Speech

The Labor Market and Economic Growth SouthernIllinoisUniversityatEdwardsville ThirdAnnualRutmanLecture Edwardsville,Illinois April10,2003 Iam pleased to be here this evening to seemstobeinperpetualrecession.Muchof presenttheThirdAnnualRutmanLecture. WesternEuropealsoseemsstuckinaslowgrowth I have long been interested in why some mode.Why?Thereisnosimpleanswer,butI’ll countries enjoy more rapid economic reviewwithyoutonighttheimportanceofaflexi- growth than others, and I want to concentrate blelabormarket,whichweenjoyinspadesinthe on a part of the growth process that seems to UnitedStates.Inbrief,anefficientlabormarket me to be under-appreciated and perhaps even iscriticalbecausegettingtherightworkersinto neglected: the role of the labor market. therightjobs,andwrongworkersoutofwrong Istillremembertheemphasisinmyhigh jobs,iscentraltorealizingthefullproductive schoolsocialstudiesandhistoryclassesonnatural potentialofaneducatedpopulaceworkingwith resourcesasthesourceofgrowth.Myteachers moderncapital. tookitasself-evidentthattheUnitedStateswas Beforeproceeding,Iwanttoemphasizethat arichcountrybecauseofitsbountifulminerals, theviewsIexpressherearemineanddonot superbfarmland,andplentifulhydropower.Asia, necessarilyreflectofficialpositionsoftheFederal withitstremendouspopulationpressureanda ReserveSystem.Ithankmycolleaguesatthe scarcityofnaturalresources,seemedcondemned FederalReserveBankofSt.Louis—especially DavidWheelock—fortheirassistanceandcom- toMalthusianmisery.LatinAmericawasagreat ments,butIretainfullresponsibilityforerrors. growthopportunitybecauseofitsrelativelysmall populationandextensiveresources.Yet,today, wetalkoftheAsiantigersandlookwithout SOME BASIC CONCEPTS successforcomparablesuccessstoriesinLatin America. Somebasicconceptswillhelpustalkabout Japan’srapidadvancestartinginthe1950s theprocessofeconomicgrowth.Overtime, changedourunderstandingofeconomicgrowth. improvementinanation’sstandardofliving, Japanhadahighsavingrateandaccumulated whichisusuallymeasuredbythegrowthof capitalrapidly.So,ourthinkingaboutgrowth incomeperperson,dependsontherateatwhich begantofocusoncapitalformation—bothphysical thepercapitaoutputofgoodsandservicesrises. capitalaccumulationandhumancapital.Econ- Inturn,thegrowthofpercapitaoutputisdeter- omistscametorealizethatnaturalresourcesplay minedlargelybythegrowthoflaborproductiv- atbestaminorroleineconomicgrowth.More ity—thatis,thegrowthofoutputperunitoflabor recently,economistshavealsoemphasizedthe input,whichoftenismeasuredintermsofhours importanceofpoliticalstabilityandsecurityof worked.Theroleofeducationasanimportant personandproperty. sourceofproductivitygrowthiscertainlyunder- Aswelookaroundtoday,Japanhasfallenflat. stoodhereataneducationalinstitution.Atthe Itssavingrateisstillhighanditspeoplestillwell sametime,mostpeopleunderstandtheimpor- educated.Yet,itsgrowthrateisminimal.Japan tanceofcapitaltothegrowthoflaborproductiv- 1 ECONOMICGROWTH ity.Improvementsinthesophisticationofthe arenotdistortedbyuncertaintyaboutthegeneral machines,tools,andotherphysicalinputsused levelofprices.Legalenforcementofprivatecon- inproducinggoodsandservices,orsimplyan tractsisanotherexampleofhowgovernments increaseinthequantityofsuchcapitalinthe canhelppromoteeconomicgrowth. handsofskilledworkers,arekeycomponentsof productivitygrowth. Asimportantaseducationandcapitalare, LABOR MOBILITY theirpotentialcontributionswillnotbefully Manyeconomistshavearguedthatlabor realizedwithoutawell-functioninglabormarket. marketpoliciescanhaveasubstantialimpacton ThatisthetopicI’lladdressthisevening. economicgrowth.Awellfunctioninglabormarket iscrucialtoensuringthatpeopleareabletotake advantageoftheirindividualtalentsbyfinding LABOR