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Look EAST for jobs

3 October 2012 By Edward Hadas

The winner of the presidential election should do something about U.S. unemployment. The current rate of 8 percent is high by America’s historical standards, and that measure does not capture the gravity of the problem – too many people have spent too long out of work or have decided to leave the workforce because jobs are too hard to find. European leaders face an even greater challenge. The EU unemployment rate is 10.4 percent, and during the last decade it has been below 7 percent for only half a year.

What is to be done? Neither Mitt Romney nor Barack Obama has a clear plan. The Federal Reserve has an idea, but it is hard to see how $40 billion a month of newly printed money will actually help create jobs. I have an alternative approach: EAST. It is both an analysis of the problem and a solution.

E is for Efficiency. The industrial economy continually makes more stuff out of less labour. More efficient workers, machines and systems constantly add to consumption, and constantly subtract jobs. The lost labour has mostly been dangerous or tedious, so there is little to regret.

Still, the job drain presents a social challenge. Unemployment is an affront to people’s need to do something meaningful. Fortunately, for more than two centuries advanced economies have more or less managed to compensate for increased efficiency. New jobs have been created to provide consumers with additional goods and services. Labour-intensive bureaucracies have expanded in law, finance and government. The available labour has been shared out over more people, leaving more time for education, leisure and retirement.

A is for Asymmetry in the labour market. Despite the success at keeping people busy, job destruction remains much easier than job creation. Destruction is the natural result of the relentless increase in production efficiency. It also fits in with the productivity mindset; employers are always thinking of ways to cut unproductive headcount.

Conversely, job creation is much less natural. While companies often need to add staff in order to grow, it is still risky for employers – the new employee may not earn his keep. Tax and benefit payment reduce the odds of success. New initiatives are often thwarted by social inertia, powerful incumbents, unsympathetic banks and smothering regulators.

S is for Surplus, the structural surplus of labour. The asymmetry of job creation and destruction creates a perpetual risk of persistently high unemployment. The actual problem is much more serious in poor countries than in rich ones, but unacceptable levels of unemployment are always and everywhere a threat. Crises are especially dangerous. When U.S. financial system stumbled badly and when the Greek government ran out of money, old jobs were quickly lost – and replacements have not yet been found.

Economists often get this wrong. They worry far more about insufficient GDP, a mythical problem in already rich advanced economies, than about the structural challenge of a potential oversupply of labour. The blind spot leads to backwards analysis. It is misleading to say that a decline in GDP caused the current U.S. unemployment problem. The predominant causality goes in the other direction: excessive job destruction led to a fall in GDP – and the GDP recovery will come only when new jobs are created.

Finally, T is for Target. Employment is best increased by making it a direct target of public policy. The old communist governments did this well. They provided jobs for all. Their method was frequently wrong – the police and domestic spying services were big employers – but the goal was right. Non-communist economies should also make full employment the first goal of economic policy.

In the long run, the goal can only be reached through a determined fight against labour asymmetry; governments should discourage job destruction and encourage job creation. Germany, where unemployment has shrunk steadily for six years, has shown the power of relatively minor changes in regulations. In the United States, hiring is probably less of a problem than firing. Law, custom and lenders all push employers to rush to let people go when times are tough. The incentives should be pushing them in the opposite direction.

The long-term goal is not to make factories less productive; that would be mad. It is to support valuable activities, from highly skilled crafts to labours of care, which are too easily judged to be marginal or “uneconomical” because they are insufficiently efficient.

In the short term, the government should be an employer of last resort, just as it has become a lender of last resort. It can create jobs directly – for example through public works projects – or indirectly by subsidising new jobs in the private sector. Right now, all the Fed’s newly created money is flowing into the financial markets. The next president would be wise to look EAST and put cash into the pockets of newly hired employees.


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