Research Programs

Sustainable Full Employment

In most economies, the potential of saving energy via insulation and more efficient uses of electricity is important. In order to reach the Kyoto Protocol objectives, it is urgent to develop policies that reduce the production of carbon dioxide in all sectors of the economy. This paper proposes an analysis of a green-jobs employer-of-last-resort (ELR) program based on a stock-flow consistent (SFC) model with three productive sectors (consumption, capital goods, and energy) and two household sectors (wage earners and capitalists). By increasing the energy efficiency of dwellings and public buildings, the green-jobs ELR sector implies a shift in consumption patterns from energy consumption toward consumption of goods. This could spur the private sector and thus increase employment. Lastly, the jobs guarantee program removes all involuntary unemployment and decreases poverty while lowering carbon dioxide emissions. The environmental policy proposed in this paper is macroeconomic and offers a structural change of the economy instead of the usual micro solutions.

The Nonprofit Model for Implementing a Job Guarantee

The conventional approach of fiscal policy is to create jobs by boosting private investment and growth. This approach is backward, says Research Associate Pavlina R. Tcherneva. Policy must begin by fixing the unemployment situation because growth is a byproduct of strong employment—not the other way around. Tcherneva proposes a bottom-up approach based on community programs that can be implemented at all phases of the business cycle; that is, a grass-roots job-guarantee program run by the nonprofit sector (with participation by the social entrepreneurial sector) but financed by the government. A job-guarantee program would lead to full employment over the long run and address an outstanding fault of modern market economies.

An Augmented Minskyan-Kaleckian Model

This paper augments the basic Post-Keynesian markup model to examine the effects of different fiscal policies on prices and income distribution. This is an approach à la Hyman P. Minsky, who argued that in the modern era, government is both “a blessing and a curse,” since it stabilizes profits and output by imparting an inflationary bias to the economy, but without stabilizing the economy at or near full employment. To build on these insights, the paper considers several distinct functions of government: 1) government as an income provider, 2) as an employer, and 3) as a buyer of goods and services. The inflationary and distributional effects of each of these fiscal policies differ considerably. First, the paper examines the effects of income transfers to individuals and firms (in the form of unemployment insurance and investment subsidies, respectively). Next, it considers government as an employer of workers (direct job creation) and as a buyer of goods and services (indirect job creation). Finally, it modifies the basic theoretical model to incorporate fiscal policy à laMinsky and John Maynard Keynes, where the government ensures full employment through direct job creation of all of the unemployed unable to find private sector work, irrespective of the phase of the business cycle. The paper specifically models Minsky’s proposal for government as the employer of last resort (ELR), but the findings would apply to any universal direct job creation plan of similar design. The paper derives a fundamental price equation for a full-employment economy with government. The model presents a “price rule” for government spending that ensures that the ELR is not a source of inflation. Indeed, the fundamental equation illustrates that in the presence of such a price rule, at full employment inflationary effects are observed from sources other thanthe public sector employment program.

Lessons from Argentina

The literature on public employment policies such as the job guarantee (JG) and the employer of last resort (ELR) often emphasizes their macroeconomic stabilization effects. But carefully designed and implemented policies like these can also have profound social transformative effects. In particular, they can help address enduring economic problems such as poverty and gender disparity. To examine how, this paper will look at the reform of Argentina’s Plan Jefes into Plan Familias. Plan Jefes was the hallmark stabilization policy of the Argentine government after the 2001 crisis. It guaranteed a public sector job in a community project to unemployed male and female heads of households. The vast majority of beneficiaries, however, turned out to be poor women. For a number of reasons that are explored below, the program was later reformed into a cash transfer policy, known as Plan Familias, that still exists today. The paper examines this reform in order to evaluate the relative impact of such policies on some of the most vulnerable members of society; namely, poor women. An examination of the Argentine experience based on survey evidence and fieldwork reveals that poor women overwhelmingly want paid work opportunities, and that a policy such as the JG or the ELR cannot only guarantees full employment and macroeconomic stabilization, but it can also serve as an institutional vehicle that begins to transform some of the structures and norms that produce and reproduce gender disparities. These transformative features of public employment policies are elucidated by turning to the capabilities approach developed by Amartya Sen and elaborated by Martha Nussbaum—an approach commonly invoked in the feminist literature. This paper examines how the access to paid employment can enhance what Sen defines as an individual’s “substantive freedom.” Any policy that fosters genuine freedom begins with an understanding of what the targeted population (in this case, poor women) wants. It then devises a strategy that guarantees that such opportunities exist and removes the obstacles to accessing these opportunities.

By Dimitri B. Papadimitriou

Los Angeles Times, January 5, 2012. Copyright © 2012 Los Angeles Times

International experience shows that direct job creation by governments is one of the very few options that has succeeded at raising employment levels more than just marginally during a crisis.

Is high unemployment as certain as death and taxes? Of course not. But if we depend on the private sector to bring rates down, joblessness could join those two certainties.

International experience shows that direct job creation by governments is one of the very few options that has succeeded at raising employment levels more than just marginally during a crisis. Nonetheless, unfounded optimism about the power of privately fueled growth underlies the latest round of interventions in Europe. The assumption that the business sector has the ability to absorb enough labor to end the unemployment crisis remains almost unquestioned.

And it is a crisis, despite the recent employment upsurge in much of the world. In Portugal, Ireland, Greece and Spain, high unemployment has continued, with anemic confidence indicators and planned-purchases data in Greece, for example, showing clear evidence that businesses and consumers are bracing for a protracted recession. In economies that are improving, outrageously high unemployment rates among important groups, particularly youths, signal the start of both a threat and a tragedy. Grave labor issues are scattered around the globe.

It's unreasonable to expect private enterprises to solve these problems. Full employment isn't an objective of businesses. Companies usually strive to keep staffing at a minimum—we've all heard the virtues of "lean and mean." There simply isn't any known automatic mechanism, in the markets or elsewhere, that creates jobs in numbers that match the pool of people willing and able to work.

In contrast, direct public-service job creation programs by governments have a history of long-term positive results. Throughout the last century, the United States, Sweden, India, South Africa, Argentina, Ethiopia, South Korea, Peru, Bangladesh, Ghana, Cambodia and Chile, among others, have intermittently adopted policies that made them "employers of last resort"—a term coined by economist Hyman Minsky in the 1960s—when private sector demand wasn't sufficient.

South Korea, for example, during the meltdown of 1997-'98, implemented a Master Plan for Tackling Unemployment that accounted for 10% of government expenditure. It employed workers on public projects that included cultivating forests, building small public facilities, repairing public utilities, environmental cleanup work, staffing community and welfare centers, and information/technology-related projects targeted at the young and computer-literate. The overall economy expanded and thrived in the aftermath.

In 2005, France outlined a program in which the government paid laid-off workers their former salaries. It showed that this model could ultimately cost the nation a lower percentage of GDP than unemployment compensation or other traditional remedies.

Of course, these ideas came long after America's Depression-era initiatives had already proved that government could successfully fulfill the role of employer without competing with the private sector. Programs such as the Public Works Administration and the Civilian Conservation Corps were followed by a "golden" era in American capitalism, and now, decades later, those policies are still providing rewards. The vogue to dismiss the 1940s recovery as entirely the result of World War II reflects political positioning, not economic data.

At the theoretical heart of job-creation programs is this fact: Only government, because it is not seeking profitability when it is hiring, can create a demand for labor that is elastic enough to keep a nation near full employment. During a downturn, when a government offers a demand for unemployed workers, it takes on a role analogous to the one that the Federal Reserve plays when it provides liquidity to banks. As in banking, setting an appropriate rate—in this case, a wage—is one key component for success, with the goal of employing those willing and able to work at or marginally below prevailing informal wages.

And, as in any good public policy, another key is rigorous, scientific monitoring and evaluation. South Africa, in response to a projected unemployment rate of 33% by 2014, has launched a $2.5-billion initiative to create 1 million "cumulative work opportunities" over five years. Analysis by Rania Antonopoulos of the Levy Institute found that care-provisioning jobs—such as home-based workers who care for the ill, the elderly or young children—had a significantly stronger impact as an employment multiplier than infrastructure-oriented or "green" opportunities. Not all jobs are created equal.

The benefits of direct job creation aren't just transitory. It's well documented that persistent unemployment results in a permanent loss of output and labor productivity. During a crisis, jobs combat these potential future effects. When the good times are rolling, they support those excluded from the prosperity while stimulating demand through feedback loops that increase the economy's vibrancy.

This is the moment to expand the range of policy responses to unemployment.

There's no evidence that work creation policies either hurt private business or break national treasuries. Incurring national debt to restore an economy through direct job creation isn't frivolous. It is logical, practical, effective and humane.

Countries in crisis round the world face the daunting task of dealing with abrupt increases in unemployment and associated deepening poverty. Greece, in the face of her sovereign debt crisis, has been hit the hardest. Remediating employment policies, including workweek reductions and employment subsidies, abound but have failed to answer the call satisfactorily. Direct public-service job creation, instead, enables communities to mitigate risks and vulnerabilities that rise especially in turbulent times by actively transforming their own economic and social environment.

With underwriting from the Labour Institute of the Greek General Confederation of Workers, the Levy Economics Institute was instrumental in the design and implementation of a social works program of direct job creation throughout Greece. Two-year projects, funded from European Structural Funds, have begun.

This report traces the economic trends preceding and surrounding the economic crisis in Greece, with particular emphasis on recent labor market trends and emerging gaps in social safety net coverage. While its primary focus is identifying the needs in Greece, broader lessons for direct job creation are highlighted, and could be applied to countries entertaining targeted employment creation as a means to alleviate social strains during crisis periods.

The American Jobs Act now before Congress relies largely on a policy of aggregate demand management, or “pump priming”: injecting demand into a frail economy in hopes of boosting growth and lowering unemployment. But this strategy, while beneficial in setting a floor beneath economic collapse, fails to produce and maintain full employment, while doing little to address income inequality. The alternative? Fiscal policy that directly targets unemployment by providing paid work to all those willing to do their part.

By Catherine Hollander

National Journal, October 11, 2011. Copyright © 2011 by National Journal Group Inc.

The U.S. job market has shown lackluster growth recently, to put it mildly.

The September employment report, released on Friday, revealed that nonfarm payrolls added just 103,000 jobs last month—not horrific, but still under the threshold economists say they need to cross in order to dent unemployment. The Senate is likely to vote on the job-creation proposals in President Obama’s $447 billion American Jobs Act this week, but the bill’s passage is a long shot.

As they consider the legislation, lawmakers may want to reflect on their counterparts across the Atlantic.

While each economy faces unique obstacles to growth, fellow developed countries like Germany, Denmark, and France have implemented programs analogous to some found in Obama’s jobs bill with success. These include job-search programs accompanying unemployment benefits and stepped-up apprenticeship programs.

Other countries have developed programs not found in the president’s legislation, such as mechanisms to certify workers who have gained skills on the job rather than in the classroom.

Unemployment insurance programs vary widely from country to country. As of 2007, the most recent year for which data was available, the U.S. paid employees 13.6 percent of their previous earnings on average, compared with 24.7 percent in the Organisation for Economic Co-operation and Development as a whole, which counts the U.S. and 33 other wealthy countries as members.

The U.S. also has short-lasting unemployment benefits compared with most of the other OECD members. By itself, this provides a “powerful incentive” for the unemployed to look for their next job, according to Gary Burtless, an economist at the Brookings Institution.

But other OECD countries have deployed different incentives to get recipients of unemployment benefits back to work. Many low-paying jobs in the U.S. pay around the same as the benefits. Other countries have ensured work earnings are higher than unemployment benefits, incentivizing recipients to look for a job, according to Stefano Scarpetta, the OECD’s Deputy Director for Employment, Labour, and Social Affairs. 

Some OECD countries have bolstered their programs to help the recipients of unemployment insurance re-enter the workforce. France and others have made unemployment benefits conditional on searching for a job and participating in re-employment programs. The U.S. has paid less attention to investing in such labor market institutions, Scarpetta said.

He recommended focusing on “training, apprenticeship, and skills” to boost unemployment among the most vulnerable sectors of the population -- the young and long-term unemployed. Countries such as Germany and Denmark stepped up their traditional apprenticeship programs in response to the economic downturn. The pumped-up programs have a strong track record of landing apprentices with jobs, Scarpetta said.

The American Jobs Act proposes to do this through new training for the recipients of unemployment insurance -- so-called “bridge to work” programs modeled after efforts in Georgia and North Carolina. These programs allow long-term unemployed workers to continue receiving unemployment benefits while they pursue work-based training.

Such training could have secondary benefits, eliminating unwanted social trends such as crime and depression that are associated with high unemployment levels, according to Dimitri Papadimitriou, president of Bard College’s Levy Economics Institute. He called the training programs a “very good idea.”

But Papadimitriou cautioned that without a more general economic recovery, simply training unemployed workers doesn’t guarantee jobs. Others fear it will be difficult to find employers willing to bring in unpaid trainees. They like to maintain control over the hiring process, Brookings’s Burtless said.

It would be more fruitful in the long run to reform the way the U.S. thinks about employment training, he said.

Several OECD countries, including Portugal, have created mechanisms by which workers who drop out of school but gain skills on the job can have those skills certified, making them more attractive to potential employers.

The U.S. places too much emphasis on formal educational credentials and not enough on skills acquisition, Burtless said. A European-style certification program could make on-the-job training more valuable by providing workers with proof that they have a transferable skill.

Such a program runs the risk of locking workers into too-rigid skill certifications, which could harm their ability to appear flexible in a changing workforce, according to Randall Eberts, president of the Upjohn Institute for Employment Research. It would not provide immediate unemployment relief, and it would take time for employers and workers to recognize the value of the certificate, but it could provide a huge help in the long run to a large portion of workers who complete their training on the job, Burtless said.

