– If we want to, we can
structure the market differently. I wanna talk now about how full employment is a policy choice. First off the extent to
which workers have jobs is primarily a matter of public policy. That it's not a question
just of individual effort. And just to be clear I'm not saying individual
effort doesn't matter but the fact that we could
have millions unemployed at certain times and other times employers
are looking for workers that's a policy choice. So we have to be very clear on that. Secondly, that when we have
high rates of unemployment it disproportionately hurts
the most disadvantaged in the labor market.
The third point I wanna make is that when you have an economy
with low unemployment we have many lower
productivity, lower paying jobs go unfilled and that's not a bad thing. So what we have today in 2022 is the unemployment rate's low. We have many low wage employers saying they can't get good workers. I like to joke about this is
the hard to get good help story that you can't get workers well that's what you expect to have when you don't pay enough. When you have a strong economy when you have a tight labor market that means that you'll have rising wages especially for those at the bottom.
What are typically low paying jobs. Those are the ones who are benefited most by a tight labor market. (upbeat music) In laying out this argument I wanna to sort of briefly
touch on alternative views of the economy. Those held by John Maynard Keynes and those held by Milton Friedman. And again these are
some extent caricatures as it always is when we
refer to a famous person. These are sort of their basic story on how they view the economy. Okay, so Keynes great innovation was that he saw that the economy was typically limited
by the level of demand.
So what that meant was
that if we had more demand in the economy that we
could have more output more employment. It's not a secret. We know what the source of demand. And again Keynes laid
out a framework for us it was very useful that we
have consumption demand. We go out and buy a car,
we get restaurant meals, we get healthcare, whatever. So we have various types
of consumption demand. Secondly, investment demand. We have investment firms do investment whether they're building new buildings or building new machines software. So all sorts of investment
undertaken by firms net exports a source of demand. So if we have more net exports we export more don't increase our imports. That also is a way to increase demand. So if we're exporting
more to Europe or Japan or the developing world that increases demand in our economy and lastly governments spending. Okay so when the government spends money whether it's on education, building roads, that also creates demand in the economy.
And he made the very important point that if there's not enough
demand in the economy to employ the available workforce then the government could create demand by spending more money or taxing less. Okay, taxing of course
reduces the amount of money we have in our pockets it
will reduce consumption. So Keynes big point here
was that the government can to a very large extent control the amount of demand in the economy. If it wants to create more demand it could spend more money. It can cut taxes or
some combination thereof and thereby increased
demand in the economy. Okay, so this is the
story we often hear about deficits being bad sometimes they can be but the point here is
deficits can create demand. So again if we're in a situation where there's not enough demand in the economy the government could run a
large deficit spending more taxing less can create
demand in the economy. Government spending isn't wasteful. It doesn't have to be at least wasteful. It could be directly productive. So the government spends
money on roads on airports, broadband, education.
These are all investments
that the government makes that have payoffs in terms of increasing
society's wealth over time. So Keynes made a joke if
you read through his book, "The General Theory"
he jokes about how even wasteful spending could
be better than nothing if we have a lot of unemployed workers the government could
pay people to dig holes and fill them up again that
would put people to work. But we would rather see
the government spend money on something that's useful. It could spend money in education developing software whatever it might be. The point is that government
spending can be productive. The contrast with Friedman
is that he sees the economy. The size of the economy is largely fixed by the amount of capital,
the skills of the workforce and natural endowments. So what does that mean? Well, at a point in time this day we have so many buildings out there. We have so much equipment. We have whatever technology we have. That's the amount of capital. That's what we have today. We could have more tomorrow
but that's what we have today.
Secondly, we have the
skills of the workforce. Some people are very highly
skilled as writing software, as doctors, whatever it might be. Other people might be less skilled. Okay, that's what we have today. Okay, so we have those skills and then we have natural endowments. How fertile is the soil? So if we have very fertile soil then we'll have a larger economy. Some places, some countries
don't have very fertile soil. They can't grow very much on their land. Harbors, some places are very lucky. We have very good harbors
in the United States in New York and Boston other places, other areas you have Rocky coasts so you don't have good harbors. We have the amount of capital we have the skills of the workforce. We have our natural endowments. That's gonna determine how
much the economy could produce. And now if the government
steps in and says, oh we have too many
people who are unemployed so we want to increase employment.
