When unemployment rates are rising, the blame is often put on the government, and it is said that "if the government were more competent, we'd be employed". I'm trying to understand this statement, and impart of that, I ask this question: Exactly how can government boost up employment numbers in a capitalistic society?
There are many methods, just as there are many reasons companies will increase or decrease their staff. They range from direct spending, to subsidies to businesses, to providing a better environment for businesses to operate.
The government can employ people directly. In most countries the government is a major employer in areas like schools, the armed forces, police, social services, and possibly state-owned industries. Also often healthcare and further/higher education are state-owned or state controlled (although those are more likely to be done via private companies or other entities).
A traditional method going back to the Depression in the 1930s is to offer funding for infrastructure projects. Roosevelt's New Deal included schemes such as the Hoover Dam and many projects around roads, bridges, and tunnels, which employed a large number of people.
Countries can also vary tax rates and other things to make it easier or cheaper to employ people. Lowering payroll taxes, for instance, will make it cheaper to take on staff by reducing outgoings. In the slump after the 2008 crash, the OECD recommended this kind of reform. This can be extended to programs that cover some part of workers salaries, as with the furlough scheme in the UK to prevent COVID-related unemployment which provided a large part of workers' salaries; or smaller-scale schemes with tax breaks (effectively money off the tax bill) for employing the long-term unemployed.
There are a wide range of things that can encourage businesses to expand. This might include money/tax breaks for research and development, but could also include non-financial things such as reducing/eliminating tariffs and making international trade easier. Stabilising the economy makes it easier to plan and invest. Lowering interest rates (under the control of central banks) makes it easier to borrow to invest and hence to expand and take on jobs.
One way is by providing loans. A government may provide loans to unemployed people. Sometimes these loans are subsidised. Say the bank provides loan at 10%, the government provides the loan at 8 or 7 to motivated individuals by analysing their project blueprints. You may call them start ups or entrepreneurs or self help groups. These people start something to sustain their livelihood and also employ some people if necessary. Had the government needed to provide jobs in the public sector itself to all those people the cost would have been more. Besides, money creates money.
Then there is contractual employment. Instead of providing jobs which is permanent in nature to x number of people in the public sector at 2y Money/month the government may employ 2x number of people in the public sector at y Money/month in public sector in a job which is temporary in nature. Say 12 months. The appointment letter often includes a clause which reads "the undersigned may terminate/extend the contract whenever it deems necessary". Luckily/unluckily these people work forever at very low income.
Indeed, before the Great Depression, economic thought generally did not consider government intervention in the economy. Since the Great Depression however, Keynesian economic thought has been dominant. In short, Keynesianism views the fundamental cause of a recession as a sudden deficit in demand. This deficit means that businesses can no longer sustain their employees, since they are facing reduced sales. In turn, those fired employees don’t buy as much without a paycheck and demand continues to drop, causing more workers to be let go, and this cycle causes the recession to worsen. This is summed up in the maxim that one person’s spending is another person’s income.
Keynesianism therefore believes that government policy can make up this demand deficit. The thinking goes, government programs can stop businesses from letting go of more employees and prevent newly unemployed people from cutting spending. Now, the vicious cycle of the last paragraph is disrupted, since government money has made up for the demand lost as people cut back on spending.
Practically, Keynesian policies are either fiscal or monetary. Fiscal policy consists of unemployment benefits, cutting taxes (so people have more income), infrastructure projects, bailouts, or stimulus checks, among others. Monetary policies involve bond purchases and sales by the Federal Reserve; skipping over the complexity, these transactions (open market operations) affect the prevailing interest rate. When interest rates are lower, businesses invest more (because it is cheaper to borrow money to make investments in their business), purchasing capital equipment and stimulating demand.
So in the face of a recession, the government has tools to confront it and ameliorate it. Of course, the real-world implementation of Keynesian theory is much more complex and messy and government intervention is not always successful. The main point is, the government can strongly influence the state of the economy and the unemployment rate.