PRODUCTIVITY AND employmentthatbestsuitsthem.Manypeople ECONOMIC GROWTH startingoutchangejobsseveraltimesbeforefind- InarecentannualreportoftheFederal ingagoodmatchofinterestsandskills.Similarly, ReserveBankofSt.Louis,weexaminedthedeter- whentechnologicalbreakthroughsorotherforces minantsofrisinglivingstandardsandwhatgov- createnewopportunities,orindeedcausespecific ernmentscandotofosterahighpaceofeconomic joblosses,awellfunctioninglabormarketwill growth.Thatreportshowedthatthehighpaceof ensurethatlaborisreallocatedtowhereitcanbe growthenjoyedbytheU.S.economyinthesecond employedmostproductively. halfofthe1990sreflectedrapidgrowthoflabor Fundamentaltoawellfunctioninglabor productivity.Afterhavingbeenlowforabouttwo marketislabormobility.Butweshouldbehonest decades,around1995,laborproductivitysud- aboutwhat“reallocationoflabor”means.Some denlybegantogrowatahighrate—aboutthe peoplejumpreadilyfromstagnantordeclining samepacethatithadgrownfromtheendof industriestoexpandingones,butmanymustbe WorldWarIIto1973,whenournationlastenjoyed pushedthroughbusinessfailuresandlayoffs.A aneraofhigheconomicgrowth. spellofunemploymentisoftenapartofthesuc- Whathascausedthereturntorapidgrowth cessfulreallocationoflabor.Paradoxically, inlaborproductivitysince1995?Economists though,publicpoliciesthattrytoohardtopro- attributetherisemainlytothemicrochip—specifi- tectworkersfromunemploymentmayinstead callytotheapplicationofnewinformationtech- increaseit. nologytotheproductionofgoodsandservices, Incomparisonwithothereconomically everythingfromcarstocataractsurgery.Thenew developedcountries,theUnitedStateshasan technologyenablesfirmstoproducemoreoutput, unusuallymobilelaborforce.Peoplemoverela- andoftenhigherqualityoutput,usingfewer tivelyfreelybetweenjobs,spellsofunemployment resources.Theapplicationofnewtechnology arerelativelyshortand,unliketheircounterparts madelabormoreproductive,whichledtorising inothercountries,Americanstendtogivelittle realincomesandhigherlivingstandards. pausetomovingacrossthecountryinsearchof Ourannualreportfocusedonthehistoryof betteropportunities.Thismobilityhasbeenan technologicalbreakthroughsandtheproductivity importantsourceofAmerica’slong-termeconomic boomsthatfollowedfromthem.Wearguedthat success. governmentscanhelpbyfosteringanenviron- LetmeillustratethemobilityofAmerica’s mentthatencouragesinventiveactivityandthe laborforcewithsomedata.Overthepasttwo efficientallocationofeconomicresources.Mone- decades,theUnitedStatestypicallyhashadone tarypolicy,forexample,canhelpinthiseffortby ofthelowerunemploymentratesamongthedevel- ensuringthatmarketsignalsofthepricesystem opedcountries.In2001,thelastyearforwhich 2 TheLaborMarketandEconomicGrowth comparabledataareavailable,theU.S.unemploy- elsewhere,Americansareunusuallyquicktopick mentrateaveraged4.8percent.Bycomparison, upandmovetotakeadvantageofthoseopportu- inbothJapanandtheUnitedKingdomtheunem- nities.Thismobilityhelpsensurethatresources ploymentrateaveraged5percent,whileinCanada flowtowheretheycanbeemployedmostproduc- andGermanytheunemploymentrateaveraged tively.Theseflowsalsohelpevenoutdifferences 7.2and7.8percent,respectively. inwageandunemploymentratesbetweenstates. TheUnitedStatesdidnothavethelowest Inothercountries,differencesinwageandunem- unemploymentrateamongdevelopedcountries ploymentratestendtopersistacrossregionsfar in2001,however.Austria,Denmark,andIreland longerthanintheUnitedStates. allhadlowerunemploymentratesthantheUnited States.ButwhatsettheUnitedStatesapartwas itslowaveragedurationofunemployment.Com- WHY IS THE U.S. LABOR FORCE paredwiththeircounterpartsinothercountries, MORE MOBILE? whenapersonbecomesunemployedintheUnited States,heorsheusuallyfindsnewemployment