Don’t Fear Putting More People to Work

For weeks now, Federal Reserve chairman Alan Greenspan has been hinting that the tight labor market could cause an inflationary wage-price spiral and threaten our 9-year-old expansion and that a “preemptive” interest rate hike would be in store when the Fed’s Open Market Committee met Tuesday and today. A new UCLA study further predicts the Fed will raise short-term interest rates twice more during 1999, reversing the three .25% rate cuts it made last fall, thus diminishing growth from about 3.8% in 1999 to 2.3% in 2000.

This thinking has a ring of almost Newtonian certainty to it: New technology can only extend productivity so far; sooner or later, growth must bow to a limited labor supply, wages will rise faster than labor productivity, prices will accelerate, inflation will loom, growth will fall. What goes up must come down.

But the latest numbers show unemployment at a 29-year low of 4.2%, while inflation remains negligible. Moreover, many U.S. cities and states have unemployment rates way below the national average, and they are doing just fine. For example, Colorado, Minnesota, Nebraska and Virginia have rates below 3%. Thirty-five cities have rates below 2.5%. Raleigh-Durham is at an “impossible” 1.6%. Their economies are booming, and their social costs--ranging from crime to health care--are down. All our cities should have such labor market problems. So why the current apprehension over 4.2% unemployment?

“The impressive strength of domestic demand, in part driven by sharply rising equity prices,” Greenspan has said, “has meant that the substitution of capital for labor has been inadequate to prevent us from steadily depleting the pool of available workers.” Here we find the heart of the chairman’s logic: that the supply of workers is fixed.

But what if the labor pool is not depleted? What if the supply of labor is in fact plentiful and demand still has plenty of room to grow?

In fact, between 35% and 45% of healthy American adults with no children under six are out of work. There is strong evidence that they would overwhelmingly choose to work if given a real choice and that they would be happier and healthier in a good job.

Who are these tens of millions of the hidden unemployed? Just think of some of your older relatives, friends with disabilities, young people, minorities, recent immigrants and women frustrated by unequal pay and glass ceilings. The government’s 4.2% does not include them because they are not actively seeking work. They have been effectively mothballed. They learn that good jobs in fact aren’t available to them. And society tells them not to work (“Enjoy your ‘golden’ years”) and pays them enough to make dependency OK financially.

Mothballing works, but there is nothing natural or inevitable about it. If we increased demand and encouraged people to contribute, i.e. to follow their natural instinct and self-interest, Greenspan would not have to fear a “depleting pool of available workers.”

The first two years of World War II proved this: America increased the number of people working 35% and also expanded the average work week 20%. There was no labor shortage. Employers then did what they do in Raleigh-Durham now: They pulled in women, older people, minorities and those with disabilities. The Advertising Council’s “Rosie the Riveter” campaign helped women quickly accept a new role.

Now as then, as noted economist William Baumol says, the pool of potential workers unemployed or underemployed is so vast that even a greatly increased demand for labor is hardly likely to exhaust it. The roughly 40% of the potential work force that is now idle is the country’s great untapped resource. Using it is our only substantial opportunity to shift to fast growth and to solve many of our social ills.

America’s constraint is not too few workers. It is job creation, which the government depresses in many ways. The Fed typically raises rates and slows growth just when business starts pulling in “mothballed” workers. What is especially pernicious is that since 1949 the government has driven up the cost of hiring by increasing payroll taxes from 2% to 36% of federal revenue. The Department of Labor’s definition of “unemployment” blinds us by hiding 90% of the jobless.

As long as the so many unemployed remain unseen and uninvited to the table, Greenspan’s logic will, sooner or later, indeed push us back to a 2% growth creep. However, that is not necessary. We could extend and, in fact, greatly strengthen the recent economic acceleration by giving everyone the choice to work.