Wednesday, October 21, 2009

Job creation

Greg Mankiw has linked to an article by Steven Davis about how to spur employment in the United States. Davis presents four ideas for improving the unemployment picture in the United States:

1) do away with or circumvent State mandates for employer-provided health insurance

2) suspend the Federal minimum wage or allow States to do so

3) make it crystal clear that the Employee Free Choice Act will not pass

4) do a quantifiable study of the success of various attempts to lower unemployment.

The issue of the minimum wage interests me not at all. I can see both sides of the argument and I think fighting over a minimum wage is a waste of time so long as there are no effective bars to employers hiring illegal aliens for less than the minimum wage.

Of Davis’ other three ideas, the fourth seems pointless and the first seems unnecessary. I’ll look at those and then have more to say about Davis’ third idea.

In presenting his fourth idea, Davis argues that we should:

Experiment with how best to put the unemployed back to work and assess the results. [snip] Some programs focus on job search assistance and interviewing skills. Others provide counseling about education and training opportunities. Yet others rely on re-employment bonuses for job losers or financial inducements to hire the unemployed. There is much potential to learn from these programs about which approaches are cost effective, and which are not.

The programs Davis discusses break down into two categories: helping people get jobs (job search assistance, interviewing skills, education and training opportunities) and persuading employers to create jobs (re-employment bonuses and financial inducements). If unemployment is high because jobs exist but job seekers are not qualified for them then the former methods will be effective. Yet Davis himself seems to say that the problem is not that we have jobs and lack qualified applicants; the problem is that we lack jobs:

The job vacancy rate is mired at 1.8% of employment, the lowest level in the history of the series.

If I understand this correctly it means there simply are not very many open jobs. If that’s the case training workers who used to be in the Widget industry how to complete for jobs in the Doodad industry isn’t going to help: not only are the Widget jobs gone, there aren’t any Doodad jobs either.

The second approach - persuading employers to create jobs - seems to be more what we need. Yet Davis begins his article by claiming that paying companies to hire workers is a fool’s game:

Another proposal circulating in Washington would offer tax credits for employers to create new jobs. Under one version, an employer receives a tax credit of $8,000 in the first year of a new job and $5,000 in the second year. But this proposal is even more costly than the proposal for unemployment insurance benefits. [snip]

Plans to whittle down the cost by restricting eligibility for the new-jobs credit would inevitably favor some employers and harm others. Eligibility restrictions would also inject greater complexity into our already-byzantine tax code.

Davis himself is thus arguing that these tactics will do more harm than good in the long run. It also seems to me - independent of anything Davis said - that providing an employer a financial incentive to hire a worker can’t possibly be that effective.

Let’s say an employer could really use another Shipping Clerk but his revenue numbers don’t quite make him feel comfortable hiring that clerk for the $30,000 salary his other Shipping Clerk is getting. The Feds pop up and offer him $8,000 to hire the clerk and suddenly he’s happy to do so. My question is: why didn’t the employer just advertise for a Shipping Clerk at a salary of $22,000?

This would almost certainly be impossible in a unionized business but according to the Bureau of Labor Statistics:

In 2008, union members accounted for 12.4 percent of employed wage and salary workers, up from 12.1 percent a year earlier, the U.S. Department of Labor's Bureau of Labor Statistics reported today. The number of workers belonging to a union rose by 428,000 to 16.1 million. In 1983, the first year for which comparable union data are available, the union membership rate was 20.1 percent, and there were 17.7 million union workers.

It’s pretty clear that most businesses are not unionized and it is therefore not written in stone that all Shipping Clerks must make the same amount of money. So why is the government’s offer of $8,000 so persuasive? Maybe the employer is so thrilled at the idea of being able to hire a $30,000 Shipping Clerk for only $22,000 that he can’t resist but I would think that in a recession those $30,000 Shipping Clerks would be a dime a dozen (so to speak) and a job offer at $22,000 would find several takers.

I have the same objection to Davis’ first idea: his call to circumvent or do away with State mandates on health insurance coverage. Davis argues that the “high cost of health insurance acts as a drag on job creation and wage growth.” He therefore wants State governments to make it cheaper for employers to offer health insurance by doing away with mandates that require insurance policies to cover treatments like “... acupuncture, alcoholism treatments, chiropractors, fertility treatments, marriage counseling....” Even better he wants the Federal government to allow companies to buy employee health insurance across State lines in order to avoid State mandates because “employers in states with onerous benefit mandates are stuck with high-cost health insurance.”

