Sunday, October 4, 2015

Unemployment and work

The labor force participation rate is at a 38-year low. But the interesting thing to note about the labor force participation rate is that it entered its steepest freefall directly after the Great Recession technically ended, a period of time that should have coincided with aggressive expansion.

However, recall that the extension of unemployment benefits up to nearly 2 years was a major political debate at the time. It would seem over-generous handouts inspired laziness in the workforce. Correlation is not causation, but think about the incentives. Why trade free money and leisure time for a 40-hour work week and a marginal increase in income?

The Wall Street Journal reported on November 6, 2009:

President Barack Obama signed legislation into law Friday providing an additional 14 to 20 weeks of benefits for those who have already exhausted theirs or will do so by year-end.

The extension comes on the same day the Labor Department announced the U.S. unemployment rate hit 10.2% in October, crossing into double-digits for the first time in 26 years as the nation’s jobless swelled to 15.7 million.

The bill, passed earlier this week by both the Senate and the House of Representatives, extends federal jobless benefits by 14 weeks for Americans in all 50 states who face exhaustion before year-end, and by 20 weeks for those living in states where the unemployment rate is 8.5% or higher.

The additional 20 weeks in hard-hit states means the maximum a person in one of those states could receive is now up to 99 weeks, or nearly two years — the most in history.

Another policy response at the time was a gargantuan Keynesian stimulus, ballooning spending to $6 trillion across all government levels. The motivation behind such astronomic spending was to increase demand for the services of the millions of workers laid off during the Great Recession. It was a massive failure, as the continued decline in the labor force participation rate shows. The problem was never a lack of jobs to match with the skills of the unemployed. The problem was getting those people into the market to use their skills to others’ advantage.

The government came up with a demand-side solution to a supply-side problem. Workers never match precisely to the skills solicited in a job advertisement. The job they’re given invariably molds to their knowledge and personality, evolving to fit them. The worker supplies his expertise to create value. The value is not in the job that is demanded, but the work and creativity that is supplied. Workers must give in order to receive.

Thanks to Republicans in Congress, the fiscal year 2015 deficit will be the lowest deficit of the Obama administration so far. This declining budget deficit does not betray a burgeoning demand deficit. The supply-side challenges remain. Workers must supply what they know to their work to create demand for their services and command salary and income. For them to do that, welfare incentives and regulations that present barriers to market entry need to be cut back.

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