Interview editor Ingrid Stegemoeller recently had the opportunity to sit down with Harry Holzer, a professor at GPPI. Dr. Holzer shares a few thoughts on unemployment, particularly the challenges facing younger workers. The full interview will be available in the print edition of the Georgetown Public Policy Review, available in Spring 2012.
Georgetown Public Policy Review: What are the biggest factors keeping the real unemployment rate around 9 percent?
Harry Holzer: Probably the biggest reason that unemployment stays high is that there simply isn’t enough aggregate demand in the economy to create demand for enough goods and services that employers would want to hire a lot of workers. Even though we have tried lots of stimulus, the economy’s aggregate demand is still weak, and that’s usually the case when you have a recession caused by the bursting of a financial bubble.
There are other issues that might also be in play, but I think that’s the most important. Some people wonder about what’s called “mismatch” in the labor market between the skills employers are looking for and those the workers have. My guess is, that’s a much smaller factor than the lack of aggregate demand, but it might be adding a percentage point or so to the unemployment rate.
There is some evidence of high job vacancy rates—not a large amount overall, relative to the size of the unemployment rate—but in certain sectors like manufacturing there’s some evidence of very skilled jobs that employers have some trouble filling.
There’s one other issue, I think, that’s probably broader than the recession. It goes through the whole last decade of the labor market, when it seems job creation was sluggish. Technology and globalization overall are good things, but they do hurt certain groups and they make it easier for employers to produce goods and services without a lot of workers. The demand for workers, even before the recession, seems to drag a little bit by those kinds of structural factors that limit new hiring. So that’s probably one more factor that makes the climb out of the recession a little slower.
GPPR: In talking about these factors, what policy steps do you think could help alleviate some of this persistently high unemployment?
HH: The question is can we do much more to generate new demand in the economy? I think we’re probably not going to have another really big stimulus package because we’ve already piled up a lot of debt and there’s a reluctance to have a really major new stimulus. The Fed has done almost as much as it can do—short-term interest rates are close to zero. I think the best thing we can hope for — and this was to some extent embodied in the President’s proposal, the American Jobs Act—is to have well-targeted policies to make it cheaper for employers to hire new workers—targeted tax credits for employers who create new jobs.
Some of that was included in the President’s payroll tax cuts for employers. I would have preferred a set of payroll tax cuts that were even more generous than what the president proposed, but better targeted. I think just reducing the overall employer payroll tax by 3 percent to 6 percent doesn’t spur a lot of hiring. But if you have a really big credit targeted at employers who are creating a significant number of new jobs I think that would be more powerful.
Would it have a dramatic effect? Probably not; but could it lower the unemployment rate by up to a percentage point? Probably. And that would help.
Efforts to improve the quality of education and training to limit some of these mismatches to make sure workers are getting the skills they need for new jobs could also help. There might be some policies to stimulate more job creation by start-up firms, too.
GPPR: You’ve written about child poverty and its negative effects on both individuals and society. How do you shine a light on this problem for policymakers in a strongly partisan environment?
HH: I’ve tried to do that because I’ve written some things showing that there is a cost to the overall economy of having so many kids grow up in poverty. And of course the poverty numbers are worse in a recession. They’re going to be bad for several years and I think coming out of this downturn kids are going to be scarred, both by the high rates of poverty and by the high rates of parental unemployment. I’ve written some papers showing that even in good times the high rates of child poverty in America mean that when those poor kids become adults they’re likely to have lower rates of education, which means lower rates of employment and earnings; higher rates of incarceration; and worse levels of health, all of which impose economic costs on the country. I did a rough calculation several years ago saying that the rate of child poverty in America ends up costing us a half-trillion dollars a year in lost or wasted GDP. That was a rough calculation and people can quibble with those numbers. But it’s probably a big number, indicating lots of economic waste.
I try to make that case. I don’t think, politically, people disagree with that. I think there’s a strong sense on both the left and the right that child poverty is wrong, that it runs counter to our ideals of equal opportunity and it is bad for the country. It’s then hard to get people to agree on what to do about it. So I think the people that oppose new spending programs, they argue yes, child poverty is bad, but spending programs aren’t necessarily alleviating it. And there are times when they’re right. It would be nice if we could come to some kind of consensus about where the spending is effective and where it is not effective, and what kinds of other policies you want—you want to talk about marriage promotion, about other things to instill work ethic and good values, fine. We’re open to those conversations, too. But I think that’s the problem. It’s not just making the case that kids are heard, it’s getting people to agree on what to do about it.
GPPR: Another population that’s been affected by this recession is those in their late teens and 20-somethings who are just starting their careers and don’t have a lot of opportunity right now in this job market. How do you think this generation will be affected?
HH: I have big concerns about this generation of young people. There’s some evidence that over the last 10-15 years, employment rates for this group have dropped, and their relative wages have decreased. There are different reasons for that. High-income kids are working less and less because they’re doing more enrichment activities, which is great, but lower income kids often aren’t getting the kinds of early work experience they need. And the recession has hit them very hard.
There’s evidence from the ‘81-’82 recession, which before this one had been the worst since the Great Depression, that young people coming out of school at that time and getting their first jobs, even if they got a job, they were still scarred by the recession, because the jobs they got weren’t as good as in earlier years. Young people make a lot of progress in the labor market in their first five or ten years by job-switching, by figuring out which job is best for them. But if you’re in a recession, it’s harder for you to do that kind of productive job-moving and your wages are going to grow more slowly.
I worry about young people joining the labor market right now. I certainly worry about the ones that can’t find anything in their field, but I even worry for the ones that do find a job, but it’s a much less successful job and job path than they would have found in a stronger economy. Young people do bear a strong brunt in a recession and it can affect their earnings for 10 to 15 years. So even when they start climbing the ladder, they’re always going to be below where they might have been.
GPPR: Based on your work, is there an answer to this?
HH: This is a real tough one because as long as the economy remains soft, there’s nothing we can do to dramatically speed up the recovery process. It’s going to take the better part of this decade to climb our way out of the hole we dug for ourselves and there’s not a lot we can do in that situation, so people in their 20s and 30s are just going to have a harder time. The best thing you can do is encourage them to get the best possible education and training that they can get if they’re not working really productively right now and to find as much work experience as they can early on.