How to boost employment

By Felix Salmon
December 3, 2010
urgency of boosting employment and reducing unemployment, we need much more than vague ideas about training and apprenticeship. The good news is that there are at least two very good ideas which could be implemented quite easily and which would have a direct effect on employment.


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Given the urgency of boosting employment and reducing unemployment, we need much more than vague ideas about training and apprenticeship. The good news is that there are at least two very good ideas which could be implemented quite easily and which would have a direct effect on employment.

The first—and this can’t be stressed enough—is simply extending the federal unemployment extensions. As Menzie Chinn notes, the CEA has scored this, and the numbers are enormous: already, the program has increased the level of employment by 793,000 jobs. If the extensions are kept dead, there will be 593,000 fewer jobs in a year’s time than there would be if they were resuscitated, including more than 46,000 jobs in Florida and more than 26,000 jobs in Michigan.

This is not intuitive, especially to economist types who think that incentives matter and that at the margin, paying people to remain unemployed is not going to increase their chances of getting a job. But the fact is that those unemployment benefits are spent, and the extra economic activity naturally creates employment.

These jobs aren’t cheap: spending $65 billion to create 593,000 jobs works out at about $110,000 per job created. But remember this is just a second-order effect of a policy which makes a lot of sense on its own. (And the net cost is less than $65 billion, thanks to the extra taxes generated by all that new economic activity.)

Cornelius Hurley has a much cheaper idea: using the Federal Home Loan Bank System to try to create jobs rather than homes. He has three specific proposals:

This paper provides three suggestions that utilize the existing system of the FHLB to promote job creation and promotion: 1. making small business and other job-creation loans a more viable and readily accessible source of collateral for advances; 2. expanding the membership of the FHLB System to include firms that are lending to small businesses; and, 3. creating an AHP-like jobs-creation program with the support of funding that formerly went to pay down REFCORP obligations. Changing the mission of the FHLB System to make job creation a primary goal would allow for the use of a pre-existing structure with a channel directly into over 8,000 community banks to increase the amount of credit available to small businesses and thus allow those businesses to immediately create new jobs and the preservation of others.

This I think is a great idea: we’ve learned the hard way that homeownership can cause more harm than good, while employment is a pretty unalloyed Good Thing.

Under Hurley’s plan, the FHLB system would be much more willing than it is now to accept small-business loans as collateral against its own bank lending. Yes, those loans are inherently quite risky, but so in one way it’s much safer to lend against small-business loans than it is to lend against mortgages: souring small-business loans don’t destroy local banks in the way that souring mortgages do.

It’s impossible to know in advance exactly how much these ideas would boost employment. But at the margin they would surely help, and the mechanisms by which they would do so are far more obvious than the mechanisms by which the Fed hopes that quantitative easing will increase employment. So let’s do it: as Hurley notes, some of his ideas could be implemented by presidential fiat, and not even need Congress to pass any laws. What are we waiting for?

11 comments

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this is a “jobs created or saved” distinction though…. Without extension of UI, employment will be worse. but extending UI doesn’t create jobs and cure the unemployment problem. I think it’s more correct to say that extending UI would save 593k jobs than to say that extending UI will create 593k jobs.

to reduce unemployment, we need to actually create jobs. extending UI is no solution – it just keeps the problem from getting worse.

Posted by KidDynamite | Report as abusive

Can you elaborate on why “souring small-business loans don’t destroy local banks in the way that souring mortgages do”? I can see them being less correlated and have other ideas but wondering what you mean. Thanks.

Posted by mattlehrer | Report as abusive

My guess is that small-business loans are not as damaging to banks because they don’t issue them lightly or in excessive amounts. I imagine $500,000 mortgages are more common than $500,000 small-business loans.

Posted by TFF | Report as abusive

We need a jobs guarantee:

http://neweconomicperspectives.blogspot. com/2009/08/job-guarantee.html

Not only has that policy been shown to work (see the link) it will solve our aggregate demand problem.

Posted by lambertstrether | Report as abusive

I see nothing particular about unemployment insurance as a way to boost employment.

A deflationary spiral is very destructive for jobs and to the extend that unemployment benefits pump money into the economy, indeed they will ‘save jobs’.

But they don’t seem to be better for creating jobs than any other avenue for pumping money in (tax cuts for the poor, for the rich, or for guys names James), QE2, QE3 or QE29. All of these push against deflation. And none of these disincentivize work, unlike UI.

Between disincentivizing work and pumping money in, I don’t think we know if UI has increased or decreased unemployment at all. The 793,000 figure is hilariously precise!

Indeed one thing we do know is that an awful lot of unemployed people are avoiding jobs that suck. Remember the campaign by United Farm Workers, “Take our jobs please”?
http://money.cnn.com/2010/07/07/news/eco nomy/farm_worker_jobs/index.htm

Out of millions and millions of unemployed, only dozens followed through. The Great Depression this is not. Would folks go for these unpleasant jobs if they didn’t get the same amount of money to not work?

Posted by DanHess | Report as abusive

Dan, those workers work their butts off and it’s back breaking work, where you need to be nomadic. Yes they woul dhave to take those obs, but seriously how many Americans are used to such hard labour with little compensation and no benefits?

The answer is few would, but if you have a family to feed then most would. If you were one of those ‘folks’, would you? More importantly, COULD you work 12 hours in the hot sun 7 days a week for less then minimum wage?

I am betting the farmers prefer the Mexicans as they are used to the labour and didn’t follow through themselves.

Posted by hsvkitty | Report as abusive

Penalties to take business, money, jobs away from USA, and more incentives to keep them in…

Posted by hsvkitty | Report as abusive

“We’ve learned the hard way that homeownership can cause more harm than good…”

False. We’ve learned that home buyership causes lots of problems, but I’ve yet to hear a convincing argument as to why home ownership is a Bad Thing.

Posted by MitchW | Report as abusive

You financial types; give money to the banks. You’re joking.
Look to FDR. Recreate the CCC, the WPA. It seems the Federal
government is the only potential agent in town. It’s up to Obama,
if he has the cojones.

Posted by pvince99 | Report as abusive

When the populace balks at extending federal unemployment benefits – it is the ideal time to start convincing them of creating an employer of last resort (ELR). The same money that would fund extending benefits can be used to create the ELR – and the fact that people would be working instead of just consuming money give voters the comfort that utility is being generated and money is not being wasted. The ELR is also useful for the unemployed in that it gives them a floor on wages that will never be taken away from them – so they won’t have to obsessively worry about taking care of their family and can afford to invest their own time and resources to retrain themselves into higher paying jobs and thus quit the ELR. The ELR by acting as a buffer stock of employment helps in the smoothing of the business cycles and also prevents the labor stock from losing their skills (and more importantly morale).

Posted by rahumkc | Report as abusive

Quit supporting housing prices at outrageously out-of-whack levels by backstopping the banking and mortgage industry. Get houses back into the hands of owners, not banks. Getting the home sales, repair and remod sectors back to work will probably lop 20% off the unemployment rate ..

Posted by Woltmann | Report as abusive