Is this capitalism? Yes, emphatically yes. Keynesian thought is slightly left of neoliberalism but at the furthest left could only be associated with social democratic thought. Social democracy, fundamentally, is a form of capitalism. Socialism is defined by taking control of capital, or private property, from the personal ownership of the capitalist class and vesting ownership in either the state or the workers (private property is economically productive equipment like machines, in contrast to personal property like your toothbrush). So social democracy is capitalism, since it does not completely replace private property ownership.
One simple way is simply to reduce the number of hours people work each week. Keynes supposed that in late capitalistic society people will be working for around fifteen hours a week, or a two day working week.
In Iceland, between 2014-19, a 4 day working week was trialed across a number of different companies and government departments with a majority reporting productivity remaining at the same levels or increasing. The trials eventially included 2,500 employees or 1% of Icelands total workforce.
This has led to Icelands unions negotiating a right to a 4 day working week for everyone. Other benefits included less burn-out, increased mental and physical health, more time for family and friends and hence increased social cohesion.
Marx said that Capitalism entails alienation. All the evidence points towards Marx's conclusion except of course, we simply do not use this term in capitalistic society, instead we talk about a pandemic of loneliness.
In 2018, a report by the Kaiser Family Foundation reported that 60 million americans said that they often or always felt lonely or socially isolated. This is before the pandemic and is an outcome of what Marx called alienation. Not only are we alienated from our work but from our fellow human beings, because most of our waking hours are spent at work or recovering from work.
Keynes recommendation of a two day working week would not only reduce alienation but also increase employment. Of course, capital is not going to easily countenance such a radical reduction in working hours but it is long overdue and if we can put a man on the moon or put build a laptop with a million times the complexity of the computers in the Apollo mission, we can certainly go over to such a radical overhaul of the working week.
For this to work, this would have to be legislated for. Because if we wait for business to do this, we'll be waiting till hell freezes over. And legislation means that the government has to intervene.
So, you're going to run into some definitional issues here... Along with the fact that the fields of economics and politics have separate viewpoints on questions like this.
To start with, from an economics point of view, the more the government is fiddling around trying to force particular outcomes the less you can call the economy "capitalist". In many ways, if you're asking the question you've already discarded one of the premises.
The second issue is that "improve" is kind of nebulous with regard to employment... Do you just mean that everyone has a "job"? That everyone is "busy"? That there are no "idle resources" that need to be "stimulated" back into production?
The government's fairly good at doing those surface-level things. You can certainly take taxed or printed money and go find something to have the unemployed do. Or make cheap loans available. Or a few dozen other things, the other answers here cover them all pretty well.
But if you mean "improve" as in "make sure everyone's doing the most productive thing they could be doing"... It's just not feasible for the government to figure that out. The sheer volume of data required to sort it out for everyone on a national scale exceeds even our modern communications technology.
And so that's why you get "make work" projects that consume valuable resources from the economy to produce less valuable products. This reduces the overall standard of living in order to achieve the illusion that everyone is busy, happy, and productive. But that illusion is what gets politicians re-elected, so they have no incentive not to take that route at every opportunity. It's quick, it's easy, and it buys the loyalty of their constituents without having to spend a single penny of their own money.
From an economics point of view, it drives up the price of labor and competes for resources with other potentially profitable ventures, thereby decreasing the energy the economy puts into long-term sustainable growth.
So that's the question you have to answer: What is your ultimate goal.
If it's long-term stability and prosperity, then the best thing to do is to create a stable, reliable environment where people can accurately estimate the potential costs and benefits of their plans. Respect for private property, enforcement of contracts, predictable long-term tax rates, that kind of thing.
If it's just to get re-elected, then crank up the printing presses and just go hire all the unemployed people to do... something... anything... Precisely what doesn't really matter, but make it at least sound like it's something helpful. Most people won't actually bother to check if all the bridges you're building actually lead anyplace or not.
