The Jobs Debate: Some Call Redistribution the Solution—Beware

blittchandan The Jobs Debate: Some Call Redistribution the Solution—BewareThe Bureau of Labor Statistics reported last Friday that U.S. payroll employment fell by 57,000 jobs in August, besting economists’ expectations of a decline of more than 100,000. Stock markets rose on the smaller-than-expected drop, in large part because losses were concentrated in the public sector. The federal and state governments both shed employees, driving a net public-sector decline of 121,000 jobs. Private employment improved by 67,000 jobs in August, following a revised increase of 107,000 in July.



Consistent Gains in Private-Sector Payrolls

Private payrolls have grown in each month of 2010, and are now 307,000 jobs above year-ago levels. While this is welcome news, reflecting a more consistent trend in private-sector job growth than during previous recoveries, the magnitude and makeup of the payroll increase is disappointing at best. The prodding pace of job growth was foreshadowed earlier in the week, in comments by Fed Chairman Ben Bernanke at the annual Economic Policy Symposium in Jackson Hole: “The painfully slow recovery in the labor market has restrained growth in labor income, raised uncertainty about job security and prospects and damped confidence.”

While the most optimistic observers have taken the August report’s private payroll findings to mean that downside risks to the economy are overblown, the current numbers show us losing ground in some measures of the recovery. The one-month rise in the unemployment rate, from 9.5 percent to 9.6 percent in August, reflects a marginal increase in the labor participation rate and a decline in the Household Report’s count of Americans actually employed.

Robert Reich, labor secretary under President Clinton and now a public policy professor at Berkeley, wrote in The New York Times on Friday that “at least 125,000 [new jobs] are needed to keep up with the growth of the potential workforce.” By that measure, the current employment trend implies higher unemployment rates and an increasing burden on public resources.

Over time, it also threatens a structurally less-competitive U.S. economy.


Office-Using Employment in Absentia

The challenge for office landlords holding high-quality assets runs deeper than the headline numbers that feed the public and media discourse. In particular, an examination of the sources of private-sector payroll growth reveals that hiring remains lackluster in key office-using sectors.

As in past months, hiring has been relatively strong in health care and education (plus 45,000 jobs in August). Professional and business service hiring was evident in August as well ( plus 20,000 jobs), but remains dominated by growth in temporary employment.

In financial activities, payrolls fell by 4,000 jobs. In fact, financial activities employment has fallen by 50,000 jobs over the past year, failing to keep pace with the general private-sector gains. Financial-sector job losses in 2010, however modest as compared to late 2008, remain an important qualifier for office occupancy and rent projections, as do the weak trends in other high-skill professions.


Radical Plans for Vitalizing the Labor Market

The uninspiring pattern of job growth presents greater risks for the long-run economic outlook than the general or office-using employment numbers suggest. In search of ideas for how to accelerate job-market gains, the incentives for entrepreneurship that have served as keystones of American life are coming under increasing fire. The debate over our job-market woes is being framed increasingly as a debate about income distribution. This is an important line of inquiry, but one that must be tempered by logical thinking and a rejection of dogmatism on both sides.

Illustrating that there are multiple dimensions to the debate, the president of the National Small Business Association, Todd McCracken, appeared on CNN on Sunday saying of the expiration of tax cuts for high-income earners that “the companies that do pay this tax–and it is a minority of small companies, for sure–but the ones that do are the more successful ones who are most likely to be growing jobs and the ones that we want to continue to be successful, and we don’t want to put disincentives in place for them to do it.”

Mr. McCracken was countered by the president of the AFL-CIO, Richard Trumka, who stated that “… when you get into tax cuts for the very rich, they don’t buy much. And that’s what happened. That’s what resulted in the deficit in the last 30 years. They gave more tax cuts to the rich. They did not give them to the people that needed it.”

Suggesting causation when observing correlation, Mr. Reich, in his column for the Gray Lady, suggested that the concentration of wealth at the top of U.S. income distribution is a principal reason for the current labor market trend. Wading into an intellectual debate with a long history, he seems to forward the notion that the concentration of wealth is a cause of job woes–rather than a symptom of tougher policy problems, like the questionable quality and efficacy of the U.S. secondary education system and a lack of mobility in the workforce.

We should be systematic and critical in evaluating this line of thinking. Tax proposals that emerge from an ideological focus on income or wealth distribution as a cause of economic stagnation will inevitably take on a more Pigovian than progressive character.

I should point out that Mr. Reich is not alone in making bold proposals for addressing the worrisome labor-market trends. Rather, he is joined by other well-respected and well-intentioned policy thinkers also concerned about how to address the employment conundrum and the real possibility of a long-term structural problem in the U.S. labor market.

These concerns are captured in last week’s Economist, where my clever compeers from Saint James Street write that “if a chunk of America’s unemployment is structural, its policymakers need urgently to think beyond stimulus measures, and also to adopt more targeted policies to help the millions stuck in the wrong place with the wrong skills.”

The problem with Mr. Reich’s proposals is not that they call into question the underpinnings of the capitalist market structure and the returns to entrepreneurial effort. In an open society, it is perfectly reasonable to question our economy’s fundamental assumptions, especially when those assumptions may have failed us.

But we must also be careful in proposing and evaluating alternatives. To “widen the circle of prosperity,” Mr. Reich suggests that greater income redistribution can enhance economic and labor market gains. For example, he offers that “workers who lose their jobs and have to settle for positions that pay less could qualify for ‘earnings insurance’ that would pay half the salary difference for two years.” Even as a Canadian reared on maple syrup and with an avowed belief in strong social supports, I can imagine few labor market interventions that would be more counterproductive to allocative efficiency in my adopted home.

Mr. Reich writes that “policies that generate more widely shared prosperity lead to stronger and more sustainable economic growth–and that’s good for everyone.”

I would suggest that he is correct in stating that a shared gain is to everyone’s benefit; if some or all are better off and no one is worse off, we have something like a Pareto shift. Where he is wrong is in suggesting that an increasingly redistributive system of public finance is a substitute for real economic gains and a more skilled, creative and flexible American workforce.


Sam Chandan, Ph.D., is global chief economist and executive vice president of Real Capital Analytics and an adjunct professor of real estate at Wharton.

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