Jobless Recovery

Government Policies Made the Economy Worse—and They're Still Impeding the Recovery


Why has the U.S. job market stayed so lousy for so long? The impact of the recession explains part of it, but it's not the whole story, according to a paper unveiled Friday by economists Steven J. Davis and John Haltiwanger. Davis, of the University of Chicago, and Haltiwanger, of the University of Maryland, looked at employment trends across the country in recent years and concluded that a significant chunk of the problem predated the economic downturn.

The issue is a reduction in labor market fluidity. Essentially, older people are staying put in the jobs they have, creating less turnover and less movement. So one of the consequences is that younger people are having trouble getting their foot in the door.

That has ripple effects for years to come. The longer it takes for someone to get his or her first job, and the lower-paying that initial job is, the harder it is to gain skills and connections that allow someone to move up the ladder. Basically, the part of the labor market that already has work (older workers) is less fluid. As a result, there are fewer opportunities for the part of the labor market that doesn't have work (younger people who want to work). They can't get jobs, can't accumulate "human capital"—everything from concrete skills to personal connections to a conceptual understanding of how their markets function—and so have a harder time getting started. It's a vicious cycle. Younger workers and men, the economists say, are hit the hardest.

Part of what makes Davis and Haltiwanger's conclusion so interesting is that in many ways it contradicts the conventional wisdom that economy has become to unsteady, too uncertain, and too volatile. What they're saying, in contrast, is that the economy isn't volatile enough. 

Why is the economy more rigid than it used to be? The economists have a few ideas, as noted in a New York Times write-up of the paper:

Mr. Davis and Mr. Haltiwanger attribute some of this decline to the aging of the work force; as people get older, they tend to change jobs less frequently. The decline in the creation of new companies is also playing a role. In effect, companies are getting older, too. This has been particularly pronounced in the retail sector, where giants like Walmart and McDonald's offer relatively stable employment.

The paper argues that economic policy also plays an important role. The cost of training workers has increased, partly because the share of all workers who require government licenses has grown by one estimate from about 5 percent in the 1950s to 29 percent in 2008. This discourages hiring. So do legal changes that have made it more difficult to fire employees, the paper says. It also mentions health insurance as a reason that employees may stay put.

In other words, policy makes a difference, especially when the marginal effects are allowed to build up over time and gum up the works. Licensing and training requirements make it more expensive to put people to work. Policies that make it harder to fire inevitably make it harder to hire too. And our half-century old policy of tying health insurance to employment through favorable tax treatment has likely made it harder, at the margins, for workers to move from job to job. 

Part of this, then, is a story about how the government got in the way. As time went on, the cumulative effects of multiple bad employment policies helped make for a bad job market. And recovery could be harder and longer than we think, because even after the effects of the recession wear off, those problematic policies will still be dragging us down.

NEXT: Cop Who Was Fired and Rehired Could Cost Columbus, Ohio, Millions Over Feud With Brother

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  1. older people are staying put in the jobs they have

    Needz MOAR entitlements to incentivize them to leave!!!1!
    Wait, I thought one of Obamacare’s plethora of advantages was that they can leave their jobs and go learn to paint or play the guitar or something. Which is it?

    1. Damn right. Fuck them young whipper-snappers.

      And get off my lawn!

      1. *pees on your lawn and kicks over your walker*. Take that you ricketty bitch!

  2. “This is all christfag lies and propaganda. My Apple and Buffet stocks are doing great so the economy must be doing great”

    – Shrike

  3. There are a couple of other things going on. First, lets not forget student loans. They prevent young people from switching careers or being willing to start at the bottom in a new career. Forget the people who can’t pay their loans for a moment. Even the ones who can pay their loans have their employment options reduced because they often can’t take a pay cut to pursue a career where they might have better long term prospects.

    Second, this is also the wages of the government trying to get everyone to own a house. It is a lot harder to move to a new job when doing so requires you to sell your home. Buying a home is one of the dumbest things a low income or entry level worker can do. When you are struggling, what you need more than anything else is the freedom to go wherever the job is. Buying a home takes that away from you.

    1. I’m getting all my paperwork together to get pre-approved for a loan at the moment. I’m 26 with no debt, 10% down payment saved and in the bank, and a career started that’s going well.

      The property values are pretty high here, and going up. The rent at my apartment has gone from $850 to $1100 in 3 years. The sooner I can buy, the sooner I can stop giving away so much of my income to a landlord.

      1. It may be the right thing for you to do. You apparently have an established job and career. But if you had a less established job and faced the prospect of losing your job and having to relocate to get another one, buying that house is a very bad idea.

        As with most of these things, the “everyone should own a home” bullshit hurts the poor the most.

        1. Right, I’ve held off a year because I was trying to switch jobs and wanted the flexibility to move wherever I needed. Luckily, I was able to just switch departments in the company. My boss was fired a month after I left, and that entire department is getting re-organized. So that was a good call.

          Where I live, the amount you pay for rent on an apartment and the approximate monthly payment on a mortgage are suspiciously close. I’m wondering if that’s true elsewhere.

          So, even for a low income person, if their employment situation remains stable, it would still be their long term advantage to buy rather than rent – because they would accumulating that equity.

  4. I remember back during the “jobs created or saved” era, someone published an article (maybe Reason?) pointing out that whenever unemployment went down, it was because the older people were getting hired. The job market for college graduates was just getting worse, but older people were sometimes able to find positions.

    What could make the problem worse is the whole minimum wage business. Raising the minimum wage cuts off the bottom rungs of the ladder. Older people will be comfortable taking jobs that used to pay less and would normally be done by younger people. Younger people will be collecting unemployment. Meanwhile, in healthcare, Obamacare is relying on the younger generations buying into and funding the system, but that’s hard to do when you can’t get a job.

    And oh yeah, there’s the education bubble that hasn’t popped yet. All these college graduates can’t find jobs and are mired in student loan debt.

  5. Why has the U.S. job market stayed so lousy for so long?



  6. Well, the Obama years have fucked my 401K over royally.

  7. Seems like it might be worth considering the boomers in this math as well. There are more people age 50-65 than there were 20 years ago and I’d bet most of them haven’t done much retirement planning on their own.

Please to post comments

Comments are closed.