So what are we gonna do? We're gonna spend a lot of money. We'll have a jobs program or we're gonna spend more in
education or whatever might be. Well, Milton Friedman would
say, okay, if you do that you're simply gonna have more inflation. Okay, because the amount of
people who are prepared to work given the state of the
economy given their skills that's determined in
effect sort of naturally that here's what we have. And that's gonna mean
that 6% of the workforce doesn't have a job. Okay, maybe we're not happy about that. But if we just were to spend more money, that's just gonna lead to inflation. 'Cause the economy
actually can't produce more than what's now producing. And given the skills the
people we're employing they're not producing enough to earn back what they're going to be paid. So it simply leads to inflation.
And he came up with this idea the non accelerating
inflation rate of unemployment that's the acronym NAIRU. And the significance of that is that if you had lower unemployment rate the inflation rate would continue to rise. An important point here
the point is accelerating. So let's say and people
often said for many years that the NAIRU was at 6%. So let's say we're unhappy and we go oh, we don't
want 6% unemployment. We wanna get the
unemployment rate down to 4%.
Well, Milton Friedman would tell us, well, maybe you could do
that for a period of time. But what that would mean
is that the inflation rate would continue to rise. So if we're starting at 2% it rises to three, it rises
to four maybe that's okay but you'll keep rising. So we'll be at five we'll be at six pretty
soon we'll be at 10. And eventually we have hyper inflation and no one thinks that's okay. So Milton Friedman would say, okay, you don't wanna go down that path. You don't wanna fool with the
non accelerating inflation rate of unemployment. If that's 6% you aren't
really doing anyone any favors by trying to get the unemployment
rate down to 5% or 4% 'cause you're not gonna have
a stable inflation rate. The inflation rate will continue to rise. And then you're in this horrible
story of hyper inflation where your money's not worth anything.
People don't trust it. And the classic story people
talk about Weimar Germany where people went to the
stores with a wheelbarrow of money and they got a loaf of bread. Okay, so no one wants to be there. (ethereal music) Well, I'm gonna argue that the Keynes view of
the world is correct. And I think there's a lot
of evidence to support that. And what I'm gonna argue
is that it's very important to try to get to lower
rates of unemployment. Okay, first it's important
to point out that the NAIRU this is not just an academic exercise. Okay, we have the Federal
Reserve Board that in effect I refer to them as the NAIRU enforcer because they've consistently acted over at least the last four decades to raise the unemployment rate to keep inflation from rising.
And the most famous example
of this was when Paul Volker was chair of the Fed 1979 to 1982, he jacked up the short term interest rate the Federal Reserve
Board directly controls the overnight money
rate Federal Funds Rates often referred to. He raised that as high as 20%. Okay, more recent years it's
typically been around 2%, 2.5%. It been zero during
the pandemic recession. Okay, that through the economy
into a very severe recession the unemployment rate rose
to over 10% and two in 1982 that did slow inflation. There's no doubt about it. Volker did this because the inflation rate was in double digits and he
felt or at least he argued that we had to do something drastic to get the inflation rate down.
So he pushed interest
rates through the roof raised on unemployment to double digits and that did get inflation down. Okay so we saw much lower
inflation inflation fell to 3% in the 1980s, he got inflation way down
from the double digit levels where it had been. So in that sense you could decide whether there was a good
thing or a bad thing. He had a lot of unemployment and that did bring the
rate of inflation down. Okay, so that's one example of where we had the Federal Reserve Board, quite explicitly raising interest rates to throw people out of work to keep the inflation rate down.
Okay, this happened again 1989 to 1990 under Alan Greenspan. Alan Greenspan raised interest rates again he was concerned or so he said that the unemployment was
getting too low at that point in 1989 and got into 5%, which again was below most
estimates at the neighborhood at the time. So he raised interest rates
and we got a recession in 1990. His recession went from
March of 90 to March of 91. And you know again so
you could tell the story that we raised the unemployment
rate to lower inflation. And it did have that effect. We saw this again when Janet
Yellen and Jerome Powell were Fed chairs in the period, 215 to 218. Again, they began to raise interest rates in advance of any evidence of inflation. And they will say that
they said that at the time they didn't see inflation but they saw the unemployment rate falling to levels that were below
what was generally estimated as the NAIRU.