Some economists were hesitant to make comparisons between the U.S. and the smaller European countries, whose economies operate in a different political environment. And it will ultimately take strong overall economic growth to turn around the labor market. Supply-side changes will have a limited impact without an accompanying improvement in demand, Papadimitriou argued.

But in the end, the point is not that other developed countries have it all figured out—it’s that no one does, and looking at programs that have been implemented abroad can be a useful jumping-off point for discussions of job-creation measures in the U.S.

Interview with Pavlina R. Tcherneva

September 8, 2011. © 2011 by Wisconsin Public Radio

As Obama tours the East promoting his jobs bill, and jobs forums spring up across Wisconsin, Research Associate Tcherneva and host Ben Merens talk about what should be done now to address unemployment. Full audio of the interview is available here.

There is little mystery to explaining our current high levels of unemployment. The Bureau of Economic Analysis recently revised its figures on GDP growth, and revealed that not only was the recession worse than we realized, but recent growth rates have been overstated as well. The hole, in other words, was deeper than we thought, and we have been climbing out of it at a slower pace. Simply put, the economy has failed to recover to the point where it can be expected to generate sufficient job growth. In the event that Congress should turn its attention away from the (so far) purely notional dangers of rising debt levels and back toward the immediate and tangible jobs crisis, it might consider a solution that has been overlooked so far: job creation through social care investment.

Case Studies in South Africa and the United States

This paper demonstrates the strong impacts that public job creation in social care provisioning has on employment creation. Furthermore, it shows that mobilizing underutilized domestic labor resources and targeting them to bridge gaps in community-based services yield strong pro-poor income growth patterns that extend throughout the economy. Social care provision also contributes to promoting gender equality, as women—especially from low-income households—constitute a major workforce in the care sector. We present the ex-ante policy simulation results from two country case studies: South Africa and the United States. Both social accounting matrix–based multiplier analysis and propensity ranking–based microsimulation provide evidence of the pro-poor impacts of the social care expansion.

The slow recovery of the job market after the recessions of 2001 and 2007–09 has fostered concerns that the link between output growth and job creation has been severed. Between 2000 and 2010, the employment rate for males plunged from 71.9 to 63.7 percent—a decline that can be accounted for almost entirely by a fall in the employment rate for the disabled members of this group.

Research Scholar Greg Hannsgen examines whether the Great Recession disproportionately affected the job prospects of disabled workers, and whether the long-run fall in employment among the disabled can be blamed largely on the design of Social Security disability insurance. His findings? At least since 2008, the ongoing fall in the probability of being employed has strongly affected the job prospects of both the disabled and the nondisabled, and the accelerated declines since 2007 hint at an important, and negative, role for the recent recession. Hence, a government jobs initiative such as an employer-of-last-resort program, and not just long-term improvements in entitlement programs, is still very much apropos.

Functional Finance and Full Employment

Forty-five years ago, the A. Philip Randolph Institute issued “The Freedom Budget,” in which a program for economic transformation was proposed that included a job guarantee for everyone ready and willing to work, a guaranteed income for those unable to work or those who should not be working, and a living wage to lift the working poor out of poverty. Such policies were supported by a host of scholars, civic leaders, and institutions, including the Rev. Dr. Martin Luther King Jr.; indeed, they provided the cornerstones for King’s “Poor Peoples’ Campaign” and “economic bill of rights.”

This paper proposes a “New Freedom Budget” for full employment based on the principles of functional finance. To counter a major obstacle to such a policy program, the paper includes a “primer” on three paradigms for understanding government budget deficits and the national debt: the deficit hawk, deficit dove, and functional finance perspectives. Finally, some of the benefits of the job guarantee are outlined, including the ways in which the program may serve as a vehicle for a variety of social policies.

This paper argues for a fundamental reorientation of fiscal policy, from the current aggregate demand management model to a model that explicitly and directly targets the unemployed. Even though aggregate demand management has several important benefits in stabilizing an unstable economy, it also has a number of serious drawbacks that merit its reconsideration. The paper identifies the shortcomings that can be observed during both recessions and economic recoveries, and builds the case for a targeted demand-management approach that can deliver economic stabilization through full employment and better income distribution. This approach is consistent with Keynes’s original policy recommendations, largely neglected or forgotten by economists across the theoretical spectrum, and offers a reinterpretation of his proposal for the modern context that draws on the work of Hyman Minsky.

This paper reconsiders fiscal policy effectiveness in light of the recent economic crisis. It examines the fiscal policy approach advocated by the economics profession today and the specific policy actions undertaken by the Bush and Obama administrations. An examination of the labor market renders the contemporary aggregate demand–management approach wholly inadequate for achieving certain macroeconomic objectives, such as the stabilization of investment and investor expectations, the generation and maintenance of full employment, and the equitable distribution of incomes. The paper reconsiders the policy effectiveness of alternative fiscal policy approaches, and argues that a policy that directly targets the labor demand gap (as opposed to the output gap) is far more effective in stabilizing employment, incomes, investment, and balance sheets.

We reinterpret unit labor costs (ULC) as the product of the labor share in value added, times a price adjustment factor. This allows us to discuss the functional distribution of income. We use data from India’s organized manufacturing sector and show that while India’s ULC displays a clear upward trend since 1980 (with a decline since the early 2000s), this is exclusively the result of the increase in the price deflator used to calculate the ULC. The labor share of India’s organized manufacturing sector has been on a downward trend, from 60 percent in 1980 to 26 percent in 2007. This means that the sector’s capital share increased from 40 to 74 percent over the same period. We also find that real wages have increased minimally during the period analyzed—well below labor productivity—while the real profit rate and unit capital costs have increased substantially. We conclude that if India’s organized manufacturing sector has lost any competitiveness, it is the result of the increase in unit capital costs. Our analysis questions policy recommendations that advocate wage moderation, which result from simply looking at the evolution of the ULC, and that blame the loss of competitiveness on high or increasing wages.

A Strategy for Effective and Equitable Job Creation

Massive job losses in the United States, over eight million since the onset of the “Great Recession,” call for job creation measures through fiscal expansion. In this paper we analyze the job creation potential of social service–delivery sectors—early childhood development and home-based health care—as compared to other proposed alternatives in infrastructure construction and energy. Our microsimulation results suggest that investing in the care sector creates more jobs in total, at double the rate of infrastructure investment. The second finding is that these jobs are more effective in reaching disadvantaged workers—those from poor households and with lower levels of educational attainment. Job creation in these sectors can easily be rolled out. States already have mechanisms and implementation capacity in place. All that is required is policy recalibration to allow funds to be channeled into sectors that deliver jobs both more efficiently and more equitably.

The economic returns to education in transition countries have been extensively evaluated in the literature. The present study contributes to this literature by estimating the returns to education in Georgia during the last transition period 2000–04. We find very low returns to education in Georgia and little evidence of an increasing trend in the returns. This picture contrasts with somewhat higher rates of return to education in the mid-1990s in Georgia and the recent estimates from other transition countries. A further analysis of the shifts in the supply and demand for education sheds light on possible causes. In particular, on the supply side, the decline in the quality of education in the 1990s has negated the improvements in the provision of skills needed by market economies during this period. On the demand side, the expansion of the Georgian economy has taken place in the direction of fields such as public administration and education that employ a highly educated workforce but do not remunerate well. Yet it would be a mistake to conclude that education is not a valuable asset in Georgia. The role of education is largely manifested in its impact on the employability of individuals, an issue that has been overlooked in the transition literature. Once this impact is taken into account, education is shown to play an increasingly important role in influencing the earnings of the working population in Georgia. The paper uses the ordinary least squares approach, instrumental variables approach, and sample selection correction, taking into account conditional and unconditional marginal effects of education on earnings.

Standard and Behavioral Approaches to Agency and Labor Markets

Employers structure pay and employment relationships to mitigate agency problems. A large literature in economics documents how the resolution of these problems shapes personnel policies and labor markets. For the most part, the study of agency in employment relationships relies on highly stylized assumptions regarding human motivation, e.g., that employees seek to earn as much money as possible with minimal effort. In this essay, we explore the consequences of introducing behavioral complexity and realism into models of agency within organizations. Specifically, we assess the insights gained by allowing employees to be guided by such motivations as the desire to compare favorably to others, the aspiration to contribute to intrinsically worthwhile goals, and the inclination to reciprocate generosity or exact retribution for perceived wrongs. More provocatively, from the standpoint of standard economics, we also consider the possibility that people are driven, in ways that may be opaque even to themselves, by the desire to earn social esteem or to shape and reinforce identity.

The nation’s economic challenges are daunting. Restoring robust American prosperity and widespread economic opportunity will not be easy. But, as Hyman Minsky stressed, “Economic systems are not natural systems…. Policy can change both the details and the overall character of the economy.”

It’s clear that what we are now facing is not simply a cyclical crisis, or even an employment crisis, writes Charles J. Whalen. Rather, it is a standard-of-living-and-economic-opportunity crisis—the latest phase in a decades-long “silent depression.” In order to resolve it, our policy response must reflect that we are dealing with a deep-seated structural problem, one rooted in the evolution of US economic development. Policymakers must pursue an agenda of recovery and reform that includes, at minimum, a major assistance package for state and local governments; more relief for the unemployed and those facing foreclosure; tougher supervision of financial institutions; stronger automatic stabilizers (e.g., public service employment); policies that foster economic opportunities for working families; improved retirement security; and labor law reform that gives workers a more realistic chance to organize and bargain collectively.

This paper proposes a difference-in-differences strategy to decompose the contributions of various types of discrimination to the black-white wage differential. The proposed estimation strategy is implemented using data from the Young Physicians Survey. The results suggest that potential discrimination plays a small role in the racial wage gap among physicians. At most, discrimination lowers the hourly wages of black physicians by 3.3 percent. Decomposition shows that consumer discrimination accounts for all of the potential discrimination in the physician market, and that the effect of firm discrimination may actually favor black physicians. Interpretations of the estimates, however, are complicated by the possibility that, relative to white physicians, black physicians negatively self-select into self-employment.

What Are the Lessons of the New Deal?

As the nation watches the impact of the recent stimulus bill on job creation and economic growth, a group of academics continues to dispute the notion that the fiscal and job creation programs of the New Deal helped end the Depression. The work of these revisionist scholars has led to a public discourse that has obvious implications for the controversy surrounding fiscal stimulus bills. Since we support a new stimulus package—one that emphasizes jobs for the 9.8 percent of the workforce currently unemployed—we have been concerned about this debate. With Congress, the White House, pundits, and the press riveted on the all-important health care debate, we worry that they are also distracted by skirmishes over economic theory and history, while millions wait for a new chance to do meaningful work and effective, if imperfect, policy tools are readily at hand. (See also, Public Policy Brief No. 104.)

Did the New Deal Prolong or Worsen the Great Depression?

Since the current recession began in December 2007, New Deal legislation and its effectiveness have been at the center of a lively debate in Washington. This paper emphasizes some key facts about two kinds of policy that were important during the Great Depression and have since become the focus of criticism by new New Deal critics: (1) regulatory and labor relations legislation, and (2) government spending and taxation. We argue that initiatives in these policy areas probably did not slow economic growth or worsen the unemployment problem from 1933 to 1939, as claimed by a number of economists in academic papers, in the popular press, and elsewhere. To substantiate our case, we cite some important economic benefits of New Deal–era laws in the two controversial policy areas noted above. In fact, we suggest that the New Deal provided effective medicine for the Depression, though fiscal policy was not sufficiently countercyclical to conquer mass unemployment and prevent the recession of 1937–38; 1933’s National Industrial Recovery Act was badly flawed and poorly administered, and the help provided by the National Labor Relations Act of 1935 came too late to have a big effect on the recovery.

A wave of revisionist work claims that “anticompetitive” New Deal legislation such as the National Industrial Recovery Act (NIRA) and the National Labor Relations Act (NLRA) greatly slowed the recovery from the Depression; in this new public policy brief, President Dimitri B. Papadimitriou and Research Scholar Greg Hannsgen review these claims in light of current policy debates and cast into doubt the argument that NIRA and NLRA significantly prolonged or worsened the Depression. Moreover, Social Security, federal deposit insurance, and other New Deal programs helped usher in an era of relative prosperity following World War II. When it comes to combating the current recession and employment slump, it is the successful experience with relief and public works, and not the repercussions of pro-union and regulatory legislation, that offer the most relevant and helpful lessons.

Did Roosevelt’s “Anticompetitive” Legislation Slow the Recovery from the Great Depression?

A wave of revisionist work claims that “anticompetitive” New Deal legislation such as the National Industrial Recovery Act (NIRA) and the National Labor Relations Act (NLRA) greatly slowed the recovery from the Depression; in this new public policy brief, President Dimitri B. Papadimitriou and Research Scholar Greg Hannsgen review these claims in light of current policy debates and cast into doubt the argument that NIRA and NLRA significantly prolonged or worsened the Depression. Moreover, Social Security, federal deposit insurance, and other New Deal programs helped usher in an era of relative prosperity following World War II. When it comes to combating the current recession and employment slump, it is the successful experience with relief and public works, and not the repercussions of pro-union and regulatory legislation, that offer the most relevant and helpful lessons.

Lessons Learned from South Africa’s Expanded Public Works Programme

Beyond loss of income, joblessness is associated with greater poverty, marginalization, and social exclusion; the current global crisis is clearly not helping. In this new Public Policy Brief, Research Scholar Rania Antonopoulos explores the impact of both joblessness and employment expansion on poverty, paying particular attention to the gender aspects of poverty and poverty-reducing public employment schemes targeting poor women.

