Unemployment Solutions: What's Most Cost-Effective

The Best Way to Solve High Unemployment According to Research

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Workers pour concrete during construction on the Central Artery project July 30, 2001 in Boston, Massachusetts.. (Photo by Darren McCollester/Getty Images

The solution for unemployment is, of course, to create new jobs. Usually, a healthy economic growth rate of 2-3% is enough to create the 150,000 jobs needed to prevent high unemployment. When unemployment creeps above 6-7% and stays there, it means the economy isn't strong enough to create sufficient new jobs without help. That's when the government steps in to provide solutions. See what it's tried with Unemployment Rate by Year.

Monetary Policy

The first solution is expansive monetary policy from the Federal Reserve. It's powerful, quick and usually effective. Lower interest rates allow families to borrow more cheaply to buy what they need. That includes expensive items like cars, homes, and consumer electronics. It stimulates enough demand to put the economy back on track. Low interest rates also allow businesses to borrow for less. That gives them the capital to hire new workers to meet rising demand.

Fiscal Policy

But when monetary policy doesn't work, then fiscal policy is usually required. The government must either cut taxes or increase spending to stimulate the economy. Expansionary fiscal policy is slower to get started. It takes time for Congress and the President to agree on the next steps. But it can be more effective once executed. It also provides much-needed confidence that the government will turn things around.

Confidence is a crucial ingredient in convincing people to spend now for a better future.

Cutting taxes also gives consumers more money to spend, increasing demand. It cuts costs for businesses. They use the cash to invest in their business and hire more workers. Government spending usually takes the form of jobs programs.

The government hires employees directly. It also contracts with companies to build things and provide services. That acts like a tax cut, by providing consumers the cash they need to buy more products.

What's the Most Cost-Effective Unemployment Solution?

Dollar for dollar, what's the best investment that creates the most jobs? A U Mass/Amherst study found that building mass transit is the most cost-effective solution.  One billion dollars spent creates 19,795 construction jobs. Another cost effective solution is spending on education. One billion spent hiring teachers creates 17,687 jobs. It has also adds $1.3 billion to the economy. That's because better-educated people get higher-paying jobs. They can buy more things with the higher wages they earn.

The next is unemployment benefits.  Every $1 billion spent on unemployment benefits creates 19,000 jobs, according to a Congressional Budget Office study. That's because the unemployed are most likely to spend every dime they get on basics like groceries, clothing, and housing.

That drives retailers and manufacturers to hire more people to meet the additional demand. Without these benefits, demand would drop. Then retailers would need to lay off their workers, increasing unemployment rates

Unemployment benefits work fast. The government just writes a check, which immediately goes into the economy. Public works projects can take a while to get implemented.

During the final quarter of 2008, unemployment programs paid $34.9 billion in benefits to eight million unemployed workers. That boosted economic growth by $57 billion. Every month in extended benefits costs taxpayers $10 billion. But, it generates $16.4 billion in economic growth. (Source: CBO,  "The Economic Outlook and Fiscal Policy Choices," September 28, 2010).

The third best unemployment solution is funding education. It creates 17,687 jobs for every $1 billion spent. That's much better than  defense spending. It only creates 8,555 jobs for the same investment. That's because it's more capital intensive. Modern defense relies more on drones, F-16s, and aircraft carriers than soldiers.

The most frequently-used fiscal stimulus is across-the-board income tax cuts. That is not the most cost-effective according to the UMass/Amherst study. One billion dollars in cuts created 10,779 jobs. But workers only spent half the money ($505 million). 

As a result, reductions in the tax rate damage the economy. Every dollar in lost tax revenue creates 59 cents in economic growth. That's because people usually don't realize they're getting a break until tax time. Since they are paying out money in taxes, they are less likely to spend anything extra. It just doesn't feel like a bonus. As a result, people are more liable to save anything they get or use it to pay down other debts. (Source: UMass/Amherst, Robert Pollin and Heidi Garrett-Peltier, Department of Economics and Political Economy Research Institute, The Employment Effects of Military and Domestic Spending Priorities, October 2007)

It's more cost effective to cut businesses payroll taxes.  One billion dollars in payroll tax cuts created 13,000 new jobs. The best place to give business tax relief is with small businesses. They produce 65% of all new jobs. 

Fiscal Policy Risks

The downside of government policy is it can add to the budget deficit, creating more government debt. As debt approaches 100% of the economy's total output, it can slow economic growth. That's because investors lose demand for that government's debt. That makes interest rates rise, increasing the cost of borrowing.

Advocates of supply-side economics say that, over time, tax cuts boost the economy they replace any lost tax revenue. All solutions to reduce unemployment must create demand to stimulate the economy. For more, see Job Creation: Ideas, Statistics, and Creation by President

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