President Obama has proposed the American Job Act of 2011 that includes tax cuts for workers and businesses and a public investment program for infrastructure projects around the country. The proposed Act provides tax incentives for employers to hire more people and, at the same time, directly creates jobs in public investment projects. The unemployment picture has not changed much since 2009. According to BLS (Bureau of Labor Statistics) data, unemployment rate decreased from 9.6% in August 2010 to 9.1% in August 2011, but it is now stuck at that rate. From July 2010 to June 2011, there was 11% increase in job openings and 3% increase in hiring. But from June 2011 to July 2011 there were only 59,000 job openings and hiring decreased by 77,000. Thus, decrease in hiring, even with some decline in layoffs rates, did not help decrease the unemployment rate.
We had 9.7% unemployment rate during the Reagan Administration, the highest rate since 1942. However, what is new this time is that the duration for many unemployed persons has increased significantly. In 2000, slightly more than 84% of the people in the labor force were unemployed for 14 weeks or less and only 7% were unemployed for 27 weeks or more. In 2010, 70% were unemployed for 14 weeks or less and 19.3% were employed for 27 weeks or more. Long-term unemployment has discouraged many to drop out of the labor force. The discouraged workers increased from 778,000 in 2009 to 1, I73, 000 in 2010 (an increase of 51%).
Unemployed are mostly concentrated in Service Occupations, Sales and Office Occupations, Natural Resource, Construction and Maintenance Occupations and Production, Transportation and Material Moving Occupations. In 2010 the unemployment rates in these occupations ranged from 9 % in Sales and Office Occupations to 16% in Natural Resources, Construction and Maintenance Occupations. The Job Act will provide a substantial number of jobs directly in construction industry, which faces the highest unemployment rate. Professor Peter Diamond, in his Nobel lecture in 2010 states that, “Historically, recovery is slow after financial crisis. The impact of a slow recovery on the long-term unemployed emphasizes the importance of stimulating demand to speed up recovery.”
To a certain extent unemployment problem arises due to a mismatch of jobs and skills and jobs and locations. Increase in mobility of labor by resolving household mortgage debt and providing information about locations of jobs could significantly alleviate the mismatch of jobs and locations. The Act also has some provision for training and education programs. Lack of skilled people is a long-term problem and cannot be fixed in a year or two. Expanding training programs in technical skills on a continuing basis to upgrade skills should attack the problem of structural unemployment. In addition, as Professor Diamond argues, in a tight labor market structural unemployment also declines. Businesses evaluate the quality of labor available in terms of their value to the firm in a tight labor market.
Given the current state of the economy we need to create jobs for those who could be hired now, and that will need some targeted demand side stimulus, because the decline in economic activity is mainly demand driven. The reduction in taxes and tax subsidies to businesses in the Job Act is meant to boost the private sector hiring of short term as well as long term unemployed. Hence the two-pronged attack on the unemployment problem in the Job Act makes economic sense, given the recent hiring record and concentration of high unemployment in certain occupations.
President Obama has proposed to finance his programs in the Job Act and reduce public debt in the long run. We would face worse public debt if the economy stalls. I would have preferred a bigger boost to the economy now by allocating more spending on targeted public investment projects, education and training programs and R&D spending. The Job Act at least moves the economy forward and not backward. Passage of the Job Act now is the best economic and responsible strategy. Winston Churchill once said, “ The price of greatness is responsibility.”