Glenn Hubbard wrote a piece yesterday for The Wall Street Journal asking where the workers were, addressing how effective monetary and fiscal policy are in increasing labor force participation while reducing the level of unemployment. According to Mr. Hubbard, while the number of the nation’s employed is at the employment level just prior to the 2007 recession, the percentage of the workers age 16 to 64 that are working or not working but looking for work has been declining steadily since mid 2000. Currently the rate is approximately 63.2% down from a peak in excess of 67% in 1999.
Mr. Hubbard writes that the stimulus promoted by Democrats in 2009 did not properly address downturn in output (gross domestic product) or high levels of unemployment.
“After the Great Recession’s sharp decline in investment and employment, U.S. business probably needed a more curative jolt to restore confidence. A sustained infrastructure program, rather than a temporary one for “shovel-ready” projects, would have provided more reassurance of longer-term demand. And far-reaching tax reform could have provided both a near-term fillip from front-loaded business tax cuts and a credible prospect for future growth.”
Mr. Hubbard goes on to address how effective monetary policy was in addressing unemployment and output. Effectiveness would depend, according to Mr. Hubbard, on whether unemployment was the result of cyclical versus structural causes:
“The Federal Reserve also has used monetary policy, through aggressive “quantitative easing,” to combat the shock from the financial crisis. In assessing this move’s effect on the labor force, a key question again is whether the problem is best seen as cyclical or structural. If labor-force participation is down because of cyclical factors, keeping interest rates low has been a smart policy, even as unemployment falls—in fact, even if it continues to fall to very low levels to draw nonparticipants back into the labor force.
Research by economists at the Federal Reserve Board published in 2013 suggests that bringing Americans back to work in this way might succeed without sparking inflation—if low labor-force participation is largely a result of a conventional downturn in business activity. If the real problem lies in the rules of the game—that is, structural factors accounting for labor force participation—such a highly expansionary monetary policy ultimately runs the risk of igniting inflation.”
Structural unemployment is defined as unemployment caused by a mismatch between the skills (or location) of job seekers and the requirements (or location) of available jobs. Cyclical unemployment refers to unemployment attributable to a lack of job vacancies, that is, to an inadequate level of aggregate demand.
Mr. Hubbard sees the unemployment problem as a structural one and that government policy can play a role in alleviating unemployment. The policy agenda, says Mr. Hubbard, has to be more ambitious than raising the minimum wage or extending unemployment insurance. Low wage workers need an incentive to return to the labor force for one. Expanding the earned income tax credit or creating some other income subsidy would be helpful, Mr. Hubbard argues.
Mr. Hubbard also suggests modifying the disability insurance program currently attached to the social security program (it discourages people from re-entering the labor force).
I agree with Mr. Hubbard that unemployment may be structural. Thirty-six percent of the unemployed have been jobless in excess of 27 weeks. This number fell by 837,000 over the past 12 months, but we don’t know how many in this number simply gave up on looking for work versus finding employment. Also our progression from a manufacturing-based to retail services-based to a new knowledge economy calls for technical skills employees may not have.
But what is the tie between interest rates and a potential employer’s desire to hire? A businessman is not going to borrow to hire more employees or expanded productive capacity unless she sees a reason to. Monetary policy is basically selling the supply side narrative to business owners; borrow the money and you will build capacity and consumers will come along and justify the leverage you’ve taken on by buying your goods and services. That policy approach brushes under the rug the notion that businesses abhor uncertainty.
For consumers low interest rates only encourage borrowing and it was borrowing that got many homeowners into trouble during the last housing bubble.
Consumers should not have to go back to the days of leveraging frivolous consumption via equity loans and credit cards. In the short term, expanding the earned income credit to include not only the working poor but middle income families may help spur additional consumption. Longer term solutions should include a streamlined jobs training/jobs placement program that trains labor for knowledge-based occupations. Under this approach you address both short term and long term consumption which encourages aggregate demand for national and global goods and services. Minimum wage increases will not boost the necessary aggregate demand for growth.
It’s also time for monetary policy that favors capital accumulation and not the trade of paper on the floor. Savers are going to deposit funds with financial intermediaries when they see increases in rates of return. Traders are able to sell bundled securities with low interest rates thanks to the Federal Reserve. Purchasers are under the impression that the paper they hold has little risk because a of low rates advocated by and for the Federal Reserve.