HOW MUCH UNEMPLOYMENT DO WE NEED?
Killingsworth, Charles
I n his presidential campaign in 1960, when the average number of unemployed workers was 3.9 million, John F. Kennedy made unemployment one of the major issues and promised to "get this country...
...From 1960 to 1970, employment in health care fields had increased by about 50 percent (from 2 million to 3 million...
...Well, some programs have "failed...
...We had a $14 billion tax cut in 1964, when the unemployment rate was around 5.4 percent...
...But the fact was that in the absence of rapid expansion of PSE and College Work-Study, or if the enrollees were counted as unemployed rather than employed, the reported unemployment rate would have been 8.1 percent in June 1976 instead of 7.5 percent...
...But excessive optimism has been replaced by virtual paralysis...
...had quite low unemployment rates—at times less than 3 percent—through most of the years 1951, 1952, and 1953...
...The disturbing fact is that some of the industries that contributed substantially to the growth of employment throughout the years since World War II now show signs of stagnation or decline...
...Now war appears to be 418 a likely candidate for listing among the declining industries...
...This is a cyclically sensitive industry, but its present difficulties have deeper roots than the recent recession...
...By the best estimates available, it appears that we spent a total of $12.2 billion on all of the main unemployment compensation programs in fiscal year 1975, and it is estimated that we will have spent another $20.6 billion in fiscal 1976...
...Moreover, it had remained essentially unchanged since the preceding February...
...423...
...When men in high office tell us that we must accept high unemployment rates for years into the future in order to bring inflation under control, they are echoing the Phillips-curve doctrine...
...The present program was the product of legislative compromise, plus an effort to fit the program into the untried framework of state and local administration that is provided under the Comprehensive Employment and Training Act...
...And the impact would have been immediate...
...More recently, there has been an overreaction against the earlier enthusiasm...
...In the three preceding years, however, health care costs as a percentage of GNP leveled off at about 7.8 percent, and the increased percentage in 1975 was partly the result of a sharp decline in total GNP and continued large price increases for health care...
...There has undoubtedly been some public disillusionment with education as the best road to the good life...
...In the consumer market, construction and site costs have far outstripped the growth in disposable personal income in the past decade...
...Forty-five years ago, there was general agreement among the world's leading economists that the only way to reduce unemployment was to reduce wages...
...Various strategies have been followed to overcome such fractiousness of the data...
...For a decade or so, many analysts believed that employment policy was virtually synonmous with fiscal and monetary policy—or, to simplify even further, that if you want to reduce unemployment, you need only to reduce federal taxes...
...For example, Chairman Arthur F. Burns of the Federal Reserve System in a recent speech remarked: "Whatever may have been true in the past, there is no longer a meaningful trade-off between unemployment and inflation...
...At the present writing, the weight of the evidence decidedly supports a finding that manpower training has been successful...
...EDUCATION From 1950 to the 1970s, the U.S...
...Cutting wages might induce some employers to hire more workers, he said, but he pointed out that this was certainly not the only or most effective way to reduce unemployment...
...The number of persons serving in the Armed Forces is the lowest since 1950...
...but the GNP percentage for 1974 was the lowest since 1950...
...Burns, have pointed out that to a large degree, recent increases in the price level have obviously been caused by factors wholly unrelated to the state of the labor market—the outstanding examples being worldwide crop failures, the unilateral decisions of the Arab oil cartel, and the tightness, in the recent past, in world markets for raw materials...
...In the present recovery period, the same pattern seems to be emerging...
...4. What are we doing now about unemployment...
...Recent news headlines made much Chart II AUTOMOBILE REGISTRATIONS AND PERSONS PER AUTOMOBILE IN THE UNITED STATES, 1900-73 RATIO SCALE 100,000 50,000 10,000 5,000 ile Registrations in Thousands 1,000 500 100 50 10 1900 1910 1920 1930 1940 1950 1960 1970 RATIO SCALE 5,000 1,000 500 Persons per Automobile 100 50 10 1900 1910 1920 1930 1940 1950 1960 1970 SOURCEStatisrical Abstract of the U S., and computations...
...The Public Service Employment program is currently financed at a level of about $3 billion per year, and Department of Labor estimates place the current number of enrollments at about 325,000...
...My basic point is not that the country is headed for another depression like that in the 1930s...
...The sudden change in this sector in turn has to some extent contributed to a devaluation of the college degree, and thus we have a self-reinforcing process...
