Reducing unemployment: Current issues and policy options - A

Federal Reserve Bank of Kansas City - Economic Review, Fourth Quarter 1994 by Higgins, Bryon

Reducing unemployment has become a top priority for economic policy in most industrialized nations. While unemployment will ebb somewhat as countries recover from the recent global recession, millions are likely to remain jobless for a variety of structural reasons. Moreover, there is a disturbing trend in many industrialized countries toward long-term unemployment, especially among low-skilled workers. This trend has had less effect on measured unemployment in the United States than in Europe in part because U.S. workers have greater incentives to accept low-wage jobs. Nonetheless, virtually all industrial countries face a jobs problem that impairs living standards and threatens a breakdown in social cohesion.

To enhance understanding of what has caused this problem and to analyze policies to address it, the Federal Reserve Bank of Kansas City sponsored a symposium entitled "Reducing Unemployment: Current Issues and Policy Options." The symposium was held August 25-27, 1994, at Jackson Hole, Wyoming.

This article highlights the issues raised at the symposium and summarizes the papers and commentary. The first section of the article identifies areas of agreement and disagreement among program participants. The remaining sections summarize the views of symposium participants and their policy recommendations.

SYMPOSIUM HIGHLIGHTS

Symposium participants agreed high structural unemployment in industrial countries has resulted from the interaction between market forces and government policies. The principal change in underlying labor market forces in the past 20 years has been a decline in the demand for low-skilled workers, caused mainly by changing technology. In countries such as the United States, with limited government policies affecting labor markets, these forces have led to marginally higher unemployment but also to large increases in income inequality and poverty. In most European countries, with more extensive government policies toward labor markets, the result has been high structural unemployment, especially for low-skilled workers. Much of the increased unemployment is not merely temporary. Long-term unemployment has become a structural feature of economies in many European countries, in part because of generous government payments to the jobless and high payroll taxes to finance those payments. Policymakers in the industrial countries have been faced with a tradeoff between growing long-term unemployment or growing income disparities, a tradeoff Chairman Greenspan characterized in his opening comments for the symposium as both stark and dissatisfying.

Most participants felt the tradeoff could be improved--but probably only modestly--by adopting different labor market policies. The least costly improvement in Europe would be to reduce "employment protection," that is, the laws that make it costly and time-consuming for employers to dismiss workers. Although providing job security, employment protection legislation has also made employers less willing to hire workers in the first place, especially so given the heavy payroll tax burden employers bear in Europe. Lowering payroll taxes, especially for low-wage workers, would further reduce the disincentive to job creation. To complement these policy changes, limiting the duration of unemployment benefits would provide greater incentive for the long-term unemployed to seek employment. Most participants also agreed that replacing "passive" income support payments to the unemployed with "active labor market policies" which increase employment opportunities could also reduce structural unemployment somewhat. Even with these and other changes to improve the functioning of labor markets, however, most participants concluded that substantially reducing European unemployment would necessarily entail increased income inequality and poverty so long as market forces continued to favor high-skilled over low-skilled workers.

In contrast to these broad areas of consensus, participants disagreed on several specific aspects of the unemployment problem. Some participants thought more accommodative monetary policies in Europe could contribute substantially to reducing unemployment, while others felt central banks could best contribute to job growth in the long run by continuing to focus on price stability. Nor was there complete agreement on the effectiveness of several labor market reforms in reducing structural unemployment. Many participants, especially those from the United States, emphasized the need for paring the European "welfare state" as a prerequisite to reducing long-term unemployment. But several of the European participants questioned the effectiveness and political feasibility of doing so, especially if it resulted in growing income disparity and poverty as in the United States.

The differing degrees of emphasis on alternative policy responses reflected in part differing evaluations of the principal causes of rising unemployment. Those who believed the chief culprit has been the growth of the welfare state naturally placed more emphasis on reversing that trend, while those who believed other causes had also been important were less inclined to recommend drastic changes in the welfare state as a solution. Participants also differed on how much unemployment could be reduced in the United States and elsewhere by increased government spending on training programs, wage subsidies, and other active labor market policies. Some felt such policies could substantially improve the job prospects for low-skilled workers, but others thought they would prove too costly or ineffective.