University of Southern California Dissertations and Theses

The United States Unemployment Problem--Structural Or Lack Of Demand?

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The United States Unemployment Problem--Structural Or Lack Of Demand?

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Content COPYRIGHT BY DONALD ROGER WELLS 1966 THE UNITED STATES UNEMPLOYMENT PROBLEM- STRUCTURAL OR LACK OF DEMAND? by Donald Roger Wells A Dissertation Presented to the FACULTY OF THE GRADUATE SCHOOL UNIVERSITY OF SOUTHERN CALIFORNIA In Partial Fulfillment of the Requirenents for the Degree DOCTOR OF PHILOSOPHY (Economics) January 1966 UNIVERSITY O F SOUTHERN CALIFORNIA THE GRADUATE SCHOOL UNIVERSITY PARK LOS ANGELES, CALIFORNIA 9 0 0 0 7 This dissertation, written by under the direction of hX$...Dissertation Com mittee, and approved by all its members, has been presented to and accepted by the Graduate School, in partial fulfillment of requirements for the degree of D O C T O R OF P H IL O S O P H Y Dean Date J A N U A E C. . L. . 9. . .6 . . 6. DISSERTATION COMMITTEE Chairman TABLE OF CONTENTS CHAPTER PAGE I. INTRODUCTION............ 1 The Problem........................ 1 History of the Problem.............. 4 Review of the Liberature ............ 6 Method of Research and Analysis ... 8 Definitions and Concepts ............ 9 Preview of Remainder of Dissertation . 12 II. THE EFFECTS OF UNEMPLOYMENT— POVERTY AND LOSS OF OUTPUT.................. 15 Causes of Poverty.................. 15 The Extent of Poverty and Unemployment 18 Characteristics of the P o o r ........ 27 Public Aid for the P o o r ............ 38 Loss of Output...................... 45 Summary............ 48 III. NEO-CLASSICAL THEORY AND THE MODERN UNEMPLOYMENT PROBLEM .......... 50 The Classical Forerunners .......... 50 _ Neo-Classical Concern with Increasing Supply............................. 56 Neo-Classicists and the Free Market . 71 Neo-Classicists and Price Stability . 84 Neo-Classicists and Automation .... 94 iii CHAPTER PAGE Summary........................ 108 IV. NEO-KEYNESIAN THEORY AND THE MODERN UNEMPLOYMENT PROBLEM............ 110 The Keynesian Background........ 110 Neo-Keynesian Concern with Lack of Demand........................ 119 Neo-Keynesian Preference for Full Employment Over Price Stability . . 141 Neo-Keynesian Attack on the Structural Hypothesis.................... 152 Summary........................ 173 V. THE STRUCTURALISTS AND THE MODERN UNEMPLOYMENT PROBLEM . .......... 175 Structuralists' Concern Over Automation.................... 176 Structuralist Attack on Neo-Classical Unemployment Theory .............. 198 Structuralist Attack on Neo-Keynesian Unemployment Theory .............. 205 Summary........................ 223 VI. SUMMARY AND CONCLUSIONS.......... 227 Analysis of the Neo-Classicists . . . 227 Analysis of the Neo-Keynesians .... 236 Analysis of the Structuralists .... 243 iv CHAPTER PAGE Policy Recommendations ............... 251 Conclusion.......................... 270 BIBLIOGRAPHY .................................. 274 LIST OF TABLES TABLE PAGE I. Income of Poor as Per Cent of All Income 1947 and 1963 22 II. Rates of Unemployment, as Published and Adjusted to United States Definitions, Eight Industrial Countries, 1960-1962 24 III. Comparison between Actual and Full Employment Labor Force, November 1957 to November 1963, Seasonally Adjusted 25 IV. Percentage of Labor Force of Four New England States Employed by Textile Industry in 1947 and in 1954 ........ 30 V. Public Assistance— Recipients and Payments by Program: 1950 and 1963 . . 37 VI. Relative Importance of Five Major Types of Industries in the United States, 1870 to 1960 ......................... 105 VII. Unemployment Rates in Industries and Occupations Most Likely to Be Affected by Automation, 1957-1962 ............ 154 VIII. Unemployment Rates in Industries and Occupations Least Likely to Be Affected by Automation, 1957-1962 . . 156 vi TABLE PAGE IX. Relative Contributions to Civilian Labor Force and to Unemployment Age Group, Fourteen-Nineteen, 1948 to 1963 .................................. 159 X. Distribution of Unemployment in 150 Major Labor Market Areas of the United States, 1959 and 1962 ........... 162 XI. Insured Unemployment in the Six New England States, Selected Years 1950 to 1962, and Ranking with Regard to All the States 1950 and 1962 ........ 164 XII. Education and Unemployment, April 1950 and March 1962 (Males Eighteen Years of Age and Over).................... 188 XIII. Classification of Workers by Occupation, 1910, 1950, and 1960 ................ 200 XIV. Changing Structure of the Labor Force, Participation, Employment, and Unemployment by Education, April 1950 and March 1962 (Males Eighteen Years of Age and Over).................... 208 XV. Labor Force Participation Rates and Educational Attainment, April 1950 and March 1962 (Males Eighteen and Over) . 210 vii TABLE PAGE XVI. Official and Real Unemployment Rates and Education, 1950 and 1962 (Males Eighteen Years of Age and Over) . . . 212 XVII. Estimated 1960 and Actual 1957 Unemployment Rates ................ 216 XVIII. Estimated 1964 and Actual 1961 Unemployment Rates ................ 218 XIX. Relative Contributions to Civilian Labor Force and to Unemployment, Males Eighteen and Over, by Educational Attainment, 1957 and 1962 246 CHAPTER I INTRODUCTION The United States is the only highly-developed and industrialized nation, with the exception of Canada, to have a persistent unemployment problem the past eight years. Many economists have written quite extensively on this problem, giving a variety of causes and proposing a variety of solutions. The purpose of this study is to review these writings with the purpose of classifying the economists into separate schools of thought on the subject and to analyze the plausibility of their argu ments and the workability of their proposals. I. THE PROBLEM Statement of the Problem The many diverse articles on the unemployment problem facing the United States have frequently advo cated a particular cause or a particular remedy for the problem. Often, two different economists will take the same data and reach opposite conclusions. Therefore, it is essential that careful attention be given not only to the statistical data but also to the logic of the arguments in order to determine if their differences are significant or merely magnified for polemical purposes. 2 Significance of the Problem While the causes of unemployment may be uncertain, their effects are not. They strike unevenly in the American economy, causing catastrophe to many families and lowering their standard of living. The fear of unemployment lurks behind the majority of labor disputes, much of the occupational licensing, and most of the discussion over automation. With laymen either com pletely confused on the subject or desiring only to know the position most favorable to their own interests, serious analysis must be given the work of professional economists in this field in order to determine if suf ficient knowledge is available for intelligent policy recommendations. While the debate rages, unemployment continues to cost the economy the loss of goods and services not produced, deterioration of usable skills, and wastage of labor resources that can never be recovered. - While aggregate unemployment rates fluctuated between 5 and 7 per cent the past few years, certain groups in the labor force experienced abnormally high rates. Teen-agers, older workers, non-whites, unskilled, and those living in areas dependent upon declining industries suffered such severe unemployment that some economists theorized that structural changes had occurred in the economy which placed certain groups beyond the reach of norual increases in demand. For example, one study revealed that in 1962, when the overall unemployment rate was 5.6 per cent, unemployment in Cleveland, Ohio, among Negro high-school graduates was 66 2/3 per cent, and among Negro dropouts, 75 per cent.* Other economists argue that, when unemployment is high, some groups always suffer more than others because the employers are able to choose discriminately in a soft labor market. Objectives in Relation to the Problem This study is designed to ferret out the real differences in the analyses of the separate schools of thought on the modern unemployment problem in order to rid the controversy of unsophisticated and non-academic idealogical manifestations. Quite often economists have successively proved false an opposing argument which was advanced, not by another economist, but by a labor leader, a businessman, or a politician. Care ful review of the literature reveals that many opinions popularly attributed to a group of economists are *Edgar May, Wasted Americans (New York: Harper and Row, 1964), p. 63. accepted only by some economic pressure group. By eliminating the non-academic arguments from considera tion , the real disagreements can be analyzed in order to determine the best policy recommendations. Hypothesis Since the problem of unemployment is possibly one of the most serious, if not the most serious, economic problems in the United States today, both because of its waste and because of its nagging per sistence, any study which helps, however slightly, to diminish it will be useful. The hypothesis of this dissertation is that significant increases in aggregate demand, coupled with a uniform labor-market policy, can reduce unemployment to a practical minimum. It is the writer's hope that by a thorough examination of / the analyses of economists, and by trying to avoid the pitfalls of polemics and extremism, some slight con tribution can be made to this subject. II. HISTORY OF THE PROBLEM In a food-gathering society there is no unemploy ment. Once economies reach the stage of division of labor, unemployment becomes a problem. Cycles of unemployment and depression have characterized much of the nineteenth and twentieth centuries in the United States, as well as in other highly-developed economies. The length and severity of the depression of the 1930*8 caused governments to take responsibility for the per formance of the economic system by attempting to insure reasonably full employment through the use of monetary and fiscal policies. The advent of World War II removed, for a time, the problem of depression from government concern, but the various electorates wanted assurance that the cessation of hostilities would not see a return to conditions of the 1930's. In the United States the assurance given the electorate took the form of the Employment Act of 1946, wherein Congress declared: . . . it is the continuing policy and responsibility of the Federal Government to use all practical means . . . to coordinate and utilize all its plans, functions, and resources for the purpose of creating and maintaining, in a manner calculated to foster and promote free competitive enterprise . . . con ditions under which there will be afforded useful employment opportunities . . • for those able, willing, and seeking to work, and to promote maximum employment, production, and purchasing power.2 While this may appear to be a radical departure from previous government policy in the United States, the emphasis on free, competitive enterprise only reiterated the strong preference for market solutions Americans have for resolving economic problems. The remarkable o Employment Act of 1946, Preamble. responsiveness of the American economy to increases in postwar demand only served to reinforce the hope that the United States could operate at close to full employ ment with a system of improved automatic stabilizers. Since 1957, however, unemployment has not been below 5 per cent overall, and has been particularly high among certain occupations, industries, geographical regions, and certain classes of workers. This situation has caused economists to search for explanations which might explain this poor performance. One school of thought blames lack of new investment; a second blames inadequate demand; and a third school maintains that structural changes have occurred in the economy which necessitate specific labor-market policies in order to adjust the supply of labor to the demand for it. The fact that unemployment has remained high despite rising national income has served as a background for the structural hypothesis. 