I’ve said before that I think State mandates are the States’ business. If a particular State wants to impose onerous mandates and pay the price in higher insurance costs and (if Davis is right) higher unemployment, that’s up to the State; the Federal government should stay out of the matter.* So I obviously consider his idea about the Federal government allowing interstate health insurance shopping a bad one.

I have no such principled objection to the individual States doing away with requiring certain medical services be covered by health insurance if that’s what the citizens of the State want. I do, however, think his idea is unnecessary. Assume businesses want to hire workers - or raise wages - but cannot do so because employee health insurance is so expensive. They don’t need the State or Federal government to help them out of this mess. They can simply not offer health insurance to new hires.** Employers could also presumably stop providing health insurance to their current workers, thus freeing up more money to hire new workers. This would probably have a devastating effect on morale - particularly if the employers did not provide a raise or at least a one-time “bonus” to make up for some of the loss - but presumably employers can get away with this sort of thing in a tight job market: the employees have nowhere else to go.

If you think Davis’ idea to eliminate or undercut mandates is a good one but you cringe at the idea of hiring new employees without health insurance benefits, consider that withholding health insurance benefits from new workers is far less draconian that what Davis proposes. Under Davis’ plan, employers will be able to shop for the cheapest possible health insurance plan with few (possibly no) rules as to what it must cover - and all employees will have to live with that plan. Those who favor this approach tend to emphasize the ability to drop mandates like alcoholism treatment and marriage counseling while ignoring the ability to drop mandates like regular mammograms, prostate screening, and well child care. On the other hand, I will freely admit that an employer deciding to take existing health insurance away from current employees is quite extreme. However, even that approach might appeal to the current employees if the choice was between all employees losing their employer-provided health insurance and some employees losing their jobs. After all, those rising unemployment numbers are swelled by people who once had jobs so it’s a good idea to help people keep the jobs they have while we’re scrambling for ways to help people without jobs find work.***

So there is no need for either State government or the Federal government to bigfoot themselves into the issue of employer-provided health insurance to improve the employment picture. Employers can simply choose to stop providing health insurance, either to new employees or to all employees, in order to free up more money to hire more employees. Similarly there is no need for the Federal government to pay companies to hire new workers. The companies can simply offer those jobs at whatever salary they could afford without government intervention.

Davis’ third point is his most interesting:

It's unclear whether the [Employee] Free Choice Act [EFCA] and card-check provision will become law. Fears that the act might become law are enough to chill investment by firms that could be targets of card-check union certification. To allay these fears and remove the chill from investment, President Obama and congressional leaders should forcefully renounce the act now. If they won't, moderate Democrats should step forward and publicly announce their opposition to the act. By taking this step, they would help restore business confidence and set the stage for more job-creating investments.

This makes sense. A business that is likely to be targeted by unions if EFCA passes has to consider that when thinking about whether to hire new employees - especially if those new hires will be stretching the company thin. It’s one thing to hire five new workers if you can pay them low wages and you know you can fire them if they don’t work out or if your business takes a turn for the worse. It’s quite another thing to hire five new workers if you fear that six months from now you’re going to be unionized, the new guys will have to start getting union wages, and you’ll be operating under an arbitration-imposed contract that prevents you from firing them. In the latter situation, wait and see is the smartest move for any company considering hiring.

The situation would be the same if the legislation hanging fire was good for employers. Let’s imagine the Union Retention Act. URA requires that all union employees must continue to be treated as their union contract specifies but that new employee cannot join a union and are not covered by the contract. Now employers will hesitate to hire because it will benefit them far more to do their hiring after such legislation is signed into law.

The issue is not whether the pending legislation is good or bad for employers; the issue is whether the legislation will change the employer-employee relationship in a significant way. If so, then as long as the legislation is neither passed nor clearly dead employers will wait and see.

Davis focuses on EFCA but I don’t remember a time when so many large potential policy changes were hanging around. EFCA is one. Climate change legislation is another. We’ve got Waxman-Markey but it hasn’t gone anywhere and now I gather someone else is putting together a different bill. We’ve got n+1 iterations of a health reform bill. Every so often someone mumbles something about regulation of the financial industry then disappears for a month. Limiting executive compensation - for companies that took TARP, for all financial companies, for insurance companies, for everyone? - drifts in and out of focus. As far as I know, even poor old PPIP doesn’t actually have a stake through its heart.

