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A back-to-normal economy

Posted: August 15, 2011 - 9:36pm

The recent employment report contained good news and bad news. The good: the economy does not appear to be sliding into another recession. The bad: that was the only good news, as hiring expanded only slightly. The question on everyone’s mind: How long will it be before we get back to a normal economy and a much lower unemployment rate?

Unfortunately, even with strong job creation it will take a long time for unemployment to return to pre-recession levels. The “natural” rate of unemployment, economists say, is 5.2 percent. If employers add jobs at the same rate that the Labor Department reported during the tech bubble — about 260,000 net new jobs a month — it will take three years for unemployment to return to that level. Unfortunately, few analysts see tech-bubble levels of growth on the horizon.

If employers add jobs at the same pace they did during the 2003-2007 expansion — 176,000 net new jobs a month — unemployment won’t recover until January 2018. This is about what the Congressional Budget Office forecasts will happen.

For now, however, employers are hiring well below this pace. Over the past year the economy has added an average of 121,000 net jobs a month, barely enough to keep up with population growth. At this pace unemployment will never return to pre-recession levels. Americans would simply have to get used to French levels of unemployment.

Deciding to accept slow growth would have serious consequences. Employees’ skills deteriorate when they spend extended time out of work. A worker who finds a job after a year of unemployment becomes less productive than if he found a job in a few months. Consequently workers earn less, both when they get hired and throughout their career. European unemployment rates make realizing the American dream much harder.

The government should be doing what it can to bring unemployment down. Doing that requires understanding why it has stayed high in the first place.

The widespread layoffs at the start of the downturn ended a year and a half ago. Workers with a job are less likely to get laid off now than before the recession began.

The job-market recovery has proceeded so slowly because entrepreneurs are starting fewer new companies and owners of existing businesses are expanding less frequently. That means less hiring and fewer new jobs. Employers are hiring no more workers today than they were when the economy melted down at the end of 2008.

Businesses invest when they see good opportunities to create goods and services that consumers value. Right now entrepreneurs see fewer such opportunities, and that’s keeping unemployment high.

The recession explains part of this, of course. The National Federation of Independent Businesses surveys small-business owners and asks them about their single greatest problem. Their top response is “poor sales.”

Government, however, also shares responsibility. Small-business owners’ next most frequent answer is “taxes.” Their third: “government regulations and red tape.” Combined, more small-business owners pick these burdens as their greatest problem than do poor sales. Excessive government reduces business opportunities — and hiring.

Unlike overall economic conditions, the government directly controls taxes and regulations. Unfortunately, it is making them worse. Since taking office the Obama administration has pursued an ideological agenda that discourages business expansion.

The Affordable Care Act significantly raised the costs and uncertainty of employer health benefits. Not surprisingly, this discourages hiring. Dennis Lockhart, president of the Federal Reserve Board of Atlanta, reports that “we’ve frequently heard strong comments to the effect of ‘my company won’t hire a single additional worker until we know what health insurance costs are going to be.’”

President Obama’s appointees to the National Labor Relations Board are attempting to foist unions on employers and employees. The board filed charges against Boeing for building a new plant in a right-to-work state. The board also plans to rush election times so workers vote before employers have a chance to make their case.

Unionized companies invest less and create fewer jobs than non-union firms. President Obama plans to super-size the union movement anyway.

The president also promises to hike taxes on “the rich.” In fact he insists upon it. But who are the rich? Successful entrepreneurs. Promising to confiscate their wealth if they succeed, while changing the regulatory rules in the middle of the game, discourages entrepreneurs from attempting to start a business in the first place.

The unemployment rate will take a long time to come down. The question is “how long?” If the president keeps it up, it could take much longer than anyone expects.

• Sherk is a senior policy analyst in labor economics in the Center for Data Analysis at The Heritage Foundation.

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