America’s Jobs Deficit and Budget Deficit

July 21, 2011

The U.S. economy has substantial imbalances in its labor market and public finances.  Politicians from both the Democratic Party and Republican Party have chosen to attach higher priority to correcting the budget than to labor market in part because of the belief that they can directly affect the fiscal outlook  but jobs only indirectly because most of them are generated by the private sector. 

Such logic ignores consideration of the possibility that one of the two deficits is a cause of the other.  It would make sense then to prioritize the cause and not the effect because such an approach would enable policymakers to address both problems at once. 

The magnitude of the jobs deficit is much greater than generally appreciated.  As noted before on these pages, U.S. jobs grew at virtually identical rates in the 1980s and 1990s, to wit at 1.84% per annum between end-1979 and end-1999.  If that rate of job creation had persevered to the present, that is for another 11.5 years, non-farm payroll employment would stand at about 160,959,000 instead of that actual figure of 131,017,000.  There would be 22.9% more people working than do presently.  Those additions would be earning income that could be taxed, but the tax revenue shortfall is even more pronounced than these numbers because many workers have settled for lower-paying work or dropped out of the labor force from getting discouraged.  For simplicity, let’s disregard that complication and use the 22.9% number as a conservative estimate of foregone workers.  Real GDP hasn’t been shaved as much as employment, since workers have become more productive, producing more in an hour than was the case at the end of the twentieth century.  Still with 22.9% more workers, real GDP might be as much as $3 trillion larger.

The various plans proposed by fiscal negotiators aim to chop spending by much more than they propose to raise taxes, and efforts on the revenue side have been channeled into closing loopholes like mortgage interest rather than imposing new taxes or increasing existing tax rates.  The biggest tax  loophole of all is the jobs deficit.  In countries like Britain and Greece where fiscal austerity has been imposed already, the short-term effect on unemployment has been adverse.   Budget cuts in the United States are in danger of similarly undercutting the desired result by aggravating the jobs deficit.

Improvement in the U.S. labor market has in fact stalled, partly in anticipation of the direction that demand management is now taking.  New jobless insurance claims averaged 421K in the four weeks to July 16 following means of 433K in the eight weeks to June, 402K in the eight weeks to April 23, and 411K in the eight weeks to February 28.  The jobless rate climbed to 9.2% in June from 8.8% in February and is less than a percentage point below its peak of 10.1% hit 20 months earlier in October 2009.

Copyright 2011, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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