Whataccountsfortherelativelyshortaverage relativelyquickly.In2001,forexample,only0.3 durationofunemploymentintheUnitedStates? percentoftheU.S.laborforcewasunemployed Economistsdon’tagreeonallofthereasonswhy formorethanoneyear.Bycontrast,inJapan,1.3 spellsofunemploymentdifferinlengthbetween percentofthelaborforcewasunemployedfor countries,butamongthepatternsdetectedare morethanoneyear,andinGermany,some4per- thefollowing: centofthelaborforcewasunemployedformore • First,unemploymentratestendtobehigher, thanoneyear.2001wasnotanunusualyear—in andthedurationofunemploymentspells mostyearsthedurationofunemploymentinthe longer,incountriesthatoffergenerous UnitedStatesisamongtheshortestofanycountry. unemploymentbenefitsthatareallowedto Thisshortaveragedurationofunemploymentin runonindefinitely,combinedwithlittle theUnitedStatesisinpartaconsequenceofthe ornopressureontheunemployedtoobtain highmobilityoftheAmericanlaborforce. work. Peoplewhoarewillingtomovetowherethe jobsarehavelessfearofunemployment.Beinga • Second,unemploymentratesalsotendto nationofimmigrants,perhapsitisnotsurprising behigherincountriesthathavemore thatAmericansmovewithintheUnitedStatesto unionizedlaborforces,withlittlecoordi- amuchgreaterextentthandopeopleinother nationbetweeneitherunionsoremployers developedcountries.Manyofusrememberthe inwagebargaining.Unionizationneednot exodusfromtheso-called“rustbelt”tothe“sun inherentlyrestrictmobility,butinpractice belt”statesinthe1970s,andthentoSiliconValley itoftendoes. andothercentersofthecomputerindustryinthe • Third,unemploymentratestendtobe 1980sand1990s.Thiskindofmobilityismuch higherincountrieswithhightaxrates lessprevalentinothercountries.Whereasabout impingingonlabor,orwithacombination 3percentofAmericansmoveoutofstateina ofhighpayrolltaxesandhighminimum typicalyear,lessthanhalfthatnumberofBritons, wageratesforyoungpeople. Germans,andItaliansmakeacomparablemove. • Fourth,unemploymentratesarehigher CanadiansfallsomewherebetweentheEuropeans whereeducationalstandardsatthebottom andAmericansintermsofgeographicmobility. endofthelabormarketarepoor. Researchershavefoundthatlaborismuch moresensitivetoregionaldifferencesinwageand Letmeillustratehowlabormarketpolicies unemploymentratesintheUnitedStatesthanin canaffectunemploymentratesbydescribingthe othercountries.Whenbetteropportunitiesarise caseoftheNetherlands,wherepolicychanges 3 ECONOMICGROWTH appeartohavemarkedlyreducedtheaverage ownershipismorewidespreadintheUnited unemploymentrate.Beginningin1986,the Statesthaninmanyothercountries,theU.S.mar- Netherlandsinstitutedreformsthatshortened ketforlong-termmortgagesisrelativelyefficient thelengthoftimethatapersoncouldcollect andthetransactionscostsassociatedwithreal unemploymentbenefitsfrom30monthsto6 estatetransactionsarerelativelylow.Hence, months,aswellasreducedbenefitlevels.Later Americanstendnottobetieddownbytheown- reformsincreasedthelengthoftimethataperson ershipoftheirhomes. hadtobeemployedbeforebecomingeligibleto Housingmarketsarenotasdeepinmany receiveunemploymentbenefits,andmadeitmore othercountries.Further,theprevalenceofrent difficultforanunemployedpersontoturndown controls,publiclyallocatedrentalhousing,and joboffersandcontinuetocollectbenefits.Before otherfactorsinhibitmobility,evenforpeople thesereformswereputintoplace,theNetherlands whorent. consistentlyhadoneofthehighestunemployment ratesamongdevelopedcountries.Butsincethe reformswereinstituted,theNetherlandshashad SO WHAT? oneofthelowestunemploymentratesamong Whyalltheconcernaboutlabormobility? developedcountries.During2002,forexample, Thereasonissimple:Thehighmobilityofthe theunemploymentrateintheNetherlandsaver- Americanlaborforcehasbeenakeydeterminant aged2.7percent—thelowestamongalldeveloped