The author presents the results of a Levy Institute study that examines the macroeconomic consequences of scaling up South Africa’s Expanded Public Works Programme by adding to it a new sector for social service delivery in health and education. She notes that gaps in such services for households that cannot afford to pay for them are mostly filled by long hours of invisible, unpaid work performed by women and children. Her proposed employment creation program addresses several policy objectives: income and job generation, provisioning of communities’ unmet needs, skill enhancement for a new cadre of workers, and promotion of gender equality by addressing the overtaxed time of women.

 

Responding to the Current Economic Crisis and Contributing to Long-Term Development

A Collaborative Project of the United Nations Development Programme, Regional Bureau for Latin America and the Caribbean (RBLAC), and the Bureau for Development Policy (BDP), in Partnership with The Levy Economics Institute.

The Levy Economics Institute, Blithewood, Annandale-on-Hudson, New York
June 22–23, 2009.

With poverty, inequality, and unemployment trending upward worldwide, job creation, especially for marginalized populations, is urgently needed. By mobilizing unused domestic labor resources, direct job creation can become an engine of pro-poor growth while also promoting gender equality and meeting social inclusion targets—key international development goals. Public works projects, employment guarantees, and employment of last resort strategies can play a crucial role in reducing unemployment and poverty, ameliorating distress migration and delivering physical infrastructure and social services in ways that particularly benefit underserved communities.

On June 22 and 23, The Levy Economics Institute, in partnership with the United Nations Development Programme (UNDP), convened an international conference to present the merits and challenges of public job creation programs as a constitutive component of an economic recovery strategy. Titled “Employment Guarantee Policies: Responding to the Current Economic Crisis and Contributing to Long-Term Development,” the conference was held at Blithewood, the Institute’s main research and conference facility, on the campus of Bard College in Annandale-on-Hudson, New York. More than 30 top policy advisers, members of government organizations, academics, and international development specialists met to analyze and exchange views on various public employment initiatives, drawing on existing research and the outcomes of country-level programs in South Africa, Argentina, India, Iran, and Chile.

Lessons Learned from South Africa’s Expanded Public Works Programme

Beyond loss of income, joblessness is associated with greater poverty, marginalization, and social exclusion; the current global crisis is clearly not helping. In this new Public Policy Brief, Research Scholar Rania Antonopoulos explores the impact of both joblessness and employment expansion on poverty, paying particular attention to the gender aspects of poverty and poverty-reducing public employment schemes targeting poor women.

The author presents the results of a Levy Institute study that examines the macroeconomic consequences of scaling up South Africa’s Expanded Public Works Programme by adding to it a new sector for social service delivery in health and education. She notes that gaps in such services for households that cannot afford to pay for them are mostly filled by long hours of invisible, unpaid work performed by women and children. Her proposed employment creation program addresses several policy objectives: income and job generation, provisioning of communities’ unmet needs, skill enhancement for a new cadre of workers, and promotion of gender equality by addressing the overtaxed time of women.

 

There is already considerable talk about the possible need for a massive public works program in response to the deepening recession and rising unemployment; however, an ad hoc emergency approach is going to waste billions of dollars by mismatching skills and needs. In this new Policy Note, Martin Shubik of Yale University outlines a proposal aimed directly at providing good planning consistent with maintaining market freedom and minimizing pork-barrel legislation. Rather than an emergency relief program on the order of the New Deal Works Progress Administration, Shubik proposes a permanent agency modeled on the Federal Reserve that would monitor unemployment in each state and maintain a list of potential public works projects. Financing for any project could then be set in place as soon as the unemployment level in any state exceeded the trigger value, eliminating the need for relief legislation during a crisis.

The ad hoc emergency approach to the current economic crisis has a great chance of wasting billions of dollars by mismatching skills and needs. According to Martin Shubik of Yale University, the current deepening recession needs a “quick fix” solution now, but a longer-fix solution must be put into place along with it.

There is already considerable talk about the possible need for a large public works program to follow the massive infusion of funds into the financial and automobile sectors. But who is going to manage it? For us to weather this great economic storm we need to line up and coordinate (at least) four sets of highly different talents—political, bureaucratic, financial, and industrial. Without their coordination, economic recommendations, no matter how good they may appear to be in theory, will fail in execution.

An Assessment of Recent Evidence

In this paper we assess the evolution of labor-market performance in the Organisation for Economic Co-operation and Development (OECD) over the last decade. We provide a survey of the literature dealing with labor-market performance in the OECD, finding that, while this literature tends to conclude that institutions are a key part of the story, the survey’s results appear far less robust and uniform than is commonly believed. We then assess the robustness of the claims made in the most recent (2005) OECD follow-up study within a very similar cross-country setup, and highlight the impact of unobserved heterogeneity and outliers on the policy estimates. We find that in recent OECD cross-country data, changes in labor-market performance are consistently (and inversely) linked to its lagged level. Structural changes are also important: changes in the share of construction employees are very significant, even in the presence of various kinds of policy change indicators. As far as the latter are concerned, some consistent role seems to emerge only for active labor-market policies and (to a lesser extent) unemployment benefit reforms.

A Modest Proposal to Guarantee That He Meets and Exceeds Expectations

Job creation is once again at the forefront of policy action, and for advocates of pro-employment policies, President Obama’s Keynesian bent is a most welcome change. However, there are concerns that Obama’s plan simply does not go far enough, and that a large-scale public investment program may face shortages of skilled labor, put upward pressure on wages, and leave women and minorities behind. Both concerns can be addressed by a simple amendment to the Obama plan that will bring important additional benefits. The amendment proposed here is for the government to offer a job guarantee to all unemployed individuals who are ready, willing, and able to participate in the economic recovery—that is, to target the unemployed directly.

This study proposes a simple modification to a Social Accounting Matrix (SAM) in order to analyze the multiplier effects of a new sector. A different input composition, or technology, of the sector makes a conventional analysis of final-demand injections on existing sectors invalid. Author Kijong Kim shows that the modification—so-called hypothetical integration—is an efficient way to incorporate the difference into the SAM, rather than costly full-scale rebalancing. He applies this method to the case of the Expanded Public Works Programme in South Africa, and demonstrates that the proposed approach effectively represents the labor intensity requirement of the program and a new-factor income distribution.

Unemployment has far-reaching effects, all leading to an inequitable distribution of well-being. To put an economy on an equitable growth path, economic development must be based on social efficiency, equity—and job creation. Many economists, however, assume that unemployment tends toward a natural rate below which it cannot go without creating inflation. This paper considers a particular employment strategy: a government job creation program, such as an employment guarantee or employer-of-last-resort (ELR) scheme, that would satisfy the noninflationary criteria. The paper analyzes the international experience of government job creation programs, with particular emphasis on the cases of Argentina and India. It concludes by considering the application of an ELR policy to the developing world, and as a vehicle for meeting the Millennium Development Goals.

Aggregate or Targeted Demand?

This paper argues that John Maynard Keynes had a targeted (as contrasted with aggregate) demand approach to full employment. Modern policies, which aim to “close the demand gap,” are inconsistent with the Keynesian approach on both theoretical and methodological grounds. Aggregate demand tends to increase inflation and erode income distribution near full employment, which is why true full employment is not possible via traditional pro-growth, pro-investment aggregate demand stimuli. This was well understood by Keynes, who preferred targeted job creation during expansions. But even in recessions, he did not campaign for wide-ranging aggregate demand stimuli; this is because different policies have different employment creation effects, which for Keynes was the primary measure of their effectiveness. There is considerable evidence to argue that Keynes had an “on the spot” approach to full employment, where the problem of unemployment is solved via direct job creation, irrespective of the phase of the business cycle.

Can the New Developments in the New Economic Consensus Be Reconciled with the Post-Keynesian View?

The monetarist counterrevolution and the stagflation period of the 1970s were among the theoretical and practical developments that led to the rejection of fiscal policy as a useful tool for macroeconomic stabilization and full employment determination.  Recent mainstream contributions, however, have begun to reassess fiscal policy and have called for its restitution in certain cases. The goal of this paper is to delimit the role of and place for fiscal policy in the New Economic Consensus (NEC) and to compare it to that of Post-Keynesian theory, the latter arguably the most faithful approach to the original Keynesian message. The paper proposes that, while a consensus may exist on many macroeconomic issues within the mainstream, fiscal policy is not one of them. The designation of fiscal policy within the NEC is explored and contrasted with the Post-Keynesian calls for fiscal policy via Abba Lerner’s “functional finance” approach. The paper distinguishes between two approaches to functional finance—one that aims to boost aggregate demand and close the GDP gap, and one that secures full employment via direct job creation. It is argued that the mainstream has severed the Keynesian link between fiscal policy and full employment—a link that the Post-Keynesian approach promises to restore.

After the 2001 crisis, Argentina—once the poster-child for pro-market structural-adjustment policies—had to define a new strategy in order to manage the societal demands that had led to the fall of the previous administration. The demand by the majority of the population for employment recovery spurred the government to introduce a massive employment program, the Plan Jefes y Jefas de Hogar Desocupados (Program for Unemployed Male and Female Heads of Households). This program, which accounted for less than 1 percent of GDP at the outset, paved the way for a reduction of the contractionary effects that otherwise would have caused a catastrophic devaluation of the currency.

This paper explores how Argentina pursued a strategy of employment generation, with the state participating as employer of last resort, to recover from one of the worst social and economic crises in its history.

The Case of Iran

Iran’s constitution emphasizes social justice and obliges government to provide a job for every citizen. But in fact, the government’s duty to provide jobs has shifted to government support for a measure designed to create new employment opportunities through subsidized loans to the private sector. This policy has not been successful to date, and the current stock of unemployed workers is about three million—12.75 percent of the country’s labor force.

To realize the desire of the Iranian people to achieve full employment and social justice, the government must implement employment guarantee schemes, or EGS, in the most deprived areas. Elected town and village councils can design and manage the public works with the help of other government, as well as nongovernment, institutions. Programs can be financed using less than 10 percent of the annual oil-exporting revenue that is deposited in the Oil Stabilization Fund.

Forty-Five Years of Experience of Public Works in Morocco

Created in 1961, Promotion Nationale (PN) is an autonomous public entity in charge of mobilizing an underemployed or unemployed workforce for the implementation of labor-intensive projects, calling upon a simple technology likely to provide employment to unskilled workers. It is one of the major programs of social protection in Morocco—the oldest, most important, and best-targeted social program in the country.

Vis-à-vis the importance of rural underemployment, especially during dry years, estimated per million working days, PN aims to improve employment opportunities by developing collective working methods, and by generating large-scale investment for the realization of public infrastructure projects and rural equipment. This institution aims at limiting rural migration through the permanent improvement of local incomes and living conditions. It thus constitutes a safety net for a large part of the population, especially in rural areas. Forty-five years after its creation, PN has at its credit an important and single assessment regarding the fight against unemployment with minimal management costs, in spite of certain difficulties and limitations that hinder the organization, particularly in terms of the geographical targeting of rural poverty zones.

Ragnar Nurkse was one the pioneers in development economics. This paper celebrates the hundredth anniversary of his birth with a critical retrospective of his overall contribution to the field, in particular his views on the importance of employment policy in mobilizing domestic resources and the difficulties surrounding the use of external resources to finance development. It also demonstrates the affinity between Nurkse’s theory of mobilizing domestic resources and employer-of-last-resort proposals.

The Impact of Argentina’s Jefes Program on Female Heads of Poor Households

In 2002, Argentina implemented a large-scale public employment program to deal with the latest economic crisis and the ensuing massive unemployment and poverty. The program, known as Plan Jefes, offered part-time work for unemployed heads of households, and yet more than 70 percent of the people who turned up for work were women. The present paper evaluates the operation of this program, its macroeconomic effects, and its impact on program participants. We report findings from our 2005 meetings with policymakers and visits to different project sites. We find that Jefes addresses many important community problems, is well received by participants, and serves the needs of women particularly well. Some of the benefits women report are working in mother-friendly jobs, getting needed training and education, helping the community, and finding dignity and empowerment through work.

There is a body of literature that favors universal and unconditional public assurance policies over those that are targeted and means-tested. Two such proposals—the basic income proposal and job guarantees—are discussed here. The paper evaluates the impact of each program on macroeconomic stability, arguing that direct job creation has inherent stabilization features that are lacking in the basic income proposal. A discussion of modern finance and labor market dynamics renders the latter proposal inherently inflationary, and potentially stagflationary. After studying the macroeconomic viability of each program, the paper elaborates on their environmental merits. It is argued that the “green” consequences of the basic income proposal are likely to emerge, not from its modus operandi, but from the tax schemes that have been advanced for its financing. By contrast, the job guarantee proposal can serve as an institutional vehicle for achieving various environmental goals by explicitly targeting environmental rehabilitation, conservation, and sustainability. Finally, in the hope of consensus building, the paper advances a joint policy proposal that is economically viable, environmentally friendly, and socially just.

Suggestions for a New Agenda

The failure of the Doha Development Round of World Trade Organization (WTO) negotiations in July 2006 was the first major collapse of a multilateral trade round since World War II. Research Associate Thomas Palley sees the failure as an event that could mark the close of a 60-year era of trade policy largely centered on increasing market access and reducing tariffs, quotas, and subsidies. Doha’s demise represents an opportunity to challenge the intellectual dominance of the current WTO paradigm, to expose the failings of the neoliberal model of economic development, and to reposition the global trade debate.

Suggestions for a New Agenda

The failure of the Doha Development Round of World Trade Organization (WTO) negotiations in July 2006 was the first major collapse of a multilateral trade round since World War II. Research Associate Thomas Palley sees the failure as an event that could mark the close of a 60-year era of trade policy largely centered on increasing market access and reducing tariffs, quotas, and subsidies. Doha’s demise represents an opportunity to challenge the intellectual dominance of the current WTO paradigm, to expose the failings of the neoliberal model of economic development, and to reposition the global trade debate.

