In a recent article (How Not to Fix America's Broken Jobs Machine), we mentioned a few flaws in the solutions Richard Florida proposed for America's unemployment problem in his Financial Times op/ed. Earlier this week, New York Times columnist David Brooks took on the unemployment problem as well, focusing in particular on the 20% of working-age American men who are currently unemployed ("The Missing Fifth").
Putting the Statistics in Perspective
To show how unprecedented it is in post-war America for a fifth of working-age men to be unemployed, Brooks quoted another statistic from his colleague David Leonhardt: in 1954, 96% of American men between the ages of 25-54 worked (versus only 80% today).
Brooks' Proposed Solutions
Brooks tossed out several ideas. Let's take a look at them and then address them:
It will probably require a broad menu of policies attacking the problem all at once: expanding community colleges and online learning; changing the corporate tax code and labor market rules to stimulate investment; adopting German-style labor market practices like apprenticeship programs, wage subsidies and programs that extend benefits to the unemployed for six months as they start small businesses.
No surprise that Brooks leads off with education here. Recall that in our previous article on unemployment, we noted one reason education isn't a panacea for unemployment. There's another reason: Often the skills taught in schools aren't the ones employers need. Although employers are often in the best position to train their workers, in the U.S. they don't always have an incentive to do so. This ties in with another policy idea Brooks mentioned in the paragraph above, German-style labor market practices.
German-Style Labor Market Practices
Here Brooks may be on stronger ground. In an earlier article on unemployment (Why U.S. Unemployment Remains so High) we quoted Thomas Geoghegan on the consequences of German labor market policies designed to reduce labor market flexibility. Geoghegan argued that lower German labor market flexibility kept workers in skilled trades together in groups, where their skills and human capital could build.
Last December, Marc MacDonald made a similar point, in a letter to the editor of The Financial Times in response to an op/ed by Mort Zuckerman, in which Zuckerman had claimed that companies in the U.S. invested a lot in worker training in recent decades:
U.S. businesses have long been notorious for skimping on worker training compared with their counterparts in continental Europe and Japan.
Mr. Zuckerman praises the U.S.’ “labor mobility” as a reason for its economic success. But it is that very labor mobility that has caused U.S. businesses to regard worker training as a dubious investment.
By some estimates, German companies spend as much as five times as their American counterparts on worker training. As a result, German workers are renowned worldwide for their highly advanced skills.
Changing the Corporate Tax Code
Since Japan lowered its corporate income tax rate recently, the U.S. has had the highest corporate income taxes in the developed world. On the surface, it would seem that lowering those rates could encourage more multinational companies to set up shop in the U.S. and hire more workers here. However, corporations' effective tax rates are often quite different from the statutory rate. As we noted in a previous article (Exxon Mobil: The Anti-GE), General Electric (GE) paid no federal corporate income taxes in 2010.
David Brooks may have missed this article by Scott Shane a few years ago in The American, The Start-Ups We Don't Need." In that article Shane pointed out that the U.S. government already does plenty to encourage entrepreneurship - perhaps too much. Shane wrote that most start-up businesses in the U.S. were economically unproductive, created relatively few jobs, and what jobs they did create tended to be lower paying and have fewer benefits than those at larger companies. The reason for this, according to Shane, was that there simply are fewer talented entrepreneurs with high levels of human capital than there are Americans who start small businesses, and that many small businesses are started by unemployed or underemployed individuals who are motivated to do so partly by government incentives.
Shane argued that these unskilled entrepreneurs tend to have high failure rates partly because they have low levels of human capital and partly because they tend to enter over-crowded niches. Shane thought that an appropriate policy response by the U.S. and state governments would be to stop encouraging everyone to become an entrepreneur, and to instead think like a venture capitalist and provide support for those entrepreneurs with more obvious potential.
What Brooks Leaves Out
Two policy areas Brooks leaves out of his proposed solutions are trade and immigration.
Our Trade Deficit and Unemployment
In a previous article, we quoted Paul Tudor Jones on the effect of U.S. unemployment on our trade deficit with China:
The root cause of the unemployment woes is quite obvious. In the United States alone, in the last two decades, nearly six million jobs in manufacturing have been lost overseas. This equates to nearly four percentage points of the current 9.7% ...
How did we get here? On January 1, 1994, China devalued its currency by 50% in a single day, and since then has experienced a manufacturing boom.
The Boston Consulting Group recently speculated that the U.S. would experience a manufacturing renaissance over the next five years as Chinese wages rise, reducing the cost benefit to manufacturing there. If that comes to pass, it would presumably lower unemployment. But as former Intel (INTC) chief Andy Grove explained in a Bloomberg Businessweek column last year, once a country loses manufacturing capacity in certain areas, it's often lost for good.
Grove used the example of batteries to illustrate his point, noting that the U.S. lost its lead in batteries when it stopped making consumer electronic devices 30 years ago, and as a result, ceded leadership of the development of laptop batteries to other countries, and consequently remained behind in the development of batteries for electric cars (presumably, notwithstanding the work of U.S. companies such as Tesla Motors (TSLA) and A123 Systems).
The Impact of Immigration
In a recent article, we quoted Harvard economist George Borjas on the effect of immigration on domestic wages. Borjas' research suggested that for every 10% increase in the number of workers in a particular skill group that can be attributed to immigration, wages of native workers in that skill group will decline by 3%-4%. A commenter on David Brooks' column brought up immigration as well, focusing on illegal immigration in particular:
David, you are missing the 900 pound gorilla in the room - illegal immigration.
The numbers you recite - 8 million unemployed low skill men, 20% of high school educated men; these are the guys who used to make a living filling your gas tank, or mowing your lawn or doing odd work around the house. All those tasks are now the province of illegals, at least here in the D.C. area.
Little known fact: when the Great Depression hit, in 1929, Hoover began deporting illegals. FDR followed suit in 1933. Illegal cheap labor is a forgivable luxury in boom times. It is unforgivable in a 9% unemployment economy.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.