ofournation’seconomicsuccess.Thismobility countries. impliesthatwhennewopportunitiesarecreated Thisevidencesuggeststhatgovernmentpoli- thatboostlaborproductivityinexistingindustries, ciestowardlabormarketscanbeanimportant orleadtothebirthofentirelynewindustries, determinantoflabormobilityand,consequently, peoplecananddomovefreelytosupplythe theaverageunemploymentrateanddurationof labornecessarytobuildthoseindustries.For unemploymentspells.Mostofuswouldagree example,intheearlypartofthe20thcentury, thatgovernmentshouldprovideasafetynetfor wesawamassexodusofpeoplefromfarmsto peoplewhobecomeunemployed.However,we cities,bothbecausemechanizationreducedthe mustkeepinmindthatthelevelandstructure demandforlaboronthefarmandbecauseaslew ofbenefitscanaffecttheincentivefortheunem- oftechnologicaladvancesgreatlyincreasedlabor ployedtoseekoutnewjobs,whilehighminimum productivityinAmericanmanufacturingand wageratesandhightaxratescanreducethe createdhundredsofthousandsofnew,high- demandforlabor. wagejobs.Theflowoflaborfromlow-tohigh- Anotheraspectoflabormobilityconcerns productivityusesspurredeconomicgrowthand theextenttowhichpeoplemoveacrossregions increasedournation’slivingstandard. inresponsetoemploymentopportunities.What IntheUnitedStates,wehavefewimpedi- factorsinfluencethegeographicmobilityoflabor? mentstotheflowoflaborandotherresources Surelyapartoftheexplanationiscultural.Imen- fromlow-tohigh-productivityendeavors.The tionedthattheUnitedStatesisanationofimmi- costsofhiring,andalsooffiring,laborarerela- grantsand,assuch,Americanshavealwaysbeen tivelylow.Somecountrieshaveimposedrigid accustomedtomovinginsearchofnewopportu- policiestodiscouragefirmsfromlayingoff nities.Inmanyothercountries,peopletradition- employees.Theseeffortstoenhancejobsecurity allyliveclosetowheretheygrowupandtheidea have,however,oftenservedtodiminishemploy- ofmovingasignificantdistanceawayfromhome mentsecuritybydiscouragingthehiringof isforeigntothem. workersinthefirstplace.Asaconsequenceof Economicfactorsalsomayplayaroleingeo- suchimpediments,aswellastherelativeimmo- graphicmobility.Forexample,althoughhome bilityoflaborinmanycountries,manypeople 4 TheLaborMarketandEconomicGrowth whodesireworkareunabletofindit.Itmakes increasetheproductivityofresourcesinexisting nosensetoartificiallylimitopportunitiestofind industriesaswellasleadtothecreationofentirely productiveemploymentanymorethanitdoesto newindustries.Indoingso,thereareinevitably devotescarceresourcestotheproductionofgoods winnersandlosers,butgenerallythewinners andservicesthatnolongerareindemand,orthat exceedthelosersand,intheaggregate,economic canbehadlessexpensivelyfromothersources. activityexpandsandlivingstandardsrise. Thelimitsimposedbycertainlabormarket Considerthedevelopmentoftheelectric policiesareoftenentirelyunintentional.Irecall motor.Technologicaladvancesinthesecond mytravelsaroundtheEighthFederalReserve halfofthe19thcenturymadetheapplicationof Districtinthelate1990s,whenthelabormarket electricpowerfeasibleinmanyindustries. wassostrong.Oneemployerafteranother Entirelynewindustriesdevotedtothegeneration describedhowdifficultitwastofindworkers anddistributionofelectricpower,andtothe andhowfirmsweredealingwiththelaborshort- buildingofelectricmotorsandmachines,were age.Companiestookchancesonhiringworkers born.Atthesametime,theapplicationofelectric theywouldnotevenhavelookedatafewyears powerboostedlaborproductivityincountless before.Thesewereworkerswhohadbeenonwel- existingoccupations,fromautomanufacturing fare,orrecentimmigrantswithlittlecommand toofficework.Thereweresomelosers,ofcourse, ofEnglish.Agivenemployermightfindthatonly includingthosewhobuiltsteamenginesorgas half,orfewer,ofthenewhireswouldworkout, lamps.Butthejobscreatedbytheadvancesfar