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BUSH-LEAGUE UNEMPLOYMENT
Will Clinton's Labor Policies Lower the Job Boom?
by Carlos Bonilla
From the Summer 1993 issue of Policy Review
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     The American job machine finally is starting to rev up
again. Employment growth stagnated at 20,000 a month in the year
and a half leading up to the 1992 election. It rose to 135,000 a
month in the final quarter of the Bush presidency. And the pace
picked up under President Bill Clinton, as the American economy
created 800,000 new jobs in the first four months of the new
administration. This was almost as rapid as the 250,000 new jobs
created every month in the last six years under Ronald Reagan.
     Here lies the new president's central political challenge.
Mr. Clinton inherited from George Bush an economy with the
slowest job and GDP growth of any recovery since World War II. He
will be judged by voters, as Mr. Bush was, on whether he can
restore sustained job growth to the level Americans enjoyed in
the 1980s.
     Following the 1981-1982 recession, Americans became accus-
tomed to robust economic growth. The economy grew by 3.9 percent
in 1983, by a phenomenal 6.2 percent in 1984, and averaged 3.3
percent a year until 1990. Job growth was equally strong, with 21
million jobs created during that period. America's employment
record was the envy of the world.
     In July 1990 the economy slipped back into recession,
beginning a contraction that continued for the next nine months.
In that time, the nation's output of goods and services shrank by
almost 1 percent. Employment fell by 1.2 million, and the
unemployment rate reached 6.7 percent.
     To the dismay of George Bush, among others, the economy
failed to rebound as it had after prior recessions, and the
resulting turmoil cost him the presidency. The strong job growth
that had been the hallmark of Ronald Reagan's recovery during the
1980s gave way to a limping recovery that could create only
425,000 jobs in the 20 months that remained before the election.
The Reagan boom created more jobs in two months than the
post-recession Bush economy did in a year and a half.
     Even worse, unemployment continued to rise even after the
official end of the recession, peaking at 7.7 percent in June
1992, a full percentage point above the unemployment rate at the
bottom of the recession, and 2.5 percentage points higher than it
had been when George Bush entered the White House.
     Job growth did not pick up until after the election,
averaging over 130,000 a month in the final quarter, too late to
help Mr. Bush.
     George Bush did not lose the White House because of the
recession during his administration. If this were the case,
Ronald Reagan would never have been elected to a second term.
Indeed, the Reagan recession was much more severe than Mr.
Bush's. Whereas the Bush recession saw employment fall by 1.6
percent, it fell by more than 3 percent under Ronald Reagan,
whose unemployment rate peaked at more than 9 percent. Gross
domestic product fell by 2.4 percent under Mr. Reagan, compared
with only 2 percent under Mr. Bush. Presidents are driven from
the White House not because they preside over recessions, but
because they fail to articulate and enforce a blueprint for
recovery -- a blueprint designed to spur economic growth and,
above all, to boost employment.
     The danger for President Clinton is that his health care and
labor policies will reverse the upward trend we are finally
seeing in employment, and that America will be forced down a path
of fewer rather than more jobs. Unemployment in May 1993 was
still in the Bush leagues -- at 6.9 percent. And Mr. Clinton is
framing the jobs-policy debate in a way that permanently will
exclude many Americans from jobs for which they would otherwise
be qualified.

