Out of Control Policy Blog

Unemployment is a Structural Problem, But That Doesn't Mean Government is the Answer

Surveys are showing that if you have a college degree you are more likely to find work in today's employment climate than those who don't have a high school diploma. This isn't necessarily always true on the micro level. Often times unskilled labor is in high demand. But given the sluggishness of retail sales, the lack of investments, and increased number of unskilled jobs being outsourced, that just isn't the case today.

And that's a good thing.

Critics often deride outsourcing of labor to China as a bad thing. But it isn't. It allows for a continued flow of goods from manufacturers and the like while creating opportunities for Americans to take more skilled jobs, or to innovate and improve society. Unfortunately, there are two pushes against this. The first comes from seeking stimulus money to prop up the old economy, and try to support old business models. The second comes from extending social programs that allow for Americans to remain stagnant and not have to innovate, namely, unemployment benefits.

Now, it is true that unemployment is a deep, structural problem. The problem is even worse that the aggregate perspective conveys. As Mohamed El-Erian writes in The Wall Street Journal:

Almost half of unemployed Americans have been without a job for over six months. The average duration of unemployment, which hit a post-World War II record many months ago, continues to go up. Last month it clocked in at 35 weeks. Unemployment is particularly severe among the young: A quarter of Americans between 16 and 19 years old in the labor market are without a job.

The longer it takes to understand and address these issues, the more likely the U.S. will get stuck in a protracted low growth/high unemployment trap.

El-Erian also writes that persistently high unemployment erodes the skills of the labor force, puts fiscal pressure on social safety nets (aka state budgets), and it induces companies and nations to become inwardly focused. This last one can manifest itself in ways like Wall Street is now, just holding on to cash to wait for a more stable, pro-business, pro-investment, pro-growth environment; or it can manifest itself in the form of pushes to "keep more American jobs" here in the states. Both of those things are bad for long-term growth.

The millions of unemployed need to be inspired to innovate, to create, to take chances, to move, to learn new skills, to work hard in a new industry, to simply do. But that can't happen if the incentives aren't properly aligned.

If we offered $50,000 a month of unemployment benefits, would people have an incentive to stay at home? Absolutely. If we offered $50 a month in benefits would the same incentive be there? Actually, for some, that might be incentive enough. There is a threshold where the money the government gives to the unemployed to sustain themselves becomes enough to keep them off the labor bench. To keep them in a state where their skills are eroded and costs rise for budgets. The problem is that threshold is different for pretty much every person, based on their personal tastes and preferences, other sources of support, cultural identity, and a million other factors.

It is simply ridiculous to say that unemployment benefits won't keep people unemployed longer. To be fair, it is equally ridiculous for me to claim that all people on unemployment are just sitting around lazily with the cash. For more than one person in America, their unemployment check is not sustainable for them. And that is one more than we should want.

But the solution is not more checks or higher cash allowances. The solution is not more stimulus projects to give people ditches to dig and fill in. The solution is a comprehensive change in approach to the economy.

  • The less hostile the administration and Congress are to business the more jobs will be created. This means less business tax threats, less federal in-sourcing, and less government crowding out of business with its stimulus programs.
  • The less hostile the administration and Congress are to Wall Street the more investment will come. A lack of confidence and lack of stability are the driving forces keeping money parked in banks. It isn't a liquidity thing. Its not even a toxic balance sheet thing (though that is a problem for some institutions). In order for small businesses to be started or grow, they need investment. This would mean jobs and a turn in the gloomy spirit of the economy.
  • And, the less the government spends, the faster it can get its fiscal house in order, which means more confidence for employers broadly speaking because means a more stable economy with less tax needs in the future. It is true that broad cuts in government spending could reduce GDP growth in the near-term. But that is unsustainable GDP growth that we shouldn't be dependent on. Period.

For more on unemployment benefits, see this interview I did with RT on whether or not we need a jobs bill.

Anthony Randazzo is Director of Economic Research


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