Editorial – The ends of unemployment

Lawrence Solomon
The Next City
June 21, 1997

 

Discussion

DURING THE GREAT DEPRESSION, a popular song, “Brother can you spare a dime?” helped explain why there wasn’t enough work to go around: “Once I built a railroad, made it run / Once I built a tower, now it’s done” conveyed the notion that much of the work that society had to do was done. John Maynard Keynes, this century’s most influential economist, expressed a similar sentiment: “The Middle Ages built cathedrals and sang dirges,” he wrote, decrying the absence of investment in job creating projects. “[T]wo masses for the dead are twice as good as one; but not so two railways from London to York.” Jeremy Rifkin’s recent best-seller, The End of Work, warns of automation and the information society, and calls for a shortened work week to spread the remaining jobs around.

Governments also believe that society’s job-creating potential has run out of steam. Where once they considered full employment attainable, they now retreat to a concept called the Natural Rate of Unemployment. According to this concept, the natural rate of unemployment can be high due to the structure of labor markets. And given that structure, the natural rate is optimal for keeping inflation in check and the economy humming. An unemployment rate below the natural rate, in fact, becomes dangerous to the greater good. In Canada, many consider this natural rate to be eight and even nine per cent, making an unemployment rate of 10 per cent only one or two per cent too high.

Because governments now believe full employment to be neither attainable nor desirable, they see their job as preventing unemployment rates from dropping below the natural rate of unemployment. Yet the actual level of the natural rate is a mystery: Even Milton Friedman, the economist who developed the concept, believes that there is no way to determine it.

THERE SHOULD BE NO MYSTERY over why countries such as Canada find themselves with unconscionably high unemployment. Study after study show that the ranks of the unemployed are dominated by low-skilled workers. And in countries such as Canada, government policy — through the minimum wage and other mechanisms — outlaws low-paying jobs.

Regulations, particularly those affecting low-income occupations, share the blame in creating mass unemployment. A study of the United States found that approximately 10 per cent of all jobs, many in low-skilled areas such as taxi driving, hairdressing, street vending, and trash hauling, require a licence. Although the regulations aren’t designed to raise unemployment, government-organized taxi monopolies effectively shut out immigrants and students from a traditional entry into the job market; municipal ordinances prevent low-tech entrepreneurs from hawking their jewelry and T-shirts on sidewalks; and zoning rules stop single mothers who’d like to climb out of welfare from running hair salons out of their homes. While the well educated or highly motivated generally have little trouble meeting the regulations or finding their way around them, others feel overwhelmed or intimidated in the face of government bureaucracy and throw in the towel.

In our kind, compassionate, Canadian way, governments are saying that single mothers, our youth, our disabled, and others are better off on welfare than in low-income occupations. They’re saying that those who lack experience in our society should be denied low-paid entry-level positions that can qualify them for better jobs down the road. And in so doing, they exclude them from the job market, give them a welfare cheque and leave them to the company of their unemployed peers.

The economic costs of unemployment, serious though they are, are dwarfed by its social cost, a cost seen in legions of alienated youths; in once proud breadwinners now humiliated; in excuses for racism, as some groups are blamed for taking the jobs of others; in family breakups, depression, and other mental health costs; in loss of hope and purpose. Nothing should take priority over providing meaningful work to everyone desiring it; nothing is more destructive to the soul than feeling cast off, unable to contribute to society. Yet governments that impose a minimum wage undermine the social needs of the poor through this well-meaning attempt to protect the poor’s economic needs. And governments then undermine the poor’s economic needs by imposing hefty taxes on minimum wage earners, leaving them with a take-home pay almost $2 below the minimum wage.

ALTHOUGH GOVERNMENTS ACT OTHERWISE, the natural rate of unemployment is not a law of nature. It varies from country to country, even region to region, as well as varying over time. The natural rate has two components: the small amount of unemployment that arises when people are between jobs; and the large amount that results from regulations and other government policies that have created dysfunctional labor markets.

While the U.S. hardly exemplifies a well-functioning labor market, over the last two decades its labor market has become more open while ours has become more closed. While the U.S. decreased its minimum wage dramatically (relative to inflation), we increased ours. While the U.S. opened up its economy through deregulation — not just in major sectors such as communications but also in small sectors such as local taxi markets — Canadian governments clung to controls. While the U.S. has succeeded in the especially difficult task of opening up its economy to the low-skilled worker, Canadians have been denigrating low-skilled job opportunities by dismissing them as McJobs. The United Kingdom, with no minimum wage, has an unemployment rate two-thirds — and a youth unemployment rate half — that of the countries of continental Europe.