111. REVIEW OP THE LITERATURE Because the major part of three chapters is devoted to a thorough review of the literature, only a rudimentary outline can be presented in this section. The vast majority of the work on this subject has been done since 1957 because that year narked the last tine 7 the American unenployaent rate was as lev as 4 per cent. The extent of structural unenploynent has been debated anong econonists over the past five to eight years, with Professors Paul Sanuelson, Robert Solov, Robert Grodon, Edvard Kalacheck, and Janes Knowles arguing that the cause of higher uneaploynent rates since 1957 is not structural inbalance in the economy but inadequate denand. Conversely, Professors Harold Deasetz, Charles Killingsvorth, Walter Buckinghan, and Paul Sultan have voiced the opposite viev. While nuch attention has been directed in the econonic journals to this controversy, lesser attention has been given to those econonists, such as Yale Brozen, Milton Friednan, David McCord Wright, and Henry Wallich, who assert that the cause of the higher unenploynent rate is lack of nev private investnent plus restrictions on labor nobility. To this group of theorists, the debate over vhether the cause is lack of denand or structural change is largely sterile. In addition, nany non-econonists have entered the discussion, sone of whoa have taken the old technocracy position of the 1930's that full enploynent nust be abandoned as a national goal. The reason given is that they naintain that an advanced nation's ability to produce exceeds its ability to consune, and therefore 8 some citizens will not be able to find a place in the producing sector of the economy. Among econonists, only Robert Theobald has advanced this view to any great extent by calling for a guaranteed incone for all regardless of whether or not work is available. IV. METHOD OF RESEARCH AND ANALYSIS While prinarily an analysis of different schools of thinking, this dissertation undertakes original research in Chapters II, V, and VI. Naturally, no empirical studies could be nade which would be of value on so vast a subject. In the use of data, prinary sources are used whenever possible; and where the authors cited have used figures, every effort is nade to check their accuracy. Policy reconnendations are set forth in the last chapter, using the nornative nethod of deternining which policies are best designed to fulfill specific goals. Linitations on Data There are no exact statistics on job vacancies because private enployers are not required to list their job openings with any particular agency. In addition, there are estinations but little definitive infornation on the nunber of narginal workers who have becone discouraged and withdrew fron the labor force but would return if they believed jobs were available. Decentralization of the American economy has prevented the accumulation of exact unemployment registrations that European nations have at their disposal. Sources of Data Data for this study come from: Statistical Abstract of the United States 1964. Congressional Hearings and Reports, journal articles, published lectures, research studies, books, periodicals, and newspapers. V. DEFINITIONS AND CONCEPTS Definitions and concepts of major significance are treated in this section. Lesser definitions will be provided as the occasion requires. Unemployed person. An unemployed person is one who did not have paid work in a particular week and who was looking for work, or who had been laid off from a job but expected to be called back in the future. This definition does not include discouraged workers who have withdrawn from the labor force becau&e they believe no jobs were available. Frictional unemployment. Frictional unemploy ment is caused by normal labor turnover. This is the 10 tine lest in finding the right job when job vacancies cure not scarce. Cyclical unemployment. Cyclical unemployment is caused by downturns in the business cycle and is normally cured by the return to prosperity. Structural unemployment. Structural unemployment is caused by shifts in the composition of demand, technological changes, and competition from imports when tariffs have been reduced. It can be further defined as any persistent unemployment caused by changes in the structure of wages in relation to the demand for labor. This is not usually corrected by general increases in demand or employment. Full employment. Full employment in the United States is an unemployment rate of 4 per cent or lower. There is much more agreement on that particular target rate than there is on the reason why this rate was selected. Poverty. Poverty is a condition wherein persons have an income too low to enjoy the minimum accepted standards of living which knowledgeable people deem to be barely adequate on the current American scene with respect to food, clothing, housing, medical care, 11 education, rewarding leisure, and some reasonable margin of savings beyond necessary spending. The dollar amounts commonly used to describe poverty-level incomes are $3,000 per year for families and $1,500 per year for individuals. This definition is refined in Chapter II. Manpower gap. The manpower gap is a measurement of the difference between what the full employment labor force would be and the number of workers counted as unemployed. Alternatively, it can be defined as the number of reported unemployed plus labor force withdrawals. Automation. Autonation is the mechanization of sensory control and thought processes which are self regulating, and therefore is more specific than mechanization or technological change. This definition is further refined in Chapters III and V. Neo-classicists. Neo-classicists are economists who have accepted the traditional economic doctrines from the classicists and the early neo-classicists, such as Alfred Marshall and Arthur Cecil Pigou. In addition, these economists reject most Keynesian thought regarding macroeconomic analysis, and thus are more strongly oriented toward market solutions for economic problems than the Keynesians. 12 Neo-Keynesians. Neo-Keynesians are economists who have accepted the macroeconomic analysis of John Maynard Keynes without necessarily rejecting the micro- economic analyses of the neo-classicists. This group of theorists, while not rejecting market solutions to economic problems, believes in the necessity for government use of fiscal and monetary policies to insure full employment because they do not assume that the market system has an automatic mechanism which makes this condition probable. Structuralists. The structuralists are a new school of economists who believe that specific labor- market policies on a microeconomic level are essential to guarantee full employment because they argue that the structure of denand for labor has changed. These economists reject the idea that increases in overall demand will solve the unemployment facing the United States. VI. PREVIEW OF REMAINDER OF DISSERTATION Chapter II shows the effect that unemployment has on the standard of living in the United States. The poverty problem, while distinct from the unemployment 13 problem, is nevertheless related to it; but because many of the poor would not find their status inproved by an elinination of unenploynent, this chapter con tents itself merely with a presentation of the poverty problem. Chapter III is devoted to neo-classical econo mists and their analyses and solutions of the present unemployment problem. While they primarily wish for market solutions and more private investment, they do accept a role for the government, unlike many of the non-economists advocating this point of view. Chapter IV discusses the solutions of the Neo- Keynesians for the present unemployment problem. While assigning a strong role for the government because of their belief in the periodic occurrence of cyclical fluctuations, this group of theorists argues that specific labor-market policies alone will not reduce unemployment because there are not enough jobs to go around when demand is deficient. They argue that restoration of a level of demand sufficient to reduce unemployment to 4 per cent is possible without undue labor bottlenecks or inflation by proper use of the tools of monetary and fiscal policy. Chapter V analyzes the structuralist school and their solutions for the unemployment problem. The 14 diversity of opinion of this school necessitates classifying them according to what they do not believe rather than on some affirmative hypothesis they all hold. These theorists reject both the neo-classical market solutions and Neo-Keynesian aggregate demand solutions and concentrate on microeconomic labor-market policies designed to adjust the supply of labor to the demand for labor. Chapter VI reviews the strengths and weaknesses of the arguments of the three schools of thought and sets forth normative judgments of the best policy recommendat ions. CHAPTER II THE EFFECTS OF UNEMPLOYMENT— POVERTY AND LOSS OF OUTPUT In any discussion of the consequences of unemploy ment, the two nest frequently singled out are poverty and loss of output. Thus any study of unenploynent must include a discussion of these two subjects. Since, however, a great nunber of the poor, by whatever standard they are measured, would find their status unaltered by a change in the employment rate, this study will content itself with a presentation of the poverty problem. To attempt to do more would exceed the scope of this dis sertation. President Johnson's "War on Poverty” has brought attention to the problem of poverty in the United States with an intensity of interest hitherto unknown. Pro ponents of the legislation assert that the poor minority can no longer be ignored by the rest of the population. I. CAUSES OF POVERTY In general, two measurements are used to determine the extent of poverty in a nation: total per capita output and the distribution of that output. 16 Ontpat Per Capita ” _ Econonists generally agree that underdeveloped nations are poor because they lack the ability to produce enough goods and services for their populations. Frequently an increase in their total output is countered by an even greater increase in population, reducing per capita output. This situation, however, is not char acteristic of the United States. Distribution of Output Advanced nations have much greater ability to produce goods and services than the underdeveloped econoaies for several reasons: first, they generally have a more highly educated and skilled labor force; second, they possess advanced technology; third, they are able to save some of their current output for investment in improving that technology; and lastly, they often possess greater quantities and more adaptable natural resources. However, poverty does exist in these countries because not all individuals receive enough of these goods and services to enable them to achieve a standard of living that most unbiased observers would term "adequate." In the United States, it was revealed by the Bureau of Census survey, in March 1963, that 50 per cent of the families with less than $3,000 income per year had the head of the family 17 either unemployed or not in the labor force.'1 . It is, therefore, possible to conclude that poverty in the United States is caused by a distribution of income that leaves some individuals with inadequate purchasing power despite the fact that the United States has the highest per capita income of any nation. Relative versus Absolute Standards for Poverty In America there has not been universal sympathy for the lot of the poor. It is contended by many that those called poor today are rich compared with the average resident of an underdeveloped nation or with the wealthy of a century ago, or even with royalty of the Dark Ages. However, a good many others feel that poverty should not be a matter of history or of geog raphy. They feel that if a man is unable to provide for his family with three adequate meals a day or with housing that meets present-day appropriate standards of the community in which he lives, or with necessary medical or dental care, then this man must be called poor. In all probability, he is regarded as a failure *U.S. Bureau of the Census, Statistical Abstract of the United States. 1964 (Washington, D.C.: Govern ment Printing 6flice, 1964), p. 340. Hereinafter cited as Statistical Abstract. 18 by his neighbors and by hinself. This would appear to classify poverty as a relative concept. It has been aaintained by others, however, that poverty is not entirely relative. While it is true that there nust always be a lowest fifth of the popula tion according to incone, unless incone were conpletely equalized, it is unlikely that nany would call sone future generation's lowest fifth poor if their incone would buy what $10,000 per year would buy today. II. THE EXTENT OF POVERTY AND UNEMPLOYMENT / • Poverty Econonists for the United States governnent, including the nenbers of President Johnson's Council of Econonic Advisers, have adopted $3,000 annual incone for fanilies and $1,500 annual incone for unattached individuals as an upper linit for defining poverty in 2 the United States. This study, as nentioned in Chapter I, will accept this definition, even though the definition dees not include the size of the fanily nor the location of the residence within the country. It nust be noted that the $3,000 and $1,500 figures given above are used to define incone before 2Ibid. 19 taxes. In 1962, 3.3 million^single individuals with incones less than $1,500 per year paid federal income 3 taxes. In addition, 2.3 million families with incomes less than $3,000 per year were also taxed.4 With the increase in Social Security tax planned for 1966, it is estimated that a single individual with an income of $1,500 per year will pay a combined federal tax of $152 and a family with an income of $3,000 per year will pay 5 a combined federal tax of $335. In 1962, 9.3 million families had incomes less _ a than $3,000 per year, which was 19.9 per cent of the total families in the United States. Moreover, 11.6 per cent of the families had incomes less than $2,000 per year and 4.2 per cent of the families had incomes less than $1,000 annually, in that year. The per cent of unattached individuals living in poverty in that year was higher than that for families, but the exact percentage must be estimated because the United States Bureau of the Census gives data for individuals with 3U.S. News and World Resort. LVIII Unril 19. 1965), 1(317 % 4Ibid. 5Ibid.. p. 102. ^Statistical Abstract, p. 338. 7Ibid. 20 incomes less than #1,000 per year and for incones between #1,000 and #2,000 but not specifically for incomes less than #1,500 per year. In 1962, 28 per cent of the individuals had incomes less than #1,000 annually and 26.3 per cent had incomes between #1,000 a and #2,000 per year. In a study for the Conference on Economic Progress, in December 1964, Leon H. Keyserling, who had been President Truman's Chairman of the Council of Economic Advisers, used Bureau of the Census data to determine that five million unattached individuals had Q incomes less than #1,500 per year in 1963. He also found that 34.2 million people were poor in the United States that year; twenty-nine million of these were in families with incomes under #3,000 per annum.Both sets of data would exclude a family with eight children if the family had an annual income of #3,200 even though, in all probability, this family would have a lower standard of living than a family without children that had an income of only #3,000 per year. ®Ibid. o Leon H. Keyserling, Progress or Poverty (Washington, D.C.: Conference on Economic Progress, 1964), p. 17. 