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Another Jobs Summit—Getting It Right This Time

by | December 3rd, 2009 | 10:00 am
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The President convenes a meeting of corporate executives, union presidents, and economists to discuss the “jobless recovery.” December 2009 in Washington, DC? No, July 1993 in Chicago. We have seen this problem before, in other words. But have we learned the right lessons from the last jobs summit?

The first lesson is that there has been a change in the nature of unemployment in the United States over the last 30 years. The unemployment rate has declined over this period, but the average duration of unemployment has increased. Whereas unemployment in the United States used to mirror the business cycle—rising during downturns and falling during recoveries—this pattern began changing in the 1980s. After the last two recessions, total employment continued to decline for at least another year. In both cases, it took more than two years for employment to return to its pre-recession level.

Why?

Unemployment increasingly stems from structural factors, like technological change and increased competition at home and abroad. For example, manufacturing employment dropped by 2.3 million during the last recession between 2000 and 2002. Half a million of that drop was concentrated in autos, steel, textiles, and apparel. Employment in these four industries fell by another half a million during the recent “recovery” from 2002 to 2007, accounting for half of the decline in manufacturing employment.

As a result, a worker who loses his or her job today can expect to be unemployed for at least half a year. More than a third of those currently unemployed will be out of work for much longer. The average duration of unemployment is currently the longest it has been since the government began monitoring this indicator more than 40 years ago.

American workers are under attack from all sides. Not only are they the first to go when firms face economic difficulties, they can expect to be unemployed for quite a while, in part because of the difficulty of finding jobs in their previous industry or occupation. And as if that is not enough, most workers can expect to take a substantial cut in pay when they finally find a new job.

The US “jobs machine” petered out long before the recent recession began. Total job gains were flat from 2001 to 2006. Most of the increase in the number of people employed over this period resulted from fewer numbers of people laid off, not creation of new jobs. 

So what can and should we do? That is the task facing the attendants at the jobs summit in Washington this week and the Congress next year as it considers legislation aimed at job creation.

It is important, first, to remember that many factors contribute to job creation, including the cost of capital, market potential, the existence of modern infrastructure, and the availability of a highly skilled workforce. The poor performance in job gains tracks a lack of investment in plants and equipment. Although housing construction creates jobs, as the recent real estate bubble proved once again, those jobs last only as long as people buy houses.

Business investment in expanding production of goods and delivery of services is the most potent and long-lasting form of job creation. The statistics prove this point. Business investment in plants and equipment grew faster than investment in housing between 1995 and 2001. By contrast, residential investment grew, on average, eight times faster than nonresidential investment between 2001 and 2005, before the burst of the real estate bubble. Over the last decade investment in plants and equipment has dropped to less than 10 percent of GDP.

Here are some approaches to keep in mind:

  1. Over the long run, businesses must invest more in plants and equipment if we want sustainable high-skilled, high-wage jobs. In the meantime, we might consider the following in adopting job-creating policies. Despite calls for various kinds of job tax credits, past experience suggests that they result in job shifting, not in a net increase in employment. Job sharing incentives, similar to those in place in Europe, undermine productivity growth, which can have long-run consequences for sustainable improvements in wages.
  2. Other forms of job creation incentives, aimed at businesses but provided to workers themselves, should be considered instead. First, the government could make contributions to Social Security, Medicare and Unemployment Insurance on behalf of new hires for a temporary period. Such a “payroll tax holiday” would immediately lower the cost of hiring new workers by about 7.5 percent. It would also temporarily increase a worker’s take-home salary by an additional 7.5 percent.
  3. The administration could also expand the small wage–insurance program, currently available to only a minority of unemployed workers. Under this program, the government would pay workers half the difference between their prelayoff wage and their new wage, for up to two years.
  4. The Obama administration has taken a giant first step toward encouraging more productive investment in the United States by substantially increasing investment in physical infrastructure. Businesses will only invest in the United States if they know that they can produce their goods and services efficiently and get them to market in a timely fashion. Improvements in education and the availability of worker training are also necessary to create a workforce that has the skills necessary to meet the competitive challenges of the 21st century.
  5. Current tax policies favor investments in residential and commercial buildings rather than investment in plants and equipment. This imbalance needs to be addressed.
  6. Reducing the budget deficit would make more capital available for investment in the private sector. It is no accident that investment in plants and equipment doubled between 1992 and 2000, when the federal budget went from deficit to surplus. Reducing the budget deficit is probably the single most important action the administration and Congress can take to stimulate productive investment and create jobs here in the United States.

The bottom line is: Slow job growth is not a new phenomenon and simple tax credits alone will not be enough to fix the problem. A mix of immediate and medium-term steps must be taken in order to recharge the US jobs machine.

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