Uploaded by Ben Morehead, Associate Publisher of Policy Review magazine and authorized agent for the copyright owner(s). Subscriptions to Policy Review cost $16.95 for one year and $29.50 for two years. To order, please send e-mail to Ben Morehead (71603,2037) with your name, address, Visa, MasterCard or Amex number and expire date. BUSH-LEAGUE UNEMPLOYMENT Will Clinton's Labor Policies Lower the Job Boom? by Carlos Bonilla From the Summer 1993 issue of Policy Review To subscribe to Policy Review, call (800) 544-4843 The American job machine finally is starting to rev up again. Employment growth stagnated at 20,000 a month in the year and a half leading up to the 1992 election. It rose to 135,000 a month in the final quarter of the Bush presidency. And the pace picked up under President Bill Clinton, as the American economy created 800,000 new jobs in the first four months of the new administration. This was almost as rapid as the 250,000 new jobs created every month in the last six years under Ronald Reagan. Here lies the new president's central political challenge. Mr. Clinton inherited from George Bush an economy with the slowest job and GDP growth of any recovery since World War II. He will be judged by voters, as Mr. Bush was, on whether he can restore sustained job growth to the level Americans enjoyed in the 1980s. Following the 1981-1982 recession, Americans became accus- tomed to robust economic growth. The economy grew by 3.9 percent in 1983, by a phenomenal 6.2 percent in 1984, and averaged 3.3 percent a year until 1990. Job growth was equally strong, with 21 million jobs created during that period. America's employment record was the envy of the world. In July 1990 the economy slipped back into recession, beginning a contraction that continued for the next nine months. In that time, the nation's output of goods and services shrank by almost 1 percent. Employment fell by 1.2 million, and the unemployment rate reached 6.7 percent. To the dismay of George Bush, among others, the economy failed to rebound as it had after prior recessions, and the resulting turmoil cost him the presidency. The strong job growth that had been the hallmark of Ronald Reagan's recovery during the 1980s gave way to a limping recovery that could create only 425,000 jobs in the 20 months that remained before the election. The Reagan boom created more jobs in two months than the post-recession Bush economy did in a year and a half. Even worse, unemployment continued to rise even after the official end of the recession, peaking at 7.7 percent in June 1992, a full percentage point above the unemployment rate at the bottom of the recession, and 2.5 percentage points higher than it had been when George Bush entered the White House. Job growth did not pick up until after the election, averaging over 130,000 a month in the final quarter, too late to help Mr. Bush. George Bush did not lose the White House because of the recession during his administration. If this were the case, Ronald Reagan would never have been elected to a second term. Indeed, the Reagan recession was much more severe than Mr. Bush's. Whereas the Bush recession saw employment fall by 1.6 percent, it fell by more than 3 percent under Ronald Reagan, whose unemployment rate peaked at more than 9 percent. Gross domestic product fell by 2.4 percent under Mr. Reagan, compared with only 2 percent under Mr. Bush. Presidents are driven from the White House not because they preside over recessions, but because they fail to articulate and enforce a blueprint for recovery -- a blueprint designed to spur economic growth and, above all, to boost employment. The danger for President Clinton is that his health care and labor policies will reverse the upward trend we are finally seeing in employment, and that America will be forced down a path of fewer rather than more jobs. Unemployment in May 1993 was still in the Bush leagues -- at 6.9 percent. And Mr. Clinton is framing the jobs-policy debate in a way that permanently will exclude many Americans from jobs for which they would otherwise be qualified. Low Growth, Low Employment There are three major reasons why job growth has been so much more sluggish than in the 1980s. The first is that overall economic growth has been very slow, especially considering that the economy is in a period of recovery. The second is that America continues to enjoy significant growth in productivity, a characteristic that is good for American competitiveness, but has the perverse effect of reducing employment in many sectors of the economy. The third is that labor is becoming more expensive to hire, not only because of the rising health-insurance costs that President Clinton so often points to, but also because of the anticipated new government-mandated employment benefits that employers worry will take away their ability to control labor costs. The biggest fear among employers today is that President Clinton's health proposal will impose enormous new burdens on employment, so that each new hire brings with it a share of the nation's health-care bill. The "jobs recession" we hear so much about is in good measure a product of low economic growth. Two years after the official end of the recession in March of 1991, the nation's total output of goods and services was only 4.5 percent larger. This figure is less than half the economic growth in the first two years after the Reagan recession, and more typical of an economy only nine months out of recession. The problems inherent to sluggish economic growth have been compounded by the loss of 600,000 jobs due to the post-Cold War military reduction. Communities can adapt to military demobilization when it is accompanied by rapid economic growth. But without such growth, areas such as southern California, which has been hit hard by defense cutbacks, have suffered greatly. Economic policy must therefore focus on raising the level of economic growth if we are to raise employment. President Clinton paid lip service to this goal with his so-called $16-billion "stimulus" package. One-quarter of this package consisted of extended unemployment benefits. Another quarter consisted of low-priority public works spending -- parking garages in Fort Lauderdale, cemeteries in Puerto Rico, white-water canoe courses for the 1996 Olympics, and commissioning drawings of "significant" structures -- projects that had not been sufficiently important or well-planned to have been funded by a budget already spending $1.5 trillion. How this package, in combination with a barrage of new taxes, was supposed to stimulate the