Employment Guarantee Policies from a Gender Perspective

There is now widespread recognition that in most countries, private-sector investment has not been able to absorb surplus labor. This is all the more the case for poor unskilled people. Public works programs and employment guarantee schemes in South Africa, India, and other countries provide jobs while creating public assets. In addition to physical infrastructure, an area that has immense potential to create much-needed jobs is that of social service delivery and social infrastructure. While unemployment and enforced “idleness” persist, existing time-use survey data reveal that people around the world—especially women and children—spend long hours performing unpaid work. This work includes not only household maintenance and care provisioning for family members and communities, but also time spent that helps fill public infrastructural gaps—for example, in the energy, health, and education sectors. This paper suggests that, by bringing together public job creation, on the one hand, and unpaid work, on the other, well-designed employment guarantee policies can promote job creation, gender equality, and pro-poor development.

Employer of Last Resort and the War on Poverty

While Hyman P. Minsky is best known for his work on financial instability, he was also intimately involved in the postwar debates about fiscal policy and what would become the War on Poverty. Indeed, at the University of California, Berkeley, he was a vehement critic of the policies of the Kennedy and Johnson administrations, and played a major role in developing an alternative. Minsky insisted that the high investment path chosen by postwar fine-tuners would generate macroeconomic instability, and that the War on Poverty would never lower poverty rates significantly. In retrospect, he was correct on both accounts. Further, he proposed high consumption and an employer of last resort policy as essential ingredients of any coherent strategy for achieving macro stability and poverty elimination. This paper summarizes Minsky’s work in this area, focusing on his writings from the early 1960s through the early 1970s in order to explore the path not taken.

This working paper examines the legacy of Keynes’s General Theory of Employment, Interest, and Money (1936) on the occasion of the 70th anniversary of its publication and the 60th anniversary of Keynes’s death. The paper incorporates some of the latest research by prominent followers of Keynes, presented at the 9th International Post Keynesian Conference in September 2006.

This paper begins with an examination of various ways of measuring unemployment and, borrowing ideas from the poverty measurement literature, proposes four new general unemployment indices. The first of these is parallel to the Sen poverty index; the second, to the Sen index’s generalization by Shorrocks; the third, to the FGT poverty index; and the fourth, to the Watts poverty index. The authors then present an empirical illustration based on Swiss data compiled at the state, or canton, level, using the so-called Shapley decomposition to determine the contribution of three components—the traditional unemployment rate, the average unemployment duration, and the inequality in the unemployment durations—to the differences between the values of the four proposed indices, both within a given canton and within Switzerland as a whole. The paper concludes with a discussion of the assumptions made about the maximum unemployment duration for the purposes of the study, and their impact on the results obtained.

Spatial Dimensions and Fiscal Implications

Since its enactment in 2005, the National Rural Employment Guarantee Act (NREGA) has been implemented in 200 districts in India. Based on state-by-state employment demand-supply data and the use of funds released under NREGA, it is found that, although it is a demand-driven scheme, there are significant interstate differences in the supply of employment. The supply falls far short of demand, particularly in low-income states, where the organizational capacity to implement the scheme is limited. It is also noted that the NREGA-induced fiscal expansion has not contributed to higher fiscal imbalances. The consolidation of other public employment programs into NREGA has actually kept the total allocation of funds by the central government at a level no higher than those reached in the fiscal years 2002–03 to 2005–06. The NREGA fund utilization ratio varies widely across states and is abysmally low in the poorer states. Since the flow of resources to individual states is based on approved plans outlining employment demand, it may turn out to be regressive for the poorer states with low organizational capacity in terms of planning and management of the schemes, especially labor demand forecasting.

A Plan for Tunisia

This paper establishes the financial feasibility of an employer-of-last-resort (ELR) program in a small developing country like Tunisia. It argues that an ELR-led economic development policy is vastly superior to the traditional import substitution industrialization (ISI), export-led, and FDI-led development models, all of which Tunisia has adopted without much success in reducing unemployment. Despite outperforming its peers in terms of macroeconomic stability, Tunisia’s official unemployment rate still hovers around 15 percent, with two-thirds of first-time job seekers having university degrees. The paper demonstrates that a well-targeted ELR program can be gradually introduced over a six-year period to remedy this problem by reclaiming sovereignty over the country’s domestic monetary and fiscal policies under a floating exchange rate regime. The estimated ELR net wage bill would be around 2.7 percent of GDP; however, spending by ELR workers would offset program costs, and the net effect on GDP would be an increase of about 3.6 percent. The paper concludes by proposing a set of complementary policy reforms that must accompany an ELR program to ensure long-term growth sustainability along with full employment and price stability.

A Survey of Theories and Policy Experiences

This working paper provides a survey of the theoretical underpinnings for the various employment guarantee schemes, and discusses full employment policy experiences in the United States, Sweden, India, Argentina, and France. The theoretical and policy developments are delineated in a historical context. The paper concludes by identifying some questions that still need to be addressed in the context of the global political economy.

Toward Convergence and Full Employment

Unemployment in the European Union (EU) is a serious problem that threatens to disrupt the integration of accession countries, the character of individual countries, and the continued existence of the EU. European integration poses a huge conundrum for European employment because the conventional theory explaining unemployment in Europe—labor market rigidities—is wrong. According to Senior Scholar James K. Galbraith, the application of this policy will not cure European unemployment, but it could destroy the economic promise of the EU for its poorer regions and the accession countries.

Toward Convergence and Full Employment

Unemployment in the European Union (EU) is a serious problem that threatens to disrupt the integration of accession countries, the character of individual countries, and the continued existence of the EU. European integration poses a huge conundrum for European employment because the conventional theory explaining unemployment in Europe—labor market rigidities—is wrong. According to Senior Scholar James K. Galbraith, the application of this policy will not cure European unemployment, but it could destroy the economic promise of the EU for its poorer regions and the accession countries.

Explaining the Organizational Structure of Large Law Firms

We study the economics of employment relationships through theoretical and empirical analyses of an unusual set of firms, large law firms. Our point of departure is the "property rights" approach that emphasizes the centrality of ownership's legal rights to control important, nonhuman assets of the enterprise. From this perspective, large law firms are an interesting and potentially important object of study, because the most valuable assets of these firms take the form of knowledge—particularly knowledge of the needs and interests of clients. We argue that the two most distinctive organizational features of large law firms, the use of "up or out" promotion contests and the practice of having winners become residual claimants in the firm, emerge naturally in this setting. In addition to explaining otherwise anomalous features of the up-or-out partnership system, this paper suggests a general framework for analyzing organizations where assets reside in the brains of employees.

Searching for the Missing Link

This paper examines the proposition that capital stock relative to aggregate output has been an important variable in the determination of the Non-Accelerating Inflation Rate of Unemployment (NAIRU) over the last four decades. The authors present new empirical evidence that lends strong support to the claim that the aggregate capital-output ratio, the real price of imports, and aggregate capacity utilization were determinants of the NAIRU during the period. The same evidence also shows that technical progress and changes in long-term unemployment did not affect the NAIRU. We believe this evidence suggests that, insofar as the aggregate capital-output ratio is affected by changes in real interest rates, the stance of monetary policy is one determinant of the NAIRU.

Employer-provided health benefits for workers who retire before age 65 has fallen over the last decade. We examine a cohort of male workers from the Health and Retirement Survey to explore the dynamics of retiree health benefits and the relationship between retiree health benefits and retirement behavior. A better understanding of this relationship is important to the policy debate over the best way to increase health coverage for older Americans without reducing work incentives. Concerning the dynamics at work, we find that, between 1992 and 1996, 24 percent of full-time workers who had retiree health benefits lost their coverage, while 15 percent of full-time workers who lacked coverage gained it. Also, of the full-time employed men who were covered by retiree health benefits in 1992 and had retired by 1996, 3 percent were uninsured, and 15 percent were covered by health insurance other than employer-provided insurance. On the relationship between retiree health benefits and retirement, we find that workers with retiree benefits were 29 to 55 percent more likely to retire than those without. We also find that workers who are eligible for retiree health benefits tend to take advantage of them when they are relatively young

Tax Expenditures, Costs, and Implications for Middle-Class Elderly

By any measure, pension coverage should be at an all-time high: the nation is richer and workers are older. However, the pension world is a paradox, as pension security falls for middle-class workers and pension spending increases. The United States government directly and indirectly spends more than half a trillion dollars on the elderly each year. Direct spending is mainly through Social Security and indirect spending through the tax code's special treatment of employer and personal retirement plans. The tax favoritism is an astonishing one fourth of the direct spending. But the nature of the tax subsidy is changing. The tax subsidy for 401(k) plans, which are beneficial to employers and higher-income workers, is overtaking that for traditional pensions, which cover lower-income workers and help expand pension coverage. Since tax policy is designed to meet a public purpose, perhaps the more than $100 billion dollars per year spent indirectly on pensions could be better spent? Using tax expenditure data from the federal budget and data from both employers' surveys (the Chamber of Commerce and the National Compensation Survey) and workers' surveys (the Bureau of the Census's Current Population Survey), this study reflects on alternative pension polices that transform the tax subsidy and expand Social Security and traditional pensions. Such a sharp change in federal policy may stem the loss of pension security of middle-class workers and expand it for lower-income workers.

Toward Effective Implementation of the Act

The National Rural Employment Guarantee Act of 2005 is a major development in the history of poverty reduction strategies and rural development policies in India. Though the successful passage of the Act is due to the long struggle by NGOs, academics, and some policymakers, its successful implementation is a much bigger challenge. Effective implementation of the Act requires that labor-intensive works be planned for the needy poor on a continuous basis; that the right kind of assets are undertaken to promote the development of the local/regional economy; and that the labor-absorbing capacity of the mainstream economy be raised and assets maintained well and used productively to generate benefits for the poor, as well as to promote pro-poor economy growth.

The past experiences of wage employment programs in India, however, suggest that there are several challenges ahead. These include strengthening the planning component of the program, particularly planning for infrastructure and natural resource management; coordination and conversion of the Employment Guarantee Scheme with ongoing programs; ensuring supply of labor on EGS works; promoting equity in the ownership of the assets; and using assets to improve the employment generation in the long run. This paper discusses these challenges and observes that the Employment Guarantee Act should not be treated as one more poverty alleviation program, but should be seen as an opportunity to eradicate the worst kind of poverty and to empower the poor and promote pro-poor growth of the Indian economy.

Some Evidence Concerning the Micro-foundations of a High Technology Cluster

Observers of Silicon Valley’s computer cluster report that employees move rapidly between competing firms, but evidence supporting this claim is scarce. Job-hopping is important in computer clusters because it facilitates the reallocation of talent and resources toward firms with superior innovations. Using new data on labor mobility, we find higher rates of job-hopping for college-educated men in Silicon Valley’s computer industry than in computer clusters located out of the state. Mobility rates in other California computer clusters are similar to Silicon Valley’s, suggesting some role for features of California law that make non-compete agreements unenforceable. Consistent with our model of innovation, mobility rates outside of computer industries are no higher in California than elsewhere.

The job numbers in the United States and around the globe continue to look bleak. Not only are the absolute numbers dismal, but also job growth has dragged on with no hope for a substantial change in prospects. This situation supports the view that we are facing a long-term problem that requires critical and creative problem-solving responses. Since unemployment is the major cause of poverty, many of our most pressing social problems are directly or indirectly related to joblessness. Forstater argues that not only the quantity but also the quality of jobs is at issue.

Inflation targeting has become an increasingly popular strategy for setting monetary policy during the last decade. While no countries had formal inflation targets before 1990, currently 22 countries use inflation targeting. One notable exception is the United States, where the Federal Reserve has a dual mandate to pursue both price stability and full employment. Some economists advocate inflation targeting for the United States, partly because they fear that otherwise the Fed will try to push unemployment below its “natural rate”—its lowest sustainable level—and trigger accelerating inflation. However, the natural rate theory has proven to be a poor guide for policy making over the last 10 years. Unemployment in 2000 fell two percentage points below estimates of the natural rate without spurring inflation. Since inflation targeting derives its justification largely from the theory of the natural rate, it is questionable whether the United States should switch to an inflation-targeting regime. These doubts are reinforced by the manifest success of monetary policy under the dual mandate.

Previous work on entrepreneurship and wealth has documented that entrepreneurial households are wealthier and have higher wealth mobility. However, the literature has not paid attention to the components of wealth change. Furthermore, endogeneity problems in the measurement of the interaction between saving rates and entrepreneurship are not well addressed.

In this paper, by reexamining the relationship between entrepreneurship and household wealth more rigorously, I show that while entrepreneurial households save more out of their income, it is not true that they experience higher rates of wealth increase or capital gains. In my analyses, I control for the endogeneity between the decision to start a business and household savings. I find some evidence that the decision to become a business owner is endogenous to the rate of capital gains and to the rate of saving (out of income). My results also show that households do not save more in order to start a business. Therefore, the evidence suggests that business owners save more, but not that those who save more become business owners.

Implications for Social Security Reform

When it comes to retirement income policy, there is a general perception that workers have full 40-year working careers before retiring. Further, it is generally assumed that workers with low lifetime earnings have low earnings in each year during a normal working career. The basic research question is why do some workers have low lifetime earnings? Is it due to low earnings in every year, or is it due to some years of no earnings combined with years of relatively modest earnings? The key findings from this paper are: (1) most individuals with minimum (and subminimum) wage lifetime average earnings are women, and (2) most of these women have low lifetime average earnings because of fewer years with earnings, rather than low earnings in each year of a 40-year working career.

