How to Reduce Unemployment to 4%

By Diana Furchtgott-Roth

WASHINGTON--In January 2001, at the start of this decade, America's economy created 268,000 jobs, and the national unemployment rate stood at 4.2%. Five years later, after a so-called "jobless recovery," the unemployment rate was 4.7%, with 193,000 new jobs created in January 2006. Now the rate is 9.8%, with a scant 39,000 jobs created last month.

As we enter a new decade, it's worth asking whether we'll see 4% unemployment again-and what it will take for us to get there.

President Obama's economists don't see 4% in their crystal ball. The latest projections, issued by the White House last summer, show unemployment averaging 9% in 2011, declining to 5.2% in 2017. A new outlook will be issued in February.

So, in the spirit of wishing the new 112th Congress and my fellow Americans a happy new year, I'd like to offer five ideas to create jobs and lower unemployment.

Repeal Employer Health Insurance Penalties. Beginning in 2014, employers with 51 or more workers who don't offer the right kind of health insurance will pay the Treasury a penalty of $2,000 a year for each uninsured employee. Just expanding from 50 to 52 workers would cost an employer $44,000 a year (the first 30 employees are exempt from penalties), enough to hire one skilled or two entry-level workers.

Employers are preparing already by substituting customer-operated scanners for cashiers, bringing in chopped lettuce to fast food outlets rather than hiring young people to chop it, and hiring temporary rather than permanent workers. Many employers with fewer than 51 workers do not plan to hire more, and those with 55 or 60 are thinking about how to get to the magic number of 50. Congress should change this major disincentive to firms' expansion.

Reduce Taxes on Repatriated Foreign Corporate Earnings. American companies hold offshore $1 trillion of earnings from foreign operations. They're discouraged from repatriating these assets by the 35% U.S. corporate tax, the highest among industrialized nations. If U.S. corporations invest these earnings in other industrial countries, they would pay taxes of 2% or less to these governments.

No one knows what the repatriation rate would be with a lower U.S. tax-but it would be higher than it is now, adding to investment and employment.

Cisco CEO John Chambers and Oracle president Safra Catz, writing in the Wall Street Journal on October 20, suggested reducing the tax on repatriated earnings to 5%. If even half of the $1 trillion held abroad were to come back to the United States, this would create $500 billion in stimulus, and Uncle Sam would get $25 billion in tax revenues.

Expand Free Trade. Trade creates jobs by expanding employment at U.S. exporters and even when it encourages foreign companies to invest in the United States. Andrew Bernard, a professor at Dartmouth College, together with economists Bradford Jensen of Georgetown University, Stephen Redding of the London School of Economics, and Peter Schott of Yale University, write that "an abundance of evidence indicates that firms entering export markets grow substantially faster in employment and output than non-exporters."

Trade also benefits millions of families who cut their shopping bills by buying low-cost imports. To take just one example, the amount that Americans spend on clothing has declined by over 20% in real terms over the past 20 years, leaving more money available for other goods.

The Senate could help create jobs at no cost by simply ratifying pending free trade agreements with South Korea, Panama, and Colombia and by expanding global free trade agreements.

Leave Carbon to Congress. The 111th Congress failed to pass the "cap and trade" bill, which would have granted authority to the Environmental Protection Agency, in consultation with other Cabinet agencies, to issue regulations within a year governing the allocation of allowances to emit greenhouse gases. But this has not deterred EPA from plans to issue such regulations anyway, beginning in January.

At no cost, EPA could create jobs by shelving its plans to regulate carbon until Congress acts. In May the nonpartisan Congressional Budget Office reported that job losses from limits on emissions would exceed gains elsewhere from employing workers in "green jobs," raising the overall unemployment rate.

The EPA regulations would penalize American firms by imposing higher energy costs, encouraging them to move abroad. America's carbon-intensive sources of energy, coal and oil, disfavored by the regulations, are produced domestically and employ American workers.

Exempt Teens from the Minimum Wage. The rise in the U.S. minimum wage, in three steps from $5.15 an hour in 2007 to $7.25 an hour in 2009, has contributed to an increase in the teen unemployment rate of 10 percentage points, from 16% to 26%.

Under federal law, employers are allowed to pay teens $4.25 an hour for 90 consecutive calendar days, or until their 20th birthday, at which point the wage must rise to $7.25.

But this exception is complex. Employers must show that teen workers don't displace others. Moreover, if a state's minimum-wage law doesn't specifically include a teen exception, there is no federal exemption. Minimum wage laws in California and New York don't mention teens. These states' 2009 teen unemployment rates, at 33% and 27% respectively, were higher than the U.S. average, then 24%.

At no budgetary cost, Congress could expand this minimum wage exception for teens and give states incentives to incorporate it into their minimum wage laws. This would not prevent employers from paying teens more as their skills rose, but it would give unskilled teens a first step on the career ladder.

As we enter a new decade, with a new Congress, we shouldn't regard our 9.8% unemployment rate as the new normal. Rather, we should encourage Congress to draft new laws to fix the problem and return our unemployment rate back where it belongs-to the 4% or 5% range.


Diana Furchtgott-Roth is a contributing editor of RealClearMarkets, an adjunct fellow at the Manhattan Institute, and a columnist for the Examiner.

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