economy is anyone's guess. The president's proposal was firmly rooted in the past, without regard to the changes that have taken place in the American economy and workplace. Products of Technology Over the past two decades, American manufacturing has enjoyed a spectacular boom in the productivity of labor. With 5 percent fewer employees than in 1970, American manufacturers now produce 75 percent more goods than before. This is the flip side of productivity: higher productivity means that we are able to produce more goods and services without an increase in the quantity of labor employed. Productivity growth is driven by a number of factors, but its chief motivation is to reduce costs by replacing man-hours and reducing costs. In the post-World War II era, American manufacturing, particularly in such heavy industries as steel and autos, created a labor-cost structure that eventually rendered manufacturers unable to compete even domestically. Reducing the manufacturing labor force through the application of new technologies was essential to American industry's rebirth. This modernization sometimes has occurred at a cost to employment, however, especially in low-growth industries. Employment in the American steel industry has fallen 45 percent over the past 30 years, while shipments have fallen by only 6 percent. Nucor, a world-class steel producer based in Charlotte, North Carolina, can produce a ton of steel with one-12th the number of man-hours it used to take using traditional methods. Nucor's steelworkers are well-paid and well-skilled, but there are not very many of them. Productivity growth once was thought to be the exclusive domain of manufacturing. In fact, the service sector now is seeing the same replacement of human labor with products of technology. Universal product codes integrate cashiers into inventory management, and in the process making obsolete workers formerly detailed as inventory takers. The ubiquity of automatic teller machines led the Progressive Policy Institute to warn, in its book Mandate for Change, that half of the nation's bank tellers stand to lose their jobs in the years to come. Legions of workers once devoted to the paper trail of business transactions have found that their skills have been incorporated by information networks that span the country. Professionals working at personal computers have replaced secretaries and computer operators, while elevator operators remain only as quaint relics in the U.S. Capitol. These technological advances have made service workers much more productive, and also made many tasks in ordinary life much more convenient. Americans now get cash when and where they need it, without having to wait in interminable bank lines. Letters no longer must be completely retyped because of a typo. The painstaking drawing of architectural blueprints can be simplified enormously through computer graphics. Distorting the Price of Labor Yet as inevitable as the march of technology seems to be, it is not random. Productivity increases will be sought in those sectors where costs can be reduced. But despite the opportunities that technology creates, there are human costs. For people who had planned on being draftsmen or bookkeepers or steelworkers, there are temporary but very real problems as they adjust to a changing labor market. We see some of those frictions today, as we go through an especially rapid period of technological change. The great danger of the productivity revolution is that it is distorted by government policies that are artificially raising the price of labor. President Clinton seems to want to give workers in service industries the same wage and benefits packages that exist in manufacturing. Lamenting the loss of highly paid manufacturing jobs, Mr. Clinton and his colleagues now are intent on restructuring the service sector in the image of manufacturing. The result, almost assuredly, will be fewer, higher-paying jobs in services as productivity advances take the form of labor-saving technology. Well-intentioned policies already have had a pronounced effect on the cost of labor. Social Security and Medicare already claim 15.3 percent of most payroll dollars, up from 12.3 percent in 1980. Federal unemployment compensation adds slightly under 1 percent, with the states adding another 2 percent on average. Additional, and unpredictable, costs have arisen from the Americans with Disabilities Act, as well as state laws requiring advanced notice of plant closings and newly enacted family-leave legislation that, for now, requires that employers provide additional unpaid leave. These policies are intended to help employees, but they also raise the cost of providing a job. Many of these costs ultimately are passed on to workers, either in the form of lower wages or in the loss of employment. To these already existing costs, the Clinton administration is adding enormous potential new ones. Uncertainties about labor costs under President Clinton are so great that many employers are deferring hiring decisions until they better understand the administration's intent. Overtime for factory workers, at an average of 4.3 hours per week, is at the highest level ever recorded. The use of temporary help in service industries is expanding rapidly. Growing numbers of employers have concluded that it is cheaper to pay overtime or bring on temporary help than to incur the uncertain liability of hiring additional full-time staff. The largest of these uncertainties is the fear that employers will be required to provide health-care benefits for their workers. The president's health-care package will affect directly a sector of the economy that itself accounts for 14 percent of gross domestic product, and indirectly will affect all other sectors of the economy. Its impact will be felt the hardest in the service sector, where a majority of the economy's uninsured workers are found. Regardless of whether health-care reform lives up to its promised goal of controlling costs, it will raise employment costs in this sector markedly, and therefore depress employment. 