10Ibid. As far as recent progress is concerned, there were 32 per cent of the families with incomes less than $3,000, Measured in 1962 dollars, in 1947, compared with 20 per cent in 1 9 6 2 . Thus, poor families decreased 37.5 per cent while Gross National Product 12 increased more than 75 per cent in real terms. During this period the average family income, measured in 1963 dollars, rose from $4,980 per year to $6,600— an increase of 53 per cent. Keyserling, in his study mentioned above, found that the gap between the average income of the poor and the average income of all families and individuals widened between 1947 and 1963.13 As shown in Table I, Keyserling found that the percentage of income received by the poor decreased faster than the number of poor families and individuals. Unemployment Since 1957 the unemployment rate in the United States has been higher than that of any other highly ' ^ Statistical Abstract, p. 339. 12 U.S. President, Economic Report of the President (Washington, D.C.: Government Printing Office, 1964), p. 208. 13Keyserling, op. cit.. p. 26. TABLE I INCOME OF POOR AS PER CENT OF ALL INCOME 1947 AND 1963 Year Poor Families as Per Cent of All Families Per Cent Income Going to Poor Families Poor Individuals as Per Cent of All Individuals Per Cent ef Income Going to Poor Individuals 1947 32.1 11.3 53.6 19.6 1963 18.9 4.6 44.5 12.8 Decrease 41.0 59.3 17.0 34.7 NOTE: Poor families are those with incomes less than $3,000 and poor individuals are those with incomes less than $1,500, measured in 1962 dollars. SOURCE: U.S. Bureau of the Census, as cited in Leon H. Keyserling, Progress or Poverty (Washington, D.C.: Conference on Economic Progress, 15547: developed country except Canada. While the United States used the sample survey method to determine unemployment, European nations used the actual regis tration figures at placement offices and at public relief agencies. However, even when the European nations tried the sample survey method their rates were still lower than those of the United States, as shown in Table II, compiled by Robert J. Myers, Deputy Commissioner, Bureau of Labor Statistics. It must be noted, however, that Italy's rates were below those of the United States when the sample survey method was used, but not when they usddtheir own method of actual registrations. It has been asserted that the American method understates the unemployment problem because the size of the labor force grows more slowly as unemployment increases since some marginal workers withdraw from the labor force. This has been verified in a study by Professors Thomas Dernburg and Kenneth Strand of 14 Oberlin College. As illustrated in Table III, they have compared the actual labor force, as reported by the Bureau of Labor Statistics, with what the full 14 Thomas Dernburg and Kenneth Strand, "Manpower Gap," Challenge. XIII (December, 1964), 42. 24 TABLE II RATES OF UNEMPLOYMENT, AS PUBLISHED AND ADJUSTED TO UNITED STATES DEFINITIONS, EIGHT INDUSTRIAL COUNTRIES, 1960-1962 Rate Adjusted to Rate as United States Published Definition Country i960 . r §&r 1361 1962 United States 5.6 6.7 5.6 5.6 6.7 5.6 Canada 7.0 o 0 t - 6.0 7.0 Cl o I * 6.0 France 1.0 0.9 0.9 1.9 1.7 1.8 Germany 1.2 0.8 0.7 1.0 0.5 n/a Great Britain 1.6 1.4 1.9 2.4 2.2 2.8 Italy 8.2 7.6 6.3 4.3 3.7 3.2 Japan 1.0 0.9 0.9 1.1 1.0 1.0 Sweden 1.4 1.2 1.3 n/a 1.5 1.5 NOTE: n/a = not available. SOURCE: International Labor Office Year Book of Labor Statistics and the International Labor Review, and fron various national publications, as cited in Robert J. layers, "Unemployment in Western Europe and the United States," in Unemployment and the American Economy, edited by A. M. Ross (New York: John Wiley and Sons, Incorporated, 1964), p. 174. TABLE III COMPARISON BETWEEN ACTUAL AND FULL EMPLOYMENT LABOR FORCE, NOVEMBER 1957 TO NOVEMBER 1963, SEASONALLY ADJUSTED (THOUSANDS OF PERSONS) Year Actual Labor Force Unem- oloyment Unem ployment Rate Full Em ployment Labor Force Manpower Gan Gap Unem ployment Rate 1957 68,246 3,606 5.28 68.749 4,109 5.98 1958 68,839 4,471 6.49 69,779 5,411 7.75 1959 69,659 3,686 5.29 70,886 4,913 6.93 £960 71,195 4,398 6.18 72,312 5,513 7.63 1961 71,571 4,472 6.25 73,874 6,775 9.17 1962 72,202 4,060 5.62 75,252 7,110 9.45 1963 73,412 4,096 5.58 76,588 7,272 9.49 NOTE: The figures in the first three columns differ from those reported by the Bureau of Labor Statistics because Dernburg and Strand used a different seasonal adjustment procedure. SOURCE: Thomas Dernburg and Kenneth Strand, "Manpower Gap," Challenge. XIII (December, 1964), 42. 26 employment labor force would have been had workers not withdrawn, and developed the gap unemployment rate. This rate is the ratio of unemployment plus net cyclical withdrawal from the labor force to the full employment labor force. Since 1961 the gap unemployment rate has increased, even though the reported unemployment rate has decreased. Discouraged worker hypothesis. Professors Dernburg and Strand found that, as the period of unemployment lengthens for a worker, many become dis couraged and withdraw from the labor force. This effect was noted to be particularly strong among women workers, teen-age boys, and men over sixty-five. A decrease in employment of 1,000 was matched by a withdrawal of 180 men and 300 women from the labor force.15 Additional worker hypothesis. When the bread winner is unemployed, secondary workers may enter the labor force to help support the family and then with draw when the job picture improves. The aforementioned two professors found this hypothesis to be weaker and 15Ibid., p. 43 27 to occur later in the cycle than the discouraged worker hypothesis. The only age group in which the additional worker hypothesis was found to doninate was for nen 16 between the ages of fifty-five and sixty-four. The fact that only 23 per cent of the poor families had more than one wage earner in the family, compared with 17 47 per cent of all families in 1962, lends support to the conclusion that the additional worker hypothesis is weaker. III. CHARACTERISTICS OF THE POOR Location of the Poor The poor in the United States are found in slum neighborhoods of city centers, on small farms, in regions dependent upon declining industries, and on Indian reservations. The heavy migration of twenty-seven million people from rural areas to urban centers the past forty years has exceeded the international migration of twenty-four million the previous forty years. The influx of people to these city centers from small farms and depressed regions has been matched by a large exodus 16Ibid. •^Statistical Abstract, p. 340. 28 of Biddle-class people froa these city centers to the suburbs, leaving an area concentrated with low income residents and a declining tax base* One study found that 58 per cent of all welfare recipients lived in 18 these city centers; a separate study disclosed that one out of sixteen children under eighteen years of age 19 in these city centers is on relief. A depressed area is often caused by a shift in demand away from the commodity produced by the industry upon which the area was dependent. The coal regions in Appalachia, which have received considerable atten tion in the press recently, serve as an example. But localization should not be confused with dependency. Even if a declining industry were localized, that area would not become a depressed region if only a small amount of that area's total working force were employed by the declining industry. Often, as an industry declines, the region becomes less dependent upon it, if the decline is sufficiently gradual, as shown in the case of New England and the textile industry illustrated 18Ben H. Bagdikian, In the Midst of Plenty, the Poor in America (Boston: Beacon Press, T$64;, p. l27"“ ^Edgar May, Wasted Americans (New York: Harper and Row, 1964), p. 1 0 " ! 29 in Table IV. If attention is shifted from industries to firms, greater structural disruption is experienced. The contraction of a firm located in a small town can cause more labor displacement in relation to the size of the labor market than the contraction of an industry in a larger region. As an example, a plywood firm in Denmark, South Carolina, closed in the late 1950's and 20 120 workers lost their jobs in a town of 3,500 people, causing it to become a depressed area. Because job opportunities are limited in these depressed areas, many workers, unable or unwilling to relocate, are forced to live on welfare benefits until they reach sixty-five, when they become eligible for Social Security. Education of the Poor The coincidence of poverty and limited education is shown by the fact that 36 per cent of the heads of poor families in 1961 did not finish the eighth grade 21 and that 61 per cent did not attend high school. 20 International Labour Office, Unemployment and Structural Change (Studies and Reports, New Series No. 65. Geneva: International Labour Office, 1962), p. 48. 21 Statistical Abstract, p. 339. 30 TABLE IV PERCENTAGE OF LABOR FORCE OF FOUR NEW ENGLAND STATES EMPLOYED BY TEXTILE INDUSTRY IN 1947 AND IN 1954 State Percentage of Labor Force Employed in Textile Industry 194? 1954 Connecticut 9.8 6.4 Massachusetts 18.1 10.3 Maine 25.8 18.3 Vermont 14.1 6.3 SOURCE: New England Textiles and the New England Economy. Pari 11.pp. 30-35, as cited In International Labour Office, Unemployment and Structural Change (Studies and Reports, New Series No. 65. Geneva: International Labour Office, 1962), p. 44. Conversely, only 2 per cent of the heads of poor families in 1961 had college degrees, compared with 65 per cent of the heads of families who earned over 22 $10,000 per year. Studies made of the welfare programs in the United States reveal that the parents of welfare children have much less education than the average of the population. In 1963, only 16 per cent of the mothers who received welfare payments for dependent children had finished high school contrasted with 56 per cent of all women; 42 per cent of the fathers of the children on welfare had less than five years of 23 schooling compared with only 9 per cent of all males. A NewYork study revealed that 70 per cent of the children on welfare do not finish high school and 24 that only 3 per cent go on to college. Race of the Poor The incidence of poverty is much higher among non-whites than among whites. While non-whites repre sented only 10 per cent of all families in 1962, they 22Ibid. 23 Keyserling, op. cit., p. 41. 32 25 represented 22 per cent of the poor families. That same year, 19•9 per cent of all families had incomes less than $3,000; but taking non-white families sepa rately, 44.5 per cent had incomes less than $3,000, while only 17 per cent of the white families were in 26 this category. Furthermore, 10.9 per cent of the non-white families had annual incomes less than $1,000 • 4 in 1962, contrasted with only 3.3 per cent of the white families.27 Keyserling's study for the year 1963 revealed practically the same figures for families as occurred in 1962, but his figures for unattached individuals showed poverty to be more evenly dispersed among the races. According to Keyserling, 42 per cent of the white unattached individuals and 56 per cent of the non-whites had incomes less than $1,500 per year, while 26 per cent of the whites and 41 per cent of the non- 28 whites had incomes less than $1,000 per year. Sex Distribution of the Poor In 1962, one-fourth of the poor families had a female head, but 49 per cent of all families headed 25Statistical Abstract, p. 340. 2®Ibid., p. 339. 27Ibid. 28 Keyserling, op. cit., p. 46. 33 by a female had incomes less than $3,000 per year contrasted with only 16.5 per cent of families with 29 a male head. These figures are corroborated by the evidence that the median income for females in 1962 was only $2,447 compared with $5,240 for males. The argument that full employment would make a strong contribution toward eliminating poverty is given support by the finding that fewer than 9 per cent of the families wherein both the husband and the wife 31 were in the labor force lived in jpoverty in 1962. Furthermore, only 1.4 per cent of such families had 32 incomes less than $1,000 per year in 1962. Age Distribution of the Poor In 1962, 47 per cent of the families headed by a person over sixty-five years of age lived in poverty, while only 19.9 per cent of all families were classified 33 as poor. While there exists a suspicion that poverty 29Statistical Abstract, p. 340. g0Ibid.. p. 343. 31 Keyserling, op. cit., p. 47. 32ibid. ^ Statistical Abstract. p. 340. 34 is rather widespread among families headed by teen agers, the United States Bureau of the Census dees not list that information separately but combines these families with those headed by persons in their early twenties, under the heading "ages 14-24." However, 32 per cent of the families headed, by a person between fourteen and twenty-four had incomes under $3,000 per year in 1962 as contrasted with less than 13 per cent of the families headed by persons between the ages of 34 twenty-five and fifty-four. Youth. The unemployment rate among teen-agers fourteen to nineteen was 13.7 per cent in March 1964, m e up from 12.3 per cent in 1962. Special studies have noted, however, that many teen-agers were not in the labor force nor in school, and consequently would have caused the figures to be higher if they had been counted. Professor Robert Solow, of Massachusetts Institute of Technology, reported that unemployment among teen-agers who had dropped out of high school was 26.8 per cent in the United States in October 1961, compared with 36 17.9 per cent for those who had graduated. 