Not Enough Labor Day

How the government is destroying jobs

Today, many Americans will be enjoying a respite from the incessant demands of their jobs. But many Americans will be wishing desperately they could trade the holiday for the incessant demands of a job. This year, given the state of the economy, Labor Day should be called Not Enough Labor Day.

The unemployment rate during the recent recession peaked at 10.1 percent last October, and in August, it was 9.6 percent—an increase from July. Nearly 15 million people are looking for suitable work and not finding it.

Most of the loss of employment is the result of large events: the financial crisis, the housing bust, and the general collapse of demand. Congress, the administration, and the Federal Reserve are straining to stimulate hiring through fiscal and monetary policies aimed at reviving growth.

But that is not all the government does to affect employment. Alas, much of what it does offsets the good it is trying to accomplish.

A sad example is the payroll tax, which impedes job creation in two ways. First, it imposes an extra cost on employers for hiring workers—a cost they don't incur if they decide to replace workers with machinery. Second, it reduces the take-home pay of those hired, making it less attractive for them to work.

Richard Rogerson, an economist at Arizona State University and author of the new book The Impact of Labor Taxes on Labor Supply, says the negative effect of payroll taxes is especially large when the revenues go to programs like Social Security. Evidence from Europe, he says, suggests that "a 10-percentage-point increase in labor taxes used to fund transfer programs leads to a reduction in hours worked of between 10 and 15 percentage points."

Many liberals admire Europeans for their civilized habit of working less than Americans do. But they used to work more. The change came about because higher taxes on that side of the Atlantic have greatly reduced the gains from working.

Generous social welfare benefits were another factor in sapping the European work ethic. But the United States is moving in the same direction. President Obama recently signed a bill extending unemployment insurance benefits, allowing those out of work to collect for up to 99 weeks.

There is something to be said for providing extra help to people who lose their jobs during hard times. But there is an unintended side effect: longer spells of unemployment. In the past year, the average duration has increased from 25 weeks to 34 weeks—far above the average peak duration of 21 weeks during previous recessions over the past 65 years.

What's different this time? "The dramatic expansion of unemployment-insurance eligibility to 99 weeks is almost certainly the culprit," writes Harvard economist Robert Barro in The Wall Street Journal. The extension provides the longest coverage ever.

Economists disagree on how much jobless assistance aggravates the problem it is supposed to ameliorate. But a study this year by the liberal Brookings Institution estimated that without the additional benefits, the unemployment rate would be at least 0.7 percentage points lower than it is—the equivalent of a million jobs.

The extension makes it feasible for some unemployed workers to put off looking for work longer than they otherwise could—which is why workers without coverage usually find new jobs quicker than workers with coverage. Often, the benefits just postpone the inevitable, depriving the economy of labor without yielding better jobs for those looking.

Then there is the increase in the federal minimum wage that took place last year. In the teeth of the downturn, the government required companies to boost their pay floor to $7.25 an hour, an increase of 70 cents. The intention may have been humane, but the effect was like tossing a struggling swimmer an anchor.

For Washington to dictate higher pay is bound to destroy jobs in the best of times. But the very worst moment to raise the minimum wage is during a period of economic stagnation combined with deflation, as we had last year.

When inflation screeches to a halt, many workers will be compelled to accept lower pay than they once would have taken. (Many already have.) A higher minimum wage prevents some from doing that.

Paying people not to work, barring them from taking wages they would be willing to accept, and penalizing companies that hire them? It's an ingenious formula for destroying jobs, and it seems to be working.

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