So they said, we have
to raise interest rates. Again they'd been at zero
following the great recession. They began to raise them a
quarter point each meeting and they were worried or so
they said that the unemployment it was getting so low that we would start to see
problems with inflation. Then we saw a change in
heart by Jerome Powell. Again it was Fed share at
the time and still Fed share in 219, he said, oh, we don't
see evidence of inflation. And he recognized the positive effects that low unemployment had on
those who are disadvantaged in the labor market. So beginning in 219, he said, well the Fed under the law is responsible not just for keeping low inflation but it's also responsible
for maintaining high levels of employment rather than preemptively raising interest rates. As Greenspan certainly did in
94, 95 and Yellen and Powell had done in 2015, 2018, he's gonna wait to see if we see inflation and then he'll start to
raise interest rates.
So it's a very, very different view from what we'd seen at the Fed
over the prior four decades. Let the unemployment rate
get as low as possible. And then talk about
raising interest rates. Don't raise interest rates
in advance of any evidence of problems with inflation. To illustrate why I think
this is so important. Let me distinguish between the idea of individual responsibility and a macroeconomic
story for unemployment. So what I have here is the
employment to population ratio. This is a percentage of
that group that's employed for men between the ages of 25 to 34. So these are young men. We're looking at the great recession. So 2008, 2009 into 2010 where the percentage of
young men that were employed fell sharply. So a lot of economists
were looking at this and they were going why is it
that young men are not working well rather than saying, oh it's some issue with the economy. A lot of economists said,
well it's young men. They don't feel like working.
And there was actually
serious scholarly research it said well the problem is video games. Video games have gotten really good. So these young men are
all instead of working, they're watching internet porn,
they're playing video games. They'd rather do that. Okay, so the problem's not the economy. The problem is the young
men playing video games and watching internet porn. Okay so people could tell
that story 2011, 2012, they couldn't tell the
story a few years later. Okay, so if we look at what happened 213, 214, 215, 16, 17, 18,
they're going back to work. So what you had happened
was a situation where young men weren't working
in 2010, 2011, 2012 that was because there weren't
opportunities out there.
Later on the economy keeps growing the unemployment keeps falling
those opportunities come back and guess what? These men are working. Okay, as far as I know they could still play the
video same video games. They could still look at internet porn but they were choosing to work okay. So clearly the story
was one of the economy the economic opportunities the job opportunities
available to these young men. And I'd say based on this story it looks pretty clear to me. It was a story of job
opportunities in the economy. Not that young men
didn't feel like working. Okay the next point, who
is it that's most benefited by low unemployment rates. Well the unemployment
rate for everyone fell. So you could see for
whites it fell from about 4.5% in 1995 to about
3.8% in the year 2000. For Blacks it fell much more okay? For Blacks they were
looking at unemployment rate of over 10% in 1995.
Okay, it fell to about 6.5% in 2000. Okay, 6.5% is still high. So I'm not gonna say that's good but obviously it's a lot better than an unemployment rate that's over 10%. So we're looking at a drop of close to four percentage points. Okay, so it made a huge
difference for Blacks. Okay, it also made a huge
difference for Hispanics. Okay, so the unemployment
rate in 1995 was about 9% for Hispanics. It felt to about 5.5% in the year 2000. People with less than a high
school education similar story. So we had a unemployment
for people with less high school education of about 9% in 1995. That felt just over 6% in 2000. So again you had a lot of
people, less education, they were able to get jobs in 2000, they weren't able to get jobs in 1995.
So we could look at the
overall unemployment rate and say obviously 4% is better than 5.6% but it makes the biggest difference for those who are disadvantaged
in the labor market. So again if we think of how can we help black people
are having a tough time in the economy? Well big part of that story would be try to get to
something like full employment and you'll get a lot of
black people have jobs who wouldn't have otherwise which again you look at the six and a
half percent unemployment that we had in 2000 that's not good. No one should be satisfied with that but it's a hell of a lot
better than we were at in 1995. So full employment or something
close to full employment makes a very big difference for the most disadvantaged
groups in society. Okay, this is another example
if we compare 2015 and 2019. Okay, the unemployment rate
continued to fall in 2019, we got unemployment rate down to 3.5%.