...The main point of this paper is that this "need" is another illusion...
...Large orders for conventional weapons and other equipment create large numbers of assembly-line jobs for semiskilled workers...
...Therefore, the states with the largest present unemployment problems will have a competitive disadvantage as compared with the states that are less affected...
...Others, like Dr...
...The source of the paralysis is a new simplism: that the country needs to have 7 million or 8 million unemployed workers, at least for the next few years, in order to bring inflation under control...
...The consensus appears to cluster around an unemployment rate of 7 to 7.5 percent by the end of 1976 (although the rate for August was 7.9 percent...
...In the government market, the boom in education construction has ended, and the national network of freeways is virtually completed...
...But there is really no convincing proof of the widely accepted belief that any reduction in unemployment, no matter how much and no matter what means are employed, will cause more inflation...
...417 of large percentage increases in automobile sales in 1976 compared to the previous year...
...In a broader kind of cost accounting, that net dollar cost must be set off against the value of the goods and services produced by the PSE worker...
...The Vietnam War removed about a million young men from the civilian population (most of whom would otherwise have been in the labor force...
...In the euphoric mid-1960s, it was fashionable to say that never again could a democratic government permit high levels of unemployment for extended periods...
...5. What additional steps should we take to deal with unemployment...
...During most of calendar year 1975, between 6 million and 7 million workers were receiving benefits...
...WAR Over the past 40 years, wars and war preparations have had larger effects on the labor market figures than most analysts have recognized...
...the estimate is a net cost of $2,600 to $3,500 per job created after 24 months...
...the assertedly rapid rate of decrease in the reported unemployment rate was said to show that there is no need for governmental job creation...
...HEALTH CARE...
...Today, almost any proposal to reduce unemployment invites the accusation that the proposer is "in favor of inflation...
...One consequence of the recent popularity of PSE programs has been a sharp cutback in expenditures for manpower training programs...
...It is difficult to estimate how many jobs were or will be created by the tax cuts...
...others who are in need are not eligible...
...war production was sharply cut back...
...In 1973, the industry employed about 950,000 workers...
...BY FAR the largest present program for dealing with unemployment is unemployment compensation...
...In terms of numbers of dollars, the biggest effort to date against unemployment is tax-cutting...
...In the years of the Great Depression we provided jobs, under roughly equivalent programs, for 30 to 35 percent of the unemployed...
...and the labor force resumed its normal rate of growth...
...There are other, less mechanistic ways to analyze the outlook for unemployment...
...Distribution of unemployment among various subgroups of the labor force must also be considered...
...There were wage and price controls during part of this period, but their abrupt removal early in 1953 made no difference...
...Ironically, the decline in the unemployment rate from 8.9 percent in May 1975 to 7.5 percent in June 1976 was often cited by those who opposed job creation programs by government...
...The point is not that tax-cutting has no effect on unemployment...
...It is true that few, if any, professional economists would state the doctrine quite so crudely...
...The clear implication was that all of the decrease in reported unemployment was the result of natural forces of economic recovery in the private sector...
...it doesn't make sense to 422 have cities hiring new people with federal money while they are laying off regular employees...
...THE NATIONAL unemployment rate for June 1976 was 7.5 percent of the labor force...
...The recession aggravated the displacement effects of structural change while leading many analysts to believe that all of the unemployment was caused by the business cycle and the fight against inflation...
...Prime sponsors in addition to governmental units should be encouraged...
...The total value of tax cuts, personal and business, and rebates in 1975 is estimated at approximately $22 billion...
...The data invoked to provide empirical support for this concept have turned out to be fractious...
...The system has always included limited duration of benefits, a relationship between wages previously earned and the size of the benefit amount, and employer experience rating...
...If all else fails, or seems inadequate, there is the useful notion of a shifting Phillips curve—that is, a relationship that changes over time...
...But unemployment compensation is much less defensible as a program that is to deal with a high level of long-term unemployment, particularly when structural changes in the economy contribute to the unemployment...
...During calendar year 1975, the total number of unemployed averaged 7.7 million workers, or 8.5 percent of the labor force, and Administration spokesmen "projected" unemployment rates well above most postwar recession highs for most of the late 1970s...
...Professor Wassily Leontief has estimated that for each 10 workers in the automobile and parts industry, there are about 15 in other industries that supply raw materials...