Low Growth, Low Employment

     There are three major reasons why job growth has been so
much more sluggish than in the 1980s. The first is that overall
economic growth has been very slow, especially considering that
the economy is in a period of recovery. The second is that
America continues to enjoy significant growth in productivity, a
characteristic that is good for American competitiveness, but has
the perverse effect of reducing employment in many sectors of the
economy. The third is that labor is becoming more expensive to
hire, not only because of the rising health-insurance costs that
President Clinton so often points to, but also because of the
anticipated new government-mandated employment benefits that
employers worry will take away their ability to control labor
costs. The biggest fear among employers today is that President
Clinton's health proposal will impose enormous new burdens on
employment, so that each new hire brings with it a share of the
nation's health-care bill.
     The "jobs recession" we hear so much about is in good
measure a product of low economic growth. Two years after the
official end of the recession in March of 1991, the nation's
total output of goods and services was only 4.5 percent larger.
This figure is less than half the economic growth in the first
two years after the Reagan recession, and more typical of an
economy only nine months out of recession. The problems inherent
to sluggish economic growth have been compounded by the loss of
600,000 jobs due to the post-Cold War military reduction.
Communities can adapt to military demobilization when it is
accompanied by rapid economic growth. But without such growth,
areas such as southern California, which has been hit hard by
defense cutbacks, have suffered greatly.
     Economic policy must therefore focus on raising the level of
economic growth if we are to raise employment. President Clinton
paid lip service to this goal with his so-called $16-billion
"stimulus" package. One-quarter of this package consisted of
extended unemployment benefits. Another quarter consisted of
low-priority public works spending -- parking garages in Fort
Lauderdale, cemeteries in Puerto Rico, white-water canoe courses
for the 1996 Olympics, and commissioning drawings of
"significant" structures -- projects that had not been
sufficiently important or well-planned to have been funded by a
budget already spending $1.5 trillion. How this package, in
combination with a barrage of new taxes, was supposed to
stimulate the economy is anyone's guess. The president's proposal
was firmly rooted in the past, without regard to the changes that
have taken place in the American economy and workplace.

Products of Technology

     Over the past two decades, American manufacturing has
enjoyed a spectacular boom in the productivity of labor. With 5
percent fewer employees than in 1970, American manufacturers now
produce 75 percent more goods than before. This is the flip side
of productivity: higher productivity means that we are able to
produce more goods and services without an increase in the
quantity of labor employed. Productivity growth is driven by a
number of factors, but its chief motivation is to reduce costs by
replacing man-hours and reducing costs. In the post-World War II
era, American manufacturing, particularly in such heavy
industries as steel and autos, created a labor-cost structure
that eventually rendered manufacturers unable to compete even
domestically. Reducing the manufacturing labor force through the
application of new technologies was essential to American
industry's rebirth.
     This modernization sometimes has occurred at a cost to
employment, however, especially in low-growth industries.
Employment in the American steel industry has fallen 45 percent
over the past 30 years, while shipments have fallen by only 6
percent. Nucor, a world-class steel producer based in Charlotte,
North Carolina, can produce a ton of steel with one-12th the
number of man-hours it used to take using traditional methods.
Nucor's steelworkers are well-paid and well-skilled, but there
are not very many of them.
     Productivity growth once was thought to be the exclusive
domain of manufacturing. In fact, the service sector now is
seeing the same replacement of human labor with products of
technology. Universal product codes integrate cashiers into
inventory management, and in the process making obsolete workers
formerly detailed as inventory takers. The ubiquity of automatic
teller machines led the Progressive Policy Institute to warn, in
its book Mandate for Change, that half of the nation's bank
tellers stand to lose their jobs in the years to come. Legions of
workers once devoted to the paper trail of business transactions
have found that their skills have been incorporated by
information networks that span the country. Professionals working
at personal computers have replaced secretaries and computer
operators, while elevator operators remain only as quaint relics
in the U.S. Capitol.
     These technological advances have made service workers much
more productive, and also made many tasks in ordinary life much
more convenient. Americans now get cash when and where they need
it, without having to wait in interminable bank lines. Letters no
longer must be completely retyped because of a typo. The
painstaking drawing of architectural blueprints can be simplified
enormously through computer graphics.

