Can supply-side policies reduce unemployment? Lessons from North America

Abstract

Gary Burtless considered lessons about maintaining a low rate of structural unemployment that can be learned from the North American experience. Cyclical unemployment rises and falls in inverse proportion to the level of aggregate demand in an economy, but cyclical kind of unemployment was not the focus of Burtless’s paper. Burtless examined the effects of “supply-side” policies, which he interpreted to include policies aimed at changing the skills of the workforce and the microeconomic incentives facing workers and employers in a labor market. He argued that the low rate of structural unemployment and high rate of adult employment in the United States in partly explained by several supply-side policies. Two micro-economic supply-side policies were greatly expanded after the mid-1980s. First, the US government established very generous earnings supplements, payable to low-income workers, to encourage low-wage workers to find and keep jobs. Second, American social assistance programs were reformed to limit the duration of income support payments and to link support benefits to workers’ active participation in job search, occupational training, and, as a last resort, community work experience jobs. A variety of experimental and nonexperimental studies suggests these measures help explain the increased employment rate of economically disadvantaged US workers during the 1990s. Over the past two decades the US also maintained strong incentives for employers to create job openings for the hard-to-employ. Payroll tax and regulatory burdens on employers remain low by OECD standards, and the relatively low US legal minimum wage was permitted to fall during the 1980s and 1990s. Burtless concludes that “The US experience suggest… that strong doses of supply-side medicine can boost the employment rates of the hard-to-employ.”