Previously Published by Bill Watkins in the September 2016 California Economic Forecast

A decade of slow or declining economic and job growth has been accompanied by fundamental changes in America’s job composition.  Those changes have caused profound disruptions in the lives of millions of workers, primarily low-educational-attainment workers, and their families.

The situation is not improving.

Economic growth (GDP) appears to have slowed, even from its previously anemic pace.  Job growth has been weak too, but it’s a little better than economic growth.  Weaker economic growth than job growth implies declining or very weak productivity growth, and we’ve recently seen quarters with each.

Declining productivity doesn’t necessarily mean that individual workers productivity has declined.  It could.  If demand fell and businesses were slow to lay off workers, perhaps because of the cost of firing and hiring, individuals’ productivity would fall.

That’s not what we’re seeing now.  Instead, we’re seeing the impacts of changing job composition.  We’ve lost, and continue to lose, high-productivity jobs.  Our job growth has been in low-productivity sectors.  Naturally, high productivity jobs pay more than low-productivity jobs.

Combined, Mining, Construction, Manufacturing, and Wholesale Trade are still down over 2.5 million jobs since their pre-recession highs.  Other sectors have seen strong growth over the same period.  The generally very low paying Leisure and Hospitality sector has grown by over two million jobs.  The surprisingly low paying, on average, Education and Health sector has been our fastest growing sector.  It’s up 3.9 million jobs, almost all of which are in health care.

Technological change, increased trade, poorly incentivized safety net programs, regulation, and slow economic growth are all claimed to contribute to the change in job composition.

Technological change is an appealing explanation, but the past decade has been characterized by low business investment and slow productivity growth.  This is not what we’d expect if we were going through a generalized technological revolution.  As it is, the most visible gains from advancing technology have been in oil and gas exploration and production.  Oil prices are consequently down, but many governments, organizations, and people are doing all they can to limit or erase the gains from these technologies.

People have worried about technological change’s impact on employment since the dawn of the industrial revolution.  Time and again, those worries have proved unfounded.  I do believe, though, that the spread of electricity throughout the economy and the adoption of tractors in agriculture contributed to the persistent unemployment of the Great Depression.

The Great Depression and the Great Recession share some similarities.  So, we can’t reject the possibility that technological change is contributing to persistent unemployment, low investment and productivity growth notwithstanding.  If so, its impact is relatively minor.

Increased trade, combined with an ineffective safety net, has contributed to persistent unemployment.  This is a bit sacrilege for an economist.  If there is anything approaching a consensus among economists, it is that trade is good.  The proofs are elegant and convincing.  I have no doubt that countries that voluntarily trade are better off.  But, this ignores distributional issues, and distributional issues can be important.

As a free-trade enthusiast, I’ve argued, and deeply believe, that the benefits of free trade are sufficient to allow us to protect the workers, and the families of workers, displaced by the increased trade.  But, we don’t.  Maybe we shouldn’t expand trade until we do?

Our safety net is so bad that it actually contributes to persistent unemployment.  Means-tested welfare programs create cliffs, where small amounts of new income cause the loss of thousands of dollars in benefits.  So, why work?  Extended unemployment benefits encourage workers to be idle long enough that their skills atrophy.

Our regulatory environment is increasingly onerous, and contributes to persistent unemployment.  Perhaps the worst example is coal.  Our government has declared war on our coal industry, with the avowed goal of eliminating the industry, and by extension the livelihoods of the industry’s workers and their families.

Other regulations may be well meaning, but they are laced with pernicious consequences.  These include minimum wages, licensing requirements, and mandated benefits.

Recently, we’ve adopted more reckless ways to increase our economy’s regulatory burden.  Sarbanes-Oxley, Dodd-Frank, and the Affordable Healthcare Act are examples of massive regulations that were written in a short time in response to a perceived crisis and passed with insufficient consideration and debate.  Unemployed workers and their families pay a disproportionate share of costs of the poorly-considered regulations.

These regulations have performed one service.  For those willing to see, it’s clear that micromanaging markets by politicians and their bureaucratic lackeys is a terrible idea.

Slow economic growth contributes to persistent unemployment.  Unfortunately, it’s becoming increasingly fashionable to accept slow economic growth, or even argue that slow economic growth is good.  This is terrible thinking.  Our low and declining labor force participation rate, is one result of slow economic growth.  The fact remains that the best opportunity for a low-productivity worker exists with higher-productivity workers are employed.

How do we know when the higher productivity workers are employed?  The unemployment rate won’t help.

Unemployment numbers are distorted by labor force participation rates.  If a worker becomes discouraged and stops looking for a job, the unemployment rate falls.  The media, who engage in only the shallowest analysis, report this as if it were good news!  They say the world is better, when what really happened was that a person gave up looking for a job.  The once proud and self-sufficient worker surrendered to the soul-crushing life of a ward of the state.

The correct measures of economic vigor are labor force participation rates, new jobs as a percentage of the population, and per-capita GDP growth.  By those measures we aren’t doing very well.

What to do?

Lots of economists would say increase trade and public capital investment.  I disagree with both.  My arguments against public capital investment are here.

My reluctance to increase trade are not because I doubt the gains from trade.  Trade will increase the wealth of both trading partners.  Instead, it’s based on our inability to protect those displaced by increased trade.

Over the past year, I’ve had the opportunity to meet many men who lost their jobs because a factory moved to Mexico.  Yes, everyone was a man, and every factory moved to Mexico.

In every case, the impacts were devastating and long lasting.  Sure, some have bounced back and are now doing relatively well, but they bear the scars of divorce, destroyed families, extended unemployment, and reduced living standards.  More aren’t doing well, having slipped into a mind-numbing life of drug abuse and round-the-clock television.

We’re back to what to do?

One thing we need to do is completely revamp our safety net, in a way that always provides an incentive to work, to keep at least some of that next dollar earned.  Replacing our existing system with a negative income tax would do the trick, and save billions in administrative costs.  It would improve economic growth.  It would save families and lives.

We need to completely revamp our regulatory regime, reducing the compliance burden on businesses, embracing market-oriented solutions, and subjecting new regulation to rigorous cost-benefit analysis.

Just these two things need to be done.  Revamping our safety net and our regulatory environment would release Americans to do what they have always done: work hard, create wealth, and create opportunity.  We would see a sustainable boom, one like we haven’t seen in decades.