Preface

This paper was prepared to provide background for the deliberations of the Senate Budget Committee prior to their markup of the First Concurrent Resolution on the Budget for Fiscal Year 1977.

The report was prepared by Arnold Packer, Anthony Carnevale, Charles McQuillen, and Martin Asher of the Senate Budget Committee staff and by David Mundel and Alan Fein of the Congressional Budget Office.

EMPLOYMENT

I. The Problem and Alternative Solutions

A. THE PROBLEM

1976 AND 1977

More Americans either lost or failed to find opportunities to earn livings commensurate with their ability in 1975 than in any other year since the depression of the 1930's.

In the first quarter of the bicentennial year 7.6 percent of the formally defined labor force was unemployed, about 7.2 million individuals. Another 0.9 million people has dropped out of the formal labor force because they failed to find work and gave up the search. Although there has been substantial improvement since the 8.9 percent unemployment recorded last spring, the unemployment at the end of this year will still exceed that recorded in the depth of previous post-war recessions.

The unemployment rate for this year will be determined by the fiscal and monetary policy set for fiscal 1976 and the Transition Quarter. Most forecasters believe that these policies will bring unemployment down by one-half percentage point more (to 7.0 percent) during the course of this year. Most forecasters also predict that the unemployment rate will decline moderately again during fiscal 1977 if Federal expenditures and revenues are maintained at the current policy level.

THE LONGER-TERM FUTURE

1

Under any credible set of economic assumptions, unemployment will be at unusually high levels for at least several years beyond 1977. The Congressional Budget Office (CBO) has developed two economic paths upon which to base a 5-year budget projection. The "slowgrowth" path is more optimistic than some private forecasts and provides for sustained growth rates that equal the best of the postwar years. The "fast-growth" path probably comes close to the best that could be achieved under the most favorable conditions. The number unemployed under these two outcomes are shown below:

Table 10.-UNEMPLOYMENT AND EMPLOYMENT UNDER TWO ECONOMIC GROWTH PATHS

1 See Five-Year Projections Fiscal Years 1977-81, Congressional Budget Office,

January 26, 1976.

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B. GOALS

The ideal solution to the unemployment problem is to create an economic climate in which all Americans of working age can realize their full potential without creating inflationary labor shortages. Given the present state of the economy, this ideal solution cannot be fully achieved. A more realistic set of goals would be to—

(1) provide most individuals with an opportunity to use their skills in a manner that would provide adequate incomes and reasonable job satisfaction without creating inflationary labor shortages;

(2) establish education and training programs that could develop and maintain the skills required in the labor markets; (3) enforce anti-discrimination laws and improve information and placement services so that there is a better match between available opportunities and available human resources; and (4) provide, without reducing the incentive to seek employment, adequate income maintenance so that those who cannot find appropriate employment still can maintain an adequate standard of living.

It is difficult to translate these broad goals into specific numerical unemployment rate targets. Most observers believe that an unemployment rate of 4.0 to 5.5 percent would satisfy the first goal, given the current labor market structure. However, even the high 5.5 percent unemployment rate probably cannot be achieved before 1978 and may not be achieved by 1981 if the slow growth path is chosen. Therefore, a fifth goal must be added for the next few years, to be achieved by— (5) structuring Federal budgets in a way that will provide the appropriate response to the abnormally high unemployment that appears inevitable while enhancing the possibility of meeting the first four goals as the economy is restored to full employment.

C. BASIC APPROACHES AND DECISIONS

A diversity of approaches to alleviate unemployment undoubtedly will be used during the next 5 years. The basic policy question is not which approach to use but rather what mix provides the best overall strategy.

(1) MACROECONOMIC

The most important approach, and the one without which no approach can succeed in the long run, is to set general fiscal and monetary policies that will increase economic demand in the private sector. The Budget Committee must recommend overall spending and revenue targets to the full Senate on April 15. The Committee should also indicate its economic goals and expectations to the Federal Reserve Board.

(2) ENHANCED EMPLOYABILITY

Training, education, placement services, day care programs, and other programs to improve the match between skills and opportunities will be important elements of the solution. Other experimental approaches such as wage subsidies might be considered. The Committee must indicate its view on the President's proposed accelerated depreciation on investment in high unemployment areas.

(3) INCOME MAINTENANCE

and

Unemployment compensation, food stamps, welfare assistance, other similar programs can help maintain adequate standards of living on a temporary basis for the unemployed. The Committee must decide whether to recommend extension of the Federal Supplemental Benefits (FSB) and Special Unemployment Assistance (SUA).

(4) DIRECT EMPLOYMENT

Anticyclical revenue sharing, federally financed public works projects, and/or other public employment programs can directly increase the number of available jobs in the United States. The Committee must decide whether to include funds for these programs in the First Concurrent Resolution (FCR).

Not only are all four of these approaches probably necessary, they must be integrated as part of a total national effort. Funds spent for public works, training, or income maintenance not only provide direct assistance to individuals, they provide additional fiscal stimulus for the economy as a whole unless their effect is offset by tax increases or reductions in spending for other purposes. The Committee must also bear in mind the inflationary risk of an overly stimulative budget and the potential that inflation may have for thwarting the economic recovery.

II. Growth: How Fast?

THE MAJOR CHOICE

The most important decision Congress must make about unemployment is whether to adopt fiscal and monetary policies that will produce fast growth of the economy over the next 5 years.

Restoring a healthy economy clearly is the most desirable way to solve the unemployment problem. The most durable and socially acceptable employment is generated either in response to consumer demand for goods and services or to citizen demand for public services which the citizens are willing to support with tax dollars. These positions, derived from economic demand, offer the best chance for entry into career ladders leading to permanent jobs at adequate pay. The two economic growth paths charted by the CBO would produce very different employment outcomes as shown in Table 1.

The CBO slow growth path would leave 1.6 million more unemployed in 1978 or 6.3 million more person-years of unemployment over the 1976-80 period than would the fast growth path. Counting discouraged workers makes the difference even more dramatic. The difference in the number employed would be 2.1 million in 1978 or 9.2 million person-years of employment over the 5-year period. Moreover, even this understates the difference in employment experience. Fast growth undoubtedly would produce higher productivity and larger real wage gains. Promotion, advancement, and other signs of career advancement would be more prevalent with fast growth as would profits and business investments.

The major danger of faster growth is that it could be more inflationary. Many (but not all) econometric studies indicate that inflation depends on how low unemployment gets, not how fast it gets there.