Economy and Jobs



The Issue


The National Bureau of Economic Research declared the recession officially ended in mid-2009. Since then Americans have suffered through the slowest recovery of the post-war era. Not until April 2014 did the economy return to pre-recession employment levels, despite the population growth in the interim.

Perhaps surprisingly, job losses played little role in the labor market’s weakness. Job losses surged in 2008–2009 during the financial crisis—but not by historically unusual amounts. Companies actually shed more jobs in the much milder 2001 recession. Job losses also quickly abated. By 2010 they had fallen below pre-recession levels and have remained low since. By late 2015 the number of laid-off workers applying for unemployment insurance (UI) benefits had fallen below the levels that occurred during the late-1990s tech bubble.

Rather, the recovery remained sluggish because job creation dropped markedly. Between the fourth quarter of 2007 and the fourth quarter of 2009, the gross number of new jobs firms created fell by one-seventh. Job creation rates still remain 10 percent below pre-recession levels. Job creation since then has not been enough to restore employment rates to pre-recession levels.

The unemployment rate has fallen, but this has primarily happened because many Americans have stopped looking for work. Overall labor force participation has fallen to levels not seen since the Carter era. Demographic shifts like the aging and retirement of the baby boomers only explain part of the exodus from the workforce. Among 25-to-54-year-olds the employment rate remains over 2 percentage points below pre-recession levels.

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 (CBO) estimates that Obamacare will ultimately induce about 2 million 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 45 percent. These disincentives hold back labor force participation and the economy.

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During this slow recovery workers’ earnings have grown modestly. Average hourly wages, adjusted for inflation, stood 6 percent higher at the end of 2015 than at the end of 2007. If policymakers want to help boost workers’ earnings they should promote policies that increase workers’ productivity. Over the past generation average compensation has closely tracked productivity growth: average productivity has increased 81 percent since 1973, while average compensation has increased 78 percent.

Policymakers can also improve workers’ standards of living by repealing and reforming misguided policies that raise the cost of living. Many federal programs designed to benefit a specific industry—the Sugar Program and the maritime Jones Act, for example—raise prices for consumers. Removing those laws would increase living standards in the same way that productivity growth would. Likewise, poorly designed laws that overregulate production raise consumer prices. The complicated federal fuel-efficiency regulations, called Corporate Average Fuel Economy (CAFE) standards, add $3,800 to the cost of a new vehicle.

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Recommendations


Prevent Future Ineffective Fiscal Stimuluses. 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 fiscal 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.

Repeal Regulations Driving Up Prices. Congress and state legislatures should repeal legislation that unnecessarily drives up prices for American families. Congress should repeal the CAFE standards (car prices), the Jones Act (prices of shipped goods), and the sugar, ethanol, and milk programs (food prices).

Eliminate Unnecessary Licensing. Government policy makes it difficult for unemployed workers to switch jobs. One-third of jobs in the economy require a government license to perform. Many of these licenses have little health or safety rationale. For example, every state licenses barbers and requires on average a year of training before they can cut hair. Twenty-four states license African American hair braiders. Thirteen states license bartenders. Four states license interior designers. Louisiana licenses florists. Trade associations lobby for these licenses to stifle potential competitors. This raises prices on consumers while locking out prospective workers from jobs they could perform well in. Americans should not need an expensive permission slip from the government to earn a living. State and local governments should eliminate licensing requirements in jobs that pose little health or safety risks to consumers.

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, such policies are decidedly the wrong approach. Trade has come to represent an increasing portion of U.S. economic activity, and both imports and exports are vital to job creation and economic expansion.

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 in the first six years of the Obama Administration, with 184 new major regulations totaling more than $80 billion annually—although the actual cost of this massive expansion of the administrative state is obscured by the large number of rules for which costs have not been fully quantified. Scores of other rules are in the pipeline. Excessive regulations that stifle investment and growth must be repealed.

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. 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.

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.


Facts and Figures


  • The employment-to-population ratio for prime-age workers (25–54-year-olds) stood at 77.2 percent in the fall of 2015, down 2.5 percentage points from fall 2007 before the recession. The net drop in unemployment comes from people leaving the labor force, not individuals finding new jobs.
  • In the fourth quarter of 2007, employers created 7.7 million gross new jobs. In the first quarter of 2015, they created 6.9 million gross new jobs—10 percent below pre-recession levels.
  • Demographic changes like the ageing of the baby boomers cannot explain why the prime-age employment rate has fallen. The economy remains weaker than the headline unemployment rate suggests.
  • The CBO estimates that the Affordable Care Act (popularly known as Obamacare) will cause 2 million workers to leave the labor force.
  • Trying to create jobs with infrastructure spending will not work. Infrastructure spending involves heavy capital investments but is not labor intensive. Highway, street, and bridge construction employs only 300,000 workers—just 0.2 percent of the labor force.
  • In its first six years the Obama Administration implemented regulations costing businesses $160 billion annually.
  • Americans would save $3,800 off the price of a new car if Congress repealed the CAFE regulations.

Selected Additional Resources


Congressional Budget Office, “Budgetary and Economic Effects of Repealing the Affordable Care Act,” June 2015.

James Sherk, “Additional Infrastructure Spending Would Employ Few New Workers,” Heritage Foundation Issue Brief No. 4081, November 7, 2013.

James Sherk, “Not Looking for Work: Why Labor Force Participation Has Fallen During the Recession,” Heritage Foundation Backgrounder No. 2722, September 2, 2014.

James L. Gattuso and Diane Katz, “Red Tape Rising: Six Years of Escalating Regulation Under Obama,” Heritage Foundation Backgrounder No. 3015, May 11, 2015.

James Sherk, “Examining the Department of Labor’s Implementation of the Davis–Bacon Act,” testimony before Committee on Education and the Workforce, U.S. House of Representatives, April 28, 2011.

James Sherk and Salim Furth, “Supply and Demand: Why Job Growth Remains Sluggish,” Heritage Foundation Backgrounder No. 2853, November 7, 2013.