Jobs, Jobs, Jobs

After the latest set of elections, everyone is really harping on the "jobs jobs jobs" agenda. With unemployment crossing ten percent, this is an eminently reasonable approach to take.

Yet both Republicans and Democrats haven't a clue about how to actually generate jobs. Meanwhile, Europe's managed to keep the rise in unemployment fairly low, and some countries are actually recovering. And they've done so without a stimulus. Here's what The Economist has to say:

The United States has put in place a hefty fiscal stimulus, but relatively little of that money has gone into labour-market policies—schemes to slow firing, boost hiring or support the jobless. Although America has extended its (meagre) unemployment benefits, and is likely to do so again, Congress’s main response to persistently high joblessness has been a host of ill-targeted new stimulus proposals. The extension of a homeowner’s tax credit is imminent and a $250 payment to old people is being discussed.

Europe’s policymakers, in contrast, appear to have a more coherent strategy: one which uses government money to subsidise a shortened work week, cuts labour costs and, in a few cases, offers tax subsidies to support new jobs. The OECD says 22 out of 29 of its member countries have extended support for workers on furlough, and 16 have cut payroll taxes and other social contributions. The countries doing these sorts of things are disproportionately in continental Europe.

And The Economist's resident blogger:

As the piece notes, one wants to be careful putting in place policies that will lead to ossification of the current structure of the work force, particularly given the structural shifts underway in the American economy. But America's oblique approach to stimulus has meant fewer jobs saved per stimulus dollar. What's more, the fact that stimulus policies have not directly targeted unemployment (for the most part) has probably led to a waning of public confidence in the very idea of stimulus, thereby making it difficult to follow up the spring economic package with a booster shot. Tying stimulus more directly to hiring subsidies and payroll tax cuts would ensure a steady constituency for additional action. Washington should take note.

In fairness, I suppose I should say that the Republicans have been far more favorable to this type of European strategy--which is, after all, in many cases being implemented by the local right-of-center party. And, of course, parts of Europe still have plenty of structural problems generating chronic unemployment. As the graph shows, the type of unemployment now seen as catastrophically bad is more or less routine in Continental Europe.

The general point is that wage inflexibility is really bad. The reason why you see rising unemployment during recessions is that companies want to compensate workers less during bad times. But people don't tend to like wage cuts. So you see mass layoffs. The way to tackle this is not through massive spending somewhere else, but by altering the incentives of employers to hire and fire; by cutting payroll taxes, giving out credits for job creation, or ideally allowing employers to cut wages and have the government make up the difference.

But I'm optimistic about this. Given the huge importance of job creation to politician survival--I think it's fair to say that the Democrats will win or lose in 2010 and 2012 based almost solely on the strength of the labor market--you'd expect them to take seriously ideas which have a proven track record of generating jobs very cost-effectively. And you'd expect the crack economic team advising the White House to be aware of these types of policies and their performance internationally.

And if it doesn't happen--well I guess I'll be there to write an angry blog post in response. It would really be very short-sighted and horrible for the US not to follow suit with useful policies to generate jobs.