Max Gulker of the American Institute for Economic Research has a great short paper out summarizing the problems with a federal jobs guarantee. It echoes many of the issues that I raised about such a program on this blog.
One thing that is often underappreciated is just the sheer scale of the programs proposed. For reasons I outlined, the true numbers could potentially be much higher than the Levy Institute and Center on Budget and Policy Priorities (CBPP) worked proposals. But even taking their numbers as given, the estimated 10.7 million participants according to CBPP and 12.7-17.5 million from Levy would make the federal program by far the world’s largest employer, if thought as a single firm or entity.
Consider the striking chart below.
At the Levy report’s upper-bound estimate, the numbers employed would exceed the world’s nine largest employers combined. Even the CBPP’s lower estimate would only be marginally below the employment level of the world’s five largest employers combined.
Senate Judiciary Committee Chairman Chuck Grassley recently reintroduced an E-Verify bill that ought to concern privacy advocates. If enacted, the bill would implement the employment verification scheme nationwide, something President Trump called for during his campaign. Nationwide E-Verify would establish the framework for a national ID system that would undoubtedly come to be used for more than the enforcement of immigration laws.
E-Verify allows employers to check a new hire’s information against government databases to confirm legal status. It is an ineffective system. One reason why E-Verify suffers from inefficiency is because, as things stand, employers taking part in E-Verify use information from documents such as Social Security cards provided by employees. Because the E-Verify system matches employees’ names with a Social Security Number (SSN) it’s possible for an unauthorized worker using a fraudulent SSN to be cleared for employment. A 2009 audit commissioned by the United States Citizenship and Immigration Services estimated that 54 percent of unauthorized workers who submitted documents via E-Verify were erroneously cleared for employment thanks to fraud.
An effective E-Verify system would have to address this glaring loophole. One way of addressing E-Verify’s inadequacy is to include biometric information, such as a facial photograph. Such proposals are worrying.
The E-Verify system currently checks submitted data against Department of Homeland Security (DHS) and Social Security Administration databases. Section 11 of Grassley’s bill would allow the E-Verify system to include the “passport and visa record (including photographs) maintained by the Department of State” as well as driver's license photos. Seven states voluntarily provide DHS with driver's license data as part of the Records and Information from DMVs for E-Verify (RIDE) initiative.
That Grassley’s bill explicitly mentions driver's license photos is important. Allowing the DHS secretary to deem it necessary for the E-Verify system to confirm identity via driver's license photos introduces biometric information that proponents believe will make the system more effective.
If the statute purports to require that 43 states provide DMV information that raises constitutional concerns, but as the recent debates surrounding REAL-ID show, the federal government could try to coerce states into compliance. DHS announced last month that residents in nine states will need an identifying document other than a state driver's license to fly if their licenses are not REAL-ID compliant by January 22, 2018.
Even if the federal government fails to force states to submit DMV data under a nationwide E-Verify scheme, there is still the possibility of nationwide E-Verify leading to a de facto biometric national ID card.
Congress could gather biometric data from residents of states that don’t send DMV data to the federal government by mandating a biometric Social Security card in an attempt to address one of E-Verify’s most prominent flaws. Such a plan has been proposed before.
In 2010 Sens. Charles Schumer (D-NY) and Lindsey Graham (R-SC) took to the pages of The Washington Post, proposing a way to “mend immigration.” They listed mandatory biometric Social Security cards as one of the four pillars of their plan.
If nationwide E-Verify is enforced we should expect such proposals to resurface as states resist DHS requests for their driver's license photos. These proposals would lead to a biometric national ID being required for employment.
Such a biometric ID card will not only be used to enforce immigration law. A mandatory nationwide identity card provides an ideal mechanism for lawmakers wishing to establish a gun registry, something gun rights activists haven’t overlooked. In 2015, the president of the National Association for Gun Rights (NAGR) wrote to supporters, urging them to contact the House Judiciary Committee to register their opposition to Rep. Lamar Smith’s (R-TX) “Legal Workforce Act.” If enacted, the legislation would have mandated E-Verify nationwide.
But it’s not only law abiding gun owners who should fear nationwide E-Verify. A national ID system designed for immigration enforcement will almost certainly be applied in wider law and regulatory enforcement contexts. A national ID could be used to regulate and oversee access to healthcare, medicine, and housing. Such a system would put citizens’ privacy at risk, allowing for increased government monitoring and data collection.
Grassley’s bill is cosponsored by some of his Republican colleagues. Perhaps Grassley and his bill’s cosponsors should consider that many notable members of their party considered national ID schemes anathema to Republican principles. When Attorney General William French Smith proposed a national ID, President Reagan ridiculed the idea saying, “Maybe we should just brand all the babies.” Sen. Barry Goldwater (R-AZ) was also opposed to a national ID system. More recently, Sen. Rand Paul (R-KY) has spoken out against national ID.
Nationwide E-Verify’s costs would vastly outweigh its proclaimed benefits, and would lead to calls for, and implementation of, nationwide biometric ID. Such proposals are a threat to Americans’ privacy and a needless expansion of federal government power.