If the government wants companies to hire and the best hope of persuading them to do so is to make the business climate as certain as possible then the Administration’s efforts should be focused on getting everything and everyone settled down. Instead it’s as if Washington is doing everything in its power to make the business climate as unsettled, uncertain, and insecure as possible. The problem is not that the government is passing laws that are bad for business nor that the government is passing laws that are good for business. The problem is that the government is hanging fire on an armful of policies that will change the business climate - whether the change will be better or worse for business is irrelevant. So long as businesses do not know which way that cat will jump, they’re paralyzed. Anything they do now as far as hiring or salaries or promised bonuses or health insurance might - a month from now or a year from now - turn out to have been the wrong decision.

I understand that there are issues the Administration and the Congressional leaders believe need to be addressed: climate change; health care/insurance; EFCA; executive bonuses. But those issues should have been addressed and settled rather than allowed to drag on and on. Obama came in with a solid victory in the November election and a Democratic Congress. We would be in much better shape today if Obama had used his pre-inauguration time and team to write bills addressing each of these issues; had demonstrated his commitment to transparency by posting those bills at on January 20; and had flexed his popularity - and Congress’ abysmal approval ratings - by announcing he wanted an up-or-down vote on each bill within, oh, say, 100 days. If they were passed we’d know what the rules were. If they weren’t passed, Obama should have made it clear that the issues were off the table for the rest of his first term.

For example, Obama should have been able to get a simple carbon tax with revenues used to offset the additional cost to families making under $250,000. Any revenues over that could have been used to bring down the deficit or fund health care reform or whatever. Especially if the tax started small and went up gradually this should have been doable.

Similarly, Obama should have pushed for an up or down vote on single payer. If it didn’t pass, he should have had a fallback position that simply insured the uninsured. Once that passed - and I think it would have - the issue should have been tabled until after his re-election.

EFCA should have been voted on way back in February - it’s not like this is some new idea. If it passed, we’d live with it; if it didn’t, Obama should have declared the issue dead. By the same token all the other ideas floating around out there - new financial regulations; limiting executive compensation; PPIP - should have been addressed by now. Either new laws should have been passed or the issues should have been packed away so businesses would know the rules wouldn’t change for at least the next three or four years.

Is that a lot to have gotten done in 100 days? Sure. But remember the legislation didn’t have to be as complicated as it’s gotten. A carbon tax bill would have been much, much simpler than Waxman-Markey; the single-payer bill runs to less than 16 pages (in Arial 12); EFCA was already written.

Obama and those who call themselves “progressives” wouldn’t have gotten everything they want. But if Obama had been able to get make some progress on his big issues and had been able to stabilize the business climate enough to encourage companies to hire, he would have won himself a lot of credit for putting people back to work. Credit that he could have spent in his next term when a prosperous economy would make his larger plans look more affordable.


“... anything that turns up in a footnote... takes on the character of divine revelation.” - Margaret Halsey

* The issue becomes more complicated because States which choose policies that cause higher unemployment are subsidized to some extent by States which don’t through mechanisms like Federal unemployment benefits. However, a disquisition on the pernicious effects of Federal funds on the issue of State responsibility is beyond the scope of this post.

** I am not aware of any Federal law that requires employers to provide health insurance. It does appear that Hawaii requires employers to provide health insurance to all full-time employees and California may or may not - I’ve found references to a 2003 bill but no discussion of it being currently in force. I have not seen anything indicating any other State has such a requirement although Massachusetts has its own thing going on.

*** This is actually how capitalism is supposed to work: when an employer is in a buyer’s market it can provide less compensation and still be able to hire and retain employees. As the employees receive less, the business frees up more revenue to lower prices, gain more volume, and expand. As the business expands it need more employees which means there are eventually more job offers than there are job applicants. At that point the business must begin offering better compensation to attract new workers and to retain existing ones. Now employees are in a buyer’s market so they demand more and more compensation to take a job or to stay in one they have. The business becomes less competitive as more of its revenue goes into employee salaries; layoffs begin - or the company fails - and the process cycles back to a buyer’s market for employers.

This process looks problematic to a country that increasingly wants security and stasis but I think of it as a variation on creative destruction - it is not industries that are being superseded but employees. I suspect that many people who abhor “creative destruction” when in comes to employees would be far more supportive of it when it comes to the large financial institutions that got themselves into hot water last year - even though allowing those huge institutions to fail would put thousands of people out of work. And vice versa: I suspect many captains of industry who can provide ten thousand reasons why their large companies absolutely needed to be saved by the government would also have ten thousand reasons why it’s preposterous for employees to expect their employers to save them from the normal ups and downs of a capitalist economy.

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