When governments these days vow to fight high unemployment, they usually mean the small levels of unemployment above the natural rate. Instead of tinkering with programs designed to fine tune our extraordinarily high unemployment rate down to the presumed natural rate of eight or nine per cent, governments should eliminate the causes behind our dysfunctional labor market.

Taking the following steps would quickly slash the unemployment rate and provide opportunities for a new generation of workers.

  • Abolish income taxes for low-income earners. With the federal and provincial government deficits about to be eliminated, many governments are considering tax cuts, particularly to those in high tax brackets to stimulate investment. But a greater social payoff would come from directing tax cuts to the poor, for whom income taxes can amount to thousands of dollars a year. Last year Canadians earning the minimum wage paid about $2,000. As John Maynard Keynes noted, workers know enough not to work when it doesn’t pay them to do so. Tax cuts to the poor are indispensable to transforming the welfare — and now workfare — culture that governments impose.
  • Exempt low-income earners from payroll taxes, which have escalated dramatically to the detriment of the poor. People don’t pay into the national pension and unemployment plans while they’re on welfare, and the self-employed low-income earner does not pay any unemployment insurance premiums, yet governments require the salaried poor to do so as a condition of employment — a requirement that forces up their wages without increasing their take-home pay and puts them beyond the hiring capabilities of many struggling businesses. Payroll taxes for low-income earners can amount to one-seventh of their take-home pay; if a minimum wage earner got to keep these tax monies — which have been raided by politicians over the years and no longer serve their intended purposes — he would have another $1,500 a year in his bank account.

    To kickstart the unemployed’s entry, and re-entry, into the workforce, the government should give all low-income earners the right to opt out of unemployment insurance and CPP. Without the burden of payroll deductions, those earning the minimum wage would receive an effective pay increase of 30 per cent, helping low-income families make ends meet, encouraging entrepreneurship among the poor, revolutionizing attitudes to the work ethic, and encouraging meaningful reform of the pension system. Last year, the take of governments from a minimum wage earner was often an astounding $3,500.

  • Once the various taxes on low-income earners are gone, abolish the minimum wage, or at least reduce it by the amount employees would now be saving in payroll deductions to ensure no person is worse off. About four per cent of the work force, most of them part-timers, earns the minimum wage, and of this four per cent, two-thirds are students. Of the balance, many are immigrants and other new entrants into the workforce who haven’t yet acquired the training and experience to command a higher wage. For the overwhelming proportion of permanent, full-time members of the workforce — approximately 99 per cent — minimum wage laws are irrelevant. Yet the very people who most need training and experience in permanent full-time jobs — those an employer would only hire at $1 or $2 an hour below the minimum wage — are shut out by virtue of it, preventing them from acquiring the skills and knowledge of an industry that would improve their prospects.

    THE ONLY ACCEPTABLE UNEMPLOYMENT RATE is something vanishingly close to zero. In earlier times, when economies were based on the exploitation of finite resources, a plausible argument could be made that jobs based on those resources were finite. But in an age whose most valuable resource is information — a resource without limit — the notion of finite limits to work has become nonsensical.

    Jobs exist in limitless numbers, but as long as society places hurdles before the jobless — particularly legal bars to taking jobs — we’ll see books predicting the end of work. Remove the hurdles, and we’ll see book titles that read The End of Unemployment.

    Lawrence Solomon
    Editor

    Lawrence Solomon can be reached at: LawrenceSolomon@nextcity.com


    Discussion

    ,

        Kingston, responds: July 7, 1997

    ,

      Director, Social Policy Research Unit, University of Regina, Regina, responds: July 30, 1997

    Todd E. Speck, Kingston, responds: July 7, 1997

    Thank you for the editorial on the end of unemployment.

    I am a 32-year old recent graduate of Queen’s in philosophy and political studies. I originally returned to school in response to unemployment and underemployment in a society that places tremendous emphasis upon a person’s credentials regardless of the applicability of these credentials to the vocation at hand (unfortunately for me, my current credentials are economically meaningless, but I do not regret the experience). Most of my contemporaries have suffered, along with me, from the increasingly rigid economic structure of this society, and I have been railing on for years about the topics that you discussed in your editorial.