buttheinvestmentwasworththeeffort.Would outnumberedthosedestroyed.Andevenmany firmshavetakenthesechancesifthelawrequired ofthelosersfoundthecoststemporary,asthey elaborateproceduresforfiringworkersandpay- wereabletofindnewemploymentingrowing industriesafteraspellofunemployment. mentofexpensiveseverancebenefits?Theanswer Moveforwardtothelastdecadesofthe20th isobvious.Manyofthemarginalworkersofa century.Thistimethemicroprocessorwasthe fewyearsagoareemployedtoday,andarenot hotnewtechnology.Itledtothecreationofthe marginalanymore. desktopcomputerandassociatedsoftware. Thousandsofjobswerecreatedbyfirms,suchas Microsoft,Apple,andDellComputer,thatdidnot A DYNAMIC ECONOMY evenexistin1970.Atthesametime,theapplica- Asuccessful,high-growtheconomymustbe tionofthenewtechnologyinestablishedindus- adynamiceconomy.BythatImeanthatthrough triesgreatlyenhancedproductivityandledto theinterplayofmarketforces,resourcesaremoved risingwagesandincreaseddemandforlabor. efficientlytotheirmostproductiveuses.When Somefirmsandjobsdidnotsurvivethecomputer newtechnologiesorotherforcescreateprofitable revolution.Butmanyofthosewholostjobsin opportunities,themarketsystemwillallocate oldindustrieswerequicklyre-employed,thanks productiveresourcestoexploitthoseopportuni- tothecreationofnewjobsinbothnewandexist- ties.Ahighlymobilelaborforcegivesacountry ingindustries.Onbalance,thetechnological acompetitiveedgeinexploitingnewtechnologies progressboostedeconomicgrowth,increased andothermarketopportunities. employment,andraisedourstandardofliving. U.S.historyisrepletewithexamplesof“cre- Iamachampionoffreemarkets,butthat ativedestruction”—atermcoinedbytheecono- doesnotmeanthatIseenoroleforgovernment mistJosephSchumpetertodescribetheprocess inthelabormarket.Governmentcanandshould bywhichnewindustriesdisplaceexistingindus- provideasafetynetforthoseaffectedbythewinds triesandhowthisphenomenonisfundamental ofchange.Governmentplaysanindispensable toeconomicgrowth.Schumpeterexplainedthat roleinhelpingeducateourworkforce.Ialso technologicaladvancesandotherforcescanboth stronglysupportpoliciesthatfosteraneconomic 5 ECONOMICGROWTH environmentthatencouragesinventionandthe applicationofnewtechnologies. TheUnitedStatesalsoenjoyshighratesof newbusinesscreation,whichcomplementbeau- tifullytheflexiblelabormarket.Thenationhas longhadaclimatethatisfavorabletostartinga business,totryingoutnewtechnologies,andto creationofjobsinnewindustries.Atthesame time,weallowfirms,bothnewonesandoldones, tofail.Althoughwearedistressedwhenwelearn offailuresandtheirassociatedjoblosses,weare heartenedbythecreationofjobsinnewor expandingindustries.Creativedestruction,the processdescribedbySchumpeter,istheengine ofeconomicgrowthandrisinglivingstandards. Labormobilityensuresanefficientandrapid reallocationofresourcessothatthepainofcre- ativedestructionisminimizedwhiletheoppor- tunitiesitcreatesbringaboutarisingstandardof living. Althoughjobcreationinthecurrenteconomic recoveryhasbeennil,Iamoptimisticaboutthe prospectsforfuturegrowthoftheU.S.economy. TheinstitutionsandpracticesintheU.S.labor markethavenotbeenweakenedbytherecession of2001andtheslowrecovery.Allthefundamen- talsthatdroveeconomicgrowthinthepastare inplacetoday.Intime,thesefundamentalswill overwhelmthepresentuncertaintiesthatare holdingtheeconomyback.Growthisinthis economy’sbonesandwillnotbedenied. 6

William Poole (2003, April 9). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_20030410_poole

@misc{wtfs_speech_20030410_poole,
  author = {William Poole},
  title = {Speech},
  year = {2003},
  month = {Apr},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_20030410_poole},
  note = {Retrieved via When the Fed Speaks corpus}
}