Weak job creation has become the new normal

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.

Gallery

Tom Toles on the economy: A collection of cartoons about the state of the economy.

This new labor-market terrain also provides a new impetus to better control employers’ fast-rising costs of health coverage. Congress could strengthen provisions of the Affordable Care Act designed to slow health-care inflation. Start by expanding prevention programs and accelerating the shift to uniform electronic medical records. Even more powerful steps would include new rules and incentives for all providers to base reimbursements on results rather than services provided, and to adopt “best practices” that deliver the same results at less cost.

Sadly, the day has passed when U.S. businesses responded to strong growth by generating jobs for everyone who wanted to work. Over the past decade and two expansions, our job creation rate has fallen sharply compared with previous decades. Policymakers in both parties have to face this new reality and, with the president, devise approaches to actively promote stronger employment.