Although the economic recovery is two years old, for many it seems as though
the country is still mired in a recession. This is because the unemployed,
though smaller relative to the labor force than at this point in past cycles,
are having an extremely difficult time finding new jobs – perhaps the most
difficult time since the 1930s. Combine this with the fact that the percentage
of jobless who are “white collar” has doubled over the past 10 years and you can
see why perceptions of this economy are so dour.
Much has already been written about this jobless recovery and the reasons for
it. For example, the September/October 2002 Economic Report first observed that
the unusually large rise in productivity has a dark side – its impact on
employment. Two issues later, the January/February 2003 Economic Report explored
the broader aspects of this absence of job creation and its implications for the
strength and longevity of the economic recovery. Finally, the
previous issue of this Report identified
outsourcing as a problem that is relatively new, but likely to threaten the
availability of jobs for American workers for many years to come.
For this issue, I would like to pick up where I left off and offer some
solutions to ameliorate today’s paucity of jobs. In the main, we need to make it
more attractive for business to produce goods and services in the United States,
rather than overseas, using U.S. workers, rather than foreigners. The
Administration must also make a few adjustments to its fiscal policy with the
aim of creating jobs through faster economic growth. It should also consider a
WPA-style project to upgrade our infrastructure, which is labor-intensive by
nature. Offering tax credits for education and training would be helpful as
well, since domestic employees must add more value to their jobs than their
foreign counterparts do, in order to justify their higher rates of pay.
On this subject, let me point out that low labor costs alone are not the only
reason behind the growing trend to outsource the production of both goods and
services. If it were, countries like Sri Lanka, where labor costs are among the
lowest in the world, would be the locale of choice (Chart 1). That it is not
reflects the old adage, you get what you pay for: Sri Lanka’s labor force is not
very educated, thus not suited for most U.S. companies’ needs. On the other
hand, the people of India, Pakistan, China and the Philippines, just to name
four countries, are highly skilled, and in some cases, speak perfect English.
Yet, because they get paid a fraction of what their American counterparts earn,
their services are very much in demand by U.S. companies for the production of
both goods and services.
Another point worth noting is that there are good reasons for some firms to
keep their operations here in the United States, even though it might be cheaper
to move part of them offshore. Remember the trend to just-in-time manufacturing?
This requires suppliers to be close to their customers. Other firms may not want
to deal with the uncertainties of foreign exchange and possible delays when
goods are transported long distances. Still others value the importance of
“face-time” with their customers, suppliers, elected officials, and so on.
All well and good, but the bottom line is that we still need to jump-start
the job creation process here in the United States so that this recovery will
survive to celebrate its third birthday a year from now. For as you can see from
Chart 2, while the reported unemployment rate may not be all that high compared
with past experience, the labor market is far weaker than it looks. Because of
the difficulty the unemployed are having finding new jobs, many people have
become so discouraged they have stopped looking for work altogether. If these
folks were added back into the labor force, along with those who are working
part time instead of full time, or at jobs that require fewer skills and pay
less than their previous position, the jobless rate would be nearly four points
higher – close to 10 percent.
Any discussion that involves making it more attractive for businesses to
produce goods and services here in the United States must begin by examining the
cost of labor, since this is the typical firm’s biggest single expense item. As
Chart 3 shows, while the rise in wages and salaries has slowed dramatically over
the past four years, overall compensation costs are still rising close to their
20-year average of four percent. The reason: the cost of benefits, most of which
is health care. These costs must be contained if American workers are to have
any chance at all at being competitive in what has increasingly become a global
labor market. Some of this is already beginning, since radiology is one of those
jobs that are being outsourced, but more will have to be done – especially in
the area of tort reform.
Other aspects of labor costs must be controlled as well. These include, but
are not limited to, workers’ compensation premiums and companies’ pension
obligations. This latter item in particular is draining corporate coffers,
intensifying the need to cut costs elsewhere, in order to maintain
profitability. According to the consulting firm Watson Wyatt, corporate
contributions to traditional (defined benefit) pension plans will be eight times
larger this year than they were just four years ago. As a consequence, the
pension-funding gap for all such plans has shot up to $350 billion from as
little as $23 billion. This reflects the “perfect storm” combination of the drop
in both the stock market and interest rates. Washington needs to devise a new
formula that will reduce the amount that companies must inject into these
pensions without compromising their integrity.
