As documented in Box 1-2 in the IMF’s latest World Economic Outlook, unemployment in the advanced economies remained persistently high. That brings to the fore how to best deal with adjusting the labor force so as to bring down structural unemployment (although obviously higher aggregate demand would help). In my view, there is the “are there no poorhouses?” approach (cut unemployment benefits, etc. and thus reduce the natural rate of unemployment). The other is to use evidence-based approaches to improve the labor force quality, and improve job matching, thereby decreasing structural unemployment. This alternative is discussed in a recent La Follette Policy Report, by Robert Haveman, Carolyn Heinrich, and Timothy Smeeding, entitled “Policy Responses to the Recent
Poor Performance of the U.S. Labor Market”:
[W]hile many EU nations have suffered the same or greater decline in gross domestic product (GDP) during the Great Recession than has the United States, some of them—especially Germany and Belgium—have been much more successful in maintaining employment. Many others have suffered the same younger under-skilled worker job loss as in the United States.
The most successful EU nations have employed an armada of programs during the recession, including government supported
short-time work programs (e.g., job sharing), which led to reduced hours of work instead of layoffs. Also, “working
time accounts” avoided overtime payments to workers
whose total working hours were below average for the firm. Both strategies protect older, more advantaged workers, while encouraging jobs for the unemployed; both are untried in the United States.
Training, Retraining, and Job Search
Europeans also have strong programs for worker (re)training, coupled with job-search assistance, more commonly known as active labor market policies. The most well-known of these are the Danish “flex-security” labor market policies that combine flexible employment standards designed to make hiring and firing easier depending on production with effective
retraining institutions and generous (but time-limited) income support programs. Other EU nations have maintained
or expanded core job-search assistance and have provided
more targeted re-employment services, including training
opportunities, for the most hard-to-place unemployed.
U.S. employers, rather than the public sector, account for the lion’s share of spending on formal workplace training—including activities such as on-the-job training, customized training, work-based learning, and tuition assistance. Expenditures
on these private-sector programs exceeded $109 billion
in 2005 (at a time when the federal government was spending about $5 billion on workforce development programs).
A drawback is that employer-based training efforts disproportionately go to better-educated and skilled workers and exclude unemployed people and low-skilled workers. The United States also spends far less on workforce development compared to many of its international counterparts: in 2005, U.S. labor market policy expenditures were approximately 0.4 percent of GDP, with countries such as Germany, the Netherlands, and Denmark outspending the United States by as much as 10 times.
The American Recovery and Reinvestment Act of 2009 allocated approximately $2 billion to expand the federal Workforce Investment Act (WIA) adult training activities to improve individual skill levels and job seekers’ employment prospects. Research suggests that the timing of extra public dollars for training could not be better, as the opportunity costs—or “lock-in” effects—of training are likely to be lower at a time when unemployment rates are high and employment
opportunities are poor. The latest evaluation evidence also indicates that these extra dollars would best be directed toward programs serving disadvantaged adults. Such programs
are more effective than the WIA and Trade Adjustment Assistance programs serving dislocated workers. A 2008 non-experimental evaluation of WIA programs found the average
increment in earnings for adult women (associated with receipt of training) to be 26 percent of their average earnings, with the impact for adult men around 15 percent of average earnings. This same study found no evidence that WIA dislocated
worker training programs produce benefits.
U.S. research that examines training outcomes over a longer follow-up period supports strategies that combine skills acquisition (particularly through customized community
and technical college training programs) with job search efforts that encourage participants to be selective in job entry, with average increases in participant earnings on the order of 20-25 percent over five years. Further, while youth training
programs have been much maligned as generating low returns, a recent review of the evidence points to some promising
strategies that combine academic and work-oriented activities and promote more intensive youth engagement in these programs. The Career Academies program, for example,
organizes youth into small, intensive learning communities
that blend academic, career, and technical curricula. The program establishes partnerships with local employers to provide career awareness and work-based learning opportunities
for at-risk students. An eight-year, experimental evaluation
of Career Academies showed significant reductions in high school dropouts and higher monthly earnings, months worked, hours worked per week, and hourly wages for participants,
compared to control youth.
Measures such as the New Jobs Tax Credit would alter the terms on which lower-skilled workers are hired. They would make hiring low-skilled workers a more profitable and attractive
proposition by offsetting constraints on labor demand due to market rigidities and by countering trade and technological
forces that curtail employment of less-skilled workers. The policies intend to increase the returns to employers from labor by less-skilled workers, and, in the process, lower business
costs and increase output.
In early 2012, a $140 billion bill extending emergency jobless benefits (and a temporary cut to payroll taxes) was passed and signed. Several parts of that bill work toward modernizing
the current unemployment insurance system. Now, states can use some of their UI money to encourage unemployed
workers back into the work force, including wage subsidies
to firms for taking on and retraining jobless workers. The bill also requires states to confirm that persons receiving long-term benefits are engaged in job searches, giving states a window into counseling unemployed workers or providing other job search services. Provisions in the bill also enable and encourage “work sharing” programs designed to reduce layoffs. While these are relatively small steps, they do reflect several of our suggestions and indicate a recognition that the problems with our current UI system need to be addressed; if expanded significantly, they could lead the nation into a new framework for attaining increased work and earnings.
On a related note, the La Follette School of Public Affairs is presenting a symposium on “The Wisconsin Idea at 100: Making the Link to Policy” at the Tripp Commons, Memorial Union, starting at noon today. Topics include “Family Support and Poverty,” “Financial Policy,” and “Wisconsin as Laboratory.”