34Ibid. 35Ibid.. pp. 217-218. 33Robert Solow, The Nature and Sources of Unemployment in the United States (WickseliLectures. 'Stockholm:Almqvist and Wiksell, 1964), p. 26. 35 Keyserling's study revealed that high school dropouts were three tines as likely to occur anong sixteen year olds coning fron families whose incone was less than $5,000 per year than fron fanilies with annual incones in excess of $7,500.3^ The lack of education of nany teen-agers is evidenced by the fact that one-half of the youths who 38 took the Selective Service Test in 1963 failed. The aged. In addition to the large percentage of elderly fanilies living in poverty, 37.2 per cent of the unattached individuals over sixty-five in 1962 39 had annual incones less than $1,000. Because the United States Bureau of the Census does not give figures for those with incones less them $1,500 per year, Keyserling's figures will be used for this auount. His study found 63.5 per cent of the unattached individuals over sixty-five years of age with incones 40 less than $1,500, and therefore living in poverty. 37 Keyserling, op. cit., p. 10. S8Ibid. 39 Statistical Abstract, p. 36. *°Keyserling, op. cit.. p. 79. The nunber of aged receiving welfare paynents has decreased from 2,789,000 in 1950 to 2,194,000 in 41 1963, probably because of the large increase in the nunber of persons over sixty-five covered by Social Security. In 1950, 1,770,984 were receiving Social 42 Security benefits compared with 10,263,331 in 1963. Even though the nunber of children receiving welfare benefits now exceeds the nunber of old people on welfare, the elderly receive average nonthly paynents nore than twice as high as those for children, as shown in Table V. Medical costs for the aged. In 1962, 87.5 per cent of the narried couples over sixty-five, 78.5 per cent of the non-narried nen over sixty-five, and 82*3 per cent of the non-narried wonen over sixty-five reported that they incurred nodical charges that j§ 0g year. The average cost per year for couples was $442, for the unnarried nen it was $260, and for the unnarried wonen it was $282.44 With the large per centage of old people living in poverty, these costs t > ^ Statistical Abstract, p. 304. 42Ibid., p. 288. 43Ibid.. p. 74. 44Ibid. 37 TABLE V PUBLIC ASSISTANCE— RECIPIENTS AND PAYMENTS BY PROGRAM: 1950 AND 1963 1950 1963 Nunber of RecAnients (Thousands) Old Age Assistance 2,789 2,194 Aid to Dependent Children: Fanilies 652 969 Recipientsa 2,234 3,989 Children 1,662 2,993 Average Monthly Pavnent Old Age Assistance $44b *77 Aid to Dependent Children: Per Fanily *72b *131 Per Recipienta $21b *32 Includes the children and one or both parents, or one caretaker relative other than a parent, in fanilies where the needs of such adults were considered in deternining the amount of assistance. ^Current dollars. SOURCE: U.S. Bureau of the Census, Statistical Abstract of the United States. 1964 (Vashington, D.C.: Governnenl-Printing Office, 1964), p. 304. 38 could represent as much as 15 per cent of the elderly*s incone per year. IV. PUBLIC AID FOR THE POOR While many poor people receive public benefits in the form of Social Security, veterans' programs, and workman's compensation, this section will be limited to discussion of public aid which is closely associated with poverty and unemployment: unemployment payments, welfare benefits, and public housing. It is also in this section that many of the problems of the poor will be shown to be separated from the problem of unemployment. It is, therefore, beyond the scope of this dissertation to do more than to present the problem of these people. Unemployment Payments During 1963 an average of 1,623,000 workers were receiving unemployment benefits under state or federal 45 programs, but unemployment averaged 4,166,000 during that year. These figures are given further credence by Keyserling's study, which showed that in June 1964 slightly more than one-quarter of the 4,692,000 reported unemployed at that time were receiving payments under 45Ibid., p. 298. 46Ibid.. p. 216 39 47 either a state or federal program. In Jane 1964 it was reported that 803,000 had exhausted their benefits 48 at that time. The average maximum period of benefits was twenty-six weeks. The average weekly benefit paid the unemployed 49 under these programs in 1963 was 835.27. This repre sented, at that time, approximately 35 to 40 per eent of the average weekly wage; in the 1940's, the unemploy ment benefit accounted for approximately two-thirds of 50 the weekly wage. This is the criterion used by those who claim that unemployment benefits do not cause malingering— the relationship between the benefit paid and the average weekly wage. The unemployment benefits have been financed by taxes levied on the employer's payroll. In some states experience rating has been introduced whereby the employer's rate varies directly with the number of layoffs originating from his firm. The rates on the employer vary from 0.1 to 4 per cent of the payroll; Keyserling, op. cit.. p. 54. 48Ibid. ^Statistical Abstract. p. 216. 5®Keyserling, loc. cit. 40 in some states the maximum rate is twenty tines the 51 mininum rate. Experience rating has been attacked by sone labor economists, notably Richard Lester of Princeton University, on the grounds that it could cause employers to work their labor force overtime rather than hire new employees who may subsequently be laid off, causing the 52 employer's contribution to increase. Welfare Benefits Unlike unemployment benefits, which are financed under a sort of insurance scheme, welfare benefits are an outright dole, administered exclusively by state and local governments but financed in part with federal grants to the states, under the Social Security Act. To receive a federal grant for assistance payments under the Social Security Act, a state must have a welfare program approved by the Welfare Administration's 53 Bureau of Family Services. Each state is permitted to determine the conditions under which needy people 51 Richard Lester, "Discussant," in Unemployment and the American Economy, edited by Arthur U. Ross (tiew fork: John”Wiley and Sons, Incorporated, 1964), p. 196. 52Ibid. ^ Statistical Abstract. p. 279. 41 may receive assistance and the amount of the grant. In June 1963 the total amount of assistance paynents in the United States amounted to $4,736,000,000, of which $2,671,000,000 was financed by the federal 54 government. As was shown in Table V, page.37, the number of dependent children receiving this form of aid in 1963 exceeded the nunber of aged recipients, but the total payments to the elderly from this source were $2,029,000,000 that year as opposed to 55 $1,477,000,000 granted to dependent children. Furthermore, because the amount of the grant is determined by the states and the localities, there was a wide dispersion in the average grant in December 1963. For example, in Minnesota the average grant per old person in that month was $112.45, while in Mississippi it was $38.64; the average grant of aid to dependent children in Minnesota amounted to $185.00 per family and $51.05 per recipient, while in Mississippi the figures were $37.92 per family and $9.58 per recipient. The aid to dependent children has aroused the strongest opposition of any of the public assistance 54Ibid., pp. 304-305. 55Ibid.. p. 304. 56Ibid., p. 307. programs. The fact that some states provide no benefits at all to a family that has a father able to work lends support to the thesis that some fathers have been forced to desert their families in order for their children to determine eligibility may intensify public opposition to these benefits if it can be shown that a large number of recipients were recent arrivals from other parts of the country. In the much publicized case in Newburgh, New York, in 1961, public resentment appeared to be directed at the newcomers from the South, mostly Negro, 58 who were receiving welfare benefits. Housing for Low Income People In urban centers, housing has been one of the most difficult problems facing the poor. One New York City study indicated that, in 1962, $67 million out of a total welfare grant of $217 million, or 30.9 per cent, 59 went for rent. In Buffalo, that same year, the figures were $9 million out of $23.5 million, or 38 per 60 cent. Since 1960 the New York City Welfare Department receive aid 57 The fact that states and localities Ibid Ibid 59 Ibid., p. 127 43 has had to pay special finding fees to real estate agents in order to locate rooms for people on relief. 61 In 1962 this amounted to $44,370 for 250 cases, averaging to $177.48 per "find." Figures of the above nature have led public officials to conclude that welfare payments are in fact subsidizing slum landlords, because they increase the ability of the poor to pay and thus raise effective demand for this type of housing. Because privately owned living space has been in short supply in many urban centers, the federal and local governments have attempted to augment the avail ability of low rent housing through urban renewal pro grams and public housing projects. Urban renewal. Title I of the 1949 Housing Act, as amended in 1961, permits the federal government to pay three-fourths of the cost of removing slums and relocating displaced families in connection with the construction of low cost housing units. In 1964, the Urban Renewal Administration had 1,328 projects on its books of which only 118 were completed, 671 were in 62 execution, and 539 were still in the planning stages. 61Ibid., p. 129. ^ Statistical Abstract, p. 766. 44 There is frequently a great lapse of tine between demolition of the slum and completion of the project, during which time housing becomes even scarcer. A case in point occurred in Buffalo, New York. In early 1953 the mayor of Buffalo suggested such a project for a twenty-nine block area in the center of the city. In April 1954 the Board of Redevelopment first studied the project. That fall the Housing and Home Finance Agency appropriated $3 million for the project. The City Council approved it in June 1955, and the preliminary project was submitted to the federal government in January 1956. For the next two years the project was stalled while the property owners debated the issue and caused the plans to be altered. Finally, in December 1958, relocation of the 2,200 families began, but it was March 1961 before the last family moved. Then the Board of Redevelopment rejected the bid of one developer and awarded the land to another. In early June, 1962, new plans were called for by a new mayor. By 1964, eleven years after discussion first began, twenty-nine blocks in the center of Buffalo lay vacant, bringing the city no revenue, but intensifying the housing shortage for low income people. 63May, 0£. cit., pp. 131-133. 45 Public housing. Four separate Public Laws have resulted in the federal government building housing units since the 1930's which have been conveyed to 64 local governments for low-rent use. In addition, projects built for World War II defense workers and for migratory farm workers by the Department of Agriculture have been converted to low-rent use. By the end of 1963 there were 682,307 low-rent dwelling units super vised by the Public Housing Administration, of which 65 680,386 were locally owned. Most of these projects have maximum income limitations on the residents, which causes them to move out as their conditions improve. This provision has been attacked by critics who claim that it makes the residents ashamed to live in public housing because it causes the residents of these projects to be too homogeneous. V. LOSS OF OUTPUT The loss of output is the other major effect of unemployment. The output gap is a measurement of the difference between what would have been produced if the labor force had been fully employed and what was actually ^ Statistical Abstract, p. 759. 65Ibid. 46 produced. Potential output is a supply concept, not a Measure of how Much output could be generated by unlinited increases in deaand. The potential output, in the definition of Most econoaists including the Council of Econonic Advisers, is United to what the econoay would produce if 4 per cent of the labor force were unenployed. One econonist has noted that there appears to be nore agreenent that a 4 per cent unenploy- nent rate is a reasonable target than on any of the 66 analytical steps needed to justify such a conclusion. While reasonable price stability is also a goal of an econony in addition to full enploynent, there does not appear to be nuch agreenent on how prices would act if there were 4 per cent unenployed. The Council of Econonic Advisers estinated the output gap to be $30 billion per year, neasured in 1963 67 dollars, in their report of January 1964. According to the Council, this gap has not changed since the first quarter of 1962 because the expansion in output since 66 Arthur M. Okun, The Battle Against Unennlovnent (New York: W. W. Norton and Conpany, 1965), p. 14. 67 Council of Econonic Advisers, Annual Report of the Council of Econonic Advisers (Washington, b.C.: (Sovernneni PrintTng Office, 1964), p. 37. 47 then has just about kept pace with the growth in the 68 economy's potential. The Council estimates that a 3yk per cent growth rate in potential per year since 1955, when unemployment was 4 per cent, would have been sufficient to bring the actual output up to the poten- 69 tial. But once the economy's performance falls below its potential, the growth in actual output must be faster than 336 per cent per year to restore equality between the two. An illustration will, perhaps, serve to clarify the foregoing paragraph. Real output increased from $514 billion in the first quarter of 1961 to $555 70 billion in the first quarter of 1962 (measured in 1963 dollars), an increase of 8 per cent. This was matched by a decrease in the output gap from $50 71 billion per year to $30 billion per year. However, the increase in real output was only $20 billion between the first quarter 1962 and the first quarter 72 1963, or an increase of 3.6 per cent. The output gap did not change. Furthermore, the large increase 68Ibid. 69Ibid. 70Ibid.. p. 208. 