Really this question has more to do with economics than with politics. Politics would cover how you convince people to go along with whatever economic strategy you pick, but picking one that "works" is purely economics.
To that end I would recommend "Economics in One Lesson", by Henry Hazlitt and/or "That Which is Seen and That Which is Not Seen", by Fredric Bastiat. They both break down the economic consequences of some of the most common "improvement" strategies. Then it's just a matter of picking the ones that give the results you're looking for.
In a pure capitalist society there is no minimum wage, and absolutely no safety net.
So the theory is that the unemployment rate will naturally be reduced, through the following mechanism: If you are unemployed, since there is no safety net, at some point you run out of reserves, and you need to get food and other essentials to continue to live. There is no (legal) mechanism to obtain these, other than to work. Since there is no minimum wage, you should be able to find someone to employ you, even if the payment is as low as one slice of bread per day. In theory, if the price of labour approaches zero, there must be someone willing to employ you. And even if you don't find someone to give you that slice of bread, you won't be alive for much longer, so you won't count as unemployed any more.
Thus unemployment is reduced.
On the contrary, in a society with safety nets and minimum wages (which wouldn't be a pure capitalist society), some workers may be priced out of the market, if their skills are worth less than the minimum wage. Also the safety net means that their life will not end if they don't get a job, thus the unemployment statistic will remain positive.
In the United States, the Federal Reserve has two mandates:
- Maximizing Employment
- Stabilizing Prices
Two of the big levers they have for controlling unemployment are
- Interest Rates
- Money Supply
Generally, the Fed will try to lower unemployment by heating up the economy. They heat up the economy by lowering interest rates and increasing money supply. And the converse if they want to put on the brakes.
Exactly how can government boost up employment numbers in a capitalistic society?
Role of government in a capitalist society
In a capitalist society government has no business boosting employment numbers or otherwise interfering in the economy. Its functions are limited to the basic tasks, such as maintaining the army, assuring the rule of law, assuring basic security (e.g., by maintaining the fire stations), etc. It is not the role of a capitalist government to decide what is good and/or do good. See, e.g., Capitalism and Freedom by Friedman (Marxist refer to this system as wild capitalism):
The role of government just considered is to do something that the market cannot do for itself, namely, to determine, arbitrate, and enforce the rules of the game.
However, as has been pointed in some other answers, since the Great Depression no western government is truly capitalist. Politically the essence of the Keynsian reforms (successfully implemented at the time everywhere in the west, from England and US to Nazi Germany and Fascist Italy), was that the government should assume an active role in managing economy and assuring the economic well-being of the population. Thus, no modern capitalist is truly capitalist - rather they differ by different degree of government interference in economic affairs.
The intervention of government in economic processes is an important part of the Keynesian arsenal for battling unemployment, underemployment, and low economic demand. The emphasis on direct government intervention in the economy often places Keynesian theorists at odds with those who argue for limited government involvement in the markets.
Remark: A good example of this misuse of term capitalism is the expression crony capitalism, which means influencing the government or abusing the government power for financial gain. Obviously, this requires a government that is allowed to interfere in economic affairs, which is not the case in a capitalist society.
First, I'll reframe the question somewhat to ...boost up employment numbers in the long term .... Otherwise a Keynesian stimulus might very well work in the short term.
Second, a capitalist society within a democracy reflects the choices made by the electorate.
In a pure dog-eat-dog libertarian system you might see no welfare, no minimum wage, no regulations, no job security, almost no government spending etc...
In an extremely regulated system, you might - while the means of production nominally remain in private hands - see the opposite: very high minimum wages, heavy regulations, cradle-to-grave employment, as much government spending as tax collection allows.
In practice, democracies will typically navigate, not always very gracefully, between the two.