Two issues may have a tremendous impact on the adequacy of retirement income for today's workers: the growth of 401(k) pension plans and the possible privatization of Social Security. Workers are becoming increasingly responsible for the adequacy of their retirement income by determining how their retirement savings are invested. This paper examines the investment choices of workers covered by a defined contribution pension plan with responsibility for investments, specifically incorporating self-selection into DC pension plans. The results suggest that (1) current DC plan participants tend to be more aggressive investors than the general work force would be; (2) workers in certain demographic groups tend to invest their pension assets more conservatively than others; and (3) selection is present but appears to be economically unimportant.

Evidence from East Asia

This study explores the impact of competition from international trade on the gender wage gap in Taiwan and South Korea between 1980 and 1999. The dynamic implications of Becker's 1959 theory of discrimination lead one to expect that increased competition from international trade reduces the incentive for employers to discriminate against women. This effect should be more pronounced in concentrated sectors of the economy, where employers can use excess profits to cover the costs of discrimination. Alternatively, wage discrimination may increase with growing trade limiting women's ability to achieve wage gains. The empirical strategy controls for differences in market structure across industries in order to isolate the effect of competition from international trade. Estimation results are not consistent with Becker's theory, as greater international competition in concentrated sectors is associated with larger wage gaps between men and women.

The Evidence

The conventional wisdom is that high European unemployment is the result of job markets that are rigid and inflexible. This paper presents new empirical evidence that challenges this received wisdom. A major contribution of the paper is that it fully accounts for both micro- and macroeconomic factors, as well as taking account of cross-country economic spillovers. The evidence shows that macroeconomic factors dominate in explaining unemployment. These factors are robust to changes in empirical specification. Labor market institutions do matter for unemployment, but not in the way conventionally spoken about. Unemployment benefits and union density have no effect. The level of wage bargaining coordination and the extent of union wage coverage both matter, but if properly paired they can actually reduce unemployment. Lower tax burdens can also reduce unemployment, but a far more cost-effective fiscal approach is to increase spending on active labor market policies. The bottom line is that high unemployment in western Europe has been the result of self-inflicted dysfunctional macroeconomic policy. European policymakers adopted a course of disinflation, high real interest rates, and slower growth that raised unemployment. Moreover, they all did so at the same time, thereby generating a wave of trade-based spillovers that generated a continentwide macroeconomic funk and further raised unemployment.

Using both time-series and pooled cross-section, time-series data for 44 industries in the United States over the period 1947–97, the authors find no evidence to support the idea that the growth of skills or educational attainment had any statistically significant effect on growth of earnings. However, earnings growth is found to be positively related to overall productivity growth and equipment investment, while computerization and international trade both had a retardant effect on earnings.

Edited by William Lazonick and Mary O’Sullivan

How can we explain the persistent worsening of the income distribution in the United States in the 1980s and 1990s? What are the prospects for the reemergence of sustainable prosperity in the American economy over the next generation? In addressing these issues, this book focuses on the microeconomics of corporate investment behavior, especially as reflected in investments in integrated skill bases, and the macroeconomics of household saving behavior, especially as reflected in the growing problem of intergenerational dependence of retirees on employees. Specifically, the book analyzes how the combines pressures of excessive corporate growth, international competition, and intergenerational dependence have influenced corporate investment behavior over the past two decades. Part One sets out a perspective on how corporate investment in skill bases can support sustainable prosperity. Part Two presents studies of investments in skill bases in the machine tool, aircraft engine, and medical equipment industries. Part Three provides a comparative and historical analysis of corporate governance and sustainable prosperity in the United States, Japan, and Germany. By integrating a theory of innovative enterprise with in-depth empirical analyses of industrial development and international competition, Corporate Governance and Sustainable Prosperity explores the relation between changes in corporate resource allocation and the persistence of income inequality in the United States in the 1980s and 1990s. Contributors to the volume include Beth Almeida, Robert Forrant, Michael Handel, William Lazonick, Philip Moss, Mary O’Sullivan, and Chris Tully. Editors Lazonick and O’Sullivan are Levy Institute research associates, as is contributor Handel.

Published By: Palgrave Macmillan, Ltd.

Full employment without inflation can continue—with the right leadership, prudent policy changes to manage the dangers, and cooperation from all branches of the government.

Right-to-Work Laws, Unionization, and the Minimum Wage

Union strength is capable of boosting wages for workers at the low end of the income scale. Even when differences in education and industry type are accounted for, workers in right-to-work states have a greater probability of earning close to the minimum wage than workers in states with relatively high union density. The decline of unionization requires that other labor market institutions, mainly the minimum wage, be used to improve the distribution of income in order to combat the continuing growth of inequality in the United States.

Right-to-Work Laws, Unionization, and the Minimum Wage

Union strength is capable of boosting wages for workers at the low end of the income scale. Even when differences in education and industry type are accounted for, workers in right-to-work states have a greater probability of earning close to the minimum wage than workers in states with relatively high union density. The decline of unionization requires that other labor market institutions, mainly the minimum wage, be used to improve the distribution of income in order to combat the continuing growth of inequality in the United States.

Full Employment Policy: Theory and Practice

Claims that the nation has reached full employment take for granted the need for a reserve pool of labor to maintain price stability and labor market flexibility. But are millions of jobless and underemployed workers the best we can do in these times of economic expansion? And what will happen when the inevitable downturn comes? Reduction of the workweek and employment subsidies have been proposed to achieve higher employment, but neither is sure to raise employment and both may have serious side effects. A public service employment program that offers jobs at a fixed wage to all who are willing and able to work can provide full employment without inflationary pressures and with labor market flexibility, preserve workers’ skills, contribute valuable public services, and be relatively inexpensive.

This paper interprets the New Jersey minimum wage studies of Card and Krueger and their critics, Neumark and Wascher, through a scheduling model. The former found an increase in the number of workers in New Jersey fast-food restaurants after the state minimum wage was increased, while the latter found a decline in the total payroll hours of New Jersey restaurants. The scheduling model predicts that firms will substitute workers for hours per worker after a wage increase, which is consistent with both studies. Evidence from a subset of restaurants that reported both workers and hours data to Neumark and Wascher supports this interpretation. The New Jersey minimum wage appears to have redistributed income effectively to the targeted population by raising wages and reducing weekly hours per worker by just over one hour without causing any job loss.

Full Employment Policy: Theory and Practice

Claims that the nation has reached full employment take for granted the need for a reserve pool of labor to maintain price stability and labor market flexibility. But are millions of jobless and underemployed workers the best we can do in these times of economic expansion? And what will happen when the inevitable downturn comes? Reduction of the workweek and employment subsidies have been proposed to achieve higher employment, but neither is sure to raise employment and both may have serious side effects. A public service employment program that offers jobs at a fixed wage to all who are willing and able to work can provide full employment without inflationary pressures and with labor market flexibility, preserve workers’ skills, contribute valuable public services, and be relatively inexpensive.

Lessons from the 1999 Levy Institute Survey of Small Business

Survey responses make it clear the minimum wage can be raised. The question now is, How high can it be raised before serious employment consequences occur?

Levy Institute Survey of Hiring and Employment Practices

The Levy Institute conducted a survey of small businesses to elicit information about their hiring and employment practices, especially the hiring of former welfare recipients; preferences regarding education, training, and other characteristics of potential employees; effects of increases in the minimum wage on employment decisions; and their responses to various forms of government wage and training subsidies. Analysis of the survey results indicates weaknesses in the assumptions on which recent welfare reform has been based. It also suggests a role for small business that has been overlooked. An active partnership between government and small business, involving incentives for hiring and training as well as mandates for welfare reduction, is required if former welfare recipients are to become independent and productive members of the labor force.

Implications for Income Distribution

When the minimum wage was first enacted in 1938, the fiercest opposition came from the South, where wages were considerably lower that in the industrial North. Today, that opposition is found to emanate from states that have right-to-work laws (regardless of location). Using census data from the Integrated Public Use Microdata Series (IPUMS) for the years 1940 to 1990, this paper looks at workers earning around the minimum wage by region and industry. It shows that, controlling for education and industry type, wages tend to be depressed more in states with right-to-work legislation than in high union density states. These effects on the wage structure have implications for the distribution of income.

Levy Institute Survey of Hiring and Employment Practices

The Levy Institute conducted a survey of small businesses to elicit information about their hiring and employment practices, especially the hiring of former welfare recipients; preferences regarding education, training, and other characteristics of potential employees; effects of increases in the minimum wage on employment decisions; and their responses to various forms of government wage and training subsidies. Analysis of the survey results indicates weaknesses in the assumptions on which recent welfare reform has been based. It also suggests a role for small business that has been overlooked. An active partnership between government and small business, involving incentives for hiring and training as well as mandates for welfare reduction, is required if former welfare recipients are to become independent and productive members of the labor force.

The Job Opportunity Approach to Full Employment

Central banks, national governments, and international organizations have resisted policies that would promote full employment because high employment and high capacity utilization are associated with structural rigidities that result in sluggish growth, inflationary pressures, and other undesirable consequences. What has been almost entirely overlooked is the way in which public sector activity can enhance flexibility with regard to labor, capital goods, natural resources and environmental protection, methods of production, and location of economic activity. The job opportunity approach makes strategic use of public sector activity to create truly full employment, thereby reducing the social and economic costs of unemployment, and to promote projects designed to be consistent with broad macroeconomic goals and social values.

The Job Opportunity Approach to Full Employment

Central banks, national governments, and international organizations have resisted policies that would promote full employment because high employment and high capacity utilization are associated with structural rigidities that result in sluggish growth, inflationary pressures, and other undesirable consequences. What has been almost entirely overlooked is the way in which public sector activity can enhance flexibility with regard to labor, capital goods, natural resources and environmental protection, methods of production, and location of economic activity. The job opportunity approach makes strategic use of public sector activity to create truly full employment, thereby reducing the social and economic costs of unemployment, and to promote projects designed to be consistent with broad macroeconomic goals and social values.

Productive and Financial Challenges

The postwar system of corporate governance in Germany is being threatened by the failure of some industries to maintain their competitive position (with resulting significant job losses) and pressures for financial liquidity driven by those who have accumulated substantial financial holdings, institutions competing for control of those holdings, and those concerned about the funding of the pension system. The strength of the competitors (mainly the Japanese) lies not in cost differences, but in their capabilities, based on financial commitment and organizational integration, to innovate and thereby to build the long-run future of the corporation. If German labor, finance, and corporate managers each insist on pursuing independent strategies to extract returns from industrial enterprises and if corporations replace investment in innovation with shareholder value as the basis for corporate decision making, German industry may be unable to regenerate the basis of sustainable prosperity.

Adapting to Financial Pressures for Change

Despite the crisis in the Japanese financial sector, prolonged recession, and competitive challenges, Japan’s formidable productive system remains strong. Nevertheless, the system of corporate governance, which has pursued a strategy of retaining corporate revenues and reallocating labor resources and returns to labor in order to invest in productive capabilities, faces short-term pressures from a transformation of the financial sector and long-term pressures from the growth of intergenerational dependence. Current reforms seek to generate funding for the pension system and profits for financial enterprises from international securities and money markets. These reforms seem to work within the corporate governance framework that emphasizes the retain-and-reallocate strategy, but the question is whether they will create powerful pressures to extract returns from the domestic economy, thereby affecting how corporations are managed and resources allocated.

Productive and Financial Challenges

The postwar system of corporate governance in Germany is being threatened by the failure of some industries to maintain their competitive position (with resulting significant job losses) and pressures for financial liquidity driven by those who have accumulated substantial financial holdings, institutions competing for control of those holdings, and those concerned about the funding of the pension system. The strength of the competitors (mainly the Japanese) lies not in cost differences, but in their capabilities, based on financial commitment and organizational integration, to innovate and thereby to build the long-run future of the corporation. If German labor, finance, and corporate managers each insist on pursuing independent strategies to extract returns from industrial enterprises and if corporations replace investment in innovation with shareholder value as the basis for corporate decision making, German industry may be unable to regenerate the basis of sustainable prosperity.

Adapting to Financial Pressures for Change

Despite the crisis in the Japanese financial sector, prolonged recession, and competitive challenges, Japan’s formidable productive system remains strong. Nevertheless, the system of corporate governance, which has pursued a strategy of retaining corporate revenues and reallocating labor resources and returns to labor in order to invest in productive capabilities, faces short-term pressures from a transformation of the financial sector and long-term pressures from the growth of intergenerational dependence. Current reforms seek to generate funding for the pension system and profits for financial enterprises from international securities and money markets. These reforms seem to work within the corporate governance framework that emphasizes the retain-and-reallocate strategy, but the question is whether they will create powerful pressures to extract returns from the domestic economy, thereby affecting how corporations are managed and resources allocated.

Year-to-year economy-wide measures of income distribution, such as the Gini coefficient, are rarely available for long periods except in a few developed countries, and as a result few analyses of year-to-year changes in inequality exist. But wage and earnings data by industrial sectors are readily available for many countries over long time frames. This paper proposes the application of the between-group component of the Theil index to data on wages, earnings, and employment by industrial classification in order to measure the evolution of wage or earnings inequality through time. We provide formal criteria under which such a between-group Theil statistic can reasonably be assumed to give results that also track the (unobserved) evolution of inequality within industries. While the evolution of inequality in manufacturing earnings cannot be taken as per se indicating the larger movements of inequality in household incomes, including those outside the manufacturing sector, we argue on theoretical grounds that the two will rarely move in opposite directions. We conclude with an empirical application to the case of Brazil, an important developing country for which economy-wide Gini coefficients are scarce, but for which a between-industries Theil statistic may be computed on a monthly basis as far back as 1976.