71lbid. 72Ibid. 48 in output during 1961 caused a decrease in unemployment of 800,000 between the first quarter of 1961 and the first quarter of 1962, but the smaller increase in output during 1962 caused a decrease in unemployment of only 160,000 between the first quarter of 1962 and 73 the first quarter of 1963. This further confirms the contention that output and unemployment are strongly correlated, and thus the loss of output is one of the effects of unemployment. VI. SUMMARY This chapter has attempted to show the extent that unemployment affects the amount of poverty and loss of output in the United States. It must be empha sized again that poverty and unemployment are two different problems, even though there is a strong relation between them. Full employment will not mean the end of poverty even if all those employed earned enough to exceed the dollar limits used to classify the poor. Many poor are not in the labor force; 44 per cent of the heads of families with less than S3,000 annual income were not in the labor force in March 73Ibid.. p. 230 74 1963. Full employment will not better the conditions of the elderly beyond the working age; in fact, it could worsen their conditions if price increases diminish the purchasing power of their fixed incomes. Full employment will help those of working age, however, find jobs and make it easier for youths to find their first jobs, or part-time work, while in school. But if those outside the labor force are to be helped out of poverty, the solution must come from other than a full employment policy. 74Statistical Abstract. p. 340 CHAPTER III NEO-CLASSICAL THEORY AND THE MODERN UNEMPLOYMENT PROBLEM This chapter will attempt to show a discernible pattern among neo-classical economists on the present- day American unemployment problem. While it will become apparent that these thinkers do not concur unanimously on all subjects relating to this problem, it will be argued that their common adherence to the classical tenets of Say's Law, the market system, the desirability of competition, and the concern with overcoming scarcity justifies grouping them under one heading. I. THE CLASSICAL FORERUNNERS Any discussion of the neo-classical school must necessarily begin with their classical predecessors. The latter include Adam Smith, David Ricardo, Jean B. Say, and John Stuart Mill, all of who published in the century following 1776. The central hypothesis of this school of writers was that individual freedom and economic prosperity were compatible because the free market insured that each individual could further his own interests most by satisfying the desires of society as a whole. Thus profit maximization by the individual entrepreneur was the manner in which this man could 51 serve the community and himself best. Adam Smith, in pointing out that each individual's struggle to maximize his own profits resulted in the highest national output, brought out the fact that this concurrence is unintended: "He [the entrepreneur] is in this, as in many other cases, led by an invisible hand to promote an end that was no part of his intention."1 He went on to state that this is the best possible situation for society because this enterpriser could not have helped society more than if he actually made that his primary purpose. In fact, Smith stated that he knew of no merchant who benefited society by specifically trading for the public 2 good. Say's Law A strong tenet of classical economics, and bearing directly on the employment problem, was their acceptance of Say's Law. The French economist, Jean B. Say, placed great emphasis on increasing the supply of goods as the way to increase prosperity, but very little emphasis on increasing demand for those goods. He felt that the act ^Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, edited by Edwin Caiman (.New Yorlc: Random House, Incorporated, 1937), p. 423. 2Ibid. 52 of producing would itself create a denand for other goods, and therefore general overproduction would be inpossible. Producers were always anxious to sell their output for fear their products would lose value, and were equally anxious to dispose of the noney they received for their products for fear that, too, would lose value. Say concluded: . . . But the only way of getting rid of noney is in the purchase of sone product or other. Thus, the nere circunstance of the creation of one product innediately opens a vent for other products.3 Say disnissed the problen of hoarding noney by assuning that the only use noney has was a nediun of exchange and not a store of value, and therefore no one would hoard but with a view to buying sonething with the 4 noney. Even though Say's Law did not go unchallenged, the nain body of classical thinkers accepted it unequivocally. The assunption of pure conpetition in the product and resource narkets and of perfect nobility of factors lent support to the theory that any period of narket gluts or unenploynent was only Jean B. Say, A Treatiste on Political Economy. translated by C. R. Prinsep (Philadelphia: J. B. Lippincott, 1857), p. 134. 4Ibid.. p. 136 53 temporary, and that the economy was groping for an equilibrium. The Market System Another tenet of classical theory was the free market system. This institution regulated all economic activity without any one person being able to regulate anyone else because no single seller or buyer was significant enough to control price. Competitive conditions. Adam Smith differentiated between the natural price and the market price. The natural price was that which was necessary to pay the factors of production, and if not met would result in a reduction of supply. The market price, on the other hand, was determined by the forces of supply and demand at a particular time, and could diverge from the natural price. However, without using the word, Adam Smith envisioned an equilibrium or balance in the market when the two prices were the same because the quantity brought to market would then be just sufficient to compensate the factors of production and to satisfy 6 effective demand. 5 Smith, 0£. cit., p. 55. 6Ibid., p. 56. 54 . . • The whole quantity upon hand can be disposed of for this price, and cannot be disposed of for more. The competition of the different dealers obliges them all to accept of this price, but does not oblige them to accept of less.' He went on to say that if the market price is below the natural price, some factor of production must be paid less than its natural rate, and thus withdrawal of that factor would reduce the quantity of the commodity supplied until the market price rose to equality with the natural price. Conversely, if the market price is above the natural price, some factor of production must be receiving more than its natural rate, causing an increase in the quantity supplied of that resource, which will increase the amount of the quantity offered for sale until the market price fell to a level equal Q to its natural price. This analysis demonstrates the concept of market equilibrium under competitive conditions. Adam Smith considered the natural price as the central price to which the prices of commodities were gravitating, but that certain market imperfections could prevent the 9 two prices from being equal. 7Ibid.. p. 57. 8Ibid. 9Ibid.. p. 58. Monopoly. One of the underlying assumptions that the classicists made when writing of the market system was the absence of monopoly. If competitive conditions did not prevail, the allocating mechanism became distorted. Adam Smith compared a monopoly with a trade secret, which allowed a seller to keep the market constantly understocked by supplying less than the buyers wanted.In addition, monopoly pricing was detrimental to the public, according to him, because "the price of monopoly is upon every occasion, the highest which can be got . . . the price of free compe tition, in the contrary, is the lowest which can be taken.Furthermore, he attacked the exclusive privileges of labor unions, which he called corpora tions, because of their apprenticeship laws which restricted the number of sellers in a field of endeavor, and thus caused the market price to be higher than the 12 natural price. In summary on the classical doctrines, it can be noted that they placed great emphasis on increasing output to overcome scarcity; on the market system as 10Ibid.. p. 61 11Ibid. 12Ibid. 56 an allocative and distributional mechanism; and on free competition as a condition prerequisite to proper per formance of the economy. II. NEO-CLASSICAL CONCERN WITH INCREASING SUPPLY The neo-classical economist, following in the classical tradition, puts great emphasis on overcoming scarcity by increasing supply. Increasing supply involves capital formation, and capital formation, to a neo-classicist, means the need for more saving, and more saving requires an unequal distribution of wealth and incomes. It is this line of analysis which these thinkers use to explain the present-day unemployment problem. Unemployment is caused by slow growth which can be rectified by increased investment in new plant and equipment. Capital Formation Professor David McCord Wright feels that the real source of unemployment lies in the failure to_ create capital as fast as the rate of population growth. He is of the opinion that, unless the capital stock is large enough for the population, a reduction of money 57 wages even below subsistence would not provide enough 13 jobs for the labor force. This economist recognizes that the causes of unemployment in developed nations frequently differ from those in an underdeveloped economy. In the former nations, unutilized plant capacity is usually given as the cause of unemployment, while in the underdeveloped countries lack of capital is at the root of the problem. However, Professor Wright asserts that this does not mean that the American unemployment problem is caused by excess capacity and lack of demand because the large increase in the labor force in the United States in the 1960's necessitates a greater increase in investment to 14 equip that labor force. He feels that some economists often mistake the results of lack of investment for the cause of the unemployment because a decrease in invest ment results in an apparent shortage of purchasing power 15 as a result of the negative multiplier. This reason ing concludes that depressions cure caused not by the lack of demand but by a reduction of investment. *3David McCord Wright, Growth and the Economy (New York: Charles Scribner's and Sons, 1^64), p. 359. 14Ibid.. p. 246. 15Ibid.. p. 247. Professor Henry C. Wallich also agrees that increased capital formation is the solution for unemployment because investment is essential for growth which will provide employment. He feels that too many people confuse growth in capacity with growth in the 16 rate of use of existing capacity. Merely increasing the use of existing capacity could hurt growth by causing bottlenecks of production and possibly lead to inflation. At the present time, however, he states that there may be some room to increase the use of existing capacity because American business has been averaging 85 to 88 per cent utilization of plant while businessmen reportedly have preferred to utilize plant 17 at an average of 92 per cent of capacity. But while admitting that the nation would be better off by using idle resources when they exist, this economist empha^- sizes that when full employment is reached it is impossible to have more investment and more consumption 18 simultaneously. Because stronger emphasis is placed 16Henry C. Wallich, The Cost of Freedom (New York: Harper and Brothers, 1&6Q), p."T5§. 17Henry C. Wallich, Newsweek, LXV (May 3, 1965), 80. *®Wallich, Cost of Freedom, p. 160. 59 0 on capital fornation than on consumption, Professor Wallich disagrees with those economists who advocate the use of welfare expenditures to aid growth because he considers these to be pure consumption expenditures 19 and therefore incapable of encouraging growth. Professor Wright maintains that choking off growth would lead to permanent underemployment because full employment requires constant formation of new business and new capital equipment. The alternatives to full employment through growth of investment are seen as either unemployment or an environment in which the government chokes off all saving and fills the gap with expenditures on welfare, military goods, or ornate 20 public projects such as stadia or memorials. While he recognizes that in a deep depression consumption must be stimulated first if the economy is to be kept 21 from a complete collapse, he nevertheless feels that merely stimulating consumption will not cure the depression— the cure must involve revival in the heavy goods sector which is limited to mere replacement, 19Ibid., p. 159. 20David McCord Wright, Capitalism (New York: McGraw Hill Book Company, Incorporated, 1951), p. 199. 21Ibid., p. 204. 