Clinton Should Pull Up Roots of Joblessness

Bill Clinton correctly showed during the presidential campaign that virtually no jobs had been created during President Bush’s tenure in the White House. While on average roughly 2 million jobs a year had been created in the United States from 1970 to 1989, job expansion has been virtually nil since.

The newly elected president has made it clear that doing something about jobs and the economy is his top priority. But the best Clinton strategy would be to move decisively to end the government programs that have created this situation.

When presidents let labor markets operate without interference, such as after both world wars, the economy adjusts quickly to changing circumstances. When there is massive intervention, such as by Presidents Hoover and Roosevelt during the Great Depression, the nation suffers prolonged unemployment.

The law of supply and demand applies to labor markets. When labor is less expensive, more of it is hired. When the cost of hiring workers rises, less hiring is done.

What turned a modest recession in the late 1920s into the Great Depression was a government policy supporting high wages, which priced labor out of the market. Likewise, the 1990 recession was partially triggered by a large increase in wages.

During the great economic expansion from 1983 to 1989, hourly wage costs (including fringe benefits) rose slightly more than 4 percent a year. After allowing for inflation and some increase in the productivity of workers, labor costs actually fell as a percentage of sales, making hiring more attractive.

But beginning at the end of 1989, hourly wage costs started to rise faster, then soared at an annual rate of 8 percent in the second quarter of 1990. Why? One major factor was the 13.4 percent increase in the federal minimum wage that took effect on the first day of that quarter.

Soaring labor costs reduced employment. In time, this led to smaller wage increases, setting the stage for a market-induced recovery Then, on April 1, 1991, another large increase in the federal minimum wage forced labor costs to rise for a time at a more than 5 percent annual rate, thwarting recovery.

Other recent legislation also has aggravated joblessness. On three occasions, for example, Congress extended unemployment insurance benefits, making the unemployed more finicky about the work they would accept and raising what economists call the “reservation” (the minimally acceptable wage) of the unemployed, further retarding job growth.

To have both new job opportunities and a rising standard of living, labor productivity — the output per hours worked — must rise. In recent years, several pieces of legislation — such as the 1990 amendments to the Clean Air Act, the Americans With Disabilities Act and the 1991 Civil Rights Act—retarded productivity growth. By restricting the ability of employers to use labor and capital inputs as they would like, new regulations arising from these laws reduce the ability of employers to cut labor costs.

Clinton’s promises do not seem likely to alleviate unemployment. He favors indexing the minimum wage, allowing it to rise on a continual basis. His health care proposals will lead to a huge increase in the cost of fringe benefits associated with health care, which can be financed only by lowering wages, raising prices or reducing profits, the latter leading to a reduction in jobs. And the higher income taxes he has in mind will only reduce labor inputs. As for his proposed spending on infrastructure” (i.e., political pork barrel), the evidence is not encouraging: Massive public works spending in the 1930s was accompanied by an unemployment rate languishing in double digits for a decade.

The nation’s fundamental economic problem is stagnating labor productivity. Since 1970, labor productivity has risen less than 1 percent a year, compared with more than 3 percent annual growth from 1947 to 1970. Higher productivity lowers labor costs per dollar of sales revenue, providing incentives for firms to hire and creating pressures for higher wages. Higher labor productivity, in turn, requires ending punitive tax laws restricting capital formation as well as providing new incentives to save. It also requires an end to well-intended regulatory initiatives that lower output per worker.

Significant growth in employment will require liberation of labor markets from oppressive constraints imposed by government. If the Clinton administration fails to do so, the president-elect’s 1992 campaign rhetoric will return to haunt him in l996.