In the latest issue of Cato Journal, I review Casey Mulligan's book, Side Effects and Complications: The Economic Consequences of Health-Care Reform.
Some ACA supporters claim that, aside from a reduction in the number of uninsured, there is no evidence the ACA is having the effects Mulligan predicts. The responsible ones note that it is difficult to isolate the ACA’s effects, given that it was enacted at the nadir of the Great Recession, that anticipation and implementation of its provisions coincided with the recovery, and that administrative and congressional action have delayed implementation of many of its taxes on labor (the employer mandate, the Cadillac tax). There is ample evidence that, at least beneath the aggregate figures, employers and workers are responding to the ACA’s implicit taxes on labor...
Side Effects and Complications brings transparency to a law whose authors designed it to be opaque.
Frederic Bastiat, the great French economist (yes, such creatures used to exist) from the 1800s, famously observed that a good economist always considers both the "seen" and "unseen" consequences of any action.
A sloppy economist looks at the recipients of government programs and declares that the economy will be stimulated by this additional money that is easily seen, whereas a good economist recognizes that the government
can't redistribute money without doing unseen damage by first taxing or borrowing it from the private sector.
A sloppy economist looks at bailouts and declares that the economy will be stronger because the inefficient firms that stay in business are easily seen, whereas a good economist recognizes that such policies imposes considerable unseen damage by promoting moral hazard and undermining the efficient allocation of labor and capital.
We now have another example to add to our list. Many European nations have "social protection" laws that are designed to shield people from the supposed harshness of capitalism. And part of this approach is so-called Employment Protection Legislation, which ostensibly protects workers by, for instance, making layoffs very difficult.
The people who don't get laid off are seen, but what about the unseen consequences of such laws?
Well, an academic study from three French economists has some sobering findings for those who think regulation and "social protection" are good for workers.
...this study proposes an econometric investigation of the effects of the OECD Employment Protection Legislation (EPL) indicator... The originality of our paper is to study the effects of labour market regulations on capital intensity, capital quality and the share of employment by skill level using a symmetric approach for each factor using a single original large database: a country-industry panel dataset of 14 OECD countries, 18 manufacturing and market service industries, over the 20 years from 1988 to 2007.
One of the findings from the study is that "EPL" is an area where the United States historically has always had an appropriately laissez-faire approach (which also is evident from the World Bank's data in the Doing Business Index).
Here's a chart showing the US compared to some other major developed economies.
It's good to see, by the way, that Denmark, Finland, and the Netherlands engaged in some meaningful reform between 1994-2006.
But let's get back to our main topic. What actually happens when nations have high or low levels of Employment Protection Legislation?
According to the research of the French economists, high levels of rules and regulations cause employers to substitute capital for labor, with low-skilled workers suffering the most.
Our main estimation results show an EPL effect: i) positive for non-ICT physical capital intensity and the share of high-skilled employment; ii) non-significant for ICT capital intensity; and (iii) negative for R&D capital intensity and the share of low-skilled employment. These results suggest that an increase in EPL would be considered by firms to be a rise in the cost of labour, with a physical capital to labour substitution impact in favour of more non-sophisticated technologies and would be particularly detrimental to unskilled workers. Moreover, it confirms that R&D activities require labour flexibility. According to simulations based on these results, structural reforms that lowered EPL to the “lightest practice”, i.e. to the US EPL level, would have a favourable impact on R&D capital intensity and would be helpful for unskilled employment (30% and 10% increases on average, respectively). ...The adoption of this US EPL level would require very largescale labour market structural reforms in some countries, such as France and Italy. So this simulation cannot be considered politically and socially realistic in a short time. But considering the favourable impact of labour market reforms on productivity and growth. ...It appears that labour regulations are particularly detrimental to low-skilled employment, which is an interesting paradox as one of the main goals of labour regulations is to protect low-skilled workers. These regulations seem to frighten employers, who see them as a labour cost increase with consequently a negative impact on low-skilled employment.
There's a lot of jargon in the above passage for those who haven't studied economics, but the key takeaway is that employment for low-skilled workers would jump by 10 percent if other nations reduced labor-market regulations to American levels.
Though, as the authors point out, that won't happen anytime soon in nations such as France and Italy.
Now let's review an IMF study that looks at what happened when Germany substantially deregulated labor markets last decade.
After a decade of high unemployment and weak growth leading up to the turn of the 21th century, Germany embarked on a significant labor market overhaul. The reforms, collectively known as the Hartz reforms, were put in place in three steps between January 2003 and January 2005. They eased regulation on temporary work agencies, relaxed firing restrictions, restructured the federal employment agency, and reshaped unemployment insurance to significantly reduce benefits for the long-term unemployed and tighten job search obligations.
And when the authors say that long-term unemployment benefits were "significantly" reduced, they weren't exaggerating.
Here's a chart from the study showing the huge cut in subsidies for long-run joblessness.
So what were the results of the German reforms?
To put it mildly, they were a huge success.
