By: Megan McArdle
July 15, 2011
What's the single best idea to jumpstart job creation?
When unemployment numbers go up, as they have for the past few months, everyone gets scared. But the problem in this job market is not so much that unemployment is rising, as that it's not falling. Job separations (layoffs, firings, and quits) are actually down substantially from pre-crisis levels. But so is job creation. The result is that people who are thrown out on the job market stay there. And for every month that they languish, their job prospects decrease. Employers would rather hire someone who already has a job, and because so few jobs are being created, they have plenty of those people to choose from. Nor are they entirely irrational. Research shows that long-term unemployment takes a toll on skills, industry knowledge, and psychological well-being--what economists call "human capital".
This makes long-term unemployment our greatest priority; if we do not get those people into work soon, many will never return. When employers do start hiring again, they will look to the sizeable pool of shorter-term unemployed. By the time demand is robust enough for them to dip deep into the reserve army of labor, it may be too late for many of them.
But how to get employers to hire people who have already been out of work for too long? Traditional government solutions like job training have an absolutely dismal record. The only government solution to long-term unemployment we've ever found was to have World War II, and for various reasons, we're probably not going to reauthorize that particular program.
One suggestion is to give them direct incentives to choose the long-term unemployed over those who are already in work, or out of work for only a short time. How? We could exempt new hires from both the employee and the employer sides of the payroll tax, one month for every month that they were unemployed. The result is a direct wage subsidy of more than 10%. But it is a time-limited subsidy, and one carefully targeted to those who need it the most. By the time the tax relief expires, these workers will have been reintegrated into the labor force. This will cost the government something of course--but not nearly as much as supporting them on welfare, disability, or early retirement--or the prison system.