Economy and Jobs

Talking Points

  • The labor market remains weak. The proportion of adults with jobs has barely changed since the recession ended, and unemployment has fallen only because millions of Americans have left the labor force.
  • The chief problem is a lack of job creation, not layoffs. During the recession, job losses increased and job creation fell. Layoffs have fully recovered, but job creation has not.
  • Government policies have also reduced the reward for working. By 2015, the typical American worker will face an effective marginal tax rate of over 50 percent. For each dollar they earn, workers lose more than 50 cents in higher taxes and reduced government benefits (like Obamacare subsidies). This discourages work.
  • Government stimulus failed to reduce unemployment and gave most businesses little incentive to expand. Congress should instead focus on reducing government-imposed barriers to hiring.

The Issue

The National Bureau of Economic Research declared the recession officially ended in mid-2009, but the job market has scarcely recovered. The proportion of Americans with jobs has not improved in the past five years. Job growth since then has only kept pace with population growth—not even enough to make up for the jobs lost in the downturn. As of November 2013, 1.3 million fewer workers have jobs now than when the recession began. American workers have experienced the slowest recovery in the post-war era.

The official unemployment rate fell from 10.0 percent in late 2009 to 6.7 percent by the end of 2013, but only be-cause millions of Americans have dropped out of the labor force. Employees not looking for work do not count as unemployed. The proportion of adults working or looking for work (62.8 percent) has fallen to the lowest level since 1978. Demographic shifts like the aging and retirement of the baby boomers can explain just one-quarter of this drop in labor force participation.

Perhaps surprisingly, job losses have played little role in the labor market’s continuing weakness. Layoffs surged in 2008–2009 during the financial crisis, but not by historically unusual amounts. Employers actually laid off more workers following the much milder 2001 recession. By 2010, layoffs returned to pre-recession levels. The number of laid-off workers applying for unemployment insurance (UI) benefits has fallen to its lowest rate since the mid-2000s and late 1990s, two periods of significant growth and low unemployment.

The lack of job creation, not job losses, explains why employment rates remain so low. Between the 4th quarter of 2007 and the 3rd quarter of 2009, the gross number of new jobs created fell 17 percent. Since then, it has only partially recovered. Employers still create 600,000 fewer gross jobs a quarter than before the recession began. Initially, the financial contraction and credit crunch held back hiring and investment in new businesses. Since then, a procession of harmful economic policies—such as implementing Obamacare, substantial tax increases, and the prospect of future tax increases—have so dampened business confidence and elevated uncertainty that the economy became and remains far less hospitable to growth-inducing, job-creating entrepreneurial activity.

The President’s health care law has compounded this damage. Obamacare encourages businesses to replace full-time employees with part-time workers. Employers who do not provide qualifying health benefits to full-time employees must pay a $2,000 penalty that comes out of their after-tax profits. This equates to raising compensation costs by over $3,000 because—unlike the penalty—employers can deduct compensation costs from their tax liabilities. Consequently, many employers have cut employee hours below the law’s 30-hour-a-week threshold. Too many workers must now either juggle schedules at two jobs or deal with sharp reductions in their earnings. Even the Administration understands this problem: Many analysts suspect this explains why it unilaterally delayed the employer mandate until 2015.

Government policies reducing the reward for working have further contributed to the labor market’s weakness. Substantial expansions of government benefit programs during the recession meant 4 million laid-off workers faced effective marginal tax rates of 100 percent or more. What they would gain in additional income they would entirely forfeit through higher taxes and reduced benefits. Part of the drop in labor force participation represents workers responding rationally to their incentives. The exchange subsidies in Obamacare have further reduced the reward for working. The Congressional Budget Office estimates that Obamacare will induce 800,000 workers to leave the labor force, and University of Chicago economist Casey Mulligan estimates that the median American now faces an effective marginal tax rate exceeding 50 percent. These disincentives hold back labor force participation and the economy. More deficit spending will not solve these problems.