...Rarely mentioned was the fact that 1975 was an extremely depressed sales year...
...Despite the tax cut in 1964, and also despite manpower programs emphasizing enrollment of the disadvantaged, black teenage unemployment (for example) did not decline during the great boom of the 1960s...
...First, the experience of the 1960s shows that this remedy does the least for the most disadvantaged members of the labor force...
...Some analysts say that the Phillips curve describes a short-run relationship...
...rather, the point is that the magnitude of the effect has usually been substantially exaggerated in recent years...
...Registration figures since 1930 include passenger cars and toss...
...These examples suffice to make the point that the national unemployment rate averages together very large differences in unemployment among various groups...
...In general, the maximum duration for any recipient is 65 weeks, or approximately 15 months...
...Society gets the benefits of the goods and services thus produced, and the individual has a better chance of hanging on to selfrespect and ability to work...
...Many economists, with varying degrees of success, tried to determine whether the Phillips curve relationship was applicable to the American experience...
...2. What Is the Outlook For Unemployment...
...withdrawal from Vietnam and the catastrophic rise of unemployment in the current recession may have corrected the complacency of the 1960s and the early 1970s...
...It is certainly possible to find ways of reducing unemployment that would make the inflation problem worse...
...In discussions during recent years, the main evidence on this point has often been said to be what happened in the late 1960s...
...The most common statement of the doctrine is that if you want less unemployment, you must accept more price inflation...
...Additional variables 419 have been thrown into the equations, often with little effort to justify their use except for the fact that more satisfactory results were thereby produced...
...In the past five years, national defense expenditures as a percentage of GNP have marched steadily downward—from 9 percent in 1969 to 6 percent in 1974...
...Tighter eligibility requirements should be enforced...
...And whatever the national unemployment rate, the individual without a job has a personal rate of 100 percent...
...Chart III makes the point...
...increased its spending on education at all levels almost ten-fold—from $8.8 billion in 1950 to $83 billion in 1972...
...The definition of unemployment was changed twice during the relevant period (1965 and 1967), and the definition changes in combination reduced the reported unemployment rate by about 0.7 percent...
...Unemployment compensation payments do not encourage preparation for a change in occupation or place of residence, which will be 8 7 6 5 4 3 2 Chart III U.S...
...Second, a PSE program is a much more cost-effective way of providing jobs for the unemployed than is taxcutting...
...The greatest shortcoming of such heavy reliance on unemployment compensation is that the program pays huge sums of money to millions of people for doing nothing and going nowhere...
...4. What Are We Doing about Unemployment...
...Second, there is general agreement that tax-cutting is not the most effective tool for dealing with structural unemployment...
...The nation spent $12 billion (4.6 percent of GNP) on health care in 1950...
...Some of this reduction may be attributed to the U.S...
...The most valid criticism of the PSE program is that it is far too small to make a real dent...
...Many economists and most political figures avoid that accusation like the plague...
...Many economists have attributed all of this reduction in unemployment to fiscal policy (a few would give some of the credit to monetary policy as well...
...Currently, the number of job slots it has funded equals about 4 percent of the total number counted as unemployed...
...From 1950 to 1974, the percentage of the labor force employed in construction decreased somewhat, but in absolute numbers the industry provided 1.2 million more jobs in the latter year than in the earlier...
...Most careful studies of manpower training programs show positive rates of return...
...I n his presidential campaign in 1960, when the average number of unemployed workers was 3.9 million, John F. Kennedy made unemployment one of the major issues and promised to "get this country moving again...
...Target groups should be limited...
...As will be seen shortly, one reason why the discussion of national employment policy has been so muddled in the past 10 years has been the widespread tendency—still with us—to attribute changes in the unemployment rate to the wrong causes...
...The development of persistent and excessive unemployment after U.S...
...This interpretation rests upon a fallacy that is easily revealed...
...By contrast, the estimated net cost per public service employment job after 24 months is $2,600 to $3,500, according to the CBO study...
...This is surely short-sighted...
...Enrollees in both programs are counted as "employed" in the statistics, but the jobs involved are not "market-generated" in any generally accepted sense of that term...
...However, the Congressional Budget Office has recently published impact estimates implying that the 1975 tax cuts will produce from 660,000 to 880,000 jobs after 24 months...