63-Percent Tax Rate Currently there are about 39 million uninsured Americans, 22 million of whom have some connection to the workforce, either as workers or their dependents. The administration is widely expect- ed to announce that employers must offer health insurance to all workers, and shoulder a substantial portion of the costs for insuring lower-income workers and their dependents. The cost of these requirements easily could exceed $40 billion, a dramatic increase in labor costs. The average cost for employer-provided health insurance is more than $4,200 for an individual with family coverage. Requiring that employers provide and pay for health insurance for low-wage workers is equivalent to raising the payroll-tax rate on a minimum-wage job to 63 percent (including existing payroll-tax rates). Such a mandate would affect directly the employability of at least 18 million workers, 4.7 of whom are working at or below the minimum wage, as well as another 13.3 million whose hourly wage is less than the minimum wage plus the cost of the mandate, roughly $6 an hour. The impact lessens at higher wage scales -- not only is the mandate's cost a smaller increase in total compensation, but a greater proportion of higher-wage workers are covered already. The uncertainty extends beyond mandated health benefits. Richard Freeman, a members of the secretary of labor's Commission on the Future of Worker-Management Relations, the special group formed by the secretary of labor to recommend revisions to the National Labor Relations Act, wants to emulate European employment practices -- shorter work weeks and a greater number of vacation days, including perhaps as much as four weeks of leave -- all in the name of forcing an increase in employment. In Europe, however, these policies have been unable to prevent unemployment rates that are substantially higher than those in the United States. France, Britain, and Italy all have unemployment rates close to 11 percent; unemployment is running 9 percent in Belgium, and close to 8 percent in Sweden and former West Germany. European heavy industries, such as steel-making, have seen employment losses as severe as in this country despite shorter work weeks and work years. These employment policies promote unemployment sharing, not job creation. At the same time, Clinton administration officials support a number of projects that, if enacted, would raise costs for the vast majority of employers, regardless of industry. The chief economist for the Department of Labor, Lawrence Katz, has spoken favorably of the European practice of extending collective bargaining agreements to firms not party to them, as well as raising the minimum wage. The new assistant secretary at the Department of Health and Human Services, David Ellwood, is on record as advocating drastically higher minimum wages despite his acknowledgement that such an increase would be accompanied by job losses. Discouraging Employment Large numbers of high-paying jobs with high skills content are the Holy Grail of all administrations. How to get all three at the same time is the hard part. Conceivably, you could mandate that all jobs in America must pay over $40,000 a year. The jobs that remained would meet at least one and probably two of the three criteria, but there would not be very many of them. The Clinton administration's strategy of driving up labor costs by taxing employment seems guaranteed to discourage hiring at all levels, but particularly for low-wage labor. Hiring will only make sense for an employer who is acquiring skilled workers with already-high levels of productivity. But America will need jobs at all levels, not just for those with post-graduate educations or those who can get into the apprenticeship programs favored by the administration. To sacrifice low-skilled, entry-level jobs is to close the future to many marginally skilled job entrants. We must accept that the immediate postwar years were an aberration in American economic life. An economy in which individuals could leave high school -- with or without a degree - - with few if any job skills, and enter into lifetime employment at high wages was only sustainable when much of the world's industrial capacity lay in ruins. America went on a postwar binge no different from a Texas oil town when the gushers come in; but now it is time to accept that the boom is over and we all must work for a living. Free Lunch Theory To create good jobs means that we must let jobs be created at all levels of American society. Not all jobs will be "good" jobs immediately. Some will be decidedly entry-level jobs. Yet we cannot ignore the large numbers of entry-level workers who need those jobs and who, without access to them, will not be able to advance. Our option is either to force entry-level jobs out of existence by requiring that employers pay high wages and provide benefits, or to recognize that without these jobs individuals with deficient education and training -- and America has many -- will never enter the workforce. If these people cannot enter the workforce, how will they acquire the skills to progress in the workforce? On this score the administration was half right. We do need to do a better job training and retraining the workforce. But the administration failed by believing that the costs for such a program could be passed on to employers. It was this free lunch theory of social progress that drove Mr. Clinton to campaign on a platform to tax employers 1.5 percent of payroll in order to improve skills in the labor force. The support that could have been won for a skills-enhancement program was squandered by casting it as an entitlement, no different than welfare. As former senator and well-known liberal George McGovern has written, "How do those least likely to be employed ever become part of the American workforce...? We too often forget that a job -- any job -- is often the best training for a `better' or more specialized job. For many employees, an entry-level job is the only opportunity to learn about the workplace.... Unfortunately, many entry-level jobs are being phased out as ... employers are pressured to replace marginal employees with self-service or automation." Conventional wisdom says that Americans should not try to compete on a wage level with Third-World countries paying pennies an hour for labor. That is true. The sad reality, however, is that Americans who enter the workforce with Third-World skills cannot continue to expect an advanced standard of living unless they either improve their skills or convince other Americans to subsidize them. If Americans want to live in a society that provides a wealth of services to all its members, then we must be willing to part with the notion that we can make someone else pay for these services. We cannot subsidize ourselves. CARLOS BONILLA is the chief economist for the Employment Policies Institute in Washington, D.C. To reprint more than short quotations, please write or FAX Ben Morehead, Associate Publisher, Policy Review, 214 Massachusetts Avenue, NE, Washington, DC 20002, FAX (202) 675-1778.