 2007 = 100

Figure 5

Source: OECD Main Economic Indicators November 2009; ECB Online Database.

Transatlantic industrial production was initially relatively unaffected by the first financial market crisis indicators in August 2007, although it fell gradually in the United States from around the beginning of the current recession in January 2008. However, on both sides of the Atlantic a very dramatic crash occurred in the fall of 2008, with Europe seeing an even larger decline than in the United States, before a gradual stabilization and timid recovery by the second and third quarter of 2009.

In marked contrast to the synchronized economic growth data, however, US and EU labor markets have so far witnessed remarkably different trends during this crisis. This is illustrated in figure 6.

Figure 6 Harmonized unemployment rates, August 2007–October 2009

Figure 6

Source: OECD Labor Force Statistics.

While the US unemployment rate has more than doubled since early 2008 to 10.2 percent in October 2009, increases in Europe have so far been more muted. In France, supposedly the core eurozone country and labor market overregulator, unemployment has risen by only about 2 percentage points to 10.0 percent, according to the latest available data. Meanwhile, in Germany the essentially flat unemployment rate still at less than 8 percent really stands out, both among other EU countries and obviously when compared to the United States.4

For the first time in decades therefore the unthinkable—at least among labor economists—has happened and US unemployment rates are today above those of the core eurozone countries. It is hard to imagine a better reason than that for the Obama administration to reconsider its domestic employment policy response to the crisis.

Superficially of course, it would seem that core-Europe’s labor markets have been far better able to cope with the economic crisis than the US labor market. However, one caveat must immediately be highlighted.

Any relatively better labor market performance in core Europe is countered by a collapse of eurozone labor productivity relative to the US, especially in manufacturing. This is illustrated in figure 7.

Figure 7 US and euro area labor productivity Q3 2007–present, Q3 2007 = 100

Figure 7

Source: BLS LPC Database; ECB Labor Market Indicators.

As can be seen, the decline in labor productivity5 in the euro area after Q3 2008 is far larger than in the United States, where productivity has in fact rebounded strongly in recent quarters.6 The superior short-term labor market performance of core Europe therefore has come at least partly at the expense of labor productivity, which remains the single most important measure of long-term increases in economic welfare. Core Europe could therefore have shored up trouble for the future by trying to counteract employment shifts between sectors in the current downturn.

It is further important to realize that the benign recent core-European labor market trend represents an explicit social choice in the countries in question. Not only did France and Germany let their existing extensive social safety nets play their intended role as automatic stabilizers after the fall of 2008, but both countries have further moved aggressively to financially support temporary flexible working-time arrangements—the so-called “work sharing programs.” Increasing the flexibility of working hours for individual workers at the outset of the crisis, so that fluctuations in labor needs are distributed across all workers rather than selectively among them (which would have resulted in some layoffs) has clearly been instrumental in containing unemployment rates.7

In many ways, the core-European policy response is a welcome improvement on the disastrous European labor market policies of the 1980s where the “lump of labor fallacy” led governments to facilitate workers’ early retirement or other premature exits from the labor market in the false hope that more people leaving the workforce would free up additional job opportunities for younger workers. Similarly, it is clear that in core Europe’s generally still highly regulated labor market, attempts to combat hysteresis effects by maintaining people in employment even at reduced hours is likely to be a sensible policy, as many core-European workers would otherwise have invariably slipped into long-term unemployment.8

What conclusions should the Obama administration draw from Europe’s success with work-sharing measures?

With the US unemployment rate at 10.2 percent, it may be too late to expand “work sharing programs” from the current 17 state-level programs.9 Government-supported “work sharing programs” similar to those in core Europe work to preserve existing employment rather than to create new jobs. Hence such programs disproportionately benefit skilled workers, whom companies will prefer to “hoard,” as they are more likely to find employment elsewhere if laid off. This type of insider-outsider dynamic has been very prevalent in Europe during the crisis, where increases in unemployment despite work sharing programs have been heavily concentrated among people on temporary work contracts.10 Additional protection for “insiders” is clearly not what the US labor market needs at the moment.

Instead, in the short term, Congress should implement a temporary holiday for Social Security and Medicare payroll taxes for new hires. This could provide an urgently needed, powerful broad-based and immediately implementable job creation stimulus for the US labor market.11

For the long term, Congress needs to get serious about multi-year funding for broad-based workforce skills improvement and retraining programs. The one-off funding for the Workforce Investment Act (WIA) included in the stimulus bill and the long-warranted expansion of Trade Adjustment Assistance (TAA) to services sector workers are welcome,12 but must be prolonged. Only sustained funding will insure that the relevant skills-enhancing programs are in place when US workers need them. With job losses in the current recession increasingly of a structural nature (meaning that workers will need to seek new jobs in a new industry),13 such programs will be more needed to avoid another jobless US recovery.

Notes

1. See the president’s remarks on the economy from November 12, 2009.

2. This is especially the so-called “duration theory of hysteresis” of permanently lowered worker employability from prolonged periods of inactivity, but also reflects “insider-outsider” effects. See Blanchard and Summers (1989) Hysteresis in Unemployment, National Bureau of Economic Research (NBER) working paper 2035.

3. See, for instance, Baily and Kirkegaard (2004) Transforming the European Economy, for one detailed analysis.

4. Note that several of the more peripheral euro zone countries—such as Spain and Ireland—have suffered even more dramatic labor market deteriorations than the United States, following dramatic slumps in domestic housing markets. At the same time, several smaller EU members—noticeably Austria and the Netherlands—have also maintained nearly flat headline unemployment rates during the economic crisis according to Eurostat data.

5. As no up-to-date EU productivity data is available on a per-hours-worked basis, the data in figure 7 refers to labor productivity per person employed. The number of hours worked per employee is difficult to directly compare between the US and EU due to data collection differences. However, a rough-and-ready comparison between “average actual hours worked in the main job by full-time employees” in the eurozone (see table 2 in Eurostat 2009 The impact of the crisis on employment), which fell by 0.8 hours from Q2 2008 to Q2 2009, and “average constant elasticity of substitution (CES) weekly hours of production for workers in the US,” which fell by 0.6 hours from June 2008 to June 2009, suggests comparable declines in average workers across the Atlantic. See also DG ECFIN latest euro zone indicators [pdf].

6. See BLS release for Q3 productivity on November 5, 2009.

7. A recent summary of EU member states’ labor market measures during the economic crisis shows that flexible working time promotion in the EU goes far beyond Germany and France with 16 member states picking up the idea. See Carone, Koopman, and Pichelmann (2009) Labour Market Prospects and Policies to Soften The Impact of the Financial Crisis [pdf].

8. For an elaboration of the German effects of “work sharing measures (Kurzarbeit),” see Eichhorst and Marx (April 2009) Kurzarbeit: Sinnvoller Konjunkturpuffer oder verlängertes Arbeitslosengeld? IZA Standpunkte #5.

9. See for instance the NY Times, June 16, 2009, “Work Sharing May Help Companies to Avoid Layoffs” or “Obama Urged to Turn Successful State Programs National.”

10. See Eurostat (2009:5-6).

11. See Zandi (2009) US Fiscal Stimulus Revisited for a similar earlier proposal for such a tax holiday. As noted in Bartik and Bishop (2009), with Social Security contributions and Medicare taxes capped at certain levels, such a payroll tax holiday will not affect hiring of the highest earners. The Jobs Creation Tax Credit is available here.

12. See Department of Labor ARRA overview.

13. See Kirkegaard (2009) Structural and Cyclical Trends in Net Employment over US Business Cycles, 1949–2009: Implications for the Next Recovery and Beyond for details.

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