Home > unemployment > America can be a full-employment economy once again

America can be a full-employment economy once again

from John Komlos

Irving Berlin was dreaming of an old-fashioned Christmas. I’m dreaming of an old-fashioned economy in which everyone has a job. I know, it was ages ago, but what are dreams for anyway?

Isn’t it strange that full employment has to be a dream, even a quarter millennium after the beginning of our stupendous surge in wealth with the Industrial Revolution? But what is full employment? Well, it’s simple enough, isn’t it? An economy in which there are enough jobs to go around for everyone. But here is where the complications begin.

There are rationalizations galore why we have to accept unemployment as an integral part of our economic system.

The practitioners of the dismal science — those in charge of the concept — don’t think of it in those terms. True to their reputation, they believe that full employment is, well, simply unattainable. There will always be a lack of jobs; people are not buying enough stuff, businesses are investing too much overseas, we are importing too much, the banks are sitting on their money, unions are destroying jobs, people do not have gas money to look for a job, people are too easily discouraged from looking for a job, government regulation and taxes discourage firms from hiring, workers do not have the right skills, and then there is always the perennial scapegoat: the minimum wage. And even when there is an opening, it takes time to find the right person for the job. There are rationalizations galore why we have to accept unemployment as an integral part of our economic system.

These rationalizations have been formalized under the umbrella concept of the “natural rate of unemployment.” This is thought of as the minimum level of unemployment attainable in the economy. It would be futile for the Fed to try to use monetary policy to get the unemployment rate below that level because it would just lead to inflation. Fiscal policy wouldn’t help either because increasing government expenditures by borrowing would increase the interest rate and thus would just be at the expense of private investment. Or so the thinking goes.

The Fed has put the natural rate of unemployment, or the minimum attainable level of unemployment, at about 5.2 percent. This concept has become so engrained in the economists’ culture that even former Fed chair Ben Bernanke referred to it as “full employment.” The media adopted this euphemism — reminiscent of newspeak — which implies that 5 percent is as good as zero. Given that the unemployment rate right now hovers around 5.6 percent, by this logic, we are nearing full employment.

This attitude – that this is the best the U.S. can do – writes off some 8 million workers —roughly the population of New York City. That is invidious because it encourages policy makers to be complacent about the plight of a substantial segment of the labor force. And, of course, the confusion among the public about what full employment means is then complete. That is precisely why Noble laureate William Vickrey referred to the natural rate of unemployment as “one of the most vicious euphemisms ever coined.”

That is not all. This concept of full employment has other hidden flaws — namely that there are additional workers who are barely hanging on with the skin of their teeth but are not counted as unemployed. People who could find only half-time jobs even though they would like to work full time are considered employed for the purposes of the statistics, as Making Sen$e reported last year. So they are not counted as unemployed. Also left out are those who would like to work but have not looked recently because they thought it futile to do so — they have been turned down so often that they became depressed and could not muster the motivation or they ran out of gas money and could no longer afford to look for a job.

This group — let’s call them underemployed — is substantial: they are as numerous as the unemployed. Together the unemployed and the underemployed total an amazing 11.2 percent of the labor force or 17.5 million workers. These unfortunates add up to the whole labor force in 21 of the 50 U.S. states. This is not all. They obviously have dependents, so we are really talking about some 35 million people who are in this underprivileged group. Furthermore, the underemployment rate is much higher in many states. In 2014 it was near or above 15 percent of the labor force in Arizona, California and Nevada. Yet, according to the received wisdom, we are getting close to full employment. If that is not newspeak, I do not know what is.

Is this really the best we can do? My answer is a resounding no. We must reject the concept of the natural rate of unemployment. In 1944 the unemployment rate was 1.2 percent. That is what we should be aiming for. Sure that was wartime, you say, and we’re not likely to match that any time soon. But that just means that there was a high demand for tanks and airplanes, making work easy to find. Well, why not declare war… not in the conventional sense, of course, and not as Paul Krugman has suggested — tongue in cheek — by declaring an impending alien invasion, but by declaring other kinds of “wars”: on inferior school systems, on slums, on decaying infrastructure, on pollution, on global warming, on poverty, or on using fossil fuels. There is no shortage of such “wars” given the backlog of desperately needed investments in the economy. These projects could create enough jobs to create full employment for many years to come.

Insofar as exclusion from work threatens one’s very existence and given that most of us need to work in order to survive, the right to life implies straightaway that we must have a right to a job.

Let us diverge to assert the obvious, namely that people have a natural right to life. The Declaration of Independence even states that the right to “Life, Liberty, and the pursuit of Happiness” is “unalienable.” Moreover, the UN’s Universal Declaration of Human Rights states similarly, “Everyone has the right to work . . . and to protection against unemployment.” Insofar as exclusion from work threatens one’s very existence and given that most of us need to work in order to survive, the right to life implies straightaway that we must have a right to a job. Otherwise we cannot survive.

