Is the Government Responsible for the Poor Jobs Market?

Whether they are relying on anecdotes or statistics, just about everyone knows that the employment situation remains much worse than before the Great Recession began in December 2007.

Data from the Bureau of Labor Statistics show (see figure below) that the share of the U.S. population with a job declined from 62.9 percent in November 2007 to 59.4 percent in June 2009, when the recession officially ended. Since then, this fraction has been largely flat, coming in 0.6 percentage points lower in October 2012 than at the time the recovery started.

The $64,000 question is why. Without an understanding of the cause of the weak employment situation, policy makers stand no chance of fixing it.

As is often the case, there is no shortage of answers, just a shortage of agreement. Economists at the Federal Reserve Bank of St. Louis, for example, blame weak investment in real estate, which keeps businesses from hiring in traditionally high employment sectors of the economy. University of Chicago economics professor and Nobel Prize winner Gary Becker points to uncertainty about future economic policy, which has caused business to delay investment. Nobel laureate and Princeton University economics professor Paul Krugman, disagrees, saying that the problem is weak demand, which keeps business from expanding.

While some of these authors believe that the government may not have done enough to respond to the financial crisis and the recession, or that its inaction on key issues is to blame, none of them see government policy as the cause of the current weak job market.

But enter University of Chicago professor Casey Mulligan. He places the blame for a lack of jobs squarely on the back of policy makers. In a recent book entitled The Redistribution Recession, Mulligan argues that government’s remedy for rising unemployment during the recession – a dramatic increase in government support programs – is the cause of the weak employment situation today. The enlargement of the amount and duration of unemployment benefits; amplification of loan forgiveness, health subsidies, and transfer payments to those adversely affected by the downturn; and growth in the minimum wage, his argument goes, reduced people’s motivation to work, and spurred businesses to put money into equipment and machinery, rather than hire more workers.

If Professor Mulligan is right, policy makers are in a pickle. Shrinking government support programs back to pre-recession levels – by eliminating extended unemployment benefits, for example – will be necessary to get hiring back to where it was before the economic downturn. But our political leaders expanded the safety net to help workers hurt by the bad economy, particularly the poor employment situation. With the jobs market still weak, undoing these policies will hurt those still suffering from the worst recession since the Great Depression.

They don’t call economics the dismal science for nothing.

Source: Bureau of Labor Statistics

3 Comments ▼

Scott Shane


Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

3 Reactions

  1. Good article. It seems to me that government headwinds; from massive regulations, high taxes, and poor leadership are very important factors. The bigger the government, the harder it is for America to reach its full economic potential. I know this is politically incorrect, but I see it every day in our small business world. Our leaders need to get out of our way, not micromanage us.

  2. Trying to add jobs in such a tough economy is very difficult to do. Government jobs seem to be even more difficult to come by as they are still being cut across the country. Granted.com is a place for you to search for available jobs.

  3. My Personal opinion is yes, the U.S. Government is the #1 reason for the poor economy; and the tough job market.

    The debt of the entitlement programs is 550% of GDP.

    You have Harry Reid stating they should get credit for trimming one billion dollars off the debt. Given the trillions in debt… that’s like an adult stating “give me a break, I paid you a penny on the million dollars I owe you.”

    There’s the uncertainty of the fiscal cliff; and a government in place that absolutely HATES small businesses.

    They want to raise taxes without cutting spending; and even the taxes they would raise would only run the government for days.

    We need less government regulation, a fair tax structure (get rid of the loop holes that allowed billion dollar G.E. to pay no taxes), and lower the over all tax rate.

    Show leadership by having a real balanced budget (Harry Reed has yet to put forth a single budget; those who tried to put out budgets didn’t get passed).

    Now that we had fifty some percent vote for the SAME persons who have been dragging us down (all because of greed over entitlements — as if they are owed it as part of the constitution — WRONG), we have another four years down hill.

    I’m not a Romney fan, but he pointed out what would happen if President Obama got re-elected, and it is happening just as it was foretold. Sigh.

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