Industrial/Labor Market Policy – Think Swedish

In Economic Planning, Economics, European Politics, Full Employment, History and Politics, Living Wage, Politics of Policy, Public Works, Social Democracy, Social Policy, Welfare State, WPA on July 25, 2009 at 1:45 pm

Introduction:

In my previous post on industrial policy, I talked about “how to re-think industrial policy for a new economic era in which the United States needs to not only achieve steady economic growth, but dramatically boost the rate of job growth.”  The dramatic urgency for emphasizing job growth in public policy is that, as Brad DeLong notes, our economic recoveries are increasingly becoming longer, and slower to reverse damage done to employment – the jobless recovery is becoming the norm, not the exception as you can see from his graph reproduced below:

As I have argued, this trend suggests a larger problem than just the immediate crisis, because jobless recoveries are in a sense, a self-fulfilling prophecy. Because we’re not producing enough jobs in recoveries, our labor market is remaining weak even in good times, which means that there’s virtually no pressure from below for wage increases. As a result, wages have been stagnant and declining, such that the median household income has declined by .6% between 1999 and 2007. This in turn makes consumer spending and confidence, one the main economic engines of the economy, incredibly reliant on credit, making the economy as a whole more vulnerable to sudden fluctuations in credit availability, which makes recessions more likely, and further job losses, and the cycle begins again.  Thus, I would argue, along the same lines as Timothy Bartik in Jobs for the Poor, that we need a permanent labor demand policy to restructure the American labor market.

A Model for Reform:

Nicolo Machiavelli famously wrote in Il Principe that “there is nothing more difficult to carry out nor more doubtful of success nor more dangerous to handle than to initiate a new order of things.” So it helps if you have a model to base your new order on, some guide-map that shows that it is in fact possible to make your new system work. And we are fortunate that in the example of Sweden, we have a very good model for reform.

Between 1932, when the Swedish Social Democratic Party was first swept into a parliamentary majority in its own right, and the early 1990s, Sweden had what may have been the best employment record in the history of the modern Western economy. After conquering the Great Depression faster than any other country, Swedish unemployment rates hovered between 1.5-3% until the early 1980s, when there was a brief spike that soon recovered. Moreover, this unusually strong unemployment record was paired by a distinctive system of labor market policies that helped to keep unemployment low.

(Note – all descriptions of the Swedish labor market system is based on Helen Ginsburg’s Full Employment and Public Policy in the U.S and Sweden, so what I am really describing is the Swedish system circa 1983. Things have changed since then.)

How to Reform:

  1. The first step is to establish a permanent Public Employment Program. As I have argued before, what you want is a scalable system of temporary public employment jobs that can be scaled up or down according to the health of the job market, that should at a minimum be used to soak up about 50% of unemployment. This would parallel Sweden’s beredsarparbete or work relief system, which historically tended to absorb about half of the unemployed at any given point. However, it was also part of a larger policy of labor demand management that would be equally important for the U.S to emulate, regardless of whether we do a jobs program (although I definitely think we should).
  2. Next, we should follow Sweden by establishing a National Labor Market Board. This board, working in conjunction with regional and local boards, would be responsible for monitoring labor market supply and demand, operating the U.S Employment Service to direct unemployed workers into either public employment or private employment,  drawing up a yearly “shelf” of projects for the Public Employment Program (that are authorized by the national government in order to hit their full-employment budget’s targets), and managing the Investment Reserve Fund and other policies. In Sweden, this institution was a tripartite affair, including both business and labor – it might be a little bit difficult to adopt such a model, given the lower degree of organization both of workers and employers in the U.S.
  3. Following on that, one would need to establish something similar to the Investment Reserve Fund. Although I have argued elsewhere that there are multiple models for funding “job insurance,” the Swedish system is actually quite interesting. Essentially, a tax on profits is levied on corporations, but waived if the corporation puts its money in a sequestered account in the central bank. This rate is then modulated counter-cyclically (increased during economic booms, and decreased in recessions) in order to smooth out the investment cycle. Furthermore, the unemployment rate kicks up, the government approves the expenditure of these tax free dollars in new investments, and combines IRF funds with general government funding for the Labor Market Fund’s public employment projects. In this sense, the IRF acts like a supplementary central bank, regulating the flow of investment as the central bank regulates the flow of credit.
  4. The final part of the system would be a series of Employment-Related Subsidies. While people are right to be somewhat wary of subsidies to businesses for creating jobs as they have had an uneven historical track record, the Swedish system is, I think, an example of how to do it right. There are three main subsidies, a Stockpiling Subsidy (which provides a subsidy for a 20% increase in inventory for corporations to cushion against the effects of a sudden decrease in consumer demand, while smoothing out the “dead cat bounce” in factory orders that normally happens in recessions; a Training Subsidy (which provides grants for employers to send their workers to school or training programs when demand is slack, rather than laying them off), and Recruitment Grants (which provide a subsidy for net new hirings, but requires the employer to list all of their openings with the Employment Service in return). Of the three, I think the training subsidy is probably the most politically advantageous – it’s hard to argue against the idea that it’s better to help workers become more productive than to fire them.

Now, in normal economic times, I still argue that these proposals are a good idea, because they would help move the “natural” rate of unemployment downwards by a couple of percentage points – similar to how they moved the “normal” range of unemployment to 1.5% in Sweden. However, in our current economic crisis, I would argue that labor demand management has moved from a luxury to a necessity. We need to act, not merely to cure the current near-10% unemployment rate, but also to push the “normal” range of unemployment to below 4% where it was in the late 1990s, the last time we saw broad wage growth throughout the economy.

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