Recommendations

  1. No more ineffective fiscal stimulus. Government spending does not address the problems depressing job creation. It does not encourage private businesses to expand or entrepreneurs to start new firms. The 2009 stimulus failed to boost employment, and additional stimulus will not succeed either. Many liberals propose massive additional infrastructure spending. Such spending should occur only on the basis of physical need; it will do little to boost employment. Beside the issue of government spending merely reallocating resources in the economy, infrastructure spending is capital intensive, not labor intensive. Highway, street, and bridge construction employs only 0.2 percent of the labor force.
  2. End any suggestion of further tax increases. The December 2013 National Federation of Independent Business (NFIB) survey of small-business owners found almost three times as many identify either “taxes” or “government regulation and red tape” as their single greatest problem (43 percent) as do poor sales (15 percent). Congress should ease these barriers to job creation, not make them worse. As the recession dissipates and the economy resumes growth, tax receipts are projected to return to their post-1960 average of roughly 18.5 percent of GDP, and that is in the absence of any further tax increases. Unfortunately, the same cannot be said for spending, which is projected to climb to a level well in excess of 20 percent of GDP. Long-term deficits are thus being driven not by low taxes, but by government spending—a reality that can and should be addressed not through higher taxes, but through reduced spending.
  3. Cut the budget deficit. Our fiscal situation is fast becoming perilous. According to the Medicare and Social Security Trustees Reports, unfunded liabilities for these two programs exceed $30 trillion. For each year that we put off serious entitlement reform, the price tag of such reform grows by $1 trillion. Cutting the budget deficit—specifically by reforming entitlements, the key drivers of America’s growing deficits—is of paramount importance.
  4. Advance free trade. While it might be tempting to reach for protectionist policies during an economic slowdown when economic growth and employment prospects are weak, this decidedly would be the wrong approach. Trade has come to represent an increasing portion of U.S. economic activity, and we ignore that reality at our peril.
  5. Repeal laws that give rise to economically harmful regulations. Regulations have the triple effect of fattening the government budget and workforce, diverting business spending away from productive activities, and passing higher prices and limited choices on to consumers. While new regulations are by no means confined to recent years, they have increased sharply under President Obama, with 131 new major regulations totaling roughly $70 billion in estimated business costs issued during his first term. Excessive regulations that stifle investment and growth must be repealed.
  6. Repeal Obamacare. The Patient Protection and Affordable Care Act, popularly known as Obamacare, has raised business costs and badly hurt the economy. A Gallup poll of small-business owners found that one-fifth had cut jobs because of the law and that two-fifths had frozen hiring. The law has substantially increased the cost of health coverage for businesses that provide it, encouraging these businesses to restrict hiring or stop providing health benefits. The law is encouraging businesses that do not provide health benefits to replace full-time workers with part-time employees to avoid the mandate/tax penalty. Economists have also found that the law will discourage workers from entering the labor force. Obamacare encapsulates the kinds of harmful regulatory policies the Obama Administration has favored at the expense of economic growth.
  7. Repeal unwarranted provisions in the Dodd–Frank Act. The Dodd–Frank financial regulation law was enacted in 2010 under the pretense that it was necessary to avoid a repeat of the 2008 financial crisis. It is now clear that little in the legislation will help avoid future crises, and some provisions may even make future crises more likely. Among the most problematic sections are those that create a new Consumer Financial Protection Bureau, which is granted virtually unconstrained authority yet is not accountable to any other entity; sections providing for the seizure and “orderly liquidation” of firms, which grants regulators broad power to close private businesses without meaningful review by the courts or other protections; and price controls on debit cards, which has forced banks to impose new debit card fees on consumers. Congress should repeal or radically restructure these and other provisions of this flawed legislation.

  8. Repeal the job-killing Davis–Bacon Act. The Davis–Bacon Act (DBA) effectively requires federal construction contractors to pay union rates. This artificially raises federal construction costs by 10 percent at the expense of taxpayers. Repealing the DBA restrictions would allow the government to build more infrastructure, employing tens of thousands of new workers at the same cost to taxpayers. Although civil engineering projects employ relatively few workers, the government should not artificially reduce infrastructure employment.


Facts & Figures

  • The employment-to-population ratio of 58.6 percent in December 2013 has not improved from November 2009. The net drop in unemployment comes from people leaving the labor force, not individuals finding new jobs.
  • The labor force participation rate has fallen 3 percentage points since the recession began. Demographic changes like the aging of the baby boomers can explain only one-quarter of that drop.
  • Layoff rates have fully recovered: Slightly fewer workers get laid off now than when the recession began. However, new hiring has not recovered. Employers hire 11 percent fewer workers each month now than when the recession began.
  • Small businesses account for a much larger share of the job losses in this recession than in previous downturns. During the 2001 recession, net employment losses by businesses with fewer than 50 employees accounted for one-tenth of total private-sector job losses. Between the fourth quarter of 2007 and the fourth quarter of 2012 (the most recent data available), reductions in small-business employment account for one-half of private-sector jobs lost in the downturn and weak recovery.
  • Sharply reduced job creation by small businesses has driven this change. Fewer entrepreneurs are starting new businesses, and fewer small-business owners are expanding their operations.
  • In the current weak economy, business owners have become more cautious about risking their capital in new enterprises, and policy choices in Washington have contributed to that caution. One-fifth of small-business owners surveyed by the NFIB said that because of the current political climate, it is a bad time to expand. Two-fifths identified government regulation and red tape or taxes as their single most important problem.
  • The Federal Reserve finds that Obamacare has discouraged hiring. According to the Fed’s October 2013 Beige Book, “Employers in several Districts cited the unknown effects of the Affordable Care Act as reasons for planned layoffs and reluctance to hire more staff.”
  • Highway, street, and bridge construction employs only 300,000 workers—just 0.2 percent of the labor force. Infra-structure spending involves heavy capital investments but is not labor intensive.
  • Many congressional “jobs bills” attempt to solve the problem of low private hiring by increasing government hiring. Historically, this approach has failed because government spending does not encourage private entrepreneur-ship or investment and the resources that the government spends do not materialize out of thin air; they are taken from the private sector. Countries in which the government spends heavily to create jobs—such as France and Germany—do not enjoy higher employment rates. In fact, they have higher unemployment.

Selected Additional Resources

Heritage Experts on Economy and Jobs


  • David Burton

    Senior Fellow in Economic Policy


  • Salim Furth

    Senior Policy Analyst


  • James Sherk

    Senior Policy Analyst in Labor Economics

To talk to one of our experts, please contact us by phone at 202-608-1515 or by email.