Thursday, February 26, 2009

How to increase employment, and at what cost

Governments across the world have been scratching their head on how to increase employment, or decrease unemployment, and the question appears to become more urgent these days. History shows that they have been extremely creative, but with little impact. The main problem is that they have tried to force some people to work less in order to spread the total number of work hours among more people, as if this were a zero sum game. Particular fiascos are the French 35 hour week and countless early retirement programs.

Economists generally do not think it is appropriate to add constraints to a market that is not in equilibrium. One should rather work through prices by imposing taxes or subsidies in order to encourage people to take some actions while losing little efficiency. The question is then what to tax and what to subsidize. Victoria Osuna takes here an interesting perspective with a model economy incorporating commuting, team work and overtime. There are three policy tools: tax overtime, subsidize wages and subsidize employment. All make work cheaper, but the substitution of hours in the workweek becomes critical. This is embedded in a real business cycle model, thus general equilibrium effects influence capital accumulation and factor prices.

The experiments are quite interesting. First, tax overtime to bring hours from 40 to 35: you need a 12% tax, steady-state employment increases 7%, but GDP decreases 10.2%. The issue is that a lot of capital now lies idle. To get the same increase in employemnt, a wage subsidy is desastrous, as it reduces GDP by 12.7%. The problem is that the subsidy needs to be substantial, 16.5%, which leads to large misallocations of capital. An employment subsidy of 4.5% does better, dropping GDP by "only" 4.7%.

So, if you want to increase employment, be aware that there will be substantial costs in terms of output and lost productivity. I am not sure it is worth it.

4 comments:

sam said...

There are more employable workers than jobs globally. Speaking for our country first, I see that we need to recapture our manufacturing base that we built since WWII then lost to the developing countries. The idea was to create jobs overseas so we could get our share of emerging markets. It was not a good idea. We need to go back after the textile industry and any industry that has jobs and take them back into the USA. Remember the "Buy America- look for the union label" drive. Good idea but it failed because consumers needed to paymore for goods. We need to open new manufacturing sights -with the help of stimulus money if needed- then employ workers at rates that are a match for overseas producers when you factor in freight costs. Then we need to find a way to subsidize as required until we drive our markets to USA made goods.
How about that?

Economic Logician said...

Sam: a country does not absolutely need manufacturing. If its comparative advantage lies in other sectors, it should develop those and it will improve everyone's welfare.

Other countries are much better at manufacturing than the US. The US is better at many other things. Then we can let countries trade, and everyone will have more goods.

Protectionism and import substitution are a losing proposition.

sam said...

what sectors do you believe will create the number of jobs needed for our unemployed? In what sectors do we have a global position that will be a base for needed job growth? What segments of our society are being left behind and will never have a place in tomorrow world? How do we help them or must they go on the doal?

Economic Logician said...

The US labor force has a great advantage over other countries: it is very flexible and adaptable. This is one reason the unemployment rate is lower than elsewhere (usually). In many other countries, workers are too specialized and find it very difficult to transition to others jobs (or locations).

The US has achieved remarkable things in economic terms without much state intervention. In fact, where the government helps a sector, it is usually to the detriment of some other, like when steel is shielded form foreign competition, leading to higher steel prices for other industries. In general, I do not think the government should intervene on such matters.