The most powerful forces at work here are globalization and technology. As globalization has created tens of thousands of new businesses around the world, competition everywhere has intensified. The spread of information and Internet technologies across much of the global economy has also given consumers and businesses access to countless new outlets and suppliers, further intensifying competition. The result is that businesses have lost a lot of what economists call their “pricing leverage.” That means that when a firm’s costs rise — as they have steadily for energy and health care over the past decade — businesses cannot pass on all of their additional costs in higher prices. That, in turn, means businesses have to cut other costs — and they have started with jobs and wages.
What policies can help under these new conditions? On Tuesday the president suggested public-private institutes to develop new manufacturing technologies, access to training in advanced technologies and more funds for infrastructure. But the best approach would be to directly reduce the cost for business to create more jobs. Congress could, for example, permanently cut the payroll tax rate for employers and make up the difference for the Social Security trust fund with a modest carbon or value-added tax.