Government Policies Made the Economy Worse – and They’re Still Impeding the Recovery

Why
has the U.S. job market stayed so lousy for so long? The impact of
the recession explains part of it, but it’s not the whole story,
according to a paper unveiled Friday by economists Steven J. Davis
and John Haltiwanger. Davis, of the University of Chicago, and
Haltiwanger, of the University of Maryland, looked at employment
trends across the country in recent years and concluded that a
significant chunk of the problem predated the economic
downturn.

The issue is a reduction in labor market fluidity. Essentially,
older people are staying put in the jobs they have, creating less
turnover and less movement. So one of the consequences is that
younger people are having trouble getting their foot in the
door.

That has ripple effects for years to come. The longer it takes
for someone to get his or her first job, and the lower-paying that
initial job is, the harder it is to gain skills and connections
that allow someone to move up the ladder. Basically, the part of
the labor market that already has work (older workers) is less
fluid. As a result, there are fewer opportunities for the part of
the labor market that doesn’t have work (younger people who want to
work). They can’t get jobs, can’t accumulate “human
capital”—everything from concrete skills to personal connections to
a conceptual understanding of how their markets function—and so
have a harder time getting started. It’s a vicious cycle. Younger
workers and men, the economists say, are hit the hardest.

Part of what makes Davis and Haltiwanger’s conclusion so
interesting is that in many ways it contradicts the conventional
wisdom that economy has become to unsteady, too uncertain, and too
volatile. What they’re saying, in contrast, is that the economy
isn’t volatile enough. 

Why is the economy more rigid than it used to be? The economists
have a few ideas,
via The New York Times:

Mr. Davis and Mr. Haltiwanger attribute some of this decline to
the aging of the work force; as people get older, they tend to
change jobs less frequently. The decline in the creation of new
companies is also playing a role. In effect, companies are getting
older, too. This has been particularly pronounced in the retail
sector, where giants like Walmart and McDonald’s offer relatively
stable employment.

The paper argues that economic policy also plays an important
role. The cost of training workers has increased, partly because
the share of all workers who require government licenses has grown
by one estimate from about 5 percent in the 1950s to 29 percent in
2008. This discourages hiring. So do legal changes that have made
it more difficult to fire employees, the paper says. It also
mentions health insurance as a reason that employees may stay
put.

In other words, policy makes a difference, especially when the
marginal effects are allowed to build up over time and gum up the
works. Licensing and training requirements make it more expensive
to put people to work. Policies that make it harder to fire
inevitably make it harder to hire too. And our half-century old
policy of tying health insurance to employment through favorable
tax treatment has likely made it harder, at the margins, for
workers to move from job to job. 

Part of this, then, is a story about how the government got in
the way. As time went on, the cumulative effects of multiple bad
employment policies helped make for a bad job market. And recovery
could be harder and longer than we think, because even after the
effects of the recession wear off, those problematic policies will
still be dragging us down.