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A Multi-Prong Approach to Bringing Unemployment Down

The US unemployment rate is still too high. After reaching a peak of about 10% in late 2009, it has very slowly inched its way down to 9.5% but seems to have leveled off at this juncture. It has been grudgingly above 9% since May of 2009 a period of 15 months. (Taken from the US Department of Labor, Bureau of Labor Statistics, seasonally adjusted.)
One eye-opening statistic, is the variation in the unemployment rate among those who did not complete high school, those with a high school diploma, those with some college or an associate degree, and those with a college degree or higher. For those without a high school diploma, the unemployment rate is 13.8%. For those with a high school diploma and no college, the unemployment rate is 10.1%. For those with some college or an associate degree, the unemployment rate is 8.3%. For those with a bachelor degree and higher, the unemployment rate is 4.5%. (Source: Bureau of Labor Supply, civilian population aged 25 or higher, seasonally adjusted.)
The questions that arise from this are:
-          Is the rise in unemployment a structural or cyclical problem?
-          What policies can be put into place to alleviate the overall unemployment?
-          What policies can be put into place to help those with the highest unemployment rates?
If the economy faces a period of decline due to a cyclical nature, of which there was an oversupply of goods and services leading to a temporary decrease in demand, then the usual Greenspan era solution of lowering interest rates would be an acceptable solution for both the economy and unemployment. Lower interest rates would stimulate the economy which would eventually lead to a balancing out in supply and demand. But what if the economic decline is not cyclical in nature, but structural? One in which excessive debt in the system has to be worked off. The de-levering process could cause a long alternating periods of very slow growth, no growth, or even declines in output. In a case like this, lower interest rates would be helpful but not sufficient for an economic expansion and a declining unemployment rate.
A three-prong approach including lower interest rates, tax cut incentives for businesses to hire workers, and government spending with incentives for the unemployed to improve their skills.
First, the lower interest rates from the Fed has been helpful. Further action which includes quantitative easing may be necessary by the Fed. But the Fed cannot alone get the economy on the right track. As the head of the Minneapolis Fed recently said, “But the Fed does not have a means to transform construction workers into manufacturing workers.”
Second, tax cuts do stimulate the economy and would help with the unemployment rate. Incentives to hire and train new workers would stimulate employment. All tax incentives should be looked at including a cut in the capital gain tax. Anything that could help offset the effects of this period of high long term unemployment caused by the de-levering process.
Third, government subsidies with incentives to those unemployed would be doubly beneficial. It would help the unemployed improve their skills and could provide a firm looking to hire a skilled worker. I do hear read about times that firms are looking to hire but many of the applicants don’t have the basic skills necessary. In cases where the unemployed person does not have a high school diploma, incentives can be offered to that person to attain that diploma. For those unemployed a long period, for example more than 1 year, could receive a conditional extension in unemployment benefits. If the unemployed person is willing to change careers, perhaps move to another part of the country, or further his skills, the unemployment benefits could be extended.
These are some of the ways that government can try to alleviate the effects of a structural de-levering process which in turn cause high unemployment. There is no magic bullet to thwart the de-levering process but strong steps can be taken to decrease its effects, especially on the unemployed.
Authored by Tom Henderson, Strategist JBH Capital.

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