60 if that, in a depression. The reasoning is that the denand for new capital equipment nust expand if the economy is to be kept at full employment, and therefore what is needed is a social environment in which firms and individuals want to construct new permanent plant 22 and equipment. This economist takes strong issue with many liberal economists who feel that maintaining consumption will provide the stimulus for the needed investment. Merely keeping consumption from falling by injecting transfer payments into the hands of the unemployed can keep business going in a steady routine but, he argues, this will not cause it to expand. Expansion requires a marginal or additional increment of profit to encourage investment. This professor feels that it is the rising expectation of profit that causes the increase in investment whereas increased transfers could waste 23 themselves in higher prices. According to Professor Wright, the great depres sion was caused by the glutting of the housing market in 1928 without any other immediate domestic source of 24 investment to take its place. That he believes in the 22Ibid., p. 209 23Ibid., p. 210. 24Ibid., p. 154. 61 Inevitability of the upturn is shown by his statement: "If the system is not forced into stagnation by unwise remedies during a slump, new sources of activity and 25 growth will soon be forthcoming." The government's task in a depression, according to this analyst, is to keep the national income from falling too far by transfer payments, but also to encourage growth-making characteristics of society by creating a climate favorable for investment. To him the key question is, "Why is the marginal efficiency of capital less than the interest rate?" He feels that social attitudes are important, and if these attitudes are such as to prevent growth or mobility of resources then injections of money into the economy will not bring about a state 26 of expansion. This professor further challenges the theory that an increase in spending will result in more employment of labor by arguing that increased spending would only result in more jobs if someone thinks it is profitable to increase production and to do so by 27 employing more labor. However, he points out that 25Ibid. 26 Wright, Growth and the Economy, p. 359. 27Ibid.. p. 242. 62 if expected costs were rising more rapidly than prices, there would be no stimulus to increase the number of jobs even though spending would be rising rapidly. So he does not feel that an increase in spending is even a necessary condition for an increase in investment. He lists four cases when investment can increase when consumption is neither stable nor rising: first, the better product that might catch the public's fancy even when sales of similar products are low; second, the cheaper product or method of production which cuts costs so drastically that it is worthwhile building plant and equipment even when sales are decreasing; third, the determined industrialist who feels the market is wrong and proceeds to build more plant which can provide a social atmosphere which encourages others to expand; and fourth, projects based on long-run population forecasts rather than on short-run demand conditions, such as freeways or subways, often built 28 during depressions to take advantage of lower costs. Professor Vright, strongly influenced by his great teacher Joseph Schumpeter at Harvard, asserts that it is impossible to have a continuous smooth and balanced expansion because a market is never friction- less. People do not stop spending a given amount on 28Ibid., p. 243. good A and then immediately begin spending a like amount 29 on good B. Investment enters the picture because the rate of output of capital which would be necessary to absorb quickly this backlog of demand is much greater than the rate of output of capital that society will 30 need once the backlog is made up. "It is the dura bility of equipment plus the asymmetrical changeability of wants plus inevitable frictions plus consumer sover- 31 eignty which produces the business cycle." He goes on to say that once the unevenness of expansion is encountered, other forces are observed which are them selves blamed for the crisis, such as swings of optimism or pessimism or changes in prices relative to wages. He feels that these forces may contribute to the violence of the oscillation without being the fundamental cause, which is the changeability of consumer wants during the expansion coupled with the aforementioned backlog problem.3* * Significance of Saving In addition to the strong need for capital formation, neo-classicists place a great emphasis on 29Wright, Capitalism, p. 153. 30Ibid. 3XIbid. 32Ibid., p. 154. 64 saving. Professor Wright lists saving, in addition to labor, natural resources, and knowledge, as essential 33 for growth and expanding employment opportunities. He emphasizes, however, that saving, while necessary for growth, is not sufficient by itself because some saving could be hoarded. But while he accuses "left wingers" of wanting to discourage saving to cut down on hoarding, he prefers to remove the barriers to 34 investment which would reduce or eliminate hoarding. If savings are to be used for investment by entrepre neurs, the atmosphere must not be hostile to enterprise and change. He is of the opinion that the economy needs constant discovery and use of this discovery if the national income is to grow; that saving which 35 merely piles up the same goods would be useless. This economist also feels that corporate saving alone is insufficient for progress, and therefore 36 individual saving should be encouraged. The problem, as he sees it, is between absolute versus marginal supply. A price which yields some of a good may not be the price which yields as much of the good as people want. The existence of corporate saving, therefore, 33Ibid., p. 41 35Ibid. 34Ibid.. p. 42. 36Ibid., p. 54. 65 37 does not make individual saving obsolete. American public officials, even though they are not trained economists, frequently make policy statements based on neo-classical thinking. However, many of their statements are less sophisticated than those of the economists. William McChesney Martin, Chairman of the Board of Governors of the Federal Reserve System, has frequently espoused the doctrine that saving is essential to growth and full employment. Speaking before the Fortieth Annual Conference of the National Association of Mutual Savings Banks, Martin stressed the need for saving by asserting that econonic growth can only come from saving, and that saving depended upon confidence in 38 the value of the dollar. Martin did not feel that there would be an incentive to save unless the value of the dollar remained stable, which meant holding the rise of prices down by a tight money policy. He stated that the Federal Reserve would do its part to minimize the substitution of bank credit for savings as a means of financing investment, because he felt that only by increasing the percentage of income that is saved would 37ibid. 38William McChesney Martin, Speech delivered May 10, 1960, reported in Commercial and Financial Chronicle. CXCI (May 19, 1966), 16. 66 39 the rate of growth be sustainable. C o n g r e s s m a n T h o m a s B . C u r t i s , R e p u b l i c a n o f Missouri, also follows the neo-classical philosophy o f a d v o c a t i n g m o r e s a v i n g s . H e r i d i c u l e s t h o s e w h o f e e l t h e s o l u t i o n o f t h e u n e m p l o y m e n t p r o b l e m l i e s i n i n c r e a s i n g a g g r e g a t e d e m a n d b y s t a t i n g t h a t t h i s i s l i k e s a y i n g t h a t t h e o n l y t h i n g n e e d e d t o b r i n g w a t e r 4 0 o u t o f t h e g r o u n d i s a t h i r s t . T h e C o n g r e s s m a n a l s o f e e l s t h a t s a v i n g i s t h e k e y t o e c o n o m i c p r o g r e s s a n d i n c r e a s e d e m p l o y m e n t b e c a u s e h e c l a i m s i t t a k e s m o r e t h a n $ 2 0 , 0 0 0 o f s a v e r - s u p p l i e d c a p i t a l , o n t h e a v e r a g e , 4 1 t o p r o v i d e o n e n e w j o b . H o w e v e r , h e d o e s n o t s t a t e h o w h e a r r i v e s a t t h a t f i g u r e n o r w h a t t h e c o n s e q u e n c e s w o u l d b e i f s a v e r s d e c i d e d t o h o a r d t h e i r f u n d s . Unequal Wealth and Incomes N e o - c l a s s i c i s t s a r g u e t h a t u n e q u a l d i s t r i b u t i o n o f w e a l t h a n d i n c o m e s i s d e s i r a b l e b e c a u s e i t e n c o u r a g e s s a v i n g w h i c h i s n e e d e d f o r e c o n o m i c g r o w t h a n d i n c r e a s e d e m p l o y m e n t o p p o r t u n i t i e s . P r o f e s s o r H e n r y C . W a l l i c h 39Ibid. 4 ® T h o m a s B . C u r t i s , 8 7 M i l l i o n J o b s ( N e w Y o r k : D u e l l , S l o a n , a n d P e a r c e , 1 9 9 2 ) , p . 1 1 . 41Ibid., p. 12. 67 mentions that political inequality and economic inequal ity are two different things: "One nan's gain in political power is bound to be at the expense of 42 others— his economic gain need not be." The function of inequality, he feels, is to accelerate growth by facilitating the use of incentives to save and to invest, which can benefit those with lesser incomes as well. He argues that unequal incomes with a faster rate of growth are more beneficial to all than equal incomes with a slower rate of growth. Professor David McCord Wright also believes in the necessity of unequal incomes. To him, unequal incomes are not the main source of insecurity or con flicts. Rather, they are caused by the mere fact that a society is growing and changing. Conflicts would not be avoided, he feels, by the mere introduction of planning or equal incomes because the insecurity of change itself is enough to cause pressure groups to try to protect their position from being altered. Nor does he feel conflict can be avoided by compensating those adversely affected by change, unless society is 42Wallich, Cost of Freedom, p. 15. 43Ibid., p. 157. 68 44 willing to subnit to unlinited blackmail. Professor Milton Friedman states that the dis tribution of income in a free market society— "to each according to what he and the instruments he owns produce"— while resulting in unequal income is com patible with equality of treatment. Differences of money income should offset differences in other char acteristics of occupations, otherwise he feels that 4 5 individuals would be treated unequally. The professor also feels that unequal income is necessary to entice individuals to undertake tasks which involve risk because, without unequal money incomes, people would 4 6 prefer routine jobs with certainty of income. While the professor recognizes that not all inequality of income produced by payment according to the value of one's marginal product results from equalizing differences or satisfying one's tastes for uncertainty, he nevertheless believes this method of 4 7 distribution is superior to any alternative. Granting that many of the differences reflect initial endowments 44Wright, Capitalism, p. 24. 45 Milton Friedman, Capitalism and Freedom (Chicago: The University of Chicago Press, 1962}, p. 162. 46Ibid.. p. 163. 47Ibid.. p. 164. 69 in property or human capabilities, he argues that the returns to an individual who inherits a large amount of property from his parents are as justified as the high returns to another who inherits a popular singing voice fron his. The reason given by Friednan is that dis allowing inheritance is tantamount to telling a rich man he can spend his wealth in riotous living but cannot leave any to his children.4* * However, the above theorist feels that the primary function of payment according to the value of one's marginal product is not distributive but allocative because the central principle of a market economy is voluntary exchange. Individuals cooperate with others, he says, because they can satisfy their own wants best in this manner and thus, if they were to receive less than what they added to the product, they would enter into exchanges solely on the basis of what they could 49 receive rather than what they can produce. Therefore, he concludes that many exchanges would not take place that otherwise would have unless individuals received payment according to what they contributed to the aggregate product.50 48Ibid. 49Ibid.. p. 166. 50Ibid. 70 This professor also asserts that capitalist results in less inequality of income and wealth than alternative economic systems. He points out that nations like the United States and those of Western Europe have much less inequality than a status society like India, a backward nation like Egypt, or even a Communist country like Russia, where levels of income 51 are quite diverse. Furthermore, he asserts that the more capitalist a nation is, the less the fraction of income paid for the use of capital and the larger the fraction paid for human services. He cites cases of India and Egypt where over half the total income is property income, whereas, in the United States, only 52 about one-fifth is property income. He also notes that capitalist societies have less permanence in the equalities of wealth and income because there is great mobility and change, so the position of particular families varies, while in more backward societies there is great rigidity. He points out that the one kind of inequality is a sign of dynamic change, social mobility, equality of opportunity; the other, of a status society. To him, competitive free-enterprise capitalism tends 53 to substitute one for the other. 51Ibid., p. 169. 52Ibid.. pp. 168-169. 53Ibid.. pp. 171-172. 71 Thus the unequal money as well as real incomes lead to more saving and induce more capital formation, which increases aggregate supply and raises the standard of life for all. III. NEO-CLASSICISTS AND THE FREE MARKET A strong tenet of neo-classical analysis, and accepted by many Neo-Keynesians and structuralists as well, is the belief that the free market system is the best method of coordinating the economic activities of the people. However, neo-classicists normally take a stronger position on the free market system because the alternative to them is central direction through coercion. The market system does not need coercion if the transaction is mutually beneficial because it will be voluntary. Function of the Market According to Professor Wallich, the free market is a device to distribute income and allocate resources efficiently, and not a device for achieving economic 54 growth. Because growth depends upon saving and plowing back into investment, the choice of growth is each individual consumer's or businessman's. ®4Wallich, Cost of Freedom, p. 162. 