Theory and Practice

In 1998, the United States' unemployment rate was at its lowest level since the late 1960s. Yet the nation's employment problem is still far from solved. Although many economists assume that unemployment tends toward a natural rate below which it cannot go without creating inflation, this paper asks whether the current employment levels are the best that can be achieved in times of prosperity and whether current employment policies will be able to deal with the challenges of the next downturn. To evaluate these questions, the author examines the relative merits of three proposed strategies to improve the employment situation-a reduced workweek, employment subsidies, and a public service job opportunity program-to see if they will meet the challenges of upholding an individual's basic right to job while not stimulating inflation. He finds that a shorter workweek and wage subsidies both have failed to meet one or both of these challenges, but that a public service job opportunity program, such as the "employer of last resort policy," would satisfy both the full employment and noninflationary criteria.

Progressive Reformers and the Constitutional Jurisprudence of “Liberty of Contract”

During the Progressive period of American history the debate over the minimum wage was often between those who clung to traditional economic theory as a reason for not having a minimum wage and those who saw the efficiency-wage benefits of adopting one. Although the latter argument proved quite effective in swaying many state legislatures, it may have also been a strategic argument for circumventing the Supreme Court's particular understanding of "liberty of contract." Under this doctrine, states could not pass any legislation mandating a minimum wage unless a compelling case could be made that such a wage would definitely serve the larger public interest. This paper argues that although efficiency-wage arguments might have been appealing to liberal reformers of that time, the arguments were ultimately used as a disingenuous means by which "liberty of contract" arguments could be circumvented.

Job Opportunity for the Less Skilled

During the recent robust expansion only 700,000 of the almost 12 million jobs created went to the half of the population that does not have at least some college education. Even though the number of officially unemployed fell to less than 4 million in the 25-and-over age group, there remain in that group over 26 million potentially employable workers—the combined number of those who are actively seeking work (and are counted as officially unemployed) and those who are currently out of the labor force but would be willing to participate. Since expansion has not proven sufficient to remedy this intolerably high level of wasted human resources, well-targeted, active labor market policies are required. One such policy is a job opportunity program that “hires off the bottom,” providing minimum-wage jobs for all those who are ready, willing, and able to work. The program would create a buffer stock of labor from which employers could hire during upturns instead of bidding up the wages of the already employed, and thus would offer both full employment and price stability.

Job Opportunity for the Less Skilled

During the recent robust expansion only 700,000 of the almost 12 million jobs created went to the half of the population that does not have at least some college education. Even though the number of officially unemployed fell to less than 4 million in the 25-and-over age group, there remain in that group over 26 million potentially employable workers—the combined number of those who are actively seeking work (and are counted as officially unemployed) and those who are currently out of the labor force but would be willing to participate. Since expansion has not proven sufficient to remedy this intolerably high level of wasted human resources, well-targeted, active labor market policies are required. One such policy is a job opportunity program that "hires off the bottom," providing minimum-wage jobs for all those who are ready, willing, and able to work. The program would create a buffer stock of labor from which employers could hire during upturns instead of bidding up the wages of the already employed, and thus would offer both full employment and price stability.

The purpose of this symposium, held September 24, 1998, at the Levy Institute’s research and conference center on the campus of Bard College in Annandale-on-Hudson, New York, was to explore the causes and consequences of the persistence of poverty, and to examine policies that might rectify the inequitable distribution of the gains of economic success.

Linking the Minimum Wage to Productivity

The fact that every change in the minimum wage requires an act of Congress means that debate over the wisdom of having a minimum is repeatedly returned to the political arena. As inflation continues to erode the value of the minimum wage, each legislative delay means that a larger increase is required. The larger the increase, the more resistance to its passage, so that by the time Congress acts, the political compromise is an increase that is too little and too late to be of much help in lifting workers out of poverty. Automatic adjustment of the wage, with increases keyed to measures of private sector productivity, would eliminate this problem. With the institution of a mechanism that provides regular and incremental increases, Congress will no longer be forced to revisit the issue, employers will not be confronted by sudden and large increases, and the value of the wage will be maintained.

Linking the Minimum Wage to Productivity

The fact that every change in the minimum wage requires an act of Congress means that debate over the wisdom of having a minimum is repeatedly returned to the political arena. As inflation continues to erode the value of the minimum wage, each legislative delay means that a larger increase is required. The larger the increase, the more resistance to its passage, so that by the time Congress acts, the political compromise is an increase that is too little and too late to be of much help in lifting workers out of poverty. Automatic adjustment of the wage, with increases keyed to measures of private sector productivity, would eliminate this problem. With the institution of a mechanism that provides regular and incremental increases, Congress will no longer be forced to revisit the issue, employers will not be confronted by sudden and large increases, and the value of the wage will be maintained.

This paper uses industrial wage data and a systematic if unconventional selection of methods to examine changes in the inter-industry structure of wages between 1920 and 1947. We first sort among the available data on wage change by industry and occupation for blocs that exhibit common patterns of wage changes over time, reducing the 83 time series available to us into eight distinct groups. Following this, we present a systematic decomposition of the sources of wage variation across groups and through time. The fact that our cluster analysis relies on wage-change observations in percentage form implies that our discriminant analysis produces eigenvectors in time-series format; thus each eigenvector is itself an artificially constructed economic time series. We identify four such forces that together explain 97 percent of the variance in wage change across groups, and identify variables in the historical record that appear to correspond closely to these forces.

This raises a beguiling possibility. It may be that simple explanations account for most of the relative-wage changes during the years under study. In a reversal of the usual notions of micro-to-macro causality, it may be that a small number of macroeconomic variates account for a large proportion of distributional changes.

In a final section, we compute an estimate of the evolution of inequality in the wage structure over time. This estimate is independent of our clustering procedures and of our discriminant analysis, and is measure is well suited to regression analysis. Using it, we test a simple macroeconomic explanation of inequality in the wage structure. The results appear to support the argument that well-known macroeconomic and social developments, including changes in the unemployment rate, in strikes, and in the exchange rate, played the determining roles in the evolution of wage inequality during this time.

This paper argues that a guaranteed income is not only consistent with the principle of reciprocity but is required for reciprocity. This conclusion follows from a three-part argument. First, if a guaranteed income is in place, all individuals have the same opportunity to live without working. Therefore, those who choose not to work do not take advantage of a privilege that is unavailable to everyone else. Second, in the absence of an unconditional income, society is, in effect, applying the principle "He who does not work, will not eat." If the application of this principle is to be consistent with reciprocity, it must be applied to everyone. Most modern industrial societies exempt many citizens from that choice. For example, the owners of external assets do not face the work-or-starve choice and do take advantage of a privilege that is not available to others. An unconditional guaranteed income is one way to eliminate that violation of reciprocity. Third, this paper addresses the criticism that the guaranteed income exploits middle-class workers by demonstrating that a basic income will have a positive effect on wages, which will at least partially counteract the effect of the taxes needed to pay for it.

How members of Congress vote on increases in the minimum wage is a function of several factors, most notably party affiliation and constituent interest. But also among those factors is the existence of "right-to-work" laws in the representative's state and the presence of labor unions, especially as they represent a voting constituency. This paper examines congressional voting patterns on the minimum wage from 1949, when the first vote to increase the wage occurred, to 1996, when the last vote occurred, and finds a relationship between union strength and positive voting, a relationship between "right-to-work" states and negative voting, and a decline in the significance of unions as a factor affecting congressional voting as unionism has declined.

This paper explores some of the links between macroeconomic policy and industrial strategy. The perspective of the present paper is to emphasize the role of the output and investment activities of enterprises rather than the general focus on the labor market in the determination of economic performance. We have explored this aspect in some detail in connection with the inflation barrier, and argue that such a barrier should be viewed in terms of a lack of capacity. We briefly review the balance of trade constraint on growth and employment. The overall implications of those two sets of analyses is that macroeconomic performance would be enhanced by appropriate industrial strategy, and that inappropriate macroeconomic policies will damage industrial performance. Policies designed to restrain inflation by lowering the level of aggregate demand will tend to depress investment and harm capacity. Improved industrial performance requires a climate conducive to investment and research and development, which in turn depends on, inter alia, high and stable levels of aggregate demand.

The Growth in Work Hours

Is the current labor market as tight as official statistics would seem to indicate? If incumbent workers increase their hours of work, it is irrelevant to the unemployment rate, but hardly irrelevant to the level of labor supply. The authors of this brief find that job insecurity and stagnating wages have made Americans willing to work those extra hours to build a financial cushion, and a 1 percent increase in hours worked per worker for a fixed labor supply is equivalent in terms of labor supply to a 1 percent increase in the number of workers. This more realistic picture of labor supply has important implications for expectations that welfare recipients can easily find jobs, for reforms in labor market statistics to provide better information, and for the direction of monetary policy.

The mean duration of unemployment approximately doubled in the United States between the early 1950s and the mid-1990s, with most of the increase occurring since the early 1970s. Using a simple model linking the average duration of unemployment with the speed of technical change, and aggregate time-series data, the authors find strong evidence that both the rate of total-factor productivity growth and investment in office, computing, and accounting equipment (OCA) per employee have a significant positive effect on mean unemployment duration. Moreover, literally all of the two-thirds rise in mean unemployment duration between 1971 and 1994 (two similar points in the business cycle) can be attributed to increases in OCA investment.

The Growth in Work Hours

Is the current labor market as tight as official statistics would seem to indicate? If incumbent workers increase their hours of work, it is irrelevant to the unemployment rate, but hardly irrelevant to the level of labor supply. The authors of this brief find that job insecurity and stagnating wages have made Americans willing to work those extra hours to build a financial cushion, and a 1 percent increase in hours worked per worker for a fixed labor supply is equivalent in terms of labor supply to a 1 percent increase in the number of workers. This more realistic picture of labor supply has important implications for expectations that welfare recipients can easily find jobs, for reforms in labor market statistics to provide better information, and for the direction of monetary policy.

To what extent have small businesses hired former welfare recipients and what might induce them to hire more? The Levy Institute conducts a national survey of small firms in many industries to find out.

Studying the Demographic Outcomes of Ethnic Intermarriage in American History

Little research has been done on the role of intermarriage in the blending of peoples in the American past, and even less has been done on the effect of past intermarriage on the ethnic identity of today's Americans. Senior Scholar Joel Perlmann sees value in studying intermarriage to show fault lines in society (social distance is larger across some divisions than others) and to examine the effect intermarriage ultimately has on assimilation. Perlmann asks, Is it assimilation that causes intermarriage or intermarriage that causes assimilation? As he sees it, the causality works in both directions: weakened ethnic allegiances are a source of intermarriage and intermarriage weakens ethnic allegiances./P>

Bilingualism and Language Loss in the Second Generation

Knowledge of English is near universal, and preference for that language is dominant among most immigrant nationalities. However, only a minority remain fluent in the parental languages, and there are wide variations among immigrant groups in the extent of their parental linguistic retention. These variations are important for theory and policy because they affect the speed of acculturation and the extent to which sizable pools of fluent bilinguals will be created by today’s second generation.

The authors examine patterns of language adaptation in a sample of over 5,000 second-generation students in South Florida and Southern California, employing multivariate and multilevel analyses to identify the principal factors accounting for variation in foreign language maintenance and bilingualism. While a number of variables emerge as significant predictors, they do not account for differences across immigrant nationalities which become even more sharply delineated. A clear disjuncture exists between children of Asian and Hispanic backgrounds whose parental language maintenance and bilingual fluency vary significantly. Reasons for this divergence are explored and their policy implications are discussed.

Two family characteristics are consistently associated with educational attainment: the level of education of parents and the material resources available to support the education of the children. Hispanic parents have a lower level of education than any other group, and Hispanic income is lower than any other group except African Americans. Hispanic children are underrepresented in preschool. On average, by age 13 Hispanic children are two years behind non-Hispanic white students in English and four years behind in science. Hispanic high school students are less likely to be enrolled in college preparatory courses. The cumulative effect is that Hispanics, especially those of Mexican ancestry, are less likely to attend and complete college than any other ethnic group. Only 7 percent of Mexicans aged 25 to 37 have completed college. The reduced likelihood that native-born Hispanics will complete college does not point to a rapid assimilation into the American economic mainstream.

The cause of the disparity is a combination of school, parental, cultural, and structural factors, including inadequate school financing, school segregation, low socioeconomic status of parents, and low educational level of parents. According to the author, the upgrading of the educational attainment of Hispanic children will require intervening beyond the classroom, and probably will require experimenting with more involvement of parents and communities—an effort that will have to be sustained over the long term.

Before the Japanese stock market crash of 1990, Japanese industry was a phenomenal success. A recent unemployment rate of under 4 percent, although low by world standards, is the highest Japan has experienced since the current mode of calculation began in 1953. Japan's industrial dominance, sustained prosperity, and commitment to lifetime employment seem to be in danger. Research Associate William Lazonick, of INSEAD and the Center for Industrial Competitiveness at the University of Massachusetts–Lowell, takes issue with this perception. He finds that the Japanese economy is in a better position than the United States to achieve sustainable prosperity, which he defines as "the spreading of the benefits of economic growth to more and more people over a prolonged period of time."

Research Associate Mary O'Sullivan, of INSEAD and the Center for Industrial Competitiveness at the University of Massachusetts–Lowell, is investigating systems of corporate governance to find which lead to successful decisions for individual firms and for an economy as a whole. She believes that success requires a form of corporate governance that generates conditions that permit cumulative and collective learning, provides financial commitment to innovative investment, and integrates human and physical resources in the development and use of technology. She warns that because both the real and financial sectors are in a continual process of change, a successful system of governance cannot be determined in the abstract. Strategies that work at one time may not work at another. In her examination of corporate governance in Germany, she therefore makes a detailed study of postwar German economic history. According to O'Sullivan, financial commitment to innovative investment in

What Prognosis for Good Jobs?