We first have to recognize that current labor market institutions will not deliver a true full-employment economy. If they have not done so since 1944 then “growing the economy” will never provide enough jobs. Rather, we need to think of new ways to restructure the labor market to begin to approach such a goal. We also need to acknowledge that the labor market is in need of repair. We would never have created a labor market in which the opportunity to work — like wealth and income — is so unevenly distributed across the labor force if we had designed a system from the ground up.

Currently, adjustments to the decline in demand for labor occur by reducing the number employed so that their labor time falls abruptly from 40 hours to zero. Employees work 40 hours, 20 hours or not at all. Would anyone “behind a veil of ignorance” design such a rigid system from scratch, a system with so much uncertainty and volatility–with working times ranging from zero to 70 hours per week even in normal times?

It would be much more palatable to have the adjustment occur in the number of hours worked so that instead of dismissing workers, the available work would be divided among those wanting to work. Hence, an institution that distributes work more evenly would be a reasonable solution to this quandary.

Thus, our aim should be to restructure the labor market in such a way that it would distribute the available work more evenly and thereby generate full employment. There are several ways to achieve this. For instance, we could reduce the standard full-time working day to seven hours. Note that, in this regard, for a long-time after the Industrial Revolution, even a 10-hour workday was a dream and most Americans worked 12 or more hours a day six days a week. The eight-hour day did not become the standard in the U.S. until the 1930s and workers literally had to fight for it because the employers were resisting it vehemently. Just think how much greater unemployment would be if people still regularly worked 10-hour days.

Given the substantial increase in productivity per hour since the 1930s it is about time that we reduce the number of hours worked per day to seven. That, by itself, would immediately open up more work opportunities for the underemployed and effectively eliminate underemployment. The extra salaries could come out of corporate profits that sum $1.9 trillion per annum and have increased by an incredible 50 percent since 2007 (before the financial crisis). No other component of Gross National Product increased by as much. If the private sector will not provide sufficient jobs then we have to restructure the institutions of the labor market in order to achieve these goals for the sake of equity.

Other policy steps could complement the above reduction in the work day. A government agency similar to the depression-era Work Progress Administration could become the employer of last resort similar to the government’s role as lender of last resort for the financial system. The new institution, whose role would be comparable to the Federal Reserve’s role in finance, could guarantee similar stability to the labor market. It would contribute to an inclusive economy in which absolutely no one is deprived of the opportunity to work.

Of course, we could also provide jobs by reducing, or even eliminating our $500-billion-a-year trade deficit as Warren Buffett advocated in Fortune magazine in 2003. It is crazy to stimulate the economy of the rest of the world at a time when our own economy desperately needs the stimulation. Getting our foreign trade in order alone would create millions of jobs and, in combination with the other two policies above, would create a full-employment economy. Such an economy would increase leisure time and reduce the psychological burden of unemployment, thereby increasing quality of life for millions of Americans. It would be a much fairer method of distributing the pain of a decline in the demand for labor (associated with globalization and technological change) than the prevailing system.

In sum, the natural rate of unemployment is a bogus concept. According to the UCLA economist Roger Farmer, “it is an idea that is past its sell-by date.” We must no longer be complacent about 17.5 million people being unable to find full-time employment. How inefficient! That is like the population of New York, Chicago, Los Angeles and Houston sitting around idly watching us work. It is up to us to stop dreaming and start acting to overcome the obstacles created by a “jobless recovery.” We can create a truly full-employment economy and eliminate the pain associated with being excluded from the labor market.

  1. March 6, 2015 at 11:26 am

    Well said John — Bravo!

  2. originalsandwichman
    March 6, 2015 at 5:01 pm

    “It would be much more palatable to have the adjustment occur in the number of hours worked so that instead of dismissing workers, the available work would be divided among those wanting to work.”

    It would indeed be more palatable. It would also be more rational. But what we need to understand is that it would violate economists’ taboo #1 — “the lump-of-labor fallacy,” which asserts that any proposal for having the adjustment occur in the number of hours worked can only be based on the assumption that “there is a fixed amount of work to be done.” To no avail, the fallacy claim has been demonstrated to be not only false but utterly incoherent.

    Let’s not hold our breath in anticipation of full-employment paradise as long as we have a profession — economics — in which practitioners who peddle tripe as tenderloin not only get away with it but are awarded the highest honours.

  3. March 6, 2015 at 7:11 pm

    John stated:

    “We can create a truly full-employment economy and eliminate the pain associated with being excluded from the labor market.”

    Has anybody asked: “Why do we all have to have jobs in order to obtain an income?”
    The aristocrats of yesteryear and the “upper class” of today never had any problem in figuring out what to do with their time.
    So, why can’t we all become aristocrats rather than wage slaves? It is quite possible to distribute purchasing power by other methods than by earning it by way of wage slavery.

    If it works for the one percent, why can’t it work for the rest of us?
    After all, our highly automated production system is quite capable of providing for most of our needs with very little human labor involved.

    It is time to leave the “I need to be a good slave” paradigm behind.

  4. Herb Wiseman
    March 6, 2015 at 7:16 pm

    In the middle ages I am under the impression that people would be able to support themselves and their families on 14 weeks of full-time work per year leaving time for family and creative pursuits. I kind of like Helge’s idea.