...UNEMPLOYMENT RATE BY QUARTERS ALL WORKERS, AGE 16 AND OLDER 1960 TO 1971, SEASONALLY ADJUSTED ESTIMATED RATE INCREASE /WITHOUT IN ARMED FORCES ESTIMATED RATE UNDER PRE-1965 / DEFINITIONS 1960 1962 1964 1966 1968 1970 1972 1961 1963 1965 1967 1969 1971 8 7 6 5 4 3 2 421 required of many people if they are to adjust to the effects of structural change...
...AUTOMOBILES Chart II shows two striking aspects of the growth of the automobile industry of the United States in the 20th century...
...When a rise in unemployment began in early 1970, Chairman Stein of the Council of Economic Advisers asserted that this was a "transitional" problem...
...During the recovery period following the 1969-70 recession, the unemployment rate remained close to the recession high throughout the economic expansion...
...But there are exceptions...
...The belief that there is such a trade-off has become an important barrier standing in the way of a substantial reduction in unemployment...
...The heavy emphasis on tax-cutting in the recommendations of many economists is not justified by considerations of cost-effectiveness...
...Such use is also creating future problems for the states that now have the highest level of unemployment...
...At least for the United States, the alleged relationship cannot be convincingly demonstrated in any straightforward manner...
...Today, a program of comparable size would provide 2.3 to 2.7 million job slots, or eight or nine times as many as are now funded...
...One is to consider the behavior of the unemployment rate after the trough month of each of the five postwar recessions...
...It now has become faddish to assert that manpower training has been shown to be a "failure...
...This tendency is particularly apparent in the last two recovery periods...
...but scarcely anyone questioned the basic proposition that a total of around 4 million unemployed workers was intolerable...
...The question now is whether we must accept, for the rest of the decade, unemployment rates that have generally been regarded as intolerable since the end of World War II...
...As previously noted, the Congressional Budget Office impact estimates imply the lowest net cost per job created for this program...
...5. What Should Be Done...
...manpower programs leveled off or were, in some instances, reduced in size...
...The one weapon that will not help is "benign neglect...
...Recent developments have accentuated the long-run trend toward slower growth...
...This approach does not help us solve such structural problems—aside from income maintenance...
...in 1975, the average was about 200,000 less...
...Having emphasized the limitations of tax cuts as an instrument of job creation, we must also emphasize the unusual aspect of the situation that made the extension of the 1975 tax cuts imperative...
...The present checkmate is largely a product of the view, which has become widely prevalent in the past decade, that there is a "trade-off" between unemployment and inflation—if you want less of one, you must accept more of the other...
...But considering only the definition changes and the Vietnam War effects, in combination they contributed about two-thirds of the reduction in the reported unemployment rate in the second half of the 1960s...
...But we will face a massive problem of redeployment of our labor force—a problem likely to equal or exceed the comparable problem of the 1950s and early 1960s...
...Some of this is temporary, as demonstrated by the 1976 increase in sales...
...Improvements can be made...
...and the 7.5 percent rate was far above the 5.2 percent unemployment that had been reported for June 1974...
...The relationship was so logical and so consistent with economic theory that, if the data did not plainly show it, there must be something wrong with the data...
...hundreds of thousands of former draftees were returned to civilian life...
...But almost immediately the so-called Phillips curve became a major factor in employment policy...
...But many, perhaps a majority, would still accept the generalization that there is some kind of "trade-off' between inflation and unemployment...
...In 1976, defense appropriations were increased substantially...
...Furthermore, it is significant that when the two governmental jobs programs stopped expanding, as they did around the end of 1975, the unemployment rate shortly thereafter stopped dropping...
...The College Work-Study 415 enrollees are students who need to work for pay a few hours per week in order to stay in school (without the program many would presumably be out of school and unemployed...
...there are "leakages" that reduce the anticipated impact of the nominal job slots by 50 to 90 percent...
...IN 1958, Professor A. W. Phillips published an article entitled "The Relations Between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861-1957...
...Furthermore, there is evidence that the lingering effects of some employment problems of the 1950s and 1960s may be augmented by new problems in the late 1970s...
...3. Is there a "trade-off' between unemployment and inflation...
...Like the insistence on wage-cutting, the Phillips curve concept surely has a kernel of truth in it...
...In the early 1970s, the automobile industry was getting about 4 percent of total disposable personal income for its products...
...There are other programs that aid the unemployed, such as food stamps, AFDC, general relief, and so on, but the amounts going to the 420 unemployed cannot be determined with precision...
