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EMPLOYMENT AND THE GOVERNMENT TAX WEDGE
By Arthur B. Laffer Ph.D., Ford Scudder CFA and Wayne Winegarden Ph.D.
Recent employment reports are showing increasing job gains and decreasing new unemployment claims. Many marketparticipants believe that the job gains are the beginning of a virtuous cycle with strong economic growth and furtheremployment growth reinforcing each other to create a strong recovery. We do not fall into that camp. Instead, we continue tobelieve that, barring any major exogenous shocks, we will see real economic growth on the order of 2% to 3% for the nextfew years.And, when you really look at the employment numbers, it is hard to take comfort in anything you see. While it is true theunemployment rate has fallen, the decline is not based on a huge surge in employment (Figure 1), but is due in part to adecline in the size of the labor force or, alternatively stated, an increase in the number of discouraged workers.
Total Weekly Hours and Total Non-Farm Payrolls
(monthly, thousands, SA, through Feb-11)
Without growth in the quantity of labor supplied, the only way the economy can grow is via productivity growth. For instance,throughout 2009 as employment was still collapsing, productivity growth soared (Figure 2). Yet generating long-term
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Supply-Side Investment ResearchMarch 24, 2011
The past few months have produced positive employment reports, but these merely scratch the surface of a severelydepressed labor market.
A significant reduction of the government tax wedge could prevent the U.S. from experiencing an elongated highnatural rate of unemployment as in the euro-zone.
The Federal Reserve’s mandate as well as reelection considerations will drive monetary and fiscal policy, inevitablyresulting in inflationary pressure and a continued slow growth economy.
The failures of the current government will create the opportunity for pro-growth reforms in 2013.
Total Weekly Hours (LHS)Total Non-farm Payrolls (RHS)