Another suggestion deals with profits that American companies have made
overseas. The Senate Finance Committee recently approved a bill that would give
a one-time tax holiday to companies that bring back to the U.S. profits that
they have been keeping overseas. What should be added to this is a provision
that these funds would have to be used to create jobs within the United States
in order to qualify for this tax break. On this subject, Washington should also
consider tax credits for those companies that add jobs here in the United
States, beyond a certain level or trend that may already have been in place, as
well as for those that provide education and training for their current staff,
so that they can continue to add value commensurate with their compensation.
Domestic labor costs are not just high relative to those in other countries.
They are also high compared with other inputs, specifically the cost of capital
and information processing equipment. Chart 4 shows the disparity between the
cost of labor and the cost of computers alone, without regard to the cost of
capital. As you can see, compensation per hour has gone up by about 175 percent
since 1980, while at the same time, the cost of computers has been cut in half.
And while there is nothing that the government can – or should – do about this,
there is something that Washington can influence: the cost of capital.
As I said at the outset, the administration needs to make a few adjustments
to its fiscal policy with the aim of creating jobs. One of these involves
reducing the attractiveness of capital relative to labor. When the cost of
capital falls relative to such other inputs as the cost of labor, most firms
will use more capital and less labor in order to lower their overall costs and
increase their profits. The administration’s reduction in the capital gains tax
did just that. And while it had the salutary effect of boosting productivity, it
did so at the expense of employment. This tax cut should be rescinded, or at
least modified so that using labor will not be as costly relative to capital as
it is now.
Other tax cuts that this administration has enacted have not provided much
bang for the buck when it comes to job creation. For maximum effectiveness in
generating the rates of economic growth that would be needed to overcome the
ongoing rise in productivity, tax cuts should be concentrated among low- and
middle-income households. These people will spend every additional dollar they
get and then some. Cutting payroll (Social Security) taxes, the largest tax the
average household pays, would be a good start. Extending jobless benefits and
restoring unemployment compensation to those whose benefits have run out would
be another step in the right direction.
There are other measures that Washington should consider as well. Since the
federal government can run a deficit while states cannot (at least over an
extended period of time), Washington should step up its grants to states and
local governments. Most of their budgets are in the red because of the jump in
such costs as Medicaid and pensions, so they are cutting spending and raising
taxes, thus taking out of the economy much of what Washington is trying to put
in.
Washington should also consider sending every taxpayer a voucher worth $300
that must be spent within 60 days or it expires. That’s $54 billion that would
be injected into the economy fairly quickly, providing maximum bang for the buck
with minimum damage to the budget.
Going further, Washington should encourage small businesses, since they are
the backbone of our economy. According to the National Federation of Independent
Business, these days, twice as many small firms are hiring than are firing – a
distinct contrast with the big companies, where almost three times as many
companies are firing than are hiring.
The Small Business Administration believes that small companies have for
years accounted for the bulk of the nation’s job growth. By the same token, it
would also seem to be a good idea for the government to offer seed money to
encourage startups – provided, of course, that they are in sectors that are
growing, thus likely to create long-lasting jobs.
Last but not least, the administration should take a leaf from our experience
of the 1930s by implementing a WPA-style project to repair and enhance the
nation’s infrastructure. By this I mean invest money in the country’s highways,
bridges, tunnels, and even government office buildings. Not only does our
infrastructure need upgrading, but also doing so would create lots of employment
– both blue- and white-collar.
After all, you can’t build a bridge overseas and bring it to the United
States. Infrastructure projects by their nature require the work to be done on
site.
Hofstra University
Zarb School of Business
Have you always wanted to earn a Master of Business Administration but
never had the time?
The
Zarb Executive Master of Business Administration (E.M.B.A.) program is
specially designed to meet the needs of full-time, experienced executives. The E.M.B.A. program allows students to complete all the requirements for the M.B.A.
in a 20-month period. With the exception of a two-day orientation class and an
international practicum, classes meet one day per week on alternating Fridays
and Saturdays.
The Zarb E.M.B.A. program features a global focus, state-of-the art classroom
facilities, distinguished Hofstra faculty, and lock-step scheduling.
The Executive M.B.A. program has a limited number of openings for the Fall
2003 entering class.
For further information, please call Dr. Barry Berman, Director of the
E.M.B.A. program, at (516) 463-5683. Dr. Berman will gladly arrange a tour of
Hofstra’s facilities. Hofstra is located on Long Island in New York.
Dr. Irwin
Kellner is the Weller Professor of Economics at Hofstra
University and Chief Economist at North Fork Bank and CBS MarketWatch.
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