Total employment contracted in February for the second straight
month, and private employment contracted for the third straight
month. The February jobs report illustrates that economic growth is
sluggish at best and could even be negative.
Despite the job losses, some evidence suggests that the
employment picture is not dire. The unemployment rate remains
surprisingly low at 4.8 percent. Wages increased by 3.7 percent
compared to the previous year, which is indicative of a solid job
market. Workers are not overly discouraged. Compared to last year,
only 21,000 more people are not working because they are
discouraged about their chances of finding a job. This is a tiny
fraction of the 4.7 million people who are unemployed but say they
would like a job.
Many of the current proposals for stimulating the economy would
make matters worse. The federal government should focus on policies
that could help restore the economy to full strength, such as
easing the burdens on businesses and entrepreneurs.
Employment declined by 63,000 jobs in February, with private
employment declining by 101,000 jobs and government employment
increasing by 38,000 jobs. Employment in December and January was
also revised downward. Private employment has now contracted for a
full quarter--the first two-month decline in five years.
Construction (-39,000) and manufacturing (-52,000) continue to
be hard-hit by the economic slowdown. Retail trade (-34,000)
declined in February as well. Real estate (-7,100) was hurt by the
downturn in the housing market, which then spread to the financial
sector (-4800). Health care (36,000) and leisure and hospitality
(21,000) posted some of the largest job gains.
All measures of the unemployment rate show that unemployment has
increased over the past 12 months. The official unemployment rate
in February 2007 was 4.5 percent, which is lower than this year's
rate of 4.8 percent. Similarly, the unemployment rate that includes
discouraged workers (those who, for economic reasons, are no longer
actively looking for a job) is 5.1 percent, up from 4.7 percent a
Almost 70 percent of unemployed workers have been unemployed for
less than 15 weeks. The number of workers who have been unemployed
for 27 weeks or more and are in danger of exhausting their
unemployment benefits has declined over the past quarter. Despite
the rising unemployment rate, the duration of unemployment has not
increased much over the past year. In February 2007, the average
length of unemployment was 16.6 weeks, and the median was 8.2
weeks. In February 2008, those numbers increased slightly to 16.8
weeks and 8.4 weeks, respectively.
What Congress Should Not Do
Congress should resist the urge to simply "do something" in
response to the latest indicators. Policymakers must ensure that
any response is constructive. Many of the policies that lobbyists
are now promoting as stimulus measures would actually harm the
economy. The following responses would worsen the economic
Increase Taxes. Every major school of economic thought,
from Neoclassical to Keynesian, holds that policymakers should not
raise taxes on a weakening economy. Tax increases simultaneously
take money out of taxpayers' pockets and decrease their incentive
to work and invest. Virtually no economists believe that this would
be the proper course.
Nonetheless, the recently unveiled House budget resolution
raises taxes by $70 billion to offset the cost of not following
through with a planned increase in the alternative minimum tax
(AMT) on middle-class taxpayers. The AMT was never intended to tax
the middle class and affects them only because Congress did not
index it for inflation. Congress has consistently passed annual
patches to ensure that the AMT does not affect the middle class.
Congress has not collected AMT taxes on the middle class and never
intended to do so. It does not need to counteract the benefits of
sparing taxpayers one tax hike by raising other taxes.
Extend Unemployment Insurance. Some analysts are urging
Congress to extend unemployment insurance eligibility to nine
months from the current six months. Advocates point to a 2004 study
concluding that this approach provides the most "bang for the buck"
because each $1 spent on additional UI benefits would increase GDP
by $1.73. The argument is that this will get money
into the hands of needy consumers who will spend it immediately,
thus stimulating the economy.
This argument is flawed. Households respond to additional
government benefits by changing their behavior. Only about 50 cents
of every dollar in UI benefits finances new consumption. The
other 50 cents finances household consumption that would have
occurred otherwise, either by spouses working longer hours or by
family members spending savings.
The UI system was designed to provide workers with insurance
against the risk of involuntary job loss, not to stimulate the
economy. Paying workers to stay unemployed for a longer period of
time does little to promote economic growth. Real-world studies
find little evidence that increasing UI benefits boosts the
Restrict Trade. Prominent policymakers are calling for
restrictions on international trade. Both Democratic presidential
candidates have called for abrogating NAFTA if Canada and Mexico do
not concede to new trade restrictions, and the prospects for
passage of the Columbian Free Trade Agreement appear dim.
Members of Congress must resist rising protectionist sentiment.
Virtually every economist on both the Left and the Right agrees
that free trade benefits the economy. The passage of the
Smoot-Hawley Act in 1930 virtually shut down international trade
and was one of the major factors that turned a recession into the
Great Depression. Americans will not become more prosperous by
shutting off trade and investment from the rest of the world.
Congress Should Lower Business
American businesses pay a 35 percent tax rate, which is much
higher than that paid by companies in most other developed
countries. This makes America less attractive to investors and puts
American businesses at a competitive disadvantage
Congress should lower the business tax rate to spur domestic
investment and job creation. The business tax reforms proposed by
House Ways and Means Committee Chairman Charles Rangel (D-NY) are a
good step in the right direction. The plan would lower the business
tax rate while removing special-interest tax credits and deductions
from the business tax code. Businesses and entrepreneurs, not
government, create jobs and drive the economy. Congress should ease
the burdens it places on them.
The economy is clearly weakening. Private-sector employment has
fallen for the past three months, driven by job losses in the
construction and manufacturing sectors. However, wages have grown
at a strong pace, and the unemployment rate is still historically
low. The economy is clearly sluggish, but America is hardly in an
In this environment, Congress must resist the rush to legislate
and should ensure that any response actually helps the economy.
Congress should not raise taxes, extend eligibility for
unemployment insurance benefits, or restrict international trade.
Instead, it should ease the burden it places on businesses and
Rea S. Hederman, Jr., is
Senior Policy Analyst and Assistant Director, and James Sherk is Bradley
Fellow in Labor Policy, in the Center for Data Analysis at The
These 4.7 million people are assumed to be
marginally attached to the labor force. They are not actively
looking for a job but state that they would like a job. They might
not be looking for a job because they are in school, are sick, or
have family commitments.
Jonathan Gruber, "The Consumption Smoothing
Benefits of Unemployment Insurance," American Economic
Review, Vol. 87 (March 1997), p. 195. Note that a 10 percent
increase in the replacement rate (representing a 10 percent
increase in individual income) reduces the fall in individual
consumption by 2.65 percent. Footnote 9 notes that the average
recipient gets 48 cents out of every additional dollar for which he
or she is eligible because not all workers eligible for benefits
receive them. Thus, when UI raises incomes by 4.8 percent,
consumption rises by 2.65 percent, so each dollar spent on UI
raises consumption by roughly 50 cents.
Cullen and J. Gruber, "Spousal Labor Supply as Insurance: Does
Unemployment Insurance Crowd Out the Added Worker Effect?"
Journal of Labor Economics, Vol. 18, No. 3 (2000), pp.
546-572; Eric M. Engen and Jonathan Gruber, "Unemployment Insurance
and Precautionary Saving," Journal of Monetary Economics,
Vol. 47 (June 2001), pp. 545-579.
Kyung Won Lee, James R. Schmidt, and George E.
Rejda, "Unemployment Insurance and State Economic Activity,"
International Economic Journal, Vol. 13, No. 3 (Autumn
1999), pp. 77-95; George M. Von Furstenberg, "Stabilization
Characteristics of Unemployment Insurance," Industrial and
Labor Relations Review, Cornell University, Vol. 29, No. 3
(April 1976), pp. 363-376.