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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 [1] (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 [2] 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 [3] uncertainty about future economic policy, which has caused business to delay investment. Nobel laureate and Princeton University economics professor Paul Krugman, disagrees, saying [4] 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 [5], 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