“Millions of Americans remain out of work, out of savings and out of unemployment benefits.” — The New York Times cover story, Feb. 21, 2010
Creating jobs is supposedly tops on the list of Obama administration’s goals, despite the fact that health-care reform is still the single focus this week.
Last week the Democrats introduced a 362-page “jobs” bill. The bill has a few good features, including a payroll tax credit for businesses, but it is loaded with costly features such as an extension of federal unemployment benefits and more federal funding for highways, a long-standing boondoggle. Meanwhile, it fails to substantially reduce the costs of hiring new workers, the most important solution to the unemployment problem.
Background: When it comes to employment, the dynamic “creative destruction” model of economy has been more destructive than creative since 2001. After a robust job creation bonanza during the Reagan and Clinton eras, employment growth slowed to a trickle under Bush II. During “the jobless Naughts,” as economists call it, the population grew by nearly 30 million, but less than 400,000 were added to the payrolls.
Nothing has improved under Obama. So far it’s been a jobless recovery, and the official unemployment rate is stuck at around 10%, amounting to 15 million ex-workers. It’s declined slightly below 10% largely due to discouraged workers being taken off the official list. Normally, during a recovery, the first sector to improve is corporate profits, followed eventually with new hires. Company earnings have risen sharply, but so far this time around the new jobs have been hard to find.
Even more alarming is the fact that the percentage of Americans unemployed for more than half a year is rising to record levels.
What is the fundamental cause of this failure to create jobs? The New York Times blames Wall Street (“institutional investors who crave swift profits…by cutting payrolls”), the decline in union power, the penchant for business to replace workers with machines. The latter, known as “automation,” has been allegedly destroyed millions of jobs for over one hundred years. In reality, it’s been a major source of creating millions of new jobs, especially in technology.
According to the Times, three sectors (automobiles, home building and banking) have led the way out of recession, but this time all three are struggling to recover.
Unfortunately, the Times has it all wrong. The real culprits to dynamic job creation is the growing Europeanization of labor in America. The federal and state governments are making it more and more costly to hire workers, ergo, business hires fewer workers. These deterrents to rehiring and new hiring include:
1. The huge rise in the federal minimum wage law to $7.25, effective July, 2009. Not coincidentally, the unemployment rate for male black teenagers rose from 38% to 50.5% during the summer of 2009, right when the economy was supposed to be recovering. As Milton Friedman once said, “The minimum wage law is the worst anti-black legislation ever passed.”
2. More costly state and federal unemployment compensation. Many small businesses can no longer afford state-mandated unemployment insurance, and have stopped hiring. I know a small business owner here in New York who used to have 50 employees. Now he has none because the cost of state unemployment insurance was too much. If he needs help, he hires part-time workers.
Moreover, every time Congress extends unemployment compensation, the unemployed delay searching for a job. Several studies have shown that the unemployed only start searching seriously for a job when the unemployed checks are about the end.
3. Businesses both large and small are reluctant to hire new workers if they are going to be saddled with new entitlement expenses, such as mandatory health insurance.
4. The growing difficulty in firing workers. Europe suffers from this malady, and the US isn’t far behind. Every major corporation now has legal counsel to protect them from lawsuits when they have to let workers go. As a result, companies that have a hard time getting rid of poor employees are reluctant to hire new workers.
Meanwhile, government is picking up the slack in private employment. At the end of World War II, only one out of forty adults worked for the government. Today one out of eight work for the state. That’s because government officials have adopted the union label and the Keynesian business model of never firing anyone. Only private enterprise lays off workers anymore.
Want to end the unemployment problem? Eliminate the minimum wage law, reduce unemployment compensation and other mandatory entitlements, curb public unions, and make the labor markets more flexible. Most importantly, the federal government could do more for job creation with one simple change in the tax cut: cut corporate taxes from the current high rate of 35%, the highest among industrious countries.
In 1946, under the influence of the Keynesian spell, Congress passed the Full Employment Act, making it the federal government’s responsibility to "promote maximum employment, production, and purchasing power." Ironically, they have done just the opposite. Economists call it the law of unintended consequences.