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Monday, May 28, 2018

A Rescue Plan for a Jobs Crisis in the Heartland

The national unemployment rate hit 3.9 percent in April, the lowest level since 2000. Still, wage growth has been and remains underwhelming. More alarming, America faces a historic crisis of male joblessness in what we call the Eastern Heartland, a band of states that runs from Louisiana north through to Ohio and Michigan.

Some of these places, like Detroit and Cleveland, were once industrial powerhouses that have been hammered by automation and an exodus of industrial employment to places with lower labor costs. Other places, like Mississippi, spent much of middle 20th century escaping from excruciating poverty, only to experience increases in joblessness over the past 20 years.

Federal policy can't bring the Rust Belt back to its former glory, and we shouldn't try to artificially relocate economic activity to less productive places. But we must do more to fight the scourge of long-term joblessness, and we should focus our efforts in the places where joblessness is most severe.

To meet this challenge, many economists have argued for a universal basic income or more generous earned-income tax credit. We would support an E.I.T.C. expansion. But the most direct way to encourage work is with a new wage subsidy that benefits workers and encourages companies to replace joblessness with employment.

The subsidy program should be more generous in struggling areas, like the Eastern Heartland, although even a flat nominal wage subsidy would deliver more bang in depressed areas with lower prices. Targeted employment subsidies aren't going to reverse the tectonic trends of regional change, but they can potentially change the hard crash of regional collapse into a softer landing.

The longstanding tendency of incomes to rise more quickly in formerly poor areas has now slowed or reversed. Divergence is replacing convergence. Migration has fallen and poor people are much less likely to move to richer areas. Moreover, the migrants who leave depressed areas are much more skilled than those who stay, depriving the area of their most likely economic leaders.

In Flint, Mich., over 35 percent of prime-aged men — between 25 and 54 — are not employed. In Charleston, W.Va., the joblessness rate for this group is 25 percent. These places represent some of the more extreme examples of what may be America's largest and least understood social problem: the rise of prime-aged male joblessness, which has reached over 15 percent for most of the past decade from under 6 percent for all of the late 1960s.

The Eastern Heartland is the epicenter of much of America's economic distress. Between 1965 and 2016, real gross domestic product in the Eastern Heartland increased by only 2.07 percent a year. Its relative G.D.P. would have been more than 50 percent higher had it grown at the rate of America's Coastal states and more than double had it grown at the rate of the Western Heartland states. The Eastern Heartland has suffered disproportionately from the opioid epidemic, and overall prime-aged male mortality rates are over 30 percent higher than for the rest of the country.

A Rescue Plan for a Jobs Crisis in the Heartland

By Edward L. Glaeser, Lawrence H. Summers and Ben Austin

Mr. Glaeser and Mr. Summers are professors of economics at Harvard, where Mr. Austin is a Ph.D. candidate.



As technological trends reduce the demand for less skilled labor, we must both strengthen American skills and encourage the employment of all Americans. The simplest way to encourage employment across America is just to add a few dollars into workers' hourly wages, which would effectively increase the national minimum wage without discouraging employers from creating new jobs. The benefit could go entirely to workers, or be split between workers and employers to increase the incentives to generate new jobs.

Subsidizing employment makes sense, because the suffering associated with not working appears far more profound than the pain associated with being part of the working poor. Two percent of prime-aged men earning over $50,000 report that they are unsatisfied with their lives. The share reporting such unhappiness rises to 4 percent among men earning between $35,000 and 50,000, and 7 percent for men earning less than $35,000. But the share of jobless men reporting such unhappiness is 18 percent.

The fans of programs that accept, and even encourage, joblessness, like universal basic income, seem to forget that human satisfaction doesn't come primarily from material comfort, but from purpose, a feeling of accomplishment and the social support that often occurs in a work environment. An America in which 40 or 50 percent of adults live without working, relying on the generosity of a federal handout, is a nightmare.

The earned-income tax credit has been effectively promoting employment for over 40 years, but its design makes it poorly suited to fighting the ocean of male joblessness. Its benefits are skewed strongly toward single-earners in families with children. Three-quarters of long-term jobless prime-aged men do not live in households with children, limiting their maximum credit to $510 in 2017. Of the men who do live in households with children, over 80 percent live with a spouse, and two-thirds of those spouses are working. The earned-income tax credit is a good policy, but it has little impact on jobless men.

Textbook economic theory suggests that the subsidy can be paid either directly to the employer or to the worker, and it will have equivalent effects since wages will adjust. But in practice, paying directly to the employer may do more for employment when wages are downwardly rigid because of explicit or implicit minimum wages. An employer-based system may also be easier to administer.

The main downside of subsidizing employment is the cost, and that's why regional targeting makes sense. The wage subsidy can be lowered in labor markets with low joblessness, and it should be phased out entirely for the prosperous and the long-term employed. The subsidy should be highest for workers who have been jobless for a long period, and for veterans, or for those overcoming a labor market disadvantage.

America's joblessness is a social disaster, and to fight that disaster our resources should be targeted toward the areas that suffer most. In the mid-20th century, we could trust in the free flows of capital and labor to equalize regional suffering, but those flows have dried up in the 21st century. We cannot bring back the Rust Belt, but we must do more to make sure that its residents have jobs.

Edward L. Glaeser and Lawrence H. Summers are professors of economics at Harvard, where Ben Austin is a Ph.D. candidate.

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John Case
Harpers Ferry, WV

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