The reason I am laying this out is to make clear that the libertarian ideal isn't necessarily an ideal state, either economically or from a societal viewpoint. What is "ideal" for taxpayers or bosses may not be acceptable for voters or workers. These are some possible things to look at, but a theoretically "perfect" system will not be that great if it gets rejected by voters
Third, employment and unemployment can be elusive terms. Does it count if someone stops looking for work? What about unreported work? Does a person sitting in front of an escalator telling people which way is up count?
So, what can a free-market oriented government do?
Reform welfare and job protection laws.
A welfare net that is too generous and too easy to access will reduce employment. At the same time, welfare was brought in during the Great Depression for economic reasons, to let people keep on consuming rather than trigger a deflationary cycle. And, when it comes to welfare, besides the economic reasons, there are also ethical reasons - helping those who truly can't support themselves.
But an overly generous welfare state can certainly come at a cost, for example in the Netherlands:
Then came the crisis in the western economies. In the 1970s the Netherlands saw a massive decline in agricultural employment, a halving of family owned retail business and the virtual disappearance of traditional industries such as shoemaking, textiles and shipbuilding. As a result the newly relaxed welfare state ended up supporting a fundamental reconstruction of the labour market. In 1970 for every 100 in employment there were 46 on state benefit; by 1990 the figure rose to 85. By the 1982 election all parties accepted the need to cut state benefits.
One example that is sometimes claimed to be a (mixed?) success is PRWORA, passed in 1996 under Bill Clinton
Welfare and poverty rates both declined during the late 1990s, leading many commentators to declare that the legislation was a success. One editorial in The New Republic opined, "A broad consensus now holds that welfare reform was certainly not a disaster—and that it may, in fact, have worked much as its designers had hoped." However, the number of welfare recipients declined much more sharply than the poverty rate, with a national average of 56% reduction in welfare caseloads and 1% reduction in poverty. The number of children living in extreme poverty, defined as a household income below 50% of the poverty line, increased, with a sharper increase among African-American families.
Job protection in Western economies run the gamut from at-will employment laws, as seen in some US states, and very restrictive systems, like France, where large scale economic layoffs (>50) need to be submitted to the government "for review".
Pushed too far, job protection laws can motivate employers to either not hire or else pursue automation extensively. On the other hand, *again the "ideal" free-market ideology runs against the self-interest of the electorate. And... are those at-will US states really paragons of economic vigor?
The risk side of things can be seen in India:
The rules are indeed onerous. In many states, firms with more than 100 employees must seek government approval to fire a single worker. As a result, many resort to contractors to fill their payrolls with temporary hires, a solution that evades red tape but produces neither dedicated staff nor a happy workplace. Other companies simply choose to stay small: some 98.6% of non-farm businesses have fewer than 10 workers. This carries a long-term cost in productivity. Indian garment-makers, for example, tend to be tiny.
Have better educated workers
Modern economies thrive on skilled workforces. While there are certainly jobs where paying the least possible to the worst-paid is a competitive advantage (flipping burgers, for example), those do not necessarily lead to strong economies.
Employers will employ more and be more competitive if they can find workers who are skilled and with appropriate education. "Appropriate" does not mean that everyone having a PhD is desirable but good-enough literacy and numeracy are always valued, and not always delivered in Western democracies.
Avoid long-term unemployed
The long term unemployed have traditionally found it very hard to reenter the job market, leading to part of the population being excluded. Spending money on retraining before skills atrophy is something that the Nordic countries typically are seen as getting right.
This study examines policies that can successfully address long-term unemployment. It focuses on Denmark and Sweden, where, despite sizeable job losses during the crisis, labour market indicators are at present better than in any other EU country. By looking at the interaction between labour market flexibility (especially in hiring and firing regulations) and passive and active policies, we argue that well-designed active policies matter more than labour market flexibility for employment.