  5. Norman L. Roth
    March 9, 2015 at 6:24 pm

    March 09 2015

    Mr. Komlos’s observation about the terrible obfuscation that has marred realistic thinking about the entire subject of what determines quantity of work needed during a particular Technological time {T in our notation} and resultant levels of employment, by almost all schools of economic thought, is well motivated. Unfortunately “WE” cannot decree full employment by “restructuring institutions” nor by simply printing lots of paper, direct “social dividend” credits to consumers; which will magically evade savings deposits; nor any other theory or vaporous policy of surrogate work creation: Whether it’s Keynes’ G or I, or the “progressive” Q&E of Greece’s newly elected government. One thing we’ve got to give them credit for [pun intended] They’re out-of-the-closet about what they want. A national government whose employment levels are a burden on somebody else’s National accounts & balance of payments. Mostly the strongest economies in the EU. In short, any deficit in one’s official definition of “full employment” will be “closed” by surrogate employment payrolls: courtesy via the funded debt route. a.k.a “QE”. Backed up by guess who ?
    The recipients {Think of the U.N.) will presumably use it in a “SOVEREIGN” dignified fashion: e.g.Lots more civil servants, lots more academics of varying quality. Middle-aged students galore ! Overstaffed public schools. Exponentially padded over -budget spending on any and all public works projects. Lots more petty officials to monitor the taxpaying citizen at work and in the daily market place. Well, it’s a job, n’ est ce pas ? Want to clear your {plural} minds on the entire subject folks ? Consult TELOS & TECHNOS. Especially Chapter Four on the NATURAL PARTICIPATION rate. pages 162 -163 of the 197 page edition. Do not neglect the footnote. There you will also encounter a “”send-up” of the preposterous notion of the “natural UNemployment rate”. Usually attributed to Milton Friedman and his acolytes.
    I.m not sure if he’s entirely to blame.. But I look to be corrected on that.

    Norman L. Roth, Toronto, Canada

  6. March 10, 2015 at 11:44 am

    Economists: stop dreaming and waffling and do your scientific homework
    Comment on ‘America can be a full-employment economy once again’

    John Komlos writes:
    “Isn’t it strange that full employment has to be a dream, even a quarter millennium after the beginning of our stupendous surge in wealth with the Industrial Revolution? But what is full employment? Well, it’s simple enough, isn’t it? An economy in which there are enough jobs to go around for everyone.”

    In a well-functioning market economy all factors, including labor, are fully employed. This is what standard economic theory asserts. Obviously, this is regularly not the case and that means that the theory of employment is empirically refuted.

    Being no real scientists economists simply ignore refutation. This is normal operating procedure since time immemorial and more than one methodologist has condemned it.

    “In economics we should strive to proceed, wherever we can, exactly according to the standards of the other, more advanced, sciences, where it is not possible, once an issue has been decided, to continue to write about it as if nothing had happened.” (Morgenstern, 1941, pp. 369-370)

    This is exactly what we observe: an endless writing and waffling about the natural rate of unemployment.

    The empirically testable employment formula for the investment economy is given with:

    Employment L depends in the main on investment expenditures I, the expenditure ratio rhoE, and on the price mechanism which is embodied in the factor price ratio rhoF. If this ratio increases employment increases (all other variables held constant).

    The price mechanism, i.e. the factor price ratio which consists of wage rate, price and productivity, should regulate itself, such that full employment results under the condition that I and rhoE (=aggregate demand) is given. The fact of the matter is that the price mechanism does not work as the representative economist think it works and this has nothing to do with market imperfections, or stickiness, or expectations, or uncertainty (for details see 2014; 2014; 2012).

    Orthodox employment theory is false and has to be replaced.

    Egmont Kakarot-Handtke

    References
    Kakarot-Handtke, E. (2012). Keynes’s Employment Function and the Gratuitous
    Phillips Curve Desaster. SSRN Working Paper Series, 2130421: 1–19. URL
    http://ssrn.com/abstract=2130421.
    Kakarot-Handtke, E. (2014a). The Three Fatal Mistakes of Yesterday Economics:
    Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2489792.
    Kakarot-Handtke, E. (2014b). Towards Full Employment Through Applied Algebra
    and Counter-Intuitive Behavior. SSRN Working Paper Series, 2456184: 1–25.
    URL http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2456184.
    Morgenstern, O. (1941). Professor Hicks on Value and Capital. Journal of Political
    Economy, 49(3): 361–393. URL http://www.jstor.org/stable/1824735.

  7. kzoner
    December 4, 2015 at 4:10 am

    Mr. Komlos,

    You say that “our aim should be to restructure the labor market in such a way that it would distribute the available work more evenly and thereby generate full employment”, yet wouldn’t a push for greater equality in the job market also lead to a reduction in efficiency and productivity? Though there are many reasons for unemployment, much of today’s unemployed are inhibited from getting a job due to their education level. So, how can we effectively redistribute available work without jeopardizing efficiency when much of the labor force does not have the knowledge, training, and experience necessary to work productively?

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