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The Independent Institute
Commentary

Stagnant Private Sector


With the fall elections just three months away, President Obama recently summoned corporate leaders to the White House again to urge them to start hiring.

The president doesn’t seem to understand that his own policies have created pervasive uncertainty about the government’s future actions, causing many private investors to steer clear of new commitments to long-term investment—the kind that gives rise to additional private-sector jobs.

The unemployment situation, of course, is dismal. According to the Bureau of Labor Statistics (BLS), the standard unemployment rate more than doubled after the economy began to contract early in 2008 and now seems stuck near 10 percent.

More significant, however, is the employment shortfall, because hours worked, in conjunction with the productive use of capital, natural resources and energy, gives rise to what we really want from the economy: goods and services.

BLS data show that between 1960 and 1970, the number of hours worked in the private business sector increased 12 percent. In each subsequent decade—1970–80, 1980–90, and 1990–2000—hours worked increased 18 percent per decade, or about 65 percent overall from 1970 to 2000.

During the past decade the growth stopped. When the economy turned down after 2000, business sector employment fell by 5 percent during the following three years. Although employment recovered after 2003, the economy ran out of steam again at the end of 2007. So, for the seven-year period as a whole there was no gain.

At that point, the most recent recession set in, pushing hours worked in the business sector down by more than 9 percent by the third quarter of 2009. Since then, hardly any gain has occurred, and the hours being worked today in America’s businesses are roughly equal to the number being worked in 1995.

Unless an unexpectedly rapid improvement occurs soon, Americans will endure not a Japanese-style “lost decade,” but a lost decade and a half or more.

Construction employment has fallen the most—about 28 percent—reflecting the housing bust. Employment in durable goods manufacturing, such as autos and appliances, fell more than 20 percent; in nondurable goods manufacturing the decline was more than 10 percent.

Employment in utilities has remained almost unchanged, and hours in leisure and hospitality services are down less than 5 percent. But elsewhere in the service sector, hours for most types of work are stuck at a level about 8 percent below their 2007 peak.

Government employment has resisted the trend. America’s local, state and federal governments employ 16 percent more people than they did in 1995. Given the uncertainty about how much value, if any, many of these government employees are producing, this development scarcely compensates for the losses in private employment.

Genuine economic recovery requires the one thing we are least likely to see: a substantial reduction of government expenditure, taxes and regulations, along with a credible government commitment to stay this less burdensome course. This would give private entrepreneurs the confidence and time to generate the prosperity only they can create.

Unfortunately, anemic private employment tempts politicians to intervene even more in the economy, heightening the uncertainty and discouraging investors further in a vicious cycle.


Robert Higgs is Senior Fellow in Political Economy at The Independent Institute and Editor at Large of the Institute’s quarterly journal The Independent Review. He received his Ph.D. in economics from Johns Hopkins University, and he has taught at the University of Washington, Lafayette College, Seattle University, and the University of Economics, Prague. He has been a visiting scholar at Oxford University and Stanford University, and a fellow for the Hoover Institution and the National Science Foundation. He is the author of many books, including Depression, War, and Cold War.

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