...But the reality is that, in the social sciences, methodologically impeccable experiments are more of a utopian vision than a practical possibility...
...1. How Much Unemployment Do We Have Now...
...There are, perhaps, other industries that belong on the list of "endangered species," but this listing is intended to be illustrative rather than exhaustive...
...Some analysts found little need for data...
...Some people even argue that we need high levels of unemployment, at least for a few years, in order to end inflation...
...The Administration insisted that no measures to reduce unemployment beyond those already in place were necessary or desirable...
...What has developed is a kind of ad hoc set of programs with some variation in financing arrangements and duration of benefits...
...The present use of this system to cope with very longterm unemployment threatens to change the system itself in rather fundamental ways...
...Large increases in the size of the armed forces during a war reduce the number of young men in the civilian labor force...
...With the passage of time, the relationship tended to become one between the level of unemployment and rate of inflation (rather than the rate of change of money wage rates), although some analysts still recognize that a change in money wage rates is far from synonymous with a change in the general level of prices...
...Since 1972, these dollars have further increased, but the share of education in GNP has gone down...
...Tax-cutting is perhaps irresistibly seductive for politicians and addictive for economists who have joined opponents of "big government" in proclaiming the virtues of tax-cutting...
...a conservative estimate of the effect on the reported unemployment rate is a reduction of 0.5 percent...
...This is not a radical or impractical goal...
...Despite these difficulties, the Phillips curve has gained increasing influence in policy-making...
...On the simplest level, for example, the data show that the U.S...
...Past and anticipated increases in the price of gasoline, insurance, financing, repairs, etc...
...Burns proposed a program of direct attack on what he presented as the real causes of inflation, and he prefaced a program for the reduction of unemployment by saying: "I believe that the ultimate objective of labor market policies should be to eliminate all involuntary unemployment...
...Huge price increases, even if largely caused by forces beyond the control of the industry, have adversely affected sales prospects...
...the increase in health service workers (assistants, aides, etc...
...Yet only rarely has the effectiveness of tax-cutting as a remedy for unemployment been dispassionately examined...
...FOR A TIME a few months ago, it seemed that Public Service Employment (the PSE program) was almost everyone's favorite remedy for unemployment...
...In the closing months of the year, the number of claimants showed a downward trend, partly as a result of exhaustion of eligibility, and by mid-1976, there were about 4.5 million workers receiving benefits...
...Thus the increase in physicians, dentists, and related practitioners was only 17 percent...
...As previously noted, the estimated number of jobs created by the 1975 tax cuts will be from 660,000 to 880,000 after 24 months—for an initial cost of about $22 billion...
...There are also many private programs, such as Supplementary Unemployment Benefits in some industries...
...The war ended...
...for example, training for welfare clients, especially enrollees in the AFDC program...
...We must recognize, at the same time, that this extension will make only a nominal contribution to the reduction of unemployment, if we accept as accurate the impact estimates of the Congressional Budget Office...
...The rate for government workers was 4.2 percent, and that for construction workers 17 percent...
...By the middle of calendar year 1976, it is likely that more than half of all the states will be borrowing to pay benefits...
...This article- approaches these tasks by undertaking to answer five questions: 1. How much unemployment do we have now...
...Yet we have no federal programs of this kind today...
...Obviously, it does not make sense to train people for jobs that are not available, and manpower training has had a bad press on this point...
...Time will tell whether this was purely an election-year phenomenon...
...Keynes himself, in the late 1930s, took the position that expansion of aggregate demand by itself would do little to remedy structural imbalances...
...Present efforts to deal with unemployment should also be evaluated...
...With 750,000 of its work force unemployed, construction is not likely to offer large numbers of new jobs in the next few years—unless the federal government steps in with a big public works program...
...The latest figures available indicate that we now have one car for every two men, women, and children in the United States...
...We never really solved that problem, although the effects of the Vietnam War led some people to believe we did...
...When we are dealing with relatively short-term unemployment, this system functions well...
...In most of 1975 it got only about 2.5 percent of a smaller total...
...For example, during the 1960s, there was experimentation with programs to increase worker mobility, and some of the programs were reported to be relatively successful...
...The "leakage" argument rests far more on speculation than on hard evidence...
...The automobile population was growing much more rapidly than the human population throughout most of the century...
...Some approaches to the reduction of unemployment would be quite likely to generate upward pressure on the price level...