And again it disproportionately benefited those at the bottom. So we could see that for whites it fell the unemployment rate over that period fell about
half a percentage point for Blacks. It fell from almost 10%
in 2015 to 6% in 2019. Okay, so again a very
large drop for Blacks. For Hispanics the drop was
from about 6.5% in 2015, to just over 4% in 2019. For people with less than
a high school education the drop was from 8% in
2015 to about 5.5% in 2019. And for native Americans the
drop was from 10% in 2015 to 6% in 2019. So again it makes this point that when we were at a
level of unemployment that many thought it was full employment. So that's why the Federal Reserve Board was raising interest rates. They thought we'd hit the neighbor in 2015 or at least we're very close to it. That's why they were
raising interest rates. It also shows up in wage growth. Okay, and what you see is real wages they didn't fall for the top end. So if you look at the 95th
percentile they did fine.
They saw decent real wage
growth over that period. But for those at the
bottom the 20th percentile their wages fell substantially
over this period. So what that means is a
worker at the 20th percentile of the wage distribution. That means they earned more than 20% less than 80% of the wage distribution. They actually saw low real wages in 1995 than what they had in 1979. The economy got richer
we got more productive. They didn't get any part of
that they actually had less. Okay, same thing for the median worker. Okay, so someone was right at the middle of the wage distribution. They earned more than half the workforce less than half the workforce. They also saw their real wages fall. So again those at the
top the 95th percentile they're doing fine. They got about 12, 13% more
in 1995 than they did 1979.
Okay, but what happens in 1995 to 2001, this is a period where
we got low unemployment. The unemployment rate
got down to 4% in 2000. Okay there you see good
wage growth at the bottom. Over that five year period
workers at the 20th percentile see their wages rise by 15%. Okay that's pretty incredible. That's quite a difference. So in a five year period they
see their real wages rise by 15% the prior 16 years their wages actually fell by six or 7%. Okay, so that tells you a
story at least to my view about the benefits of low unemployment. Again if you look at the median their real wages are rising now. That five year period of low unemployment their real wages went up about 10%. Okay and those at the top they didn't do quite as well as they did in the earlier period.
So basically you have a
story everyone's benefiting in this period of low unemployment. Those at the bottom are benefiting most. We have the recession 2001. We have relatively high unemployment through the whole period. At least to my view 2001 to
2015 we have the great recession in the middle of course
very high unemployment. But you see a situation
where most workers saw little or no gain in real wages. So again those at the
bottom the 20th percentile, they lost again over this 14 year period. So the real wages fall about
5% over this 14 year period workers at the median
very modest wage gains. Okay their wages rise about 2%. Those at the top the 95th percentile again they're doing fine. Okay, so this period of
relatively high unemployment they see their real wages go up about 17%. Okay so the point again is that when you have an economy
with low unemployment you have much more
evenly shared wage gains those at the bottom,
have the bargaining power the market power to
actually secure wage gains.
If you just try to think of
that in very practical terms when there's a low unemployment rate think of the low wage workers people are working at a
restaurant, a custodian, people in the lowest paying jobs. They could tell their boss I could get a job across the
street and they're gonna pay me a dollar an hour more. So I either wanna pay raise or I'm going across the street. When the unemployment's high
they don't have that option. Okay, so it gives workers at the bottom workers at the middle it gives them bargaining
power that they don't have in a period of high unemployment.
So again this emphasizes the importance of full employment or high employment not just for allowing
these workers to have jobs but to give them bargaining
power in the labor market so that they could share in
the gains of economic growth. So again I was making
the point earlier that if we have a high rate of unemployment that the government could spend
more money or can cut taxes have larger deficits that
will put people back to work. Also the Federal Reserve Board
plays a crucial role here. It controls the interest rates, which in effect control
the level of output and the economy control
the level of employment. So this is very much a
governmental decision that it's not just a question
of individuals working hard developing skills.
And just to be clear again I would never say that
people shouldn't try and get more skills, get better education if they were ever ask me a young person. Yeah try to get a good educational allow you to get a good job
absolutely that matters. But the point is it goes beyond that. So even people who are working hard trying to get good jobs they're gonna have a much harder time if we have high unemployment and again that disproportionately hits the most disadvantaged
groups in society.
Okay, so again if we
have high unemployment that means disproportionally we're gonna see black people, people with criminal records,
people with less education, they're the ones who are
gonna be most disadvantaged. And then the last point is
that high rates of unemployment not only keep people from getting jobs but it prevents them from getting wages sharing higher wages prevents them in sharing in
the gains from economic growth. so long and short full employment is a tremendously important policy that has a very big role in determining how many people are low income. How many people are in poverty. If we maintain high levels of employment we can get a lot of people out of poverty get them into better paying jobs and allow them to share in the
benefits of economic growth..