In theory a government could employ workers directly and "solve" the employment problem. In practice, doing so requires taxes, which will have to be paid by taxpayers. Unless of course the government jobs produce wealth themselves. But in that case, would they not have better performed by free market actors? The experience of the UK in the 70s shows the limits of nationalized companies.
However, foregoing all, or most, government spending as per some libertarian utopias may also not be that productive. I've already covered education, but let's take health care. Nationalized health care systems absorb 12% of GDP in Europe and Canada. Vs 18% in the US (9% government spending, 9% private).
Employers "on the hook" to provide health benefits in the US might rightfully rue a system where the, smaller, costs are taken care of by the government. And labor mobility - choosing to leave one job for another - can be reduced when the risks of losing one's health coverage has to be taken into account.
Don't try to pick winners
Countries too often try to pursue "sexy" industrial programs. Ever heard of the Japanese 5th generation computers? No? The lost European commission plan for analog HDTV? Or how about the aim to promote small companies rather than larger ones. France and Canada both have special rules for small companies (50 and 20 employees respectively) but this can backfire when it causes firms to consciously avoid getting bigger.
Have predictable and fair regulations and legal systems
People should be able to launch companies without the state swooping in and expropriating them. Suppliers and workers should be able to sue for moneys owed. Honest failures should be tolerated as a necessary part of innovation, even as fraud like the Theranos affair should be heavily penalized.
"Promote innovation and diversification"
Ideally a country would pursue new economic opportunities as they appear and cut back from old industries as they sunset. Nokia, shifting from paper mills to cellphones would be an example of the former while subsidizing coal mining in the US would be an example of failing to do the latter.
Yet Nokia's fall from grace is also a warning that countries do not come equal: a small country "handles" differently from a big country, no matter the wishful thinking.
High tech innovation, with appropriate links from R&D to commercialization and a vibrant ecosystem of new companies is the holy grail.
But with everyone shooting for it, it might be best for a government to work on the basics rather than try to fine-tune everything which is unlikely to work.
Watch your payroll taxes
Many countries levy a considerable amount of tax specifically from payrolls, for various reasons (funding health care or retirement are 2 typical ones). This can carry the disadvantages of high minimum wages (high cost to the employer) without its benefits (higher purchasing power to employees).
Adjust the minimum wage.
This in theory should lead to higher employment, but some studies have also claimed that too low a minimum wage discourages people from working and also lowers consumption. I'd link to something supporting that, but it is such a contentious subject that I struggle to find a middle ground study on short notice. On the other hand, really high minimum wages may truly limit marginal economic jobs - hiring that extra staff for positions with only marginal returns.
Let's say that too high a minimum wage can reduce employment but too low will be painful to individuals and might not help that much, and that a country will have to evaluate where it sits.
Reducing work hours
The first Aubry law to reduce working time was at the origin of the competitive dropout of our economy. It continues to weigh on businesses and administrations.
One problem is seen in the 4.0 or 4.5 day/workweeks. It might be fine for a large company to "partition" its 500 "undifferentiated" factory floor workers to just hire 10% more of them. But a small company may mostly need one accountant or marketer. Not 7/8th of one + an 1/8th of another.
Most Western democracies at least pay lip service to the free market model, but the actual outcomes, both in terms of aggregate economic efficiency and in terms of individual happiness vary widely. Many would fault the US model, but few would also fully endorse either Greece or France with its 55+% (pre-covid) of government gdp spending.
The Nordic countries - Sweden, Denmark, Finland (leaving out Norway due to its oil wealth component) are seen by some to be compelling models, but their approach has evolved over time and in any case may not be that easy to scale up in bigger countries with lower levels of trust in government.
p.p.s. Watch automation trends carefully
The there-are-only-so-many-jobs fallacy has a long history. People did lose factory jobs to robots but in a healthy economic system job demand moved upscale (think the guy who fixes the robots or the designer). What is somewhat new is that whole job categories such as accounting, legal services, or retail sales are contracting to automation or new distribution models (Amazon, Netflix, online newspapers).
