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.
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.
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.
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