The Jobless Recovery.  I am sure you have heard many stories in the business press that the U.S. economy is starting to recover, but job creation is slow.  Thus, the unemployment rate (and underemployment) remain problem areas even as the economy starts to pick up steam.  What should be done about this?

The traditional Keynesian story is to increase government spending.  The Keynesians tell us that government “jobs programs” are the key to increase total spending and kick start the economy.  The neo-Keynesians (Keynesians who admit microeconomics has some merit) argue for “targeted” relief programs:  government spending and jobs for those who are out of work due to globalization or their ethnic background.  Both the traditional and neo-Keynesians argue that the Bush Administration tax cuts and Federal Reserve expansionary monetary policies will do little to nothing to solve this unemployment problem.

On the other hand, other economists (non-Keynesians, or dare I say “Chicago School” economists) argue that what needs to be done is to make the labor markets more efficient.  Steps need to be taken to make it easier for the unemployed to find work AND make it easier for news firms to create new jobs.  This is a more complicated approach than the Keynesian or neo-Keynesian “just have the government spend more money” approach.

How can we make the labor markets more efficient?  One issue that needs to be addressed is health insurance.  Many workers grab the first job that comes along just to get health insurance.  This is not an efficient allocation of labor.  Perhaps we need to come up with a system where health insurance is not tied as much to the employer.  Think of the model of automobile insurance…individual specific, yet portable.  Pricing issues would still need to be worked out.

Another issue is retraining.  As our economic system continues to evolve at dizzying speeds the skill requirements of workers is continually changing.  Thus, all workers (Professionals, white collar workers and blue collar workers) are going to have to update their skill sets on a regular basis.  Government job retraining programs have been of limited success (to put it nicely), however our community college system has proved to be rather effective.  A strong argument can be made that more attentions (read:  resources and respect) need to be accorded to this very important (and often neglected) segment of our educational and training system. 

In addition, firms have to realize the government is not going to do all of this for them.  Firms are going to have to start to understand that labor is not a cost that needs to be minimized it is an asset in which investment is made.  Efficient and profitable firms are ones that invest in training and retraining their workforce.  What may appear to be a cost is actually a long term investment.

Finally, we need to think about the demand side of the labor market as well.  In terms of job creation it is small and medium sized businesses that do the majority of new job creation.  If these small and medium sized businesses can not get the capital they need to expand they will not hire new workers and new jobs will not be created.  We need to do more to help these firms get the access to capital that they need.

Any solution to the problem requires careful cost/benefit analysis.  We need to consider the reaction and long term impact of any action that is undertaken.  We must make our labor markets more efficient and dynamic.  However thinking that yet another government program will solve the problem is simplistic and unrealistic.

All the best,

MB