72 The efficiency of the market as an allocator of resources works by making it costly for firms or individuals to undertake activity that would not help them maximize their economic advantage. An example of this occurred in 1959 when the Hollywood Blacklist was ended by the winning of an Oscar by Dalton Trumbo, one of the ten Hollywood writers who refused to testify at the 1947 hearings on Communism in the movie indus- 55 try. While the Blacklist was a coercive, restrictive act on the part of the producers, the demand for the writings of Trumbo made it profitable for the film studios to buy his services under a fictitious name, thus indicating that violation of the free market allocation mechanism results in loss of an advantage. Arthur F. Burns, former Chairman of the Council of Economic Advisors under President Eisenhower, adheres strongly to the principle that the free market is the best allocator of resources. He states that most of the unemployment of young people is caused by then being priced out of the market by artificially jefi high wage levels, presumably caused either by trade 55Tine, LXXIII (January 26, 1959), 77. Arthur F. Burns, "The Federal Tax Cut and the National Economy," Challenge, XIII (October, 1964), 6. 73 anion activity or by ainiaua wage laws. As far as distribution of incoae is concerned, the free aarket provides incentives to individuals to satisfy their own desires indirectly by satisfying soaeone else's desires directly. Professor Wallich takes the position that strengthening those incentives, without aaking life harder for those who do not respond, would aake for a better economy and a better life for 57 all. He recognizes that aany, having no taste for the coapetitive life, would be lost before they start if their fate depended wholly upon their ability to 58 coapete. The fact that everyone would have a better life if incentives were strengthened indicates that he believes that incoaes would grow and not result in the situation where those who followed the incentives would gain at the expense of those who did not. Effect of Monopoly One interference with the free aarket which neo-classicists recognize as an iapediaent to its allocating and distributing aechanisa is the problea of aonopoly. Monopoly is used here not to describe ^Wallich, Cost of Freedoa. p. 101. 58Ibid.. p. 100. the theoretical situation of a single seller in an industry, but any case where a seller has the ability to restrict aarket supply and thus influence price. Most of these theorists are of the opinion that aonopoly exists because sellers fear coapetition and its result ing insecurity rather than because sellers are greedy. Professor George J. Stigler feels that aost threats to competition coae fron businessmen who want tariffs and local licensing laws. He argues that too many sectors of the business coflnunity are eager to run to Washington and seek shelter against competition when the slightest 59 wave of coapetitive activity appears. Professor Wright states that all aonopoly"is not caused by greed, but rather by the desire to have 60 security and uninterrupted routine. However, he feels that continued social growth is inpossible if the vested interests of every individual are to be respected— that of the businessman, the bureaucrat, or the laborer. According to him, independencej growth, opportunity, change, and competition seen equally repugnant to the vested interests of business, labor, 59 George J. Stigler, Interview in Challenge. XII (January, 1964), 21. ^Wright, Capitalism, p. 188. 75 and government as they combine to choke off grovth and 6 1 its inevitable insecurities. These restrictive measures are the chief threat to capitalism itself, according to this economist, because they can cause stagnation by producing an ideology hostile to change: From freedom and science came rapid growth and change, From rapid growth and change came insecurity, From insecurity came demands which ended rapid growth and change, Ending rapid growth and change ended science and freedom.62 Government Interference with the Market Only under very rare conditions would neo- classicists desire to have the government interfere with the free market. Emerson P. Schmidt, Economic Consultant for the Chamber of Commerce of the United States, feels that the free market is the most pro ductive and the most efficient way to get things done because it encourages maximum efficiency in the use of resources. He maintains that the more complicated or interdependent a society becomes, instead of requiring more government intervention it should improve the workings of the market. He states that 61Ibid., p. 198. 62Ibid., p. 206. 6 3 Emerson P. Schmidt, Interview in Challenge. XII (March, 1964), 19. 76 the government role should he limited because when majorities rule over minorities it involves coercion, and therefore those decisions should be minimized and the voluntary decisions of the market should be maxi- 64 mized. Dr. Schmidt wants every case of government intervention in the market to prove its case in the parliament of public opinion because government inter vention is far from ideal. He claims it perpetuates itself long after it has ceased to function in the C R public interest, or even in the interest of a group. Professor Wallich also attacks government intervention on the grounds of loss of freedom when majorities overrule minorities, but in addition he attacks it on the grounds of inefficiency. He feels a consumer finds it impossible to get the exact amount of the exact product or service he needs in the public sphere. He further claims that the customer has little incentive to economize because the goods come free of 66 charge: "Free provision of public services paid for by taxation is a very inefficient way of catering to consumer needs."67 64Ibid., p. 21. 65Ibid.. p. 23. 66Wallich, Cost of Freedom, p. 170. 67Ibid., p. 169. 77 Professor Friedman, taking a polar position on the free market, wants to limit government interference to things the free market either cannot do, or can do only with great difficulty. The types of government interference barely tolerated by this theorist come under the heading of monopoly and of neighborhood effects.68 Professor Friedman maintains that in the cases where technical conditions make a monopoly a natural outcome of competitive market forces, society is faced with three alternatives: private, unregulated monopoly; public regulation of private monopoly; or public monopoly. He opts for private, unregulated monopoly as the least of the evils because he is of the opinion that, in a rapidly changing society, the conditions making for technical monopoly frequently change, but both public regulation and public monopoly are likely to be less responsive to such changes, and thus less 69 readily capable of elimination than private monopoly. In the case of neighborhood effects, he asserts that when actions of some individuals have adverse effects on others for which it is not feasible to charge then, 68Friedman, on. cit., p. 28. 69ibid. 78 as in the case of stream pollution, it is justifiable for the government to interfere in this situation. When Professor Friedman chose private monopoly as the least of the evils, the reason given was that this is the most flexible of the three choices. He believes that a dynamic changing economy can make such a monopoly obsolete at some future time, but public interference can prevent this change. Closely tied up with this thinking is his strong opposition to licens ing certain occupations because licensing makes the employment problem more severe by limiting mobility and opportunity. He believes that tariffs, fair-trade laws, import quotas, production quotas, trade union restrictions on employment, and other similar inter ferences with the free market's allocation of resources are a result of governmental authority determining the conditions under which individuals can engage in certain 70 occupations. The pretext is always the same— protect ing the public interest. However, this economist maintains that the pressure on the legislature to license an occupation comes not from the members of the public who have been mulcted, but from members of 71 the occupation itself. His argument that governmental 70Ibid., p. 139. 71Ibid., p. 140. 79 licensing acts solely on the producer's behalf and not for the consumer is given support by the fact that arrangements for licensing almost invariably involve control by members of the occupation that is to be licensed. In the case of barbers, it is always a committee of other barbers that determines the eligi bility of a prospective candidate. Professor Stigler, while insisting that the government should act to preserve competition, argues that often government acts to counter what it thinks are unsound moves in the economy regardless of the effect on the competitive market. He cites the "unfortunate" steel price embargo of President Kennedy in 1962 as an example of government interference on the mistaken idea that oligopoly was the cause of 72 price increases. This professor had studied the problem of administered prices for a committee created by a contract between the National Bureau of Economic Research and the Bureau of the Budget and found no evidence that administered prices existed on any 73 important scale in the American economy. Thus, he believes that government should not have asked business 7^Stigler, loc. cit., pp. 20-21. 73Ibid. 80 or labor to take a stand against their own interests and on behalf of the rest of the economy because this exaggerates the power of these groups to do harm and underestimates the degree of competition in the econ- 74 omy. . . . Men acting together in a statesmanlike manner or being pushed into it by strong govern mental pressures leads to a seriously inefficient working of our economy. We are not going to get the right prices with the proper degree of flexi bility, the right places for investment and the right kinds of innovation if we have to clear these steps through a Congressional Committee or through a cabinet officer.75 Thus, the neo-classicist, like his classical predecessor, believes that men acting in their own interests will be guided by an "invisible hand" to do that which was no part of their original intention. However, Professor Wright takes an exception to this in the case of pressure groups. He maintains that labor leaders have given Adam Smith's "invisible hand" ai new interpretation when they claim that every union, in seeking advantages for its members, is promoting 76 the public good. However, the latter case is one of monopolistic restraints and Adam Smith was opposed to these restraints by unions, or corporations, his 74Ibid., p. 21. 75Ibid. 7®Wright, Capitalism, p. 189. name for trade unions 81 Transfer Payments While the neo-classicists rely mainly on the market to distribute income, they do recognize that there are times when this needs supplementing* The use of transfer payments by the government has generally been preferred to any attempt to increase wages by either trade union action or a minimum wage law because transfers do not adversely affect the relative prices of the various factors. Professor Wright feels that unemployment insur ance is the best method of handling frictional unemploy ment, but cautions against too liberal use of this 77 because it might harm incentives. He does state, however, that as a nation raises its productive standards it can afford more social services, including unemployment insurance* While he is of the opinion that in a deep depression maintaining consumption is the first task of government, he believes recovery will not occur until new net private investment is begun. But when the government does undertake the task of maintaining consumption, he argues that transfers should be financed by increasing the money supply 77Ibid., p. 196 82 rather than by transferring the money from slow to fast 78 spenders, as financing transfers by a highly progres sive income tax would do. Arthur F. Burns also agrees that unemployment insurance should be the first line of defense against a recession. Speaking before the School of Business Administration at the University of Southern California in I960, Dr. Burns pointed out the need to reform the American unemployment insurance system by including within it fourteen million workers who were then excluded from it and by extending the duration of the benefits automatically when unemployment reaches a certain per- 79 centage. He maintained that this type of transfer payment would prevent the decline of economic activity 80 to the point of a crisis. The most outspoken neo-classical exponent of the use of transfer payments to alleviate poverty and reduce the hardship of unemployment is Professor Milton Friedman. He believes that transfer payments, or negative taxes, accomplish the job by giving people aid, 78Ibid., p. 205. 7 9 Arthur F. Burns, "Inflation and Economic Progress," Address at the University of Southern California, March 31, 1960. (Mimeographed.) 