Can we get to below-4% unemployment? Do we need to?

Robert Pollin has a piece in Boston Review arguing for a return to full employment in the United States. The following is my comment, cross-posted from the Boston Review forum.

I share Robert Pollin’s view that the U.S. should strive for full employment — by which I mean, following his lead, an unemployment rate below 4%.

Can we do it? Pollin points to two historical precedents as grounds for optimism. The first is Sweden from 1960 to 1989. Sweden succeeded in keeping unemployment below 4% throughout those three decades by coupling employment-oriented monetary and fiscal policy with wage restraint. But Sweden’s central bank at that time was subordinate to the government. Ours, the Federal Reserve, is independent. Since the late 1970s, independent central banks such as the Fed almost always have prioritized low inflation, rendering low unemployment difficult to achieve. If the Fed isn’t on board, even a workable plan for full employment supported by the American public and our elected officials probably won’t be enough.

What about Pollin’s second precedent, the United States in the late 1990s? During those years the Fed, under Alan Greenspan, did keep interest rates low enough for the unemployment rate to drop below 4%. But Greenspan held rates low despite opposition from other Fed board members, who were concerned about potential inflationary consequences — particularly given the internet-driven stock market bubble. Greenspan took this stance in part because his belief in the self-correcting nature of markets led him to worry less than others about the bubble. In light of the painful consequences of the 2000s real estate bubble, I doubt we’ll see the Fed take that approach again for some time.

Do we need below-4% unemployment? Here a cross-national perspective might shed some light. The following charts show indicators of Pollin’s desired outcomes — a healthy economy, decent pay, low poverty, good working conditions, absence of discrimination — in twenty rich democratic nations. Each outcome is plotted against the number of years from 1979 to 2007 in which each country had sub-4% unemployment.

These charts tell us that while full employment may contribute to good outcomes, it isn’t a necessary condition. In each case, some countries have done well despite seldom or never reaching sub–4% unemployment during the measurement period. In some instances this is a function of strong unions or “production regimes” (think German manufacturing) that are unlikely to be relevant in the American context. In others, though, successful outcomes have owed much to government action.

This is good news because Americans have more influence on the policy choices of the government than on those of the Fed. Whether or not we get back to full employment, we can reach important economic and social goals.

Yet I fear this conclusion is too optimistic. I’m confident that the United States could achieve satisfactory economic growth, a reasonably high employment rate, decent wages, poverty reduction, good working conditions, and less discrimination without full employment. I’m less certain that we can manage sustained wage growth for those in the bottom half of the distribution.

The post–World War II experiences of the rich democracies suggest three routes to rising working- and middle-class wages. One is an environment in which firms face only moderate competition in product markets and limited pressure from shareholders, allowing them to pass on a significant share of growth to their employees. This characterized the period from the late 1940s through the mid 1970s, but it’s now long gone. The second is strong unions. I see little hope of that in America’s future. The third is full employment.

Is there any alternative? One possibility might be to use the Earned Income Tax Credit to subsidize wages. We could extend it higher in the income distribution (currently it phases out at about $45,000), reduce its connection to children (currently it’s minuscule for households with no kids), and index it to average wages (it’s now indexed to inflation). I would prefer the full employment path that Pollin envisions, in which wage growth comes from firms rather than taxpayers. But we ought to have a backup plan.

3 thoughts on “Can we get to below-4% unemployment? Do we need to?

  1. >I would prefer the full employment path

    Is it either/or? Wouldn’t expanding the EITC achieve both — increased wages *and* increased employment?

    EITC gives employees incentive to work, and employers incentive to hire. The incidence is split.

    Would love to hear your thoughts on that.

    The cost of an increased EITC (via inevitable higher taxes on higher earners) would be a reduction in annual savings by high earners, hence a long-term reduction in the stock of financial assets (where those savings are stored).

    But since our stock of privately held financial assets is currently $55 trillion+ and growing — three and a half times the size of our stock of productive private assets (private nonresidential fixed capital) — you gotta wonder whether that small reduction is gonna hurt us much.

  2. Oh and I like your idea of indexing EITC to wages. But how about going further and somehow indexing it to some measure of unemployment, creating an automatic stabilizer?

  3. On an annual basis, the available job pool in the corporate world is shrinking by 3-5% every year. At the same time we are continuing in the US to train people to work in this system creating a declining job pool, with more people being trained to fill jobs that are disappearing creating huge unemployment. So why are we continuing to train people for jobs that won’t exist? Today the unemployment rate is running around 7.8%, but if we calculate that number in a real sense the number is closer to 15%. How you ask? We don’t count someone as unemployed if they haven’t looked for a job during the last 30 days. Tell that to those who can’t find a job in their field who are unemployed by the true definition..

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