Distorting the Price of Labor

     Yet as inevitable as the march of technology seems to be, it
is not random. Productivity increases will be sought in those
sectors where costs can be reduced. But despite the opportunities
that technology creates, there are human costs. For people who
had planned on being draftsmen or bookkeepers or steelworkers,
there are temporary but very real problems as they adjust to a
changing labor market. We see some of those frictions today, as
we go through an especially rapid period of technological change.
The great danger of the productivity revolution is that it is
distorted by government policies that are artificially raising
the price of labor. President Clinton seems to want to give
workers in service industries the same wage and benefits packages
that exist in manufacturing. Lamenting the loss of highly paid
manufacturing jobs, Mr. Clinton and his colleagues now are intent
on restructuring the service sector in the image of
manufacturing. The result, almost assuredly, will be fewer,
higher-paying jobs in services as productivity advances take the
form of labor-saving technology.
     Well-intentioned policies already have had a pronounced
effect on the cost of labor. Social Security and Medicare already
claim 15.3 percent of most payroll dollars, up from 12.3 percent
in 1980. Federal unemployment compensation adds slightly under 1
percent, with the states adding another 2 percent on average.
Additional, and unpredictable, costs have arisen from the
Americans with Disabilities Act, as well as state laws requiring
advanced notice of plant closings and newly enacted family-leave
legislation that, for now, requires that employers provide
additional unpaid leave. These policies are intended to help
employees, but they also raise the cost of providing a job. Many
of these costs ultimately are passed on to workers, either in the
form of lower wages or in the loss of employment.
     To these already existing costs, the Clinton administration
is adding enormous potential new ones. Uncertainties about labor
costs under President Clinton are so great that many employers
are deferring hiring decisions until they better understand the
administration's intent. Overtime for factory workers, at an
average of 4.3 hours per week, is at the highest level ever
recorded. The use of temporary help in service industries is
expanding rapidly. Growing numbers of employers have concluded
that it is cheaper to pay overtime or bring on temporary help
than to incur the uncertain liability of hiring additional
full-time staff.
     The largest of these uncertainties is the fear that
employers will be required to provide health-care benefits for
their workers. The president's health-care package will affect
directly a sector of the economy that itself accounts for 14
percent of gross domestic product, and indirectly will affect all
other sectors of the economy. Its impact will be felt the hardest
in the service sector, where a majority of the economy's
uninsured workers are found. Regardless of whether health-care
reform lives up to its promised goal of controlling costs, it
will raise employment costs in this sector markedly, and
therefore depress employment.

63-Percent Tax Rate

     Currently there are about 39 million uninsured Americans, 22
million of whom have some connection to the workforce, either as
workers or their dependents. The administration is widely expect-
ed to announce that employers must offer health insurance to all
workers, and shoulder a substantial portion of the costs for
insuring lower-income workers and their dependents. The cost of
these requirements easily could exceed $40 billion, a dramatic
increase in labor costs.
     The average cost for employer-provided health insurance is
more than $4,200 for an individual with family coverage.
Requiring that employers provide and pay for health insurance for
low-wage workers is equivalent to raising the payroll-tax rate on
a minimum-wage job to 63 percent (including existing payroll-tax
rates). Such a mandate would affect directly the employability of
at least 18 million workers, 4.7 of whom are working at or below
the minimum wage, as well as another 13.3 million whose hourly
wage is less than the minimum wage plus the cost of the mandate,
roughly $6 an hour. The impact lessens at higher wage scales --
not only is the mandate's cost a smaller increase in total
compensation, but a greater proportion of higher-wage workers are
covered already.
     The uncertainty extends beyond mandated health benefits.
Richard Freeman, a members of the secretary of labor's Commission
on the Future of Worker-Management Relations, the special group
formed by the secretary of labor to recommend revisions to the
National Labor Relations Act, wants to emulate European
employment practices -- shorter work weeks and a greater number
of vacation days, including perhaps as much as four weeks of
leave -- all in the name of forcing an increase in employment. In
Europe, however, these policies have been unable to prevent
unemployment rates that are substantially higher than those in
the United States. France, Britain, and Italy all have
unemployment rates close to 11 percent; unemployment is running 9
percent in Belgium, and close to 8 percent in Sweden and former
West Germany. European heavy industries, such as steel-making,
have seen employment losses as severe as in this country despite
shorter work weeks and work years. These employment policies
promote unemployment sharing, not job creation.
     At the same time, Clinton administration officials support a
number of projects that, if enacted, would raise costs for the
vast majority of employers, regardless of industry. The chief
economist for the Department of Labor, Lawrence Katz, has spoken
favorably of the European practice of extending collective
bargaining agreements to firms not party to them, as well as
raising the minimum wage. The new assistant secretary at the
Department of Health and Human Services, David Ellwood, is on
record as advocating drastically higher minimum wages despite his
acknowledgement that such an increase would be accompanied by job
losses.

