A quarter of a
century ago, the U.S. workforce was a wonder. Laid off in one corner of the
economy, Americans quickly landed jobs elsewhere. But over the past decade, a
profound change has come about. If U.S. leaders understood what was at stake,
their fights on taxes and spending would assume a different
character.
In 2000,
according to data from the Organization for Economic Co-operation and
Development, U.S. unemployment was the lowest in the G7 group of countries.
Because jobs in America were easy to find, Americans felt confident in seeking
them: the labor force participation rate was the G7’s highest. Combining these
two effects, the share of U.S. 15-64 year-olds in work, at 74 percent, stood far
above competitors. Within the G7, only the UK, with 72 percent, came
close.
Fast forward to
2012. U.S. unemployment has gone from lowest in the G7 to third highest. Because
workers have become discouraged, the U.S. labor force participation rate has
slipped from the top spot to the middle of the pack. In consequence, the share
of Americans in work has declined by fully 7 percentage points, a fall nearly
three times more drastic than experienced in the UK. Meanwhile, in the other
five G7 countries, the employment-to-population rate has actually
risen.
This is not
Ronald Reagan’s America - nor Bill Clinton’s, come to that. A once enviable
labor market has consigned millions to material and psychological want. Nor is
it simply the amount of joblessness that has exploded. Back in 2000, the U.S.
could boast that just 6 percent of its unemployed workers had been out of a job
for 12 months or more. But by 2011, that share had jumped to 31 per
cent.
Why has the U.S.
lost its advantage? The answer is bigger than the financial crisis. The U.S.
employment rate began falling before then, sliding from 74 percent in 2000 to 72
per cent in 2006; besides, the UK experienced a similar financial bust without
an equivalent employment setback. Rather, the truth is that U.S. labor market
arrangements, which worked brilliantly for a generation, are no longer
adequate.
The U.S. labor
market formula has traditionally consisted of a stick and a carrot. Americans
were barred from receiving unemployment insurance for more than 26 weeks, which
pushed them to accept jobs even if they involved moving home or taking a pay
cut. Meanwhile the government dangled a juicy negative income tax in front of
low-income workers, boosting pay for those who re-entered the work
force.
Limited welfare
and low taxes combined to minimize the U.S. “participation tax rate”. Take an
American worker with two children who moved in 2009 from short-term unemployment
into a job paying half the average wage; he could expect to be better off to the
tune of 62 percent of his new earnings, according to the OECD. If that worker
was exiting long-term unemployment, the reward for returning to work was even
stronger. These sensible incentives stood in contrast to perverse incentives
elsewhere. In Japan and Ireland, some unemployed people faced a participation
tax rate of over 100 per cent. Taking a job would leave them worse
off.
America’s low
employment-tax wedge remains a huge strength. But it is no longer enough.
Technological change has reduced opportunities for low-skilled men and a lousy
school system has failed to equip them for this challenge. By 2005, fully a
quarter of working-age U.S. men without a high-school diploma were out of the
workforce. When the crash wiped out low-skilled construction jobs, that share
leapt to 35 percent.
Faced with this
cadre of hard-to-employ men, the U.S. has had to recognize that the old time
limit on unemployment insurance is harsh and unhelpful. Starting in 2009, the
limit has been extended; some workers have collected for as long as 99 weeks.
Meanwhile the number of Americans receiving disability payments has shot up from
5m to almost 9m since 2000. Such benefits have no time
limits.
If the labor
market stick has cracked, the carrot is decaying. The key challenge is
low-skilled men, many of whom are not married. But America’s negative income tax
is overwhelmingly targeted at parents. The U.S. has spent a generation boosting
incentives for high-skilled workers by cutting top marginal tax rates. But
payroll taxes have been allowed to take a rising share of low earners’
incomes.
In an important
recent paper, the IMF’s Fiscal Affairs Department surveys some ideas U.S.
politicians might heed. Payroll taxes should be reduced, especially for
low-income workers. Enrolment on disability should be policed for abuses, and
the disabled should be encouraged to re-enter the workforce where possible.
Unemployment insurance could be financed by individual accounts, strengthening
workers’ incentive to return to work promptly. Shorn of effective time limits,
insurance benefits should be tied to participation in training programs that
push workers into jobs.
So far, none of
these ideas has received serious attention from leaders. The politicians’ idea
of a tax debate is a slanging match about top marginal rates, not an intelligent
rethink of the payroll tax wedge. Their idea of a spending discussion is to
bicker about whether discretionary outlays should be cut aggressively or
downright savagely. The cramped terms of the debate help to explain why work
training schemes in the U.S. have actually shrunk recently and are a pale shadow
of the standard model in the rest of the rich world. As for the vital challenge
of retooling U.S. education, neither candidate seems interested. The U.S. labor
miracle may be left to die quietly. It deserves better.
AHT/ARA
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