Is high unemployment as certain as death and taxes? Of course not. But if we depend on the private sector to bring rates down, joblessness could join those two certainties.
International experience shows that direct job creation by governments is one of the very few options that has succeeded at raising employment levels more than just marginally during a crisis. Nonetheless, unfounded optimism about the power of privately fueled growth underlies the latest round of interventions in Europe. The assumption that the business sector has the ability to absorb enough labor to end the unemployment crisis remains almost unquestioned.
And it is a crisis, despite the recent employment upsurge in much of the world. In Portugal, Ireland, Greece and Spain, high unemployment has continued, with anemic confidence indicators and planned-purchases data in Greece, for example, showing clear evidence that businesses and consumers are bracing for a protracted recession. In economies that are improving, outrageously high unemployment rates among important groups, particularly youths, signal the start of both a threat and a tragedy. Grave labor issues are scattered around the globe.
It’s unreasonable to expect private enterprises to solve these problems. Full employment isn’t an objective of businesses. Companies usually strive to keep staffing at a minimum — we’ve all heard the virtues of “lean and mean.” There simply isn’t any known automatic mechanism, in the markets or elsewhere, that creates jobs in numbers that match the pool of people willing and able to work.
In contrast, direct public-service job creation programs by governments have a history of long-term positive results. Throughout the last century, the United States, Sweden, India, South Africa, Argentina, Ethiopia, South Korea, Peru, Bangladesh, Ghana, Cambodia and Chile, among others, have intermittently adopted policies that made them “employers of last resort” — a term coined by economist Hyman Minsky in the 1960s — when private sector demand wasn’t sufficient.
South Korea, for example, during the meltdown of 1997-'98, implemented a Master Plan for Tackling Unemployment that accounted for 10% of government expenditure. It employed workers on public projects that included cultivating forests, building small public facilities, repairing public utilities, environmental cleanup work, staffing community and welfare centers, and information/technology-related projects targeted at the young and computer-literate. The overall economy expanded and thrived in the aftermath.
In 2005, France outlined a program in which the government paid laid-off workers their former salaries. It showed that this model could ultimately cost the nation a lower percentage of GDP than unemployment compensation or other traditional remedies.
Of course, these ideas came long after America’s Depression-era initiatives had already proved that government could successfully fulfill the role of employer without competing with the private sector. Programs such as the Public Works Administration and the Civilian Conservation Corps were followed by a “golden” era in American capitalism, and now, decades later, those policies are still providing rewards. The vogue to dismiss the 1940s recovery as entirely the result of World War II reflects political positioning, not economic data.
At the theoretical heart of job-creation programs is this fact: Only government, because it is not seeking profitability when it is hiring, can create a demand for labor that is elastic enough to keep a nation near full employment. During a downturn, when a government offers a demand for unemployed workers, it takes on a role analogous to the one that the Federal Reserve plays when it provides liquidity to banks. As in banking, setting an appropriate rate — in this case, a wage — is one key component for success, with the goal of employing those willing and able to work at or marginally below prevailing informal wages.
And, as in any good public policy, another key is rigorous, scientific monitoring and evaluation. South Africa, in response to a projected unemployment rate of 33% by 2014, has launched a $2.5-billion initiative to create 1 million “cumulative work opportunities” over five years. Analysis by Rania Antonopoulos of the Levy Institute found that care-provisioning jobs — such as home-based workers who care for the ill, the elderly or young children — had a significantly stronger impact as an employment multiplier than infrastructure-oriented or “green” opportunities. Not all jobs are created equal.
The benefits of direct job creation aren’t just transitory. It’s well documented that persistent unemployment results in a permanent loss of output and labor productivity. During a crisis, jobs combat these potential future effects. When the good times are rolling, they support those excluded from the prosperity while stimulating demand through feedback loops that increase the economy’s vibrancy.
This is the moment to expand the range of policy responses to unemployment.
There’s no evidence that work creation policies either hurt private business or break national treasuries. Incurring national debt to restore an economy through direct job creation isn’t frivolous. It is logical, practical, effective and humane.
Dimitri B. Papadimitriou is president of the Levy Economics Institute of Bard College and executive vice president of Bard.