Reducing Unemployment: A Case for Government Deregulation. – book reviews

Stephen A. Herzenberg

By Garry K. Ottosen and Douglas N. Thompson. Westport, CT, Praeger Publishers, 1996, 171 pp. $49.95.

Garry Ottosen and Douglas Thompson are, respectively, senior research analyst and founder of the Crossroads Research Institute in Salt Lake City, an organization seed-funded by Thompson, a retired economics professor at the University of Utah. Ninety percent of their book, Reducing Unemployment: A Case for Government Deregulation, contains conservative neoclassical orthodoxy on the reasons for unemployment and how the “non-accelerating inflation rate of unemployment” might be reduced. The other 10 percent of the book hints at a more complex and interesting interpretation of unemployment–as if someone involved began to get intellectually engaged in doing something more than an ideological tract but held back (or was held back).

Let’s start with the 90 percent. The text begins with a chapter on the “costs of unemployment” and a long quote that brings to life the personal side of unemployment through the experience of a displaced welder. The second chapter introduces the concept of the “non-accelerating inflation rate of unemployment.” The third critiques the March 1994 Organization for Economic Co-operation and Development Jobs Summit conception of increases in the “non-accelerating inflation rate of unemployment” as driven by a rising “mismatch” between the skills employers need and the skills employees have. The subsequent several chapters present a kind of conservative whodunit to explain why the “non-accelerating inflation rate of unemployment” has, in fact, increased since 1970. You can guess the policy prescriptions–reduce government regulation, reform the unemployment and welfare systems to eliminate work disincentives, reduce the legal protections independent unions enjoy to weaken labor’s distorting effects on wages, repeal the Davis-Bacon prevailing wage law in construction. A series of measures that, done in tandem, should spread the depression, humiliation, and alcoholism suffered by the welder to a wide swath of the labor market.

Some of the calculations in these chapters are heroic at best. In many cases, for example, estimates of the cost of environmental regulation, the inherent difficulties of the task are one reason why. But that still leaves room for conclusions little encumbered by empirical evidence. The literature review–there is little original here beyond back of the envelope calculations–is also uneven in its treatment of research that has a policy orientation different from the authors’: they responsibly review literature showing a positive union impact on productivity; they do not mention (perhaps because it is too new) research showing the negative economic effects of the repeal of State-level prevailing wage laws. Acknowledging these limitations, and despite the lack of mystery–we know the butler did it–these chapters are a useful reference source.

The twist in this book is the subplot that points toward quite a different analysis. Two examples: Tucked away in pages 85-90 is a discussion of employment policy in Sweden and its success, until fairly recently, at keeping both unemployment and inflation low. Though the authors don’t mention it, the system that they lionize was largely the brainchild of the Swedish trade union movement. The book accounts for the success of Swedish policies partly using arguments that mesh with orthodox emphasis on avoiding work disincentives: unemployment insurance benefits in Sweden last a maximum of 14 months (although workers may qualify for cash assistance beyond that time); Swedish unemployment insurance, while generous, is subject to requirements that workers meet job counselors and take reasonable job offers or risk temporarily (under some circumstances, permanently) losing benefits. The book does laud the Swedish system of job centers that register 70 percent of all vacancies nationally. Unlike the U.S. employment service, this seems to serve key job matching functions beyond the margins of the labor market. Sweden also has relocation support and subsidized education and training (not to mention universal benefits) that cushion unemployment and facilitate reemployment. To adapt this model to the United States, despite their general opposition to government regulation, the authors propose, “requiring that all firms paying unemployment insurance taxes also report bona fide job openings and employment needs” (page 88).

The second illustration of the subplot lies further below the surface. It comes in a chapter that assigns significant blame for a high “non-accelerating inflation rate of unemployment” to union power. Most of the chapter is true to form. The authors go through empirical contortions to demonstrate the nefarious influence of unions despite their now representing less than 11 percent of the private sector work force. They suggest that union coverage did not go down much in the 1970s, while the union wage premium went up a lot, so that the product of the two could have been responsible for a significant upward shift in the “non-accelerating inflation rate of unemployment.” Their enthusiasm for the point sometimes gets slightly ahead of their own evidence. They say that “during the 1970s, unionization declined by only a relatively modest three percentage points” (page 104), even though the table on the previous page shows a 3.7-point change from 1970 to 1979. They maintain that, “in 1969, the union wage premium was probably about 12 percent” (they want it to be low so that it goes up in the 1970s), while the table on page 101 has three estimates for 1969 which average 17 percent and another for 1970 at 19 percent. The final sleight of the hand comes on page 111 when calculations for the 1970s are carried forward to the 1990s with a single sentence: “the union sphere of influence is probably now more like 20-25 percent rather than the 35-40 percent of the 1970s” (page 111). Could be. Maybe they ran out of room on the back of the envelope.

Planted around these contortions are two land mines that explode the argument about unions and the “non-accelerating inflation rate of unemployment”–or at least its generalizability across time. One comes on page 124, where the authors review the original arguments for the National Labor Relations Act. These arguments include the view that the Great Depression resulted from a failure of purchasing power to rise with potential output and that unions would help solve this problem. The second comes on page 99 where the authors, sensibly enough, make their point that unions cannot be responsible for rising unemployment unless the share of the work force that they represent, or unions’ impact on wages, rises. Perversely, from the point of view of their argument, they illustrate the theoretical point using a hypothetical example that begins in 1935. The real numbers from 1935 forward show, of course, that union coverage went from around 10 percent in the early 1930s to roughly a third by the 1950s and 1960s, with an even greater increase in union influence on wages. Unemployment went from depression-era levels to as low as 2 to 3 percent. Did they mean to leave this clue to an argument that goes directly against their case that unions raise unemployment?

One explanation for the fall in unemployment with the rise of industrial unions is that the framers of the Wagner Act were right. Industrywide bargaining with real wage increases keyed to the national rate of productivity growth was a key ingredient in the post-World War II boom.

It is, of course, analytically possible that unions helped lower unemployment in the 1930s to 1960s, but then contributed to raising the “non-accelerating inflation rate of unemployment” in the 1970s (just as it is possible that they raise productivity in some circumstances and lower it in others). Customary contractual annual base wage increases and, as the authors emphasize, spreading cost-of-living adjustments, may have fueled inflation after the productivity turndown of the early 1970s. But such context-specific arguments threaten the idea that general, ahistorical conclusions are possible about the impact of unions–more generally of institutions and policies–on unemployment.

To this reader, the Swedish employment policy case and the reinterpretation above of the link between U.S. unions and unemployment does not make a “case for government deregulation.” It makes, instead, a case for new forms of “regulation” in the broad sense–more creative policies and new institutions (even, perhaps, an expansion of occupational unions in the service sector that could provide training, job matching, and employment security now that individual firms seem less able to give workers jobs for life)–to improve the achievable combinations of unemployment, inflation, wages, income distribution, and even productivity growth.

This, of course, is a message different from the one the authors intended.

COPYRIGHT 1996 U.S. Bureau of Labor Statistics

COPYRIGHT 2004 Gale Group

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