No Need to `Jump Start' Wages Adjusted for Inlfation Have Been Falling in Recent Months, Which Should Stimulate Employment, Regardless of Government Action
Richard Vedder and Lowell Gallaway. Economists Richard Vedder and Lowell Gallaway are s of "Out of Work: Unemployment and Government & Meier), which is due out early next year., The Christian Science Monitor
PRESIDENT-ELECT Clinton says he hopes to "jump start" the United States economy to alleviate lingering unemployment and raise the sluggish growth rate. But what are the prospects that moderately aggressive government policies can significantly improve the economy? Indeed, does the economy even need to be jump-started?
Mr. Clinton has mentioned a $20 billion annual program of public works, mainly infrastructure spending, as a key component of his economic program. But, historically, government attempts to eliminate unemployment through fiscal policy measures have met with very little success.
Public works spending to alleviate unemployment was a hallmark of the depression-fighting strategy of Presidents Herbert Hoover and Franklin Roosevelt. But five years after Mr. Roosevelt launched his New Deal with such infrastructure-creating agencies as the Works Progress Administration and the Tennessee Valley Authority, the nation's unemployment rate still exceeded 19 percent.
More recently, similar programs in the 1970s were accompanied by higher, not lower, rates of unemployment than had prevailed for the previous three decades.
Two factors that serve to make public works spending ineffective in dealing with unemployment are timing and "crowding out."
Typically, years pass between the time decisions are made to build new highways, schools, or sewage systems and the time work actually begins. This is especially true with today's myriad of environmental, affirmative-action, and other regulations, not to mention the time it takes Congress to act.
Moreover, the financing of new federal spending requires taxes that directly reduce private spending and work effort, or deficit borrowing that will raise interest rates, also reducing private-sector activity.
Our research also shows that unemployment grows when the price of labor rises for employers. If what we term the "adjusted real wage" (wages adjusted for changing prices and productivity) rises, unemployment will increase.
So is it wise even to attempt to jump-start the economy? The recent recession arose when the adjusted real wage increased, caused by erratic price changes and wage demands and by government policies pushing up wages, including a higher federal minimum wage.
For the past year, however, the adjusted real wage has been falling. Money wage increases have moderated, being offset by inflation. Increases in labor productivity have lowered labor costs per dollar of output, enhancing profits and making it profitable to hire new workers. …