While diagnostic imaging equipment is not by any means a typical industry, it offers an example of a rapidly changing, high technology sector—the kind of industry in which, according to many observers, United States manufacturers ought to excel. And indeed, for most of the 100-year history of this industry, American producers have led the field, generating engineering jobs aplenty and production jobs paying well above the average wage economywide. But in the last two decades, there have been dramatic transformations, which have changed the face of the industry and pose new challenges for US companies.

There has been widespread recognition of the existence of an "underclass" in American society, but no consensus on how to address the problem or even how to define it. The term was first coined in 1982 by New Yorker writer Ken Auletta, who used it broadly to include individuals with "behavioral and income deficiencies"; other definitions have been advanced by William Julius Wilson (1987), Erol Ricketts and Isabel Sawhill (1986), and Christopher Jencks (1992). In this working paper, Executive Director Dimitri B. Papadimitriou defines the underclass as residents in urban neighborhoods characterized by concentrated poverty, joblessness, violence, and a lack of institutions that support the community. He focuses specifically on the issue of urban poverty and the changes in the urban-poor population, and relates these changes to changes in the economic and policy landscape that has evolved over the last 15 years. Policy lessons drawn from other industrialized countries are also reviewed, and consideration is given to various proposals for public action to alleviate the problems of the underclass, including community development that can be achieved via a network of community banks.

One of the principal problems with the minimum wage is that adjustments to it must be voted on by Congress. Although recent congressional action solves the immediate problem of restoring value to a wage that has otherwise failed to keep pace with inflation, it has not removed the issue from the political agenda. Every time Congress acts, it does so amidst debate about the legitimacy of the wage. When Congress does act, it is usually too little and too late. Therefore, it might be preferable to create an automatic mechanism for adjusting the minimum wage that would not only assume the value of a wage floor to society, but be tied to levels of productivity. Such an approach would accomplish two objectives. First, it would be in keeping with the economic argument that an artificial wage floor can lead to greater productivity, rather than to the disemployment effect assumed in traditional economic textbooks. Second, because increases to the wage would be regular and expected, unlike the shocks attendant to sporadic increases. In the end such a plan might not only lead to less political opposition, but to greater efficiency.

Flexibility is a desirable feature of an economic system. Structural rigidities can result in sluggish growth and inflationary pressures; many economic models, however, display considerable system flexibility because of the use of unacceptably unrealistic assumptions. The primary "real-life" features endowing the system with flexibility are unemployment and excess capacity. While realistic, unemployment is economically costly and socially undesirable. In economic theory, there appears to be a trade-off between flexibility and realism. In reality, there appears to be a trade-off between flexibility and full employment. What has not been adequately recognized, however, is the degree to which policies are available that can promote higher levels of employment—and even full employment—without resulting in deleterious rigidity.

Mary C. Waters, a professor of sociology at Harvard University, examines one way in which race matters in the United States by studying black children of immigrants in New York City. She demonstrates that the segregation and concentrated poverty in black neighborhoods have long-lasting effects on the acquisition of skills. These youth face direct employment discrimination by employers, and in response to discrimination many develop an oppositional attitude, refusing to take jobs in which they feel they must show deference to white supervisors.

Waters examines the effects of segregation on black West Indian immigrants and their children in Brooklyn. Her data come from a 1990–92 field study in New York City of black immigrants to the United States from the Caribbean. Waters cites research showing that in the United States racial segregation for blacks is more extensive than for any other ethnic group. Active discrimination and institutional racism lead to fewer city services and less private investment in residentially segregated neighborhoods. Blacks are highly segregated at all levels of income. Middle- and working-class blacks, seeking better schools and less crime, purchase housing in predominantly white neighborhoods, but white flight and bank redlining lead to declining property values in those neighborhoods, decreasing investment, and increasing poverty and crime.

Full Employment without Inflation

Since the Employment Act of 1946 a stated policy of the United States government has been to pursue simultaneously high employment and stable prices. However, because many economists and policymakers do not believe that it is possible to have both high employment and stable prices, monetary policy has generally been geared, at least for the past two decades, toward increasing unemployment as a means to achieving stable prices. Senior Scholar L. Randall Wray demonstrates that stable prices and "truly full employment" are in fact compatible with each other if a properly targeted employment program is used.

The distribution of income is conspicuous by its absence from most mainstream macroeconomic analysis. Visiting Scholar Malcolm Sawyer, of the University of Leeds, makes an effort to remedy this situation by discussing three aspects of the relationship between macroeconomics and the distribution of income: the effect of conflicts over the distribution of income on the NAIRU (nonaccelerating inflation rate of unemployment), the effect of the distribution of income on aggregate demand, and the effect of monetary policy on the distribution of income.

A Jobs-level Analysis of the New York City Labor Market, 1979–1989

The improvement in the relative economic status of African American workers in the 1960s and 1970s was reversed in the 1980s. During that decade immigration to the United States reached its highest level since the early part of this century, and many immigrants entered lesser-skilled labor markets, where most African American labor is concentrated. Yet, in what George Borjas terms an "unresolved puzzle," most researchers have been unable to find any significant negative wage effects caused by immigration. Research Associate David R. Howell and Elizabeth J. Mueller, both of the Robert J. Milano Graduate School of Management and Urban Policy of the New School for Social Research, point out that most of this research has used across-metropolitan tests despite the fact that immigrants tend to be concentrated in only a few metropolitan areas. Howell and Mueller attempt to solve the puzzle of the relationship between immigration and wages by focusing on specific jobs in specific metropolitan areas in which immigrants are concentrated.

Unemployment, Inflation, and the Job Structure

The concept of a labor market, responding to familiar underpinnings of supply and demand, completely colors thought on the relationship between employment, wages, and inflation, according to James K. Galbraith. However, he asserts, wages are determined not by such market forces, but by what he calls the job structure—a complex set of status and pay relationships involving individual qualifications, job characteristics, and industry patterns. What is the meaning of the job structure for policy? Notions of natural rates of unemployment and inflationary barriers to full employment fade away. Supply-side measures can no longer been seen as adequate to deal with problems of unemployment and inequality. Questions of distribution of income and adjustment of the wage structure are returned to the political context. The active pursuit of full employment is returned to the list of respectable, and essential, policy goals.

Unemployment, Inflation, and the Job Structure

The concept of a labor market, responding to familiar underpinnings of supply and demand, completely colors thought on the relationship between employment, wages, and inflation, according to James K. Galbraith. However, he asserts, wages are determined not by such market forces, but by what he calls the job structure—a complex set of status and pay relationships involving individual qualifications, job characteristics, and industry patterns. What is the meaning of the job structure for policy? Notions of natural rates of unemployment and inflationary barriers to full employment fade away. Supply-side measures can no longer been seen as adequate to deal with problems of unemployment and inequality. Questions of distribution of income and adjustment of the wage structure are returned to the political context. The active pursuit of full employment is returned to the list of respectable, and essential, policy goals.

No Easy Answers: Labor Market Problems in the United States versus Europe

Rebecca M. Blank considers how the flexibility of American labor markets and the regulation and redistribution policies of European labor markets may determine employers’ responses to worldwide economic transformations that result in increasing wage disparity in the United States and continuing high unemployment in Europe. She suggests that since the transformations will undoubtedly continue, governments should seek to develop plans to offset and reduce the adverse labor market effects.

No Easy Answers: Labor Market Problems in the United States versus Europe

Rebecca M. Blank considers how the flexibility of American labor markets and the regulation and redistribution policies of European labor markets may determine employers’ responses to worldwide economic transformations that result in increasing wage disparity in the United States and continuing high unemployment in Europe. She suggests that since the transformations will undoubtedly continue, governments should seek to develop plans to offset and reduce the adverse labor market effects.

US Aircraft Engine Manufacturing and Sustainable Prosperity

Aerospace, once the "crown jewel" of American manufacturing, is experiencing a structural decline characterized by a narrowing of the industry trade surplus, an increase in the foreign content of commercial aircraft and engines, a greater role for foreign companies in research and development, and a loss of "good jobs." Employment in aircraft engine manufacturing peaked in 1988 at over 141,000 employees and plummeted to just over 76,000 in 1995. Beth Almeida, of the Center for Industrial Competitiveness at the University of Massachusetts Lowell and the Department of Economics at the University of Massachusetts Amherst, examines the decline of the aircraft industry and attributes the slipping competitive advantage of the United States to the failure of American firms to extend organizational learning to the shop floor.

In May 1997, the official unemployment rate was 4.8 percent—the lowest in 24 years. Not long ago, most economists would have considered such an unemployment record impossible to achieve without igniting a cycle of wage-led inflation. Yet, in the first quarter of 1997 prices rose at only a 1.8 percent annual rate; some regional labor markets have maintained local unemployment rates of 4.0 percent without any sign of upward wage pressure. Can unemployment go even lower before prices begin to rise? Research Associate Barry Bluestone, of the University of Massachusetts Boston, and Stephen Rose, of the Educational Testing Service, think that it can.

A Critical Appraisal

The nonaccelerating inflation rate of unemployment, or NAIRU, has acquired a central role in macroeconomic theory. Fear of inflation has led to a reluctance to allow the unemployment rate to fall below the estimated NAIRU. If so much weight is going to be placed on an estimate of a theoretical variable, it is extremely important to know how valid that theory is and how valid the estimates of that variable are. Visiting Scholar Malcolm Sawyer finds that the mechanism by which an economy would reach a NAIRU has been inadequately specified and that NAIRU models have ignored the role of aggregate demand by implicitly invoking Say's law that supply creates its own demand. He concludes that it is unwise to use the estimated NAIRU as a policy variable unless and until it can be established on stronger theoretical and empirical grounds.

The nonaccelerating inflation rate of unemployment, or NAIRU, is generally viewed as a supply-side-determined, short-run equilibrium rate of unemployment. In most NAIRU models, aggregate demand plays no essential role in determining equilibrium unemployment. However, Visiting Scholar Malcolm Sawyer demonstrates that the relationship between the real wage and employment (often mistakenly called labor demand) cannot be fully articulated without reference to aggregate demand. In Sawyer's model, investment shifts the real wage-employment relationship by adding to the capital stock. Therefore, in a sufficiently expansionary environment, the NAIRU can be made compatible with full employment.

The Skill-Base Hypothesis

Over the last three decades, despite economic growth, the United States has experienced both increasing relative inequality and an absolute decline of real wages. Explanations sometimes offered for this inability to achieve sustainable prosperity are a weakening of innovative ability (a result of reduced expenditures on training, education, and research) and international competition from low-wage countries (forcing down wages). Research Associate William H. Lazonick, of the University of Massachusetts Lowell and INSEAD, champions a third explanation: the skill-base hypothesis.

The skill-base hypothesis defines two strategies of human resource investment: a broad and deep skill base uses skilled work by many people, at different levels of the organizational hierarchy, and across organizational functions; a narrow and concentrated skill base uses skilled work by a small and elite portion of the labor force. According to the hypothesis, changes in technology and international competition have been important factors relating to level of sustained prosperity, but not for the reasons usually given. Lazonick observes that US firms are still innovative, but tend to invest in technologies that require a narrow and concentrated skill base. International competition has been important, not primarily because foreign wages are lower, but because other high-wage nations, such as Japan, have chosen superior corporate strategies. Lazonick uses a case study of the automobile industry in the United States and Japan to demonstrate that investment in technologies that rely on a broad and deep skill base will lead to more international competitiveness, economic equality, and sustainable prosperity.

The US Machine Tool Industry and Sustainable Prosperity

Good, stable jobs with high earnings started to disappear from the United States economy in the late 1970s. The loss of the majority of these jobs resulted from structural changes, not cyclical variations in the manufacturing sector. Robert Forrant, of the University of Massachusetts Lowell, studies the machine tool industry's role in the decline of the US manufacturing base, focusing on Japan's ability to surpass the United States in efficient production and the adoption of new technology.

The Status of Current Research, and Proposals for an Expanded Research Agenda

The increase in earnings inequality in the United States is now a widely accepted fact that much economics literature has attempted to explain. Philip Moss, of the University of Massachusetts Lowell, examines the increase in inequality, evaluates the frequently given explanations for it, and offers an improved methodology for determining its causes.

Opposition to the minimum wage, according to Resident Scholar Oren M. Levin-Waldman, ultimately rests on a popular political philosophy and a popular economic theory. The popular version of classical liberal philosophy stresses individualism over the common project and accordingly puts the employer's right to pay low wages over the common goal of a high-wage economy. The predominant economic theory stresses efficiency over any common goal and presupposes that unregulated markets are naturally efficient.

According to Levin-Waldman, this economic theory views the market as perfectly competitive; left on its own, it operates efficiently to allocate goods and to pay all factors what they are worth. Any inefficiency is blamed, without proof, on government interference with the market. If individuals are dissatisfied with wages, they may look for another job or improve their skills. A minimum wage, if it is above the wage that would otherwise prevail, artificially increases wages above the marginal product of labor, reduces employment, and is, therefore, inefficient. In Levin-Waldman's view, most economists, wanting to focus only on objective criteria, conclude that consideration of this supposed inefficiency alone ought to drive the public policy process.

Lousy Jobs or Lazy Workers?

Most Americans believe that if they work hard, they should not be poor. Although recent government welfare reform policy is aimed at encouraging people to work more, seven to nine million working Americans remain poor. Visiting Scholar Marlene Kim, of the School of Labor and Management Relations, Cook College, Rutgers University, asks, Why are there so many working poor? Are they poor because they choose to work too few hours? If so, why don't they choose to work more? If they worked more, would doing so end their poverty? These questions have significance for public policy. If choosing too few hours is the problem, the only role policy might play is to encourage more work. But, if poverty is caused by forces beyond workers' control, policy could play a more substantial role. Kim finds that many of the working poor do not work more hours because they cannot. She also finds that because their wages are so low, most of the working poor would still be poor even if they worked full-time year-round.

