Our national unemployment rate remains stubbornly high nearly seven years after the Great Recession began despite numerous attempts by the federal government and Federal Reserve to spur job creation.
One way the Fed ordinarily fights unemployment is to lower interest rates. Cheaper money is supposed to spur companies into expanding their businesses and into hiring more employees. At least that is how it is supposed to work. But even with interest rates at their lowest point in decades, and with further monetary stimulus such as quantitative easing – the purchase of bonds by the Fed which forces more money into the economy – an inordinate amount of people continue to look for work.
The 6.2-percent jobless rate concerns Janet Yellen, the new Federal Reserve chair. She cites this rate as one of the reasons for continuing the Fed’s low-interest policy. Some economists and policymakers in Washington, D.C., now are worried that years of artificially low interest rates pose a threat of inflation. Their concern about inflation or even stagflation – a general price increase that coincides with a recession, like the episode our nation experienced in the late 1970s – is justified. Rapid and general price rises can cause significant economic disruption.
Yellen’s critics say she and those who agree with her policies are paying too much attention to the unemployment rate. In an uncharacteristically candid public debate about rates, several of the 12 Federal Reserve Bank presidents and others have suggested that rates should be raised to avoid inflation.
One point seems fairly clear while these opposing sides use technical arguments to debate this complex issue: America’s decision to pay the unemployed and its current aggressive monetary policy might be working against each another.
The theory behind providing unemployment benefits is that the money provided to people not working will encourage them to spend, which will in turn create more jobs. The opposite, however, might be occurring during this long economic recovery.
Cynthia Allen of the Fort Worth Star-Telegram newspaper recently summarized a study by the National Bureau of Economic Research. This highly respected think tank used empirical modeling and found that extensions of long-term unemployment payments have made the prospect of finding a job more difficult. Companies are forced to raise wages in order to entice people off unemployment benefits and into the workplace. The result is shrinking profit margins and a decline in hiring.
A more definitive example can be found in North Carolina. Long-term unemployment benefits in the Tar Heel State expired in July 2013, six months before other states. The jobless rate there plummeted from 9.5 percent to 6.9 percent as a result. Overall, employment rose by more than 13,000 people when long-term employment payments ended.
One can be a cynic and say that “paying people not to work” only exacerbates the unemployment problem. You can also conclude – as the National Bureau of Economic Research did – that unemployment raises the cost of labor and therefore causes firms to cut back on hiring. Whichever argument you choose, the result seems to be the same: more unemployment.
Most of us will agree, though, that a civilized society must provide a safety net for people who experience sudden and unexpected unemployment. It is the interactions of our monetary and fiscal policies that need to be reexamined.
Should the Fed keep interest rates artificially low and risk a rapid rise in inflation because policymakers continue to believe that low rates will stimulate employment? Or is the Fed hitching its low-interest rate wagon to the wrong policy horse?
There needs to be a different way to measure unemployment. It should take into consideration the people who choose not to work because they are receiving unemployment benefits and the others who cannot find work because the unemployment benefits they are receiving push their wage rate up to the point that companies cannot afford to hire them.
These are serious questions that should be addressed before runaway inflation occurs.
Michael A. MacDowell is president emeritus of Misericordia University in Dallas Township, where he occasionally taught economics. He is the managing director of the Calvin. K. Kazanjian Economics Foundation.