...the unemployment rate declined steadily from a peak of almost 11 percent in 2005 to five percent at the end of 2014, the lowest level since reunification. In contrast, following the Great Recession other advanced economies — particularly in the euro area — experienced a marked and persistent increase in unemployment. The strong labor market helped Germany consolidate its public finances, as lower outlays on unemployment benefits resulted in lower spending while stronger taxes and social security contribution pushed up revenues.
Gee, what a shocker. When the government stopped being as generous to people for being unemployed, fewer people chose to be unemployed.
Which is exactly what happened in the United States when Congress finally stopped extending unemployment benefits.
And it's also worth noting that this was also a period of good fiscal policy in Germany, with the burden of spending rising by only 0.18 percent annually between 2003-2007.
But the main lesson of all this research is that some politicians probably have noble motives when they adopt "social protection" legislation. In the real world, however, there's nothing "social" about laws and regulations that either discourage employers from hiring people and or discourage people from finding jobs.
P.S. Another example of "seen" vs "unseen" is how supposedly pro-feminist policies actually undermine economic opportunity for women.
I have two posts up at Darwin's Fool on ObamaCare's impact on jobs. In one post, I critique Politifact's ruling that GOP presidential candidate (and Iowa caucus winner) Sen. Ted Cruz (TX) is a liar for claiming that ObamaCare is a job-killer. An excerpt:
In their rush to label Ted Cruz a liar, PolitiFact ignored economic theory, ignored economic consensus, ignored problems with the evidence they had amassed, ignored that some of the evidence they collected supports Cruz, ignored reams of anecdotal evidence, and dismissed Congressional Budget Office projections based on nothing more than a subjective and arbitrary distinction PolitiFact themselves invented.
In the other post, I offer a compilation of media reports about employers who have eliminated jobs or switched to part-time hiring.
Friday's disappointing jobs report reminds us that we are still in a very slow recovery from the 2007 recession. Not only were far fewer jobs created in September than economists predicted, the estimates for July and August were revised downward. And the size of the total workforce slipped to 62.4 percent of the population, the lowest level since 1977.
The Minneapolis Federal Reserve Bank has a handy tool for monitoring the depressing news, allowing you to compare this recovery to past recoveries since World War II. Output (GDP) is recovering more slowly than in past recoveries, along with employment:
Why is the recovery so slow? John Cochrane of the Hoover Institution examined that question in the Wall Street Journal a year ago. Here's part of his answer:
Where, instead, are the problems? John Taylor, Stanford's Nick Bloom and Chicago Booth's Steve Davis see the uncertainty induced by seat-of-the-pants policy at fault. Who wants to hire, lend or invest when the next stroke of the presidential pen or Justice Department witch hunt can undo all the hard work? Ed Prescott emphasizes large distorting taxes and intrusive regulations. The University of Chicago's Casey Mulligan deconstructs the unintended disincentives of social programs. And so forth. These problems did not cause the recession. But they are worse now, and they can impede recovery and retard growth.
If you put obstacles in the way of investment and employment, you'll likely get less investment and employment.
A new e-book edited by Brink Lindsey, Reviving Economic Growth, presents ideas from 51 economists of widely varying perspectives on this crucial question.
As the Guardian recently reported, technology has created more jobs than it has destroyed, and the new jobs it has created have been of higher quality. Technology eliminated many difficult, tedious, and dangerous jobs, but this has been more than offset by a rise in the caring professions and in creative and knowledge-intensive jobs, resulting in a net increase in jobs. The sectors to lose the most jobs have been agriculture and manufacturing, which are both difficult and dangerous, while work opportunities in medicine, education, welfare, and professional services have become more abundant. (For example, there are more teachers per student, improving student-teacher ratios, and there are also more physicians per person than in the past).
In 1980, almost a quarter of the world’s employment was still in agriculture. Now, only around 15% of the world’s workers are engaged in agricultural labor. Yet we are feeding more people, undernourishment is at an all-time low, and food is becoming less expensive. Technological advances liberated humanity from toiling in fields by mechanizing many processes and boosting productivity, allowing more food to be produced per hectare of land, and freeing hundreds of millions of people to pursue less grueling work.
The elimination of so many unsafe jobs in manufacturing and agriculture means fewer worker deaths. According to data from the International Labor Organization, from 2003 to 2013, the number of work fatalities in the world decreased by 61% (i.e., over 20,500 fewer deaths). This occurred even as the world population grew by over 700 million over the same time period. If the most dangerous thing you have to face at work is the threat of a paper cut, you quite possibly have technological innovation to thank for that.
Even if in the future robots steal some jobs, advancing technology will likely make several higher-quality jobs available for every job lost. As the Guardian article cited earlier says, technology has proven to be a “great job-creating machine,” eliminating toilsome work but bringing into existence more—and better—opportunities than it takes away.
But note that behind every machine, there lurks human ingenuity. As Matt Ridley wrote in his book The Rational Optimist:
It is my proposition that the human race has become a collective problem-solving machine and it solves problems by changing its ways. It does so through innovation driven often by the market.
Learn more about what market-driven technological innovation has done to improve the state of humanity at HumanProgress.org.
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