80ibid. 83 not in kind like public housing, but in cash so they can purchase the goods upon vhich they place the highest 81 utility at the margin. In addition, transfer payments do not distort the market or impede its functioning like price supports, minimum wage laws, or tariffs. He also feels that transfers are more socially just because they aid people who are poor and not people who happen to belong to a certain occupation (farmers), be a certain age (over sixty-five), or live in a certain 82 area (Tennessee Valley). One neo-classicist, however, believes that unemployment benefits may cause malingering by the unemployed, and thus should not be too high. Dr. Martin R. Gainsbrugh, Vice-President and Chief Economist of the National Industrial Conference Board, asserts that an intensive study of the unemployment insurance system would reveal a strong correlation between unemployment and the hunting season in certain parts of the country; or in northern areas, between unemploy ment and the onset of winter weather with the possi- 83 bility of migrating south. His opinion is that 81 Friedman, o j ) . cit., p. 192. 82Ibid., p. 191. 0 * 1 Martin R. Gainsbrugh, Proceedings of a Symposium on Employment (Washington, D.C.:“Government Printing 0?7ice, February 24, 1964), p. 59. 84 unemployment in the United States may be a partial reflection of the preference of more leisure with the costs borne at public expense: . . . These measures were not intended to permit the withdrawal of active and able-bodied citizens from productive employment for purely personal reasons, in the belief that society owes them a living for any period of time, short or long.84 The attitude of the majority of neo-classical economists toward transfer payments is frequently overlooked by political conservatives who cure not economists, such as Representative Thomas B. Curtis, of Missouri, who calls unemployment payments bribery 85 of the unemployed workers. IV. NEO-CLASSICISTS AND PRICE STABILITY Price stability should not be confused with price rigidity; the price level may be stable if the price of one commodity increases while the price of another commodity decreases. It is the situation wherein the majority of prices rise without compen sating price decreases that economists generally refer to the situation as one of the absence of price stability, or more specifically as one of inflation. 84Ibid. 85 Curtis, 0£. cit., p. 10. 85 Price Stability and Fall Employment Neo-classicists generally show a stronger preference for price stability, even at the cost of moderate unemployment, than for a full employment policy, at the cost of mild inflation. Professor Henry Wallich, while admitting that inflation can act as a short run shot in the arm to the economy, maintains that it can be destabilizing in the long run and lead to a system of government controls. He does admit, however, that the United States has had only a slight price creep upward of 1*2 per cent per year since 1957. But he cautions that this is sufficient to cause a doubling of prices 87 in a lifetime. Furthermore, this professor argues that even small price increases bear watching today because there is little, if any, compensating price 88 decreases during recessions. If inflation has been mild, he claims that it is because it has been con stantly before the public eye, especially because of the balance of payments problem. Professor Wallich, 88Wallich, Cost of Freedom, p. 163. 87Wallich, Newsweek, p. 80. 88Ibid. unlike Professor Stigler, also applauds President Kennedy's Guidelines for Non-Inflationary Wage and Price Behavior for emphasizing that wage increases in 89 excess of productivity increases are inflationary. Dr* Arthur Burns would like to see the Employment Act of 1946 amended to include stability of prices in addition to full employment as a goal of national policy, even though he does not consider inflation an 90 immediate threat to the American economy. He main tains, however, that a policy of easy money and liberal credit expansion can cause inflation which nakes the next recession more serious. His analysis stems from the belief that a large public deficit, caused either by the tax cut or by financing increased federal spending by government bonds, is unacceptable to the general public, and thus the public will lose faith 91 in the ability of tax cuts to help recessions. He points out that any recession now would begin with an already sizable deficit which could grow to $15 billion 92 or $20 billion in a few months of contraction. 89Ibid. 90 Burns, "Inflation and Economic Progress," Address delivered March 31, 1960. 91 Burns, Challenge* p. 7 92ibid. 87 This economist's stand against inflation nay, in part, he explained by his interpretation of the seriousness of the present unenploynent problen in the United States. He acknowledges that the overall rate is too high to be acceptable, but emphasizes that the uneaployaent rate aaong married men is only 2.6 per cent, and thus the seriousness of the problen nay be 93 overstated. He also attributes the youth unemployment problen to their being priced out of the market, and therefore he would not advocate expansionary monetary and fiscal policy as a solution to the present unemploy ment problem. Professor Wallich, writing seven months later than Dr. Burns, takes a similar stand on the seriousness of the present unemployment problem. He states that the unemployment rate among married men is only 2.5 per cent, and therefore any further expansionary effort by the government will have high domestic costs. He strongly disagrees with Gardiner Ackley and other Johnson Administration economists that the United States can have more of everything without sacrificing 94 anything, because inflation is a potential threat. 9SIbid.. p. 6. 94Henrv C. Wallich. Newsweek. LXV (May.17. 1965), 85. 88 Professor Friedman, on the other hand, is a strong quantity theorist who believes that the quantity of money present in the economy is strongly and posi tively correlated to the performance of the economy. The Great Depression of the 1930's was, to him, caused by the monetary contraction brought on by poor Federal Reserve policy. It is his opinion that there has never been a case wherein a severe depression in any country was not accompanied by a sharp decline in the stock of money, and there has never been a sharp decline in the stock of money that was not accomplished by a severe 95 depression. He would like to see the monetary authority limited to the job of increasing the money supply month by month, or if possible, day by day, at a certain annual rate of growth between 3 and 5 per 96 cent. He does not adhere to price stability as an objective of national policy because, in his opinion, the monetary authorities do not have the clear and 97 direct power to achieve it by their own actions. Rather, the many price changes made throughout the economy are to him the result of decentralized decision makers acting, for the most part, independently. 95Friedman, oj>. cit., p. 50. 96Ibid.. p. 54. 97Ibid.. p. 53. 89 Attitude toward Balanced Budgets Popular writers with a conservative persuasion frequently allude to the need for balanced federal budgets. Neo-classical economists, however, do not subscribe in theory to this idea. Professor Wallich, for example, has no use for the balanced budget as an end in itself, but finds it a useful brake on the expansionist policies of the Johnson Administration because he fears excessive spending now could be inflationary. Noting that even the tax cut had to be justified by the irrelevant argument that it would ultimately balance the budget, Professor Wallich con tinues: . . • . yet this balance budget fetish, though it has no particular standing in economic doctrine and at times interferes with rational policy making, has its merits. If it were net for the widespread popular belief ... in the uncondi tional virtues of a balanced budget, where would our fiscal policy end? Sometimes it is needed to restrain expansionists who see no great harm in inflation. . . . Thus people who know better find themselves reaching for the myth to help stop excesses, pursuing the right goal by what is often the wrong means.9® Professor Wright agrees with Dr. Wallich that the real danger of an unbalanced budget is not the "spend ourselves into ruin" that uninformed conservatives 9®Wallich, Newsweek. May 17, 1965, p. 85. 90 say, but that such a situation, even in a depression, 99 ■ay finance foolish measures that prevent a recovery. While accepting the principle of deficit financing in a depression, Professor Wright feels that too much use of this principle to finance excessive amounts of public works could bid wages too high, to prevent a recovery of private investment, which he claims is the only factor that will bring about a recovery.10® The attitude of neo-classical economists toward balanced budgets can clearly be contrasted to that of the conservative non-economists by reference to the testimony of Bernard Baruch, elder statesman, before the Senate Finance Committee in February 1933, when Baruch was giving his views on the best policy to solve the depression: . . . We should make one single and invariable dictum the theme of every discourse: balanced budgets. Stop spending money we haven't got. Sacrifice for frugality and revenue. Cut govern ment spending— cut it as rations are cut in a _ siege. Tax— tax everybody for everything.*01 90Wright, Capitalism, p. 214. 100Ibid.. pp. 212 and 214. 101Bernard Baruch, Hearings before Senate Finance Committee, 72nd Congress, 2nd Session, February 13, 1933, p. 14. 91 Flexible Price-Wage Policy for Depressions Insofar as both classical and early neo-classical economic thought gave explicit recognition to the problem of general depression, it was assumed that the slump could be cured by price and wage reduction. Professor Wright asserts emphatically that no success ful overthrow of the mathematical logic of this position 102 has ever been made. He further points out that even John Maynard Keynes stated that cuts in money wages could stimulate effective demand by raising the marginal efficiency of capital. Keynes' statement to that effect was: When we enter upon a period of weakening effec tive demand, a sudden large reduction of money wages to a level so low that no one believes in its indefinite continuance would be the event most favorable to a strengthening of effective demand. Professor Wright, however, then states that once this fact is admitted, an ultraconservative economist could say that unemployment is always a result of too high a wage rate. His argument is that some idea of a normal or reasonable wage rate is almost inseparable lO^Wright, Capitalism, p. 57. 1 0 3 John Maynard Keynes, General Theory of Employment, Interest and Money (Mew York: jttarcourt, Brace and Company, 19^6), p. 265. 92 from the practical application of the employment con- 104 cept. Therefore, he concurs that Keynes established beyond the possibility of a doubt that we cannot be sure that the spontaneous mechanism of lower prices and wages will end a depression within a reasonable period of tine— that is, within the margin of instability the electorate will permit.***® This Professor, however, while agreeing with Lord Keynes that money wages should be kept constant in a depression, is absolutely opposed to any increase in money wages in a slump. Even if increasing money wages led to an increase in consumption, he argues it would lead to an offsetting increase in marginal cost to the employer, so that the pessimistic expectation of the wage increase would more than likely overshadow 106 any gain fron increased spending. Furthermore, if the demand for labor were elastic, the total wage bill, as well as total employment, would go down. Dr. Don Patinkin takes a view similar to Pro fessor Wright on the question of wage-price flexibility and full employment. Dr. Patinkin, taking a purely *04Wright, Growth and the Economy. p. 245. 105Wright, Capitalism, p. 57. 106Ibid., pp. 210-211. 93 theoretical position under static conditions, argues that full employment could reoccur after a depression if the economy exhibited not only relative but absolute price and wage flexibility, as suggested by Professor 107 A• C. Pigou. Relative price flexibility refers to the price of one commodity versus another, while abso lute price flexibility refers to the price level, or more specifically, the relation between the prices of all goods to the value of money. Dr. Patinkin points out that Lord Keynes overlooked the effect that a decrease in the price level would have on consumption, because lower prices increase the value of cash bal ances, and may cause wealthy holders of cash to sub stitute their excess cash for commodities, which are now lower in price. This is known as the real balance or "Pigou effect." However, Dr. Patinkin claims that this natural effect is too slow to be relied upon for effective policy. Abstracting from whether or not institutional rigidities will permit price and wage decreases, he asserts that under dynamic conditions this real balance Don Patinkin, "Price Flexibility and Full Employment," American Economic Review. XXXVIII (September, 194&), *>55. 94 108 effect will not work. Not only does he argue that price declines will have very snail effects upon con sumption, but he believes that each successive price decrease will affect consunption and saving less than the previous decrease in price. In addition, expecta tions of further price declines can cause consunption to decrease, even to the extent of causing bankruptcies, 109 thereby damaging the creditor as well as the debtor. He concludes that another way to increase real balance would be to increase the money supply while holding the price level constant.11® This theorist's evaluation of the uniqueness of the contribution of Lord Keynes is that Keynes success fully questioned the stability of a dynamic economy to return to full employment with flexible prices and wages in a reasonable period of time. Thus, even if the classical system generates full employment in the long run, it is useless for policy considerations, according to Dr. Patinkin.111 V. NEO-CLASSICISTS AND AUTOMATION A fundamