America’s Most Depressing Chart

I periodically use a “most depressing” theme when writing about charts or tweets with grim data.

I’ve done that with regional data and also looked at depressing data from specific countries.

Today, we’re going to look at some “most depressing” information about the United States. Here’s a tweet from Yale Professor Alice Evans about labor force participation for working-age men in developed nations.

Let’s start by emphasizing that that the labor force participation rate (or the employment-population ratio, for those who prefer that data set) is a more important indication than the unemployment rate.

After all, our prosperity is tied to the quantity and quality of labor and capital in the economy. Which leads me to three observations.

1. It is definitely bad news when labor force participation declines over time.
2. It is even worse news when it declines for men in their prime working years.
3. And it is utterly depressing when the United States falls behind other nations.

David Bahnsen has a new article in National Review on the topic of declining labor force participation. Here are a few excerpts. starting with some straight-forward economic analysis.

The labor-force participation rate (those working combined with those actively looking for work as a percentage of the non-institutionalized, working-age population) was steady and reliably around 66 or 67 percent for years before the financial crisis. The number dropped to between 62 and 63 percent after that and only started to trend higher after the deregulation and tax reform of 2017–18. That, of course, was upended by Covid and the 2020 shutdowns. …That problem is the failure of the labor-force participation rate to return to normal. At approximately 62 percent, we sit 1.5 percentage points below pre-Covid levels… While 1.5 percentage points may seem like a small number, with a working-age population of about 260 million people, it means we are about 4 million people below the trend-line… And paradoxically, this comes with more job openings than we have people looking for jobs.

This is an economic problem, but it should raise alarm bells for other reasons as well.

Simply stated, the decline in labor force participation may be a sign of eroding societal capital.

The American ethos values the dignity of work and sees purpose, meaning, and hope in productive activity. Not only does our economy desperately need the full weight of American ingenuity, innovation, and productivity, but our souls do as well. In a time of increased alienation, isolation, and desperation, a larger labor force would mean a greater number of people engaged in meaningful activity with attendant duties and responsibilities. It would allow for less substance abuse, less emotional angst, and more pursuits of passions. …Our goal must be not only maximum employment of those looking for work, but also that more people who are able to participate in the labor force actually do so. …A labor-force participation rate equal to our pre-2008 levels is attainable, but not without a resurgence of values focused on productivity. The end result would be far more meaningful than what we find in a GDP calculation.

He’s right, in my not-so-humble opinion.

Which raises the question of why the U.S. numbers are bad and what can be done to reverse the decline?

At the risk of admitting uncertainty, I’m not sure we have easy answers. For instance, I’m tempted to say the numbers will improve if we address some of the ways (subsidized unemployment, lax disability rules, licensing laws, etc).

But presumably those problems exist in the other nations in the chart. Indeed, most of those countries presumably have policies that are worse (such as bigger welfare states) than what we have in the United States.

Which means societal capital may be the problem (even though conventional measures suggest the U.S. ranks highly by world standards).

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The Failure of Bidenomics, Part VII

Let’s revisit the issues of Bidenomics.

Previous editions of this series have focused on Biden’s dismal record with regards to subsidies, inflation, protectionism, household income, fiscal policy, and red tape.

The assessment has not been positive, which shouldn’t be very surprising since Biden is basically a slow-motion version of Bernie Sanders.

Today, we’re going to look at Biden’s record on jobs…and that’s not going to improve the assessment.

The problem is employment rather than unemployment.

In a column for the Wall Street Journal, Nicholas Eberstadt writes about the millions of Americans who have disappeared from the labor force.

Never has work been so readily available in modern America; never have so many been uninterested in taking it. …For every unemployed person in the U.S. today, there are nearly two open jobs, and the labor shortage affects every region of the country. …Why the bizarre imbalance between the demand for work and the supply of it? One critical piece of the puzzle was the policy response to the pandemic. …Washington pulled out all the monetary and fiscal stops….created disincentives for work as never before. …In 2020 and 2021, a windfall of more than $2.5 trillion in extra savings was bestowed by Washington on private households through borrowed public funds. …With pre-Covid rates of workforce participation, almost three million more men and women would be in our labor force today.

To be fair, bad pandemic policies began with Trump.

But Biden promised changes yet has delivered more of the same.

Why does this matter?

It’s not just a numbers issue. When people drop out of the labor force, that translates into a weakening of America’s societal capital.

Mr. Eberstadt explains.

The signs that growing numbers of citizens are ambivalent about working shouldn’t be ignored. Success through work, no matter one’s station, is a key to self-esteem, independence and belonging. A can-do, pro-work ethos has served our nation well. America’s future will depend in no small part on how—and whether—her people choose to work.

Thanks to a stronger work ethic and spirit of self reliance, the United States historically has had an advantage over other nations.

But it’s increasingly difficult to feel optimistic about the long-run outlook for America’s societal capital.

Ironically, Joe Biden seemed to understand this in the not-too-distant past.

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America’s Labor Laws Are (Relatively Speaking) Great for Workers

In my fantasy country of Libertaria, there is no Department of Labor, no regulation of employment contracts between consenting adults, and no favoritism for either labor or management.

In the real world, the relevant question is the degree of regulation and intervention. Especially compared to other nations, which is why the the Employment Flexibility Index is a useful measuring stick.

The Employment Flexibility Index is a quantitative comparison of regulatory policies on employment regulation in EU and OECD countries. …Higher values of the Employment Flexibility Index reflect more flexible labor regulations.

The good news, for American workers and American companies, is that the United States has the second-best system among developed nations, trailing only Denmark (another reason why pro-market people should appreciate that Scandinavian nation).

It’s hardly a surprise that France is in last place, notwithstanding President Macron’s attempt to push policy in the right direction.

It’s worth noting that the United States has much less regulation of labor markets than the average European nation. Which may help to explain why American living standards are so much higher.

Let’s review some academic research on the issue of employment regulation.

In an article for the Harvard Journal of Law & Public Policy, Professor Gail Heriot of the University of San Diego Law School explains how regulations discourage job creation and also may encourage discrimination.

… there’s a demographic out there that we ought to be worrying about, it is young people, the perennial newcomers to the economy. Well-meaning employment laws primarily benefit those who already have jobs, often at the expense of those who do not. …For low-skilled young people trying to get their first jobs, the most immediate threat may be the steep minimum wage hikes adopted recently in various cities.…young people even with great educational credentials are unknown quantities to employers and, hence, risky to hire, especially in a legal environment in which employee terminations can lead to costly legal disputes. …he best way for employers to avoid being wrongly accused of a Title VII violation is to avoid hiring someone who could turn out to be litigious if things do not work out. That creates a perverse incentive to avoid hiring the first African American or the first woman in a particular business or department. …A law that was intended to end discrimination in hiring, thus, ends up encouraging it instead.

In a Cambridge University working paper, Maarten de Ridder and Damjan Pfajfar found that wage rigidities, which are driven in part by red tape, are correlated with greater levels of economic damage when there is an adverse policy shock.

We find considerable variation in downward nominal wage rigidities across states and over time. Our estimates of nominal rigidities are positively related to state minimum wages, unionization,union bargaining power, and the size of services and government in employment and negatively to labor mobility. …We therefore focus on nominal wage rigidities when assessing the transmission of policy shocks. We find that states with greater downward nominal wage rigidities experience larger and more persistent increases in unemployment and declines in output after monetary policy shocks. …Similar results also hold for exogenous changes in taxes… States with higher nominal rigidities experience larger increases in unemployment and declines in output after a tax increase compared to states that are more flexible. We further show that institutional factors that could drive wage rigidities—like minimum wages and right-to-work-legislation—have a similar effect. States with a higher minimum to median wage ratio and those without right-to-work legislation experience larger and more persistent effects of monetary and tax policy shocks. Combined, these results firmly corroborate the hypothesis that resistance to wage cuts deepens policy shocks.

And in an article for Regulation, Warren Meyer explains that red tape and intervention is particularly bad news for unskilled workers.

The government makes it too difficult, in far too many ways, to try to make a living employing unskilled workers. …In the 1950s, 1960s, and 1970s, there was a wave of successful large businesses built on unskilled labor (e.g., ServiceMaster, Walmart, McDonalds). Today, investment capital and innovation attention is all going to companies that create large revenues per employee with workers who have college educations and advanced skills. …the mass of government labor regulation is making it harder and harder to create profitable business models that employ unskilled labor. For those without the interest or ability to get a college degree, the avoidance of the unskilled by employers is undermining those workers’ bridge to future success

Let’s close by looking at a chart from a 2018 presentation by Martin Agerup.

He shows that red tape doesn’t even provide meaningful job security for those who are already employed.

The bottom line is that so-called employment protection legislation is very bad news for those who are looking for jobs while offering no measurable benefit for those who have jobs (especially if we compare living standards across nations).

If we want more jobs, the best prescription is less government.

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Job Churning, Trade, and Prosperity

I shared a video last year that pointed out that Americans live in a nation that became prosperous thanks to “creative destruction.”

That’s the term developed by Joseph Schumpeter to describe the economic churning caused by competition, innovation, and markets (international trade is just a minor part of this process, though it’s the part that generates the most controversy).

The bad news is that some people lose their jobs as the economy evolves and changes. And some companies go bankrupt. There are real victims and tragic stories.

But the good news is that other jobs are created. And entrepreneurs start new businesses.

And the better news is that our living standards increase. Especially over time. Even for many of those who lost jobs in the short run.

That’s why we’re much richer, on average, than our parents and grandparents.

Needless to say, a key measure of a healthy and dynamic economy is for the job gains to exceed the job losses.

So when I spoke to congressional staff earlier this week about trade and protectionism, I figured I should go beyond theory and include some numbers.

I went to the relevant website at the Bureau of Labor Statistics and found that more than 28 million jobs were lost in 2017 (final data for 2018 is still not available).

That sounds terrible. And for many workers, it was horrible news.

But the good news, as you can see in the screenshot below (click to expand), is that the U.S. economy created more than 30 million new jobs that year.

The obvious takeaway from this data is that the crowd in Washington should adopt policies that ensure we have strong growth so that people who lose jobs have lots of good options for new employment.

In other words, don’t impose the kind of policies that have created high unemployment and economic stagnation in many European welfare states.

For what it’s worth, that message seems to be lost on Bernie Sanders, who has a long list of policies that would turn America into a version of Greece, France, and Italy.

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Government Programs Lure Older Workers into Idleness and Dependency

When I write about Social Security, I normally focus on the program’s huge fiscal imbalance ($44 trillion and climbing).

But it’s not just a fiscal crisis. Social Security is also an increasingly bad deal for workers. Especially minorities with lower average lifespans. When compared to what they would get from a private retirement system, people are paying in too much and getting out too little.

There’s also another major problem with the program.

Academic experts have quantified how older workers are lured out of the labor force when they get money from the government. And since economic output is a function of the quality and quantity of labor and capital, this means we’re sacrificing wealth and reducing prosperity.

Here are some excerpts from a study by Professors Daniel Fetter and Lee Lockwood.

Many of the most important government programs, including Social Security and Medicare, transfer resources to older people… Standard economic theory predicts that such programs reduce late-life labor supply and that the implicit taxation reduces the ex-post value of the programs to recipients. Understanding the size and nature of such effects on labor supply and welfare is an increasingly important issue, as demographic trends have increased both the potential labor supply of the elderly and its aggregate importance, while simultaneously increasing the need for reforms to government old-age support programs. …We address these questions by investigating Old Age Assistance (OAA), a means-tested program introduced in the 1930s alongside Social Security that later became the Supplemental Security Income (SSI) program.

Here are charts illustrating how people are retiring earlier in part because of government payments.

And here are some calculations from the study.

Our estimates indicate that OAA significantly reduced labor force participation among older individuals. The basic patterns that we explore in the data are evident in Figure 2, which plots male labor force participation by age, separately for states with above- and belowmedian OAA payments per person 65 and older. Up to age 65, the age pattern of labor force participation was extremely similar in states with larger and smaller OAA programs. At age 65, however, there was a sharp divergence in labor force participation between states with larger OAA programs relative to those with smaller programs, and this divergence continued at older ages. Our regression results, which isolate variation in OAA program size due to state policy differences, imply that OAA can explain more than half of the large 1930–40 drop in labor force participation of men aged 65–74. …Our results suggest that Social Security had the potential to drive at least half—and likely more—of the mid-century decline in late-life labor supply for men. …Taken as a whole, our results suggest that government old-age support programs can have large effects on labor supply, through both their transfer and taxation components.

This chart captures how old-age payments in various states were associated with varying degrees of labor force participation.

By the way, I’m not sharing this information because it’s bad for people to retire at some point.

I’m merely establishing that there’s academic support for the common-sense observation that people are more likely to leave the labor force when there’s an alternative source of income (though it’s worth noting that there should be a sensible and sustainable system for providing that retirement income).

Moreover, people are likely to stop working when government systems give them money before age 65.

Three academics, Andres Erosa, Luisa Fuster, and Gueorgui Kambourov, have a study quantifying this problem in European nations.

There are substantial differences in labor supply and in the design of tax and transfer programs across countries. The cross-country differences in labor supply increase dramatically late in the life cycle…while differences in employment rates among eight European countries are in the order of 15 percentage points for the 50-54 age group, they increase to 35 percentage points for the 55-59 age group and to more than 50 percentage points for the 60-64 age group. In this paper we quantitatively assess the role of social security, disability insurance, and taxation for understanding differences in labor supply late in the life cycle (age 50+) across European countries and the United States. … The social security, disability insurance, and taxation systems in the United States and European countries in the study are modelled in great detail.

Here’s a sampling of their results.

The main findings are that the model accounts fairly well for how labor supply decreases late in the life cycle for most countries. The model matches remarkably well the large decline in the aggregate labor supply after age 50 in Spain, Italy, and the Netherlands. The results support the view that government policies can go a long way towards accounting for the low labor supply late in the life cycle for these European countries relative to the United States, with social security rules accounting for the bulk of these effects… relative to the United States, the hours worked by men aged 60-64 is…49% in the Netherlands, 66% in Spain, 44% in Italy, and 29% in France. …government policies can go a long way towards accounting for labor supply differences across countries. Social security rules account for the bulk of cross country differences in labor supply late in the life cycle (with its contribution varying from 50% to 100%), but other policies also matter. In accounting for the low labor supply relative to the US at ages 60 to 64, taxes matter importantly in the Netherlands (6%), Italy (6%), and France (5%); disability insurance policies are important for the Netherlands (7%) and Spain (10%).

And here’s one of their charts comparing hours worked at various ages in Switzerland, Spain, France, and the United States.

The good news is that we don’t push people out of the labor force as much as the French and the Spanish.

The bad news is that we’re not as good as Switzerland (probably in part because the Swiss have a retirement system based on private saving, so they have the ideal combination of good work incentives and comfortable retirement).

But it shouldn’t matter whether other countries have good systems or bad systems. What does matter is that America’s demographic profile is changing. We’re living longer and having fewer children and our system of entitlements is a mess.

We should be reforming these programs, both for fiscal reasons and economic reasons.

P.S. It’s not just Social Security. Other programs also lure people out of the job market and into government dependency, with Obamacare being an especially harmful example.

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Should Uncle Sam Subsidize Wages?

Washington is a place that gets infatuated with trendy ideas. A few years ago, everyone was talking about a “universal basic income” because of the strange assumption that millions of people will be unemployable in the future.

That idea was mostly embraced by folks on the left (though not Joe Biden), but there’s now a related idea on the right to provide “wage subsidies” so that unemployable (or difficult to employ) people can get work.

A leading proponent is Oren Cass of the Manhattan Institute, who wrote The Once and Future Worker: A Vision for the Renewal of Work in America.

National Review published an excerpt from his book.

Work has enormous social value for the individuals who engage in it and for the formation and stability of their families, the opportunities of their children, and the vibrancy of their communities. Ideally, the labor market would settle in a place where productive, family-supporting work was available to all people in all places. But nothing in the theory of economics guarantees such an outcome… If we really want to “pay for jobs” — and we should — then we should do it directly. …a…“Federal Work Bonus,”…an additional $3 into your check for every hour worked? That would be a wage subsidy. …a wage subsidy aims to produce that effect in the labor market. Workers unwilling to sell their labor for less than $12 per hour may be worth only $9 per hour to an employer. No job will emerge in that scenario. With the insertion of a $3-per-hour wage subsidy, by contrast, the employer can pay the $9 per hour that the work is worth and the worker can receive the $12 per hour that he demanded. Thus will appear a job where none existed before. …The value of the subsidy would be set relative to a “target wage” of, say, $15 per hour and would close half the gap between the market wage and the target. A worker would initially receive a subsidy of $3 per hour in this case, equal to approximately $6,000 per year if he worked full-time.

The wage subsidy Cass advocates is similar to the “earned income tax credit,” which is basically a redistribution program that is administered through the tax code.

But Cass wants the EITC to be universally available rather than primarily targeted at households with children.

The federal earned income-tax credit (EITC) already operates something like a wage subsidy, offering low-income households large tax refunds that can exceed what they paid in taxes to begin with. But the EITC gets paid long after the income is earned — at tax time the following year — based on an opaque formula. It creates none of a wage subsidy’s immediate, transparent effect in the labor market. …The EITC also skews its benefits heavily toward households with children. A single person working full-time at minimum wage would get a credit of $41, less than 1 percent of what his colleague with kids can expect.

For what it’s worth, Cass acknowledges that employers might capture some of the benefits of a wage subsidy.

If the government offers a $3 subsidy atop a $9-per-hour job, the result will not necessarily be a $12-per-hour job. The employer might instead cut the market wage to $8, to which the government would add $3.50 — half the $7 gap to the target wage of $15 — leaving the worker with $11.50. …How workers and employers respond to the subsidy will vary based on labor-market conditions. What we do know from studies of the EITC and a similar program in the United Kingdom is that, in those instances, roughly 75 percent of the financial benefit accrued to workers.

Now let’s discuss the policy implications.

Cass openly admits that a wage subsidy is a form of redistribution, and – much to my dismay – he doesn’t object if at least some of that new spending is financed by higher taxes.

Subsidizing wages is a particularly well-tailored response to the challenges that globalization presents for American workers. First, the wage subsidy is the appropriate mechanism for redistributing gains from the economy’s “winners” to its “losers.” It comes closest to doing this directly, by taking tax revenue drawn from higher earners and inserting it directly into the paychecks of lower earners. …it is redistribution. And yes, high-income taxpayers will finance it. …The roughly $200 billion price tag for a wage subsidy might require some new tax revenue, but its funding could come largely from the existing safety net, which already dedicates more than $1 trillion annually to low-income households — including many with workers.

The following excerpt also rubbed me the wrong way since he seems to be saying that it would be better if Washington had expanded redistribution instead of lowering the corporate tax rate.

…in debates over the 2017 tax-reform package, which ultimately increased the ten-year federal deficit by $1.5 trillion for the sake of reducing the corporate tax rate, while failing to deliver even the small EITC increase for childless workers that Ryan had once championed. Indeed, while the Khanna proposal in its 2017 form is not a serious one, even it could have been implemented more cheaply than the tax reform that ultimately passed. The deficit spending would have been equally costly, but at least the labor market and its low-wage workers would have been the chief beneficiaries. …the Republican party’s relative disinterest in the labor market is made apparent by its preference for a tax cut over a wage subsidy.

This is very troubling. In the long run, faster growth is much better for low-income workers.

I’m not the only skeptic of this plan.

Writing for the Week, AEI’s Jame Pethokoukis argues that Cass bases his idea on a misreading of the economy.

One of his innovative analytical insights is that economic growth from globalization is bad for workers. …This is a terrible reading of history… America would be worse off today if it had somehow kept the closed “golden age” economy of the 1950s and 1960s. Its lack of openness greatly harmed American workers… Too much of American industry became complacent, unproductive… Likewise, would America have a more thriving economy today without Silicon Valley? …Cass’ reading of the data isn’t much better as he adopts the stance of many leftists that most Americans are no better off than decades ago. Yet a recent Congressional Budget Office study shows a nearly 50 percent increase in middle-class incomes since 1970, with incomes for the bottom fifth up some 80 percent.

And Michael Strain, also with the American Enterprise Institute, was similarly critical in a column for Bloomberg.

Economic growth is under attack. Or, more specifically, the idea that public policy should place a large amount of emphasis on the economy’s rate of growth is under assault… Traditionally, conservatives have placed a premium on growth as the best way to advance the fortunes of all Americans. But in recent years, some on the right have [been] playing down the importance of growth to the well-being of many working-class Americans. The latest argument for that position comes from Oren Cass… Cass argues that the results from decades of policies designed to encourage GDP growth are “embarrassing” and have “steered the nation off course.” …conservatives have been right in their traditional focus on growth. Let’s recall why. …the hot U.S. economy is the best jobs program available for lower-wage and vulnerable workers. …this strength is benefiting low-wage workers more than other groups. …Growth doesn’t just help low-income and working-class households in the short term. Over longer periods, seemingly small changes in the growth rate have large consequences. In the past four decades, for example, real GDP per person has increased from about $28,000 to over $55,000, growing at about 1.7 percent per year. If growth instead had been 1 percent, average GDP per head would be about three-quarters what it is today.

Needless to say, I strongly agree with Strain’s final point about the importance of faster growth.

Though I confess to being at a disadvantage when judging these anti-Cass columns since I haven’t read the book.

However, to the degree that Cass truly has given up on growth (i.e., accepting some form of the “secular stagnation” hypothesis), then I side with Pethokoukis and Strain.

But that’s not my main concern. Here are the four reasons that motivate my objection to wage subsidies.

1. Redistribution should not be a responsibility of the federal government. Indeed, I want all redistribution devolved to state and local governments (or to the private sector).
2. Cass says the program will cost $200 billion. Like with most government programs, I assume the actual fiscal burden will wind up being much higher. Especially after the left starts a bidding war.
3. Existing wages subsidies are riddled with fraud because the government effectively gives people lots of money simply for filing a tax return, yet rarely bothers to confirm they actually earned the income.
4. Wage subsidies actually turn into wage penalties (i.e., punitive implicit marginal tax rates) when income rises above the target level and the handouts are withdrawn.

The bottom line is that Cass is right that it’s better to subsidize work rather than idleness.

However, Americans already are too dependent on Uncle Sam. It would be even better if we simply achieved more growth by adopting the tried-and-tested recipe for prosperity.

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Help Workers and the Economy with Lower Employment Taxes

One of the core principles of economics is that prices are determined by supply and demand. That includes the price of labor – i.e., the wages received by workers.

Another core principle is that taxes create distortions by reducing demand and supply. Which is why it’s not a good idea to impose high tax rates on behaviors that contribute to prosperity, such as work, saving, investment, and entrepreneurship.

That’s the theory. Now let’s consider some real-world implications of taxes on work.

Here are some excerpts from new research by the European Central Bank.

Several reforms can be enacted to reduce the unemployment rate in the euro area. Among them is a permanent reduction in the labour tax. Typically, a decrease in labour taxes reduces labour costs to employers and increases the net take-home pay of employees, positively impacting both labour demand and labour supply. Reducing taxes on labour can contribute to increase employment and activity rates in the EA, by increasing incentives to hire, to look for, and take up, work. …In this paper we contribute to the debate on those issues by evaluating the macroeconomic effects of a fiscal reform in the EA countries.

The study look at what happens with employment-related taxes are lowered at either the employer level or the employee level.

Permanently reducing labour tax rates paid by Home firms would have stimulating effects on economic activity and employment, and would permanently reduce the unemployment rate. The same is true when tax rates paid by Home households are reduced.

Here are some of the specific estimates of the positive impact of lower labor taxes at the firm level.

The tax rate is reduced by almost 2 p.p. (trough level). The reduction of labour taxes paid by firms reduces the gross wage bill of firms and hence increases the value of having a worker. Workers are able to obtain part of the increase in firms’ surplus in the bargaining process, which results in a real wage increase. Nevertheless, the wage increase is not sufficient to undo the increase in the value of having a worker for firms, which leads to an increase in labour demand through vacancy posting. The number of matches increases as well and, consistently, the probability of finding a job and that of filling a vacancy increases and decreases, respectively. Employment increases (and unemployment rate decreases) by roughly 0.3 p.p. after two years and 0.4 p.p. in the medium and in the long run, respectively. …Home GDP increases by 0.5% after two years. Both consumption and investment increase. Consumption increases because of households’ larger permanent income, associated with the increase in employment, hours and production. Investment increases because firms augment physical capital to accompany the rising employment.

I’ve combined some of the key results from Figures 3 and 4, all of which show the benefits over time of lower tax rates on work (the horizontal axis is quarters, so 20 quarters equals five years).

And here are the specific estimates of the good outcomes when labor tax are reduced at the household level.

Qualitatively, results are similarly expansionary as those obtained when reducing labour taxes paid by firms. Hours worked, employment, matches, and the probability of finding a job increase, while the probability of filling a vacancy decreases. …hours worked now increase by 0.4% (0.3% in the previous simulation), employment by almost 0.5% (0.35% in the previous simulation), while the unemployment rate falls by almost 0.5 p.p. (0.4 p.p. in the previous simulation). …Home GDP increases by around 0.7% after two years.

Once again, let’s look at some charts showing the benefits over time of lower tax rates on workers.

Interestingly, it appears that there are slightly better outcomes if labor taxes are reduced for workers rather than employers, but the wage numbers are better if the tax cuts take place at the business level.

I’ll take either approach, for what it’s worth.

Let’s close with one additional excerpt. The study incorporated the impact of government employment, which can have a very distorting effect on private employment given the excessive size of the bureaucracy and above-market compensation for bureaucrats.

…we allow for public sector employment and for the possibility of directed search between the private and public sector labour market… In fact, a proper assessment of the impact of the labour market reforms on private-sector employment should take into account that a common characteristic of the EA labour market is the important share of the public employment in total employment, which is, according to OECD (2015), around 20% in France, 15% in Spain, Italy and Portugal, and 13% in Germany. Thus, this component is important to understand the labour market dynamics in the EA, given also that, during a crisis period, public and private labour markets tend to be more inter-related (when the unemployment rate is high, the number of applicants to the public sector is larger).

P.S. I’m periodically asked whether I’m exaggerating when I assert that something (such as taxes distorting the supply and demand for labor) is a “core principle” in economics. But I don’t think left-leaning economists (and there are plenty) would disagree about taxes impacting supply and demand. But they presumably would quibble about the “elasticity” of supply and demand curves (in other words, how sensitive are people to changes in tax rates). Moreover, they surely would claim in some instances that any “deadweight loss” would be offset by supposed economic benefits of government spending (and pro-market people acknowledge that’s possible, at least when government is small). And, when push comes to shove, some folks on the left would openly argue that it’s okay to have less prosperity if there’s more equality.

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Another Lesson from Bastiat: So-Called Employment Protection Legislation Is Bad News for Workers

Frederic Bastiat, the great French economist (yes, such creatures used to exist) from the 1800s, famously observed that a good economist always considers both the “seen” and “unseen” consequences of any action.

A sloppy economist looks at the recipients of government programs and declares that the economy will be stimulated by this additional money that is easily seen, whereas a good economist recognizes that the government can’t redistribute money without doing unseen damage by first taxing or borrowing it from the private sector.

A sloppy economist looks at bailouts and declares that the economy will be stronger because the inefficient firms that stay in business are easily seen, whereas a good economist recognizes that such policies imposes considerable unseen damage by promoting moral hazard and undermining the efficient allocation of labor and capital.

We now have another example to add to our list. Many European nations have “social protection” laws that are designed to shield people from the supposed harshness of capitalism. And part of this approach is so-called Employment Protection Legislation, which ostensibly protects workers by, for instance, making layoffs very difficult.

The people who don’t get laid off are seen, but what about the unseen consequences of such laws?

Well, an academic study from three French economists has some sobering findings for those who think regulation and “social protection” are good for workers.

…this study proposes an econometric investigation of the effects of the OECD Employment Protection Legislation (EPL) indicator… The originality of our paper is to study the effects of labour market regulations on capital intensity, capital quality and the share of employment by skill level using a symmetric approach for each factor using a single original large database: a country-industry panel dataset of 14 OECD countries, 18 manufacturing and market service industries, over the 20 years from 1988 to 2007.

One of the findings from the study is that “EPL” is an area where the United States historically has always had an appropriately laissez-faire approach (which also is evident from the World Bank’s data in the Doing Business Index).

Here’s a chart showing the US compared to some other major developed economies.

It’s good to see, by the way, that Denmark, Finland, and the Netherlands engaged in some meaningful reform between 1994-2006.

But let’s get back to our main topic. What actually happens when nations have high or low levels of Employment Protection Legislation?

According to the research of the French economists, high levels of rules and regulations cause employers to substitute capital for labor, with low-skilled workers suffering the most.

Our main estimation results show an EPL effect: i) positive for non-ICT physical capital intensity and the share of high-skilled employment; ii) non-significant for ICT capital intensity; and (iii) negative for R&D capital intensity and the share of low-skilled employment. These results suggest that an increase in EPL would be considered by firms to be a rise in the cost of labour, with a physical capital to labour substitution impact in favour of more non-sophisticated technologies and would be particularly detrimental to unskilled workers. Moreover, it confirms that R&D activities require labour flexibility. According to simulations based on these results, structural reforms that lowered EPL to the “lightest practice”, i.e. to the US EPL level, would have a favourable impact on R&D capital intensity and would be helpful for unskilled employment (30% and 10% increases on average, respectively). …The adoption of this US EPL level would require very largescale labour market structural reforms in some countries, such as France and Italy. So this simulation cannot be considered politically and socially realistic in a short time. But considering the favourable impact of labour market reforms on productivity and growth. …It appears that labour regulations are particularly detrimental to low-skilled employment, which is an interesting paradox as one of the main goals of labour regulations is to protect low-skilled workers. These regulations seem to frighten employers, who see them as a labour cost increase with consequently a negative impact on low-skilled employment.

There’s a lot of jargon in the above passage for those who haven’t studied economics, but the key takeaway is that employment for low-skilled workers would jump by 10 percent if other nations reduced labor-market regulations to American levels.

Though, as the authors point out, that won’t happen anytime soon in nations such as France and Italy.

Now let’s review an IMF study that looks at what happened when Germany substantially deregulated labor markets last decade.

After a decade of high unemployment and weak growth leading up to the turn of the 21th century, Germany embarked on a significant labor market overhaul. The reforms, collectively known as the Hartz reforms, were put in place in three steps between January 2003 and January 2005. They eased regulation on temporary work agencies, relaxed firing restrictions, restructured the federal employment agency, and reshaped unemployment insurance to significantly reduce benefits for the long-term unemployed and tighten job search obligations.

And when the authors say that long-term unemployment benefits were “significantly” reduced, they weren’t exaggerating.

Here’s a chart from the study showing the huge cut in subsidies for long-run joblessness.

So what were the results of the German reforms?

To put it mildly, they were a huge success.

…the unemployment rate declined steadily from a peak of almost 11 percent in 2005 to five percent at the end of 2014, the lowest level since reunification. In contrast, following the Great Recession other advanced economies — particularly in the euro area — experienced a marked and persistent increase in unemployment. The strong labor market helped Germany consolidate its public finances, as lower outlays on unemployment benefits resulted in lower spending while stronger taxes and social security contribution pushed up revenues.

Gee, what a shocker. When the government stopped being as generous to people for being unemployed, fewer people chose to be unemployed.

Which is exactly what happened in the United States when Congress finally stopped extending unemployment benefits.

And it’s also worth noting that this was also a  period of good fiscal policy in Germany, with the burden of spending rising by only 0.18 percent annually between 2003-2007.

But the main lesson of all this research is that some politicians probably have noble motives when they adopt “social protection” legislation. In the real world, however, there’s nothing “social” about laws and regulations that either discourage employers from hiring people and or discourage people from finding jobs.

P.S. Another example of “seen” vs “unseen” is how supposedly pro-feminist policies actually undermine economic opportunity for women.

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Debating How Best to Create Jobs: Markets or Government?

Early last month, I wrote an article for The Federalist on job creation.

I used that opportunity to document that there is a serious problem with jobs under Obama, and I explained that the problem existed in part because the President was intervening with so-called stimulus schemes.

The far better approach is for government to “get out of the way.”

Though that’s not really correct. I want changes in government policy. Indeed, major changes. But those policy changes would involve less government, whereas Obama pushed major changes in the other direction.

I took this discussion to the next level in this debate on C-Span.

My opponent, Ross Eisenbrey of the Economic Policy Institute, was my mirror image.

He wanted more spending and I urged less spending.

He called for more intervention and I advocated less intervention.

We would probably even disagree about the answer to 2 + 2 = ?.

Viewers can make their own decisions on who did a better job in the debate. I’ll simply state that my strongest point (at least in my humble opinion) is that businesses only create jobs when they expect new workers will increase net revenue.

But don’t believe me. You can read what actual real-world employers have to say about the topic.

In other words, I agree with the message of this poster. If you think more government is the answer, you’ve asked a very silly question.

P.S. I’m in Monaco for the Convention of Independent Financial Advisors and the Princess of the Levant is with me at the Hotel Hermitage. It’s nice to get a glimpse at the lifestyle of the infamous Top 1 Percent.

Fortunately, Monaco seems to have plenty of guys with women out of their league, so I don’t feel too out of place.

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Can Government Help Workers by Making Them More Expensive?

I wish there was a magic wand that somebody could wave and all of us would have more money. Or maybe Santa Claus could play that role, or some version of the Tooth Fairy.

And if that magic person only had limited powers, I would want more money specifically for those with modest incomes.

Unfortunately, we don’t live in this fantasy world. As a society, we can’t enjoy output unless we first go through the toil and trouble of working, saving, and investing.

Heck, even some leftists have admitted that you can’t redistribute unless somebody first produces.

But that doesn’t stop some politicians from practicing free-lunch economics. They tell us, for instance, that government can impose a higher minimum wage with no job losses.

And now the Obama Administration is claiming that it can expand overtime eligibility rules without any adverse impact of base pay, hours, or employment.

In my role as the designated bad guy who has to inform people there’s no magic wand or Santa Claus, here’s what I told the New York Times.

“There’s no such thing as a free lunch,” said Daniel Mitchell, a senior fellow with the Cato Institute, who warned that employers might cut pay or use fewer workers. “If they push through something to make a certain class of workers more expensive, something will happen to adjust.”

I also shared my putative wisdom with the International Business Times, underscoring the principle that government shouldn’t intervene in labor markets.

“Our view is pretty straightforward,” Daniel Mitchell, a fellow at the libertarian CATO Institute in Washington D.C., told International Business Times by phone on Wednesday. “From a philosophical perspective the government shouldn’t get involved with labor contacts between two consenting adults. You can’t impose more labor costs and have them magically disappear.”

I also pontificated on this issue for CBS News radio, but the “highlight” of the day was having to dispel economic myths in a series of TV interviews.

In this debate for Nightly Business Report, I had to explain that faster growth was the only effective way to improve living standards, but my opponent somehow thought we should go back to the glorious 1970s.

And in this interview with Ali Velshi on AJ, I’m stunned that he blames today’s weak job market on free markets.

Last but not least, I made what will probably be my last appearance on Larry Kudlow’s great show on CNBC and used the opportunity to say we shouldn’t copy Europe’s failed welfare states.

Larry is retiring at the end of the month and he will be sorely missed.

P.S. Lots of people are suffering because of Obamacare, especially taxpayers and patients.

But since our main topic today is jobs, let’s not forget that millions of workers are being screwed over by this bad law. They’re losing jobs, losing hours, and/or losing take-home pay thanks to Obama’s ham-fisted intervention.

If you like gallows humor, Reason TV addresses this issue in a new video. Enjoy.

And if you like Obamacare parody videos, here are the other ones that will produce some smiles and laughs.

*The head of the National Socialist Workers Party finds out he can’t keep his health plan.

*A creepy version of Uncle Sam wants to know about your sex life.

*Young people discover that they’re screwed by Obamacare.

*One of the biggest statists of the 20th century is angry that the Obamacare exchanges don’t work.

*A consumer tries to buy Obama-coffee.

By the way, if you’re concerned about America’s fiscal future, here’s a video on Obamacare that definitely is not funny.

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According to Census Data, People Vote with their Feet for Less Government

The world is a laboratory and different nations are public policy experiments. Not surprisingly, the evidence from these experiments is that nations with more freedom tend to grow faster and enjoy more prosperity. Nations with big governments, by contrast, are more likely to suffer from stagnation.

The same thing happens inside the United States. The 50 states are experiments, and they generate considerable data showing that small government states enjoy better economic performance. But because migration between states is so easy (whereas migration between nations is more complicated), we also get very good evidence based on people “voting with their feet.” Taxation and jobs are two big factors that drive this process.

Looking at the census data and matching migration data with state tax systems, here’s what Michael Barone wrote. He finds (not that anyone should be surprised) that the absence of a state income tax is correlated with faster growth, which attracts people from high-tax states.

…growth tends to be stronger where taxes are lower. Seven of the nine states that do not levy an income tax grew faster than the national average. The other two, South Dakota and New Hampshire, had the fastest growth in their regions, the Midwest and New England. Altogether, 35 percent of the nation’s total population growth occurred in these nine non-taxing states, which accounted for just 19 percent of total population at the beginning of the decade.

And here’s Diana Furtchtgott-Roth, writing for Realclearmarkets.com. She uses the presence of right-to-work laws (which prohibit union membership as a condition of employment) as a proxy for the degree to which big government and big labor are imposing restrictions on efficient employment markets. Not surprisingly, the states that have a market-friendly approach create more jobs and therefore attract more workers.

The American people have been voting with their feet, the Census Bureau announced on Tuesday, leaving states with heavy union influence and choosing to live in “right-to-work” states with higher job growth where they cannot be forced to join a union as a condition of employment. …As a result of geographic shifts in population uncovered by the 2010 Census, nine congressional seats will move to right-to-work states from forced unionization states. Some winners are Texas, Florida, Arizona, Georgia, and South Carolina, while losers include New York, Ohio, Michigan, Illinois, and New Jersey. Over the past 25 years job growth in right-to-work states has been over twice as high as in unionized states.

This leaves us with one perplexing question. If we know that pro-market policies work for states, why does the crowd in Washington push for more statism?

Welcome, Instapundit readers. Since many of you might not be regular readers of International Liberty, the important lesson to learn from the Census data is that federalism is good because state governments have to compete against each other, and this helps restrain the greed of politicians. The same principle operates at the international level, which is why tax competition is such a powerful force for liberty.

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Wages Should Be Determined by Markets, not Quota-Driven Bureaucrats

Christina Hoff Sommers of the American Enterprise Institute decimates the bean-counting feminist “paycheck fairness” legislation being considered by the Senate. Republicans presumably know this is a bad idea, but one can only wonder whether they will do the right thing and block this initiative that at best will be a boon for trial lawyers and at worst will lead to massive government intervention in employment markets. Here’s an excerpt from her New York Times column.

…on the Senate’s to-do list before the November elections is a “paycheck fairness” bill, which would make it easier for women to file class-action, punitive-damages suits against employers they accuse of sex-based pay discrimination. …the bill…overlooks mountains of research showing that discrimination plays little role in pay disparities between men and women, and it threatens to impose onerous requirements on employers to correct gaps over which they have little control. …proponents point out that for every dollar men earn, women earn just 77 cents. …there are lots of…reasons men might earn more than women, including differences in education, experience and job tenure. When these factors are taken into account the gap narrows considerably – in some studies, to the point of vanishing. A recent survey found that young, childless, single urban women earn 8 percent more than their male counterparts, mostly because more of them earn college degrees. Moreover, a 2009 analysis of wage-gap studies commissioned by the Labor Department evaluated more than 50 peer-reviewed papers and concluded that the aggregate wage gap “may be almost entirely the result of the individual choices being made by both male and female workers.” …The Paycheck Fairness bill would set women against men, empower trial lawyers and activists, perpetuate falsehoods about the status of women in the workplace and create havoc in a precarious job market. It is 1970s-style gender-war feminism.

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If the So-Called Stimulus Was an Unsung Hero, I’d Hate to Meet a Singing Enemy

The White House recently released the Economic Report of the President. In a post at the White House blog, Christina Romer brags that the stimulus legislation was a big success.

This Act is the great unsung hero of the past year.  It has provided a tax cut to 95 percent of America’s working families and thousands of small businesses.  It has meant the difference between hanging on and destitution for millions of unemployed workers who had exhausted their conventional unemployment insurance benefits.  It has kept hundreds of thousands of teachers, police, and firefighters employed by helping to fill the yawning hole in state and local budgets.  And, it has made crucial long-run investments in our country’s infrastructure and jump-started the transition to the clean energy economy.  All told, the Recovery Act has saved or created some 1½ to 2 million jobs so far, and is on track to have raised employment relative to what it otherwise would have been by 3.5 million by the end of this year. 

Let’s set aside some of the disingenuous components of her post, such as categorizing income redistribution as tax relief, and focus on her claim that the legislation created at least 1.5 million new jobs when total employment has dropped by 3 million. Romer is not bad at math. Instead, she is saying that the economy would have lost 4.5 without the $787 billion increase in government spending. This what-might-have-been analysis is completely legitimate, assuming that there is good theory and evidence to back the assertion. Unfortunately (at least for the White House’s credibility), Ms. Romer and another colleague last year prepared a supposedly rigorous what-might-have-been report, where they estimated that the so-called stimulus would keep the unemployment rate at 8 percent and that failure to increase the burden of government spending would drive the unemployment rate to 9 percent. Yet as this chart from their paper indicates, when we add in the data for what actually has happened, in turns out that bigger government is not only theoretically misguided, but it also doesn’t work in the real world.

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