...The growth of manpower programs in the late 1960s, and the classification of many of the enrollees as "employed" in labor market statistics, also contributed to the appearance of full employment...
...If we want to meet some part of the very long-term unemployment problem with a minimum-income guarantee, we can devise a more rational and more equitably financed system than the present patchwork of add-ons to the existing unemployment compensation system...
...Sometimes the data are plotted on charts, and assertions are made in the text that are not clearly supported by the charts...
...But, as it happened, the June 1976 rate was exactly equal to the highest rate recorded in any preceding postwar recession...
...In the years ahead, the likelihood is that education will be taking less than its former share of a growing labor force...
...by 1968, the unemployment rate was down to 3.6 percent (annual average), and in 1969 it was 3.5 percent...
...His findings were not entirely free from ambiguity and, at least by contemporary standards, his methodology was not impeccable...
...Although the tax cuts were not motivated solely by benevolence toward the unemployed, the reduction of unemployment was said to be one of the intended benefits...
...There were other factors in addition to these, and equally unrelated to fiscal and monetary policy, that contributed to lower unemployment during the late 1960s...
...After Kennedy won the election, there was a national debate about how best to reduce unemployment...
...Yet the public discussion of the unemployment problem was strangely muted...
...In the light of hindsight, it seems unmistakably clear that the low unemployment rates of the late 1960s were "transitional," and that the chronically high unemployment rates of the 1970s reflect the reappearance of some basic imbalances in the economy that had been temporarily masked by the effects of the Vietnam War and the new programs of the Great Society...
...The greatest expansion in employment in this industry from 1960 to 1970, both in percentage terms and in absolute numbers, was at the lower skill levels...
...Those states that exhaust their reserve funds and borrow will have to tax the employers in their boundaries more heavily in the future to repay the loans than will the states that have been more fortunate...
...Under the present system, many people who are not in need are eligible for benefits...
...In June 1976, when the national unemployment rate was reported as 7.5 percent, married men with spouse present had a reported rate of 4.4 percent, while black teenagers had a rate of 40.3 percent...
...the expenditure in fiscal year 1975 was $118 billion (8.3 percent of GNP...
...The reduction in demand for teachers has had an adverse effect on the labor market for all new college graduates...
...If the labor requirements of the health care industry diminish to the replacement level, this will have a significant effect on the supply of new jobs that require only a relatively short training period...
...The criticisms are numerous and varied: The PSE jobs are not going to the right people...
...Still, it is essential to emphasize two advantages: First, it is better for society in general and better for the individuals involved to pay them for working than for not working...
...It is not excessively pessimistic to say that our previous efforts in this area have accomplished little more than to show us what does not work...
...Leads and lags of varying duration have been tried...
...Finally, we need some new approaches to the old problem of depressed areas and sick industries...
...2. What is the outlook for unemployment...
...Few informed people would argue that the existing PSE program is the best that could be devised by the mind of man...
...But it is nonsensical to generalize from such incidents...
...yet, coincident with the low unemployment rates, we also had very low rates of price increase...
...The forces of change in the American economy left large numbers of workers stranded in the wrong occupations and the wrong cities...
...This was a considerable improvement over the reported rate of 8.9 percent in May 1975...
...THE UNEMPLOYMENT RATE has a tendency to recover more slowly than other measures of economic activity after a recession has bottomed out...
...others say, a long-run relationship...
...Those for June 1976 were considerably affected by the expansion of two federally financed job creation programs: the Public Service Employment (PSE) program, under the Comprehensive Employment and Training Act, and the College Work-Study program...
...During the period of heavy production for the Vietnam War, from 1965 to 1968, defense industries provided 48 percent of the new bluecollar jobs in the economy...
...CONSTRUCTION The construction industry has the highest unemployment rate reported for any of the standard industry classifications— 17 percent in June 1976...
...3. Is There a "Trade-off" between Unemployment and Inflation...
...To attribute the entire reduction to monetary and fiscal policy imputes to such policy about three times as large an effect as is justified by the facts...
...The Vietnam War, as earlier noted, reduced the size of the civilian labor force significantly...
...Some critics have raised questions about the methodology of such studies, and some of the criticisms are justified...
...The chart illustrates the point that, in recent years, the growth rate of this industry has slowed primarily because of an approach to what appears to be an upper limit...
...Professional and technical workers had a reported rate of 2.9 percent, and nonfarm laborers a 12.7 percent rate...
