The Passive Approach to Job Creation

10 Mar 2015 8:37 AM | Deleted user

In its March report, the department of labor announced that 295,000 jobs were created and unemployment dropped to 5.5 percent. If we listen to the Administration, we should herald this as a great achievement. And yet, these numbers are quite misleading. The 5.5 percent only measures those who are “officially” unemployed — those who have actively been looking in the last four weeks. It does not account for the “real” unemployment figures, which would include those who gave up. That figure is about 11 percent.

The larger problem, however, is that these figures speak to a fundamental problem in American policymaking — what could otherwise be described as the passive approach to job creation. Serious job creation should rest on three pillars: monetary policy, fiscal policy, and wage policy. Congress has long neglected wage policy, often paying lip service to the need for higher wages while caving into business interests who claim it will lower employment. Similarly Congress cannot usually obtain the requisite consensus to adopt the right fiscal stimuli. Therefore, it effectively farms out job creation to the Federal Reserve Board. The Fed lowers interest rates or engages in quantitative easing in the hopes that investors will create jobs.

When you get right down to it this is really political cowardice. Because Congress is afraid to make hard choices, the unelected and unaccountable Fed makes them for us. But it is also too much of a top-down approach. It may well generate economic growth in that lower interest rates enable investors to invest more. That, however, is not the same as economic development with investment in real people.

Real job creation requires more of a bottom-up or grassroots approach. People need to be able to demand more goods and services in the aggregate, and they can only do this if their wages are rising. The March jobs report offers us a very incomplete picture. Arguably, it is better than an unofficial unemployment rate of 8 percent in which case the real unemployment rate would be at least 16 percent if not higher. But what it doesn’t tell us is how many of those jobs created are actually full-time as opposed to part-time. Somebody who takes a part-time job will no longer be counted in the unemployment figures even if that person is still looking for full-time work.

The other problem with the jobs report is that wage growth has been sluggish. It increased slightly, but not enough to make a big dent. Productivity since the end of the Great Recession has been up, but those gains were not shared with the workers in the form of higher wages. If Congress was really serious about job creation and the needs of the middle class rather than just paying lip service to it, it would ask what other policies could be pursued as a compliment to monetary policy. In other words, it would become more active rather than passive. That it has pursued this passive approach for so long suggests that job creation that leads to economic development is not now, nor has it ever really been a priority.

First of all, institutions matter. Wage growth has been sluggish because of the absence of institutions. Labor unions traditionally boosted the wages of their members and there were spillover effects in the uncovered sectors. Unions also got their members out to vote and provided a key constituency for the types of policies that would be beneficial to the middle class. With union membership in decline, that constituency is all but gone.

Among the policies it supported was the minimum wage. At the peak of union strength the minimum wage reached 113.8 percent of the poverty level in 1969. Before the first phase of the three phase minimum wage increase beginning in 2007, the minimum wage was below 70 percent of the poverty level. Following the third phase in 2009, the minimum wage had reached 88.2 percent of the poverty level. By 2012, however, it was down to 82.5 percent of the poverty level.

Institutions that boost wages give their workers increased purchasing power, which enables them to demand more goods and services in the aggregate. It is increased demand for goods and services that ultimately creates jobs; not simply lowering interest rates. If there is no demand for goods and services in the aggregate because low wages don’t allow for workers to make purchases, it does not matter how low the interest rates are. Jobs simply will not be created because no additional workers are needed.

In previous columns, I have argued that the minimum wage has wage contour effects. An increase in the minimum wage leads to increase in wages in intervals above the minimum wage throughout the wage distribution. In other words, the minimum wage has positive benefits for the middle class. That it might eat into the profits of some is no reason to hold the middle class hostage. We all pay for the low wages those employers pay their workers in the form of subsidies to those workers precisely because their wages are low. If we were to pay higher wages, then we might be able to reduce some taxes because some of the subsidies — which are really subsidizing profits — would no longer be needed.

Second of all, a fiscal approach is needed that will reduce taxes in a way that puts more money into everybody’s pockets; not just those at the top. The problem with the trickle down approach, whereby the wealthy get the bulk of a tax cut, is that it suffers from the same fallacious assumptions as monetary policy. There is no guarantee that these cuts will be used to invest in job creation as opposed to growth in the stock market. Instead, rates need to come down for everybody. Two or three flat tax rates with no deductions will broaden the tax base and leave many in the middle with more to spend for goods and services.

Until Congress undertakes to seriously address how serious fiscal and wage policy can work in tandem with the Fed’s use of monetary policy, we will be doing nothing more than taking a passive approach to job creation. Moreover, the dismal March jobs report makes it clear that our approach to job creation is nothing more than passive.

Perhaps it is unfair to expect too much from our Congress. Maybe it isn’t their fault that they are really beholden to special interests and care not a wit about the middle class. After all, it is not as though any serious contender for the Presidency — whom we will be hearing from soon enough — has attempted to demonstrate that these three approaches need to work together. But then again, it is easier to be passive and allow another institution — the Fed — to take responsibility.

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