Economics 9708/41 — October/November 2016

Unemployment and Government Policy

When considering alternative government policies in time of recession, it is worth remembering that in the 1930s US recession it was feared that what Keynes called ‘equilibrium at less than full employment’ might become permanent.

Moreover, technological unemployment could also remain a permanent feature of the labour market, especially among the less skilled and the elderly.

In 2013 there was another recession in the US. Unemployment stood at 6.7% of the workforce rather than above 20% as it had been in the 1930s. However, the economic recession was far from over in 2014. The US economy was 8% smaller than had been forecast for it. This led to a repeat of the question of whether stagnation is inevitable and whether unemployment would be a permanent feature.

The policies of the US government to solve the recession of 2013–14 included raising the minimum wage to US$10.10 an hour, increasing benefits to the unemployed and increasing the money supply. There was, however, little enthusiasm from some economists for more government action in the form of government spending. They did not support a programme of creating public sector jobs to combat unemployment, saying it was bureaucratic. Even if the right investment could be decided, they feared the new jobs would demand skills that the unemployed simply did not have.

However, not everybody agreed. Others gave the example that in 2009, 39 states used US$1.3 billion to create more than 260 000 jobs by subsidising private employers. Many of these jobs went to people who were difficult to employ, including those who had been unemployed for a long time. When the programme ended in 2010, 37% of the workers covered by the subsidy kept their jobs. Those who favoured such public expenditure said that the private sector, if left to its own devices, would not have hired such workers.

Supporters of public expenditure also said there were great benefits from government investment in public works in a time of recession; in previous recessions, roads, bridges and public buildings were built. And, if such investments took place again, it was argued, they would not be very expensive. The cost of government borrowing was below the rate of inflation and the investment would help reduce the nation’s debt.

To them it seemed foolish for the US central bank to stimulate the economy by encouraging increased lending with low interest rates: that would be similar to the credit expansion that had led to a financial crisis a few years before. They thought it would be better to rely on fiscal policy.

Source: New York Herald Tribune, 30 January 2014