It's probably not worthwhile to try to hold this back overmuch - a country would lose too much international competitiveness - but learning how to adapt to it will become ever more important. Race against the Machine for example made dubious claims that we can all be digital creators. Yet, the existence of some very rich YouTubers with 1M+ followers does not mean that the system can be scaled up to where we all have 1M+ followers to our creations. The existence of well-paid, hard to outsource or automate, jobs like massage therapists or personal chefs does not mean that everyone will have thriving businesses being personal chefs (to whom?).
Governments will increasingly have find the best ways to navigate the impact of automation trends, most likely by re-skilling as needed.
In many western countries the blame is correclty placed on the govt for unemployment. But not because they have done too little. Rather because they have done too much.
In 2020 the average OECD country had a ratio of taxes collected to GDP of 35%. The largest single player is the government. The second largest player in any given region is usually the state or provincial govt.
They set all the rules. In the US, the rules of the federal govt run to
more than 50 thousand pages.
Rules are set for every imaginable thing regarding the ecomony. Wages, prices, inspections, hours of work and operation, who can work, what licenses they require, what insurance they must carry, what training they must have. And so on, for thousands of pages.
If there is something wrong with the economy the only place to look is the govt.
The Great Depression is often proferred up as the example of how govt can save us from the horrors of free market. This is a huge distortion.
The market of the 1920s was heavily influenced by the US Federal Reserve. They kept interest rates low and credit easy. This produced artificial bubbles which, no surprise, eventually burst. You may not be aware of the stock market crash of 1920. On a percent basis it was worse than 1929. But in 1920, the govt did not react quickly. And by the time they had, the market had righted itself and continued on with adjustments to the burst bubble. Some companies went broke. Others started with new arrangements.
In 1929 they did react. The Fed started playing games with interest rates and moving gold around. The US govt reacted with the Smoot-Hawley tarrif act, which set off an international trade war. Internally the US govt began a series of interventions into everything from electric utilities to how butchers were allowed to sell chickens. And continual manipulation of interest rates, often totally arbitrarily.
The economy began to behave like a frightened child. New businesses that did start were often crushed by unpredictable changes in interest rates, financial laws, and labor regulations. Many people sat on whatever cash they could get, hoping things would settle down.
Thus the Great Depression bumbled along for 11 years until Pearl Harbor. The day after the attack, Roosevelt got all new economic advisors. And his one word command to them was: Production. He needed every type of war material. And they responded that the thing to do was unleash industry and commerce. Kill all the laws that the New Deal had placed on their backs. And let them produce. This was largely done. And the result was a boom.
How did this happen? The industrialists were unchained. When a navy officer said he wanted ships he did not tell them how to make them. He did not say they had to pay any given price. He did not say who had to work in the factory or for how long or for what pay. He just said "SHIPS!" And the industrialist found ways to make things work better. Innovation after innovation which the industrialists were now free to use. From what hours to where the factory was located to pay premiums for night shift.
Today the biggest problem with govt interference is not the taxes. These are a huge problem, but not the biggest. Even the interest rate meddling is only a normal problem.
The existential problem is spending. Corporations become milking-machines to obtain government funding. They move away from things that would be productive. They cease to care about doing things that are good for their clients. They care only about what will get them more money from the govt.
In a free market, those companies that provide products that their customers believe are good, those companies thrive. In a mixed economy with too much govt spending, those companies thrive that play the suck-up-to-the-govt game. A bank that gets any of the various govt support from TARP to Fanny and Freddy, will out-compete a bank that tries to stay away from such. The govt suck-ups will survive and get investment. They will take the best employees. An aircraft company that plays the military-industrial-complex game will make $billions. And shitty airplanes. And the non-crony companies get squashed.
The thing govt should do is get smaller. Much smaller. In every aspect and avenue. Less taxes. Less regulation. Less programs. But most especially, less spending.