Discouraging Employment

     Large numbers of high-paying jobs with high skills content
are the Holy Grail of all administrations. How to get all three
at the same time is the hard part. Conceivably, you could mandate
that all jobs in America must pay over $40,000 a year. The jobs
that remained would meet at least one and probably two of the
three criteria, but there would not be very many of them.
     The Clinton administration's strategy of driving up labor
costs by taxing employment seems guaranteed to discourage hiring
at all levels, but particularly for low-wage labor. Hiring will
only make sense for an employer who is acquiring skilled workers
with already-high levels of productivity. But America will need
jobs at all levels, not just for those with post-graduate
educations or those who can get into the apprenticeship programs
favored by the administration. To sacrifice low-skilled,
entry-level jobs is to close the future to many marginally
skilled job entrants.
     We must accept that the immediate postwar years were an
aberration in American economic life. An economy in which
individuals could leave high school -- with or without a degree -
- with few if any job skills, and enter into lifetime employment
at high wages was only sustainable when much of the world's
industrial capacity lay in ruins. America went on a postwar binge
no different from a Texas oil town when the gushers come in; but
now it is time to accept that the boom is over and we all must
work for a living.

Free Lunch Theory

     To create good jobs means that we must let jobs be created
at all levels of American society. Not all jobs will be "good"
jobs immediately. Some will be decidedly entry-level jobs. Yet we
cannot ignore the large numbers of entry-level workers who need
those jobs and who, without access to them, will not be able to
advance. Our option is either to force entry-level jobs out of
existence by requiring that employers pay high wages and provide
benefits, or to recognize that without these jobs individuals
with deficient education and training -- and America has many --
will never enter the workforce. If these people cannot enter the
workforce, how will they acquire the skills to progress in the
workforce?
     On this score the administration was half right. We do need
to do a better job training and retraining the workforce. But the
administration failed by believing that the costs for such a
program could be passed on to employers. It was this free lunch
theory of social progress that drove Mr. Clinton to campaign on a
platform to tax employers 1.5 percent of payroll in order to
improve skills in the labor force. The support that could have
been won for a skills-enhancement program was squandered by
casting it as an entitlement, no different than welfare.
     As former senator and well-known liberal George McGovern has
written, "How do those least likely to be employed ever become
part of the American workforce...? We too often forget that a job
-- any job -- is often the best training for a `better' or more
specialized job. For many employees, an entry-level job is the
only opportunity to learn about the workplace.... Unfortunately,
many entry-level jobs are being phased out as ... employers are
pressured to replace marginal employees with self-service or
automation."
     Conventional wisdom says that Americans should not try to
compete on a wage level with Third-World countries paying pennies
an hour for labor. That is true. The sad reality, however, is
that Americans who enter the workforce with Third-World skills
cannot continue to expect an advanced standard of living unless
they either improve their skills or convince other Americans to
subsidize them. If Americans want to live in a society that
provides a wealth of services to all its members, then we must be
willing to part with the notion that we can make someone else pay
for these services. We cannot subsidize ourselves.

CARLOS BONILLA is the chief economist for the Employment Policies
Institute in Washington, D.C.

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