    I would like to point out that the position which you take on the labor market would certainly have you branded as lacking compassion and also, most likely, as a “right-wing extremist” at institutions such as Queen’s (certainly in the philosophy and social science departments) as well as the mass media. Only recently, I had the displeasure of reading an article in the Citizen wherein the writer lamented the less-than-minimum-wage “exploitation” of women sewing at home for the Northern Reflections chain associated with Woolworths. Why comfortable middle-class girls and boys cannot understand that $4.50 earned (and retained) can be of tremendous benefit to both the individual and society, economically and socially, is a cultural mystery. We are, apparently, supposed to feel good about a “compassionate” society which forces the poor to clean up dog feces in public parks in order to receive bare subsistence funding (which workfare will amount to, no doubt), while we deny them the opportunity (among other denied opportunities) to flog apples, t-shirts, or trinkets on the street corner.

    At the moment, I can add little to your editorial, other than to note that not all the poor are “unskilled,” whatever that term is meant to imply, although most are certainly without advantageous social networks. I only wish to congratulate you upon a fine magazine and wish you all success.


    Dave Broad, Director, Social Policy Research Unit, University of Regina, Regina, responds: July 30, 1997

    Lawrence Solomon invokes “our kind, compassionate Canadian way” and argues that “governments should be trying to all but eliminate unemployment by attacking the causes behind our dysfunctional labor market.” But he goes on to say that we should do things more the way they do in the United States — which has less government regulation, lower minimum wages and has, in recent years, thrown people off welfare and into prisons.

    Mr. Solomon also devotes much of his discussion to the pseudo-scientific notion of a “natural rate of unemployment.” But he does not mention that unemployment rates are poor measures of labor-market participation, not to mention work activity. We know, for one, that the low U.S. unemployment rate masks proportionately more low-wage, low-quality jobs than we find in Canada and Europe (outside Britain). We kind, compassionate Canadians, says Mr. Solomon, dismiss “low-skilled job opportunities” as “McJobs.” Unfortunately, much labor market research shows that this is the reality for too many workers, and that the entrepreneurial spirit that Mr. Solomon would like to unleash among the poor through low-wage opportunities is a mirage produced by the post 1970s new-conservative social policy climate.

    Mr. Solomon liberally quotes John Maynard Keynes, who believed that the way to “eliminate unemployment by attacking the causes behind our dysfunctional labor market” was to recognize that it was the capitalist character of that labor market that government needed to regulate, not liberate as neo-conservatives argue. Mr. Solomon also opens his piece with a quote from E.Y. (Yip) Harburg’s song, Brother Can You Spare a Dime?, but does not mention that Harburg was a socialist who would have advocated even more government intervention than Keynes. Now, I imagine both Harburg and Keynes would agree, for example, that we have a very inequitable tax structure, but I doubt either would approve of their writings being used as backdrop for Mr. Solomon’s promotion of neo-conservative ideas.


    Lawrence Solomon replies

    Mr. Broad begins and ends with mischievous paragraphs — I did not suggest throwing people off welfare and into prison, and the political leanings of the composer of Brother Can You Spare a Dime? will help no reader understand either of our arguments. But his middle paragraph does raise relevant questions.

    Is someone better off in a low-paying job or on welfare? Mr. Broad, if I understand his criticism of McJobs, chooses welfare. Are the poor capable of starting at the bottom and working their way up? Mr. Broad calls my confidence in the capabilities of the poor a mirage.

    When Mr. Broad expressed his views, I found them paternalistic but plausible: Comprehensive Canadian studies of the movements of the minimum wage worker do not exist, making his speculation as good as anyone’s. But the raw data to prove or disprove Mr. Broad’s thesis did exist in Statistics Canada’s vaults, and I commissioned it to resolve the issue. Its results show Mr. Broad’s paternalism to be unwarranted.

    Statistics Canada found that very few members of the workforce — about one per cent — stay trapped in minimum wage work for as long as a year. The vast majority of minimum wage workers are either students (60 per cent) or the young (71 per cent), who quickly advance up the pay scale as they gain skill and experience. Immigrants – despite stereotypes of textile sweatshops and domestic drudgery – leave minimum wage status even sooner than others.

    Statistics Canada data aside, I am at a loss to understand Mr. Broad’s defence of the status quo and dislike for the thrust of my proposal — that the poor be exempt from the hefty income and payroll taxes that they now pay, allowing the minimum wage to be lowered without lowering the poor’s take-home pay. Todd Speck, on the other hand, seems to know exactly where Mr. Broad is coming from, even as he despairs at the cultural mystery that leads him and his soul mates into holding incomprehensible beliefs.

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