The High Price of Job Creation
During Wednesday night’s State of the Union address, President Obama made clear that increasing American jobs will be his number one domestic priority next year. This goal is certainly not new. Job creation was cited as the primary reason for most of the stimulus measures created in the last year. Given this renewed push to create jobs, and the new Congressional spending plans in development, it’s important to realize the sheer magnitude of what the Administration is trying to accomplish, and the cost at which it might come.
In a now-infamous research document published in January 2009, the economic advisers to President-elect Obama argued that enactment of a large stimulus package would ensure an unemployment rate no higher than 8%. Today, the national unemployment rate is 10%, and it would be even higher absent the surge in discouraged workers who have stopped looking for a job.
If the workforce participation rate were still at the January 2009 level of 66%, the unemployment rate would be nearly 20%!*
The magnitude of the net new job creation required to cut the unemployment rate to 8% is even more staggering. According to the Bureau of Labor Statistics, there are currently 137.8 million people with a job - of these, roughly 9.165 million are part-time workers who want or need a full-time job but are unable to find one. Since the working age population grows each month, even if the workforce participation rate stays at today’s depressed level, the economy would have to generate 404,000** net new jobs per month to hit 8% unemployment by November. However, if the economy must first generate jobs so that currently underemployed workers can move to full-time and the workforce participation rate increases as the economy grows – as is more likely to be the case – the economy would need to generate between 1.3 million and 1.9 million net new jobs per month to reach 8% unemployment by November. Few expect aggregate employment to increase by these amounts over the entire ten month period, let alone each month until then.
The White House originally focused its stimulus “messaging” on a much-derided jobs “saved or created” metric. In particular, the White House has emphasized how the spending has prevented layoffs of “teachers, police officers, and firefighters.” While the billions in outlays have likely “saved” some state and local government jobs, the data show an alarming trend: since the stimulus passed, public sector payrolls have added over 2.3 million jobs and private sector payrolls have shrunk by over 6.6 million.
The latest stimulus proposal from the Senate Finance Committee (newly and creatively dubbed a “jobs bill”) would do even more to subsidize public sector employment. Details of the draft recently released indicate that the Senate bill would cost $85 billion, and would include $20.5 billion in additional spending to go towards “hiring [more] teachers, police, and firefighters.” This approach is moving the United States in the direction of many developing countries, where surplus labor in the public sector is common. Activist governments in these countries react to high unemployment by creating – you guessed it – more government jobs. But the economic value added by the public sector workers tends to be low, while the resources used to pay them comes from taxing high productivity private sector workers and employers. So resources are transferred from high to low productivity activities. And as the private sector shrinks, the relative burden of the public sector increases, which then reduces private sector cash flow and discourages job-creating investment.
The Administration and Congressional Democrats are determined to reduce unemployment to 8% by the mid-term elections in November. But their strategy of increasing the deficit to “save or create” government jobs and jobs dependent on government contracts is making the situation worse. If Congress wants to do something to spur job creation, it needs to remove the uncertainty surrounding expected future income tax increases, energy taxes, and health care taxes. That will help foster the business investment that is a precursor to workers getting hired, not fired.
Christopher Papagianis is the Managing Director of e21 and was Special Assistant for Domestic Policy to President George W. Bush. Jennifer Pollom is the Director of External Affairs at e21 and was the Appropriations and Budget Counsel for the Senate Republican Policy Committee.
______________
* This is an updated calculation. The previous workforce participation rate was changed to include another subset of the labor supply. The participation rate went from 62.9% to 66% and the unemployment rate went from 20.1% to nearly 20%. All the charts were also updated.
** The previous workforce participation rate update also changed the calculation for the number of jobs the economy would have to generate each month to hit 8% by November from 737,000 to 404,000.