Comparative Labor Market Problems in the United States versus Europe

High unemployment rates and increasing terms of unemployment have persisted in western European countries for the past 20 years. These problems have been explained as resulting from inflexibility in the labor market created by such policies as protective labor market regulation and generous social assistance. The lower rates and shorter duration of unemployment in the United States were thought to result from greater labor market flexibility.

On the basis of this analysis, European nations enacted changes, such as weakening regulations, to increase labor market flexibility. However, labor market analysts have found not only that such efforts have been largely unsuccessful at reducing unemployment or increasing labor mobility, but also that the United States experienced rising wage inequality over the same time period that unemployment problems occurred in Europe. In other words, both the United States and Europe face serious labor market problems.

In this working paper, Rebecca M. Blank, of Northwestern University and the Northwestern University/University of Chicago Joint Center for Policy Research, analyzes these problems to assess the extent to which they reflect different institutional responses to related economic problems.

In their study of industry wage premia, Research Associates Judith Fields of Lehman College, City University of New York, and Edward N. Wolff of New York University find that gender wage differentials can be explained only in part by the distribution of women and men in different industries, and that other factors, such as discrimination, play a role as well. They make the case that focused antidiscrimination policy can be effective in reducing the gender gap.

The Collapse of Low-skill Wages

David R. Howell argues that the collapse of low-skill wages in the United States cannot be explained by a skill mismatch resulting from a technology-driven decline in the demand for low-skill labor. He presents evidence refuting the prevailing belief that a substantial shift in demand away from low-skill work characterized the 1980s. Howell asserts that a more compelling explanation for the growing wage gap can be found in fundamental changes in the institutions, practices, and norms that determine labor market outcomes—a return to a confrontational attitude toward labor by management, a shift to a laissez-faire approach to regulatory and redistributive functions by government, and management’s adoption of low-road strategies to cut labor costs in response to competitive pressures.

Is Prosperity Sustainable in the United States?

Unless American corporations change their structure of governance, it is unlikely that many will remain prosperous in this age of global competition, argue Research Associates William H. Lazonick and Mary O'Sullivan. US companies are not being hurt by low-wage competition but by their failure to invest in the organizational learning required to remain competitive. US corporate managers have become increasingly concerned with providing returns to stockholders, while their foreign competitors, especially the Japanese, invest in innovative thinking in order to provide higher-quality products at lower prices. If US corporations are to remain competitive, the authors say, they must invest in organizational learning—the acquisition by members of the corporation of the knowledge to solve problems collectively. The goal of all should be improving the business as a whole.

In this working paper, Research Associates William Baumol and Edward N. Wolff, both of New York University, explore the effects of the rate of technological progress on unemployment. They hypothesize that the sunk costs associated with a worker's training will depend on his or her previous training and education and the current pace of technological change. The faster the pace of change, the greater the sunk training costs, although education moderates the magnitude of those costs. A firm weighs wage and sunk training costs against a worker's marginal revenue yield. These factors combine to the disadvantage of the poorly educated, who will be forced to accept either a low wage or a longer duration of unemployment. A faster pace of technological change exacerbates this disadvantage.

Wage Insurance for the Working Poor

Barry Bluestone of the University of Massachusetts and Teresa Ghilarducci of the University of Notre Dame show that although the poverty rate for elderly Americans has declined over the past three decades, the total number of persons in poverty has grown and the number of poor nonelderly adults in poverty has nearly doubled since 1970. The authors argue for a comprehensive and coherent strategy aimed at the working poor and those susceptible to highly fluctuating incomes. Two essential components of a wage insurance system already exist in the earned income tax credit (EITC) and the minimum wage. Neither by itself is an ideal solution to the wage poverty problem, but the two programs complement one another. What makes the two fit together so well is that the existence of a higher minimum wage actually reduces the negative productivity, fiscal impact, and moral hazard effects of the EITC, while the EITC makes up for the weak target efficiency and income adequacy of the minimum wage.

No recent development in the American labor market has been more dramatic and troubling than the collapse in the buying power of workers’ paychecks. This drop in the value of wages coincided with a sharp increase in earnings inequality. Perhaps the most highly publicized characteristic of recent earnings trends has been the widening gap between highly educated and poorly educated workers. Although supply-side changes appear to provide a reasonable explanation for the modest wage growth experienced by the most well-educated men in the 1980s, this collapse at the bottom of the earnings ladder is almost universally attributed to downward shifts in the demand for low-skill workers. According to this view, it was the growing mismatch between the skills demanded by firms and those supplied by the workforce that was mainly responsible for reducing wages among the low-skilled.

This paper assesses the empirical support for the skill mismatch story: Has there, in fact, been a strong shift in demand away from low-skill workers? Does the timing of employment shifts by skill group across industries match trends in computerization�? Have there been observable declines in low-wage employment shares and substantial increases in low-skill joblessness, as the neoclassical model would predict if there is skill mismatch? The author finds that the answer to each of these questions is no, and concludes that it is necessary to look beyond supply and demand shifts to explain the wage collapse.

Resident Scholar Oren M. Levin-Waldman argues that, although the minimum wage is a serious economic issue, enacting an increase in the minimum wage is a political one. He finds that because the empirical results of an increase in the wage floor are "inconclusive,

Comparisons and Refinements

Recent discussion and some preliminary research have given a negative prognosis for children of immigrants. Senior Scholar Joel Perlmann and Roger Waldinger, professor of sociology at the University of California at Los Angeles, examine 1990 Census Public Use Samples (PUMS) to determine if conditions for the children of immigrants are as poor as indicated. They are particularly interested in second-generation Mexicans as Mexicans constitute the largest group among immigrants and the group most uniformly composed of workers who are unskilled or semiskilled and have relatively little education or capital. Given that Mexican immigrants make up such a large proportion of all immigrants, the authors want to find out if the Mexican experience differs from that of all other immigrants, because if it does, it may affect the data in ways that misrepresent the experience of all non-Mexican immigrants.

Reforming Unemployment Insurance: Toward Greater Employment

What is needed to solve the problem of growing long-term unemployment is a two-tiered system that distinguishes between short-term and long-term unemployment. The system should continue to function as an insurance program for 26 weeks to allow workers to search for employment that represents the best match with their experience, skills, and credentials. The first tier of the improved system would include reforms to reduce short-term employment through such means as altering the employer taxes that finance unemployment insurance and instituting work-sharing arrangements in order to reduce the incidence of layoffs and to maintain employment levels during periods of economic decline. The second tier would include services such as reemployment assessment and workshops and training programs to help unemployed workers find work that matches their skills or help them acquire new skills that would make them more marketable. Unemployment insurance benefits beyond 26 weeks would be contingent upon workers’ making use of these services. Levin-Waldman states that the goal of reform is not “merely to achieve greater efficiency in facilitating reemployment, but to enhance a core value of American society: work.”

Comparing Thirteen Measures of the US Fiscal Deficit on Theoretical and Empirical Grounds

For some time economists have acknowledged that reported budgetary data do not necessarily reflect actual economic activity. Agreement has not been reached, however, on how budget figures should be adjusted to reflect such activity accurately. In this working paper, Resident Scholar Neil H. Buchanan examines 13 alternative measures of the budget deficit in order to determine which, if any, are theoretically or statistically sounder than existing measures. He evaluates them in terms of their theoretical value, that is, their ability to capture benefits (such as higher levels of employment [subject to NAIRU constraints], higher rates of growth, and higher levels of private investment), and costs (higher rates of inflation and lower levels of private investment, consumption, and net exports) to the economy. He also tests whether the new definitions provide empirically more robust estimates than existing measures.

The Second Generation and Beyond, Then and Now

Assimilation of today's immigrants is one topic in the current debate on immigration. Some observers assert that recent immigrants are unable to assimilate into American society as easily as past immigrants were able to. Others counter that the pressures against assimilation today are not strong. In this working paper, Senior Scholar Joel Perlmann and Research Associate Roger Waldinger, professor of sociology at the University of California at Los Angeles, argue that assimilation cannot be studied as an outcome alone, but should be viewed as a process, aspects of which are important in their own right.

According to Resident Scholar Oren M. Levin-Waldman, the arguments both in favor of raising the minimum wage (to restore its real spending power to levels of previous years, to increase the incentive to work, and, as a matter of fairness, to allow those who work to earn incomes above the poverty line) and against raising the minimum (displacement effects resulting in lower levels of employment) both have merit, but ultimately "miss the point" because their focus is too narrow. They concentrate on how a change in the wage floor would affect one segment of the labor market (those at the bottom or teenage workers, for example) and not on how it would affect the market as a whole. Moreover, because findings on the short- and intermediate-term effects of a change in the minimum wage are inconclusive, discussion should focus on the longterm effects of raising the minimum wage, which could include raising productivity levels. The arguments for and against a higher minimum wage boil down to whether the US economy

In this working paper, James K. Galbraith rejects the analytical construct within which many economists currently operate—that is, the construct in which, in the extreme, macroeconomic behavior is identical to the behavior reflected in microeconomic demand and supply curves. He rejects it on the theoretical and practical grounds that microeconomic categories (supply, demand, price, and quantities) "have little bearing on important policy questions." The markets that have a bearing on policy either are asset markets (for which the rules are dramatically different from those for flow markets) or are not really markets at all, but rather a set of deeply structural social relations. According to such thinking, microeconomic issues become secondary in the policy arena and macroeconomic policy tools—spending, taxes, income policies, and interest rates—take the fore.

In this working paper Research Associate Edward N. Wolff documents changes during the period 1950–90 in aggregate skill levels of the workplace. Wolff investigates skill trends at the sectoral level, paying special attention to changes in skill requirements in service and goods-producing sectors, and examines the role of technological change in changing the demand for skills. He reports the results of a regression analysis in which he relates changes in skill indexes to various measures of technological activity.

Many participants in the current welfare debate assume that welfare recipients are taking unfair advantage of government programs by avoiding work. However, a growing body of research indicates that this assumption is untrue. In this working paper, Resident Scholar Marlene Kim and Thanos Mergoupis, of the Department of Economics at Rutgers University, show that many who qualify for benefits—food stamps, aid to families with dependent children (AFDC), and Medicaid—do not receive assistance. Moreover, many who qualify work many hours, are in families headed by married couples, are in their prime working years, and have at least a high school education. In their study of the decision

Essays in Memory of Athanasios Asimakopulos. Edited by Geoffrey Harcourt et al.

The essays in this volume were written by colleagues and friends of the late Athanasios (Tom) Asimakopulos. They relate to those areas to which he contributed so much in his teaching and his writings. Most of the essays are concerned with interpretations and extensions, both theoretical and empirical, of the work of Keynes, Kalecki, and Sraffa, and with the relationships among these three authors. Many take as their starting point Asimakopulos’s own interpretations and extensions of the work, of these authors. There is also an essay on public pensions, which was a long-standing interest of Asimakopulos and of his first mentor, the late J. C. Weldon. The essays reflect the belief that guided Asimakopulos’s work: that economic research plays a decisive role in the development of a civilized, humane society. The volume includes essays and comments by Louis Ascah, Paul Davidson, Gilles Dostaler, Terri Gigantes, Geoffrey Harcourt, Jan A. Kregel, Heinz Kurz, Dimitri B. Papadimitriou, Sergio Parrinello, Alessandro Roncaglia, Robin Rowley, Neri Salvadori, Claudio Sardoni, and Bertram Schefold.

Published By: Palgrave Macmillan, Ltd.

Employee Participation and Productivity: Evidence from a New Survey of Japanese Firms

Takao Kato outlines the types of human resource management practices (HRMPs) used in Japan and the effect of these employee participation programs on employee productivity and economic competitiveness. From these findings about the effects of HRMPs on Japanese productivity, Kato draws several conclusions for the direction that American policy might take in order to raise productivity in the United States. He advocates encouraging the diffusion of participatory HRMPs (both information-sharing and financial), supporting these programs once they are adopted, and recognizing the beneficial role of unions in employee participation. As to the role of government in fostering these programs, Kato found that in Japan government has played an informal and indirect role, primarily in the areas of data gathering, information dissemination, and education, rather than a direct role through interventions such as tax incentives (which are currently available to US firms adopting financial HRMPs).

Unemployment and Low Wages: The Distribution of Opportunity for Young Unskilled Workers

Robert M. Hutchens examines three paths by which a young person with limited academic credentials may avoid a life of unemployment and low wages: obtaining additional formal schooling, securing a job that provides secure employment at “good” wages, or acquiring a job that provides skills and thereby opens a door to good future jobs. He finds that the policy most likely to reduce the supply of unskilled labor would include enhancing early childhood education programs, disbursing training vouchers to young adults, and restricting the immigration of unskilled workers. Owing to the difficulty of identifying jobs, occupations, and industries that would consistently result in financial security for those with limited academic skills, Hutchens concludes that, with few exceptions, demand-side interventions will not work.

Is Health Insurance Crippling the Labor Market?

Recent survey results and anecdotal evidence appear to indicate that workers sometimes sacrifice job opportunities by remaining in their current position in order to retain health benefits. If “job-lock” is real, the nation pays an economic price in terms of a misallocation of workersamong productive opportunities, higher relocation and training costs for workers who have stayed too long in their jobs, and the loss of innovation, employment, and competition associated with start-up ventures. Douglas Holtz-Eakin suggests that the incidence of job-lock may be overstated. Therefore, reform programs proposing to dismantle the current system of employer-provided insurance in order to improve labor mobility are misguided. Rather, policy should aim to improve access to health care, improve the efficiency of insurance operations, and guarantee the portability of insurance coverage and premium expenses.