...FOR THE LAST 40 YEARS, unemployment compensation has been considered "the first line of defense" against the financial losses imposed by unemployment...
...But the rate of unemployment does not uniquely determine the rate of inflation...
...and war production provided a large number of temporary jobs for blue-collar workers...
...Unemployment figures are misleading...
...I support the Administration's opposition to further extensions of unemployment benefits, provided that other programs are developed to meet the needs of the long-term unemployed...
...But it seems doubtful that the automobile and related industries will ever again provide regular jobs for as large a proportion of the labor force as in the 197073 period...
...Two other weaknesses of tax-cutting as a remedy for unemployment should be noted...
...was 67 percent...
...I conclude that this widely held belief lacks a substantial basis in either experience or analysis...
...The percentage of Gross National Product going to education increased from 3.4 percent in 1950 to 7.9 in 1972...
...One of the great achievements of J. M. Keynes was to demonstrate the fallacy of this doctrine...
...It is a useful invention that has contributed to the moderation of past business cycles and has alleviated hardship...
...This estimate implies a loss of another 300,000 jobs in the raw materials industries because of the continuing slump in autos, or a total of 500,000 in 1975...
...These estimates cover four types of programs for the relief of unemployment: public works, antirecession grants to state and local governments, public service employment, and federal tax cuts...
...The PSE enrollees have had a substantial period of unemployment and were unable to find jobs in the normal labor market...
...Congressional Democrats criticized Administration policies, but many of them quietly backed away from the HumphreyHawkins Full Employment Bill after some prominent economists asserted that this bill would worsen the inflation problem...
...No single factor can completely explain this reversal...
...Scarcely any forecaster now predicts a return to prerecession unemployment levels within the next 12 to 18 months...
...The ultimate illusion was that government had mastered the unemployment problem and all that remained was to master the technique of `fine tuning...
...The CBO estimates imply that the net cost per job created by tax cuts after 24 months is in the range of $17,000 to $21,000...
...such leakage, at its worst, would not render the program less effective than tax-cutting...
...in prior years they also include buses...
...have contributed to slower sales...
...On the other hand, in the last three years, we have had unemployment rates that were extremely high by postwar standards—and we have had very rapid price inflation as well...
...By the end of 1975, 11 states had to borrow funds from the federal government to continue to pay unemployment benefits...
...Enrollments are down also, but by much less than the decrease in the share of GNP...
...and if you want less price inflation, you must accept more unemployment...
...but the next decennial census is likely to show little if any further increase in employment, unless comprehensive health care legislation will be passed, which is far from certain...
...It is time to take a critical look at this proposition...
...The expiration of the 1975 tax cuts on schedule on December 31, 1975, obviously would have constituted a large tax increase...
...withdrawal from Vietnam...
...I am confident that the market will again generate a growing total of jobs...
...The impact estimates of the Congressional Budget Office support this conclusion...
...But, as often happens, as the acceptance of the Phillips curve among economic policy-makers has spread, skeptics have arisen among prominent economists...
...Unemployment can be reduced far below 7 or 8 million without aggravating inflation...
...Examination of Chart I shows a pronounced tendency over time for the unemployment rate to recede less and less from the recession high after the economy as a whole has begun to recover...
...Many, perhaps most, economic forecasts nowadays are based on computer simulations of Chart CHANGES IN THE UNEMPLOYMENT RATE FOR THE CIVILIAN LABOR FORCE IN MONTHS FOLLOWING TROUGH OF FIVE POSTWAR RECESSIONS +. 4 0 - - ----------- ---------------------------ox -.4 _.8 1969-70 1 -1.2 Z) 1960-61 CO -1.6 * ** 2.o 0 1953-54 w -2.4 1957-58 U W -2.8 oC LL -3.2 *Cyclical peak ° _3 . 6 ** Vietnam escalation 1948-49 -4.0 5 10 15 20 25 30 35 40 45 50 MONTHS AFTER TROUGH 416 the whole economy...
...This has been another major growth industry since World War II...
...Monetary policy was directed toward the control of inflation, and fiscal policy did not avert the deepest recession since the 1930s...
...The modest economic recovery thus far achieved could have been endangered...
...According to the estimates, tax cuts have the smallest impact on employment of any of the four types of programs, assuming equal numbers of dollars are involved...
Vol. 23 • September 1976 • No. 4
