During this Great Depression II, government has responded to rapidly rising unemployment by providing more unemployment benefits. The 2009 stimulus program increased unemployment insurance benefits, and it finances extensions of compensation through the end of 2009. The federal government is also transferring funds to the states to cover more workers such as part time labor.
The government will get some of this back, since unemployment benefits are taxable income. But the unemployed typically have low incomes, so their income tax payments will be very low. Thus in effect, the federal government is borrowing money to pay people not to work.
If the government is just giving people money who are laid off, why not make them do something in return? The state governments should create public employment programs -- PEP!
The governments would pay a bit less than minimum wage to any unemployed workers so that they get employed in projects such as public safety, litter clean up, and construction.
The federal government did that during the Great Depression with the Works Progress Administration. The Civilian Conservation Corps built trails in national parks, and the Federal Art Project hired artists to paint murals. A new WPA could be run by the states and be funded by the federal government.
An advantage of a public employment program is that it would provide employment to all who lack work, rather than just those eligible for unemployment benefits. The self-employed and those who quit jobs are usually not eligible for the compensation today.
One problem with unemployment benefits is that they reduce the incentive to work, and so increase unemployment. So PEP should pay less than minimum wage, and workers would lose their eligibility if they refused private employment. Employers would be offered tax incentives to list job offers with PEP, which would be matched with PEP workers.
There is a tremendous amount of work that needs to be done to repair and maintain infrastructure, reduce environmental damage, and enhance public safety. Why not train PEP workers to patrol the areas with the highest crime rates? Why not put the unemployed to work cleaning up litter?
Of course a PEP program is not the first-best policy for unemployment. The best policy is to eliminate the barriers that governments have placed against employment. Taxes on labor reduce net wages while increasing the cost of hiring labor, reducing employment. The legal minimum wage is in effect a tax on hiring low-skilled labor, further reducing employment. Taxes for unemployment insurance injury compensation further increase the tax wedge between what the worker gets and what the employer pays.
The best unemployment program is a strong market demand for labor. We can maximize employment by untaxing labor and shifting the public financing to land rent or land values. Taxing land value pushes landowners to use their land productively, while untaxing labor and enterprise pulls up wages as producers and investors have the full incentive to expand.
Alas, this is not what government does. The public does not demand equity and efficiency. They want government handouts. So at least, if the government is bailing out labor, why not require some labor in exchange?
Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form
FRED E. FOLDVARY, Ph.D., is an economist and has been writing weekly editorials for Progress.org since 1997. Foldvary's commentaries are well respected for their currency, sound logic, wit, and consistent devotion to human freedom. He received his B.A. in economics from the University of California at Berkeley, and his M.A. and Ph.D. in economics from George Mason University. He has taught economics at Virginia Tech, John F. Kennedy University, Santa Clara University, and currently teaches at San Jose State University.
Foldvary is the author of The Soul of Liberty, Public Goods and Private Communities, and Dictionary of Free Market Economics. He edited and contributed to Beyond Neoclassical Economics and, with Dan Klein, The Half-Life of Policy Rationales. Foldvary's areas of research include public finance, governance, ethical philosophy, and land economics.
Foldvary is notably known for going on record in the American Journal of Economics and Sociology in 1997 to predict the exact timing of the 2008 economic depression—eleven years before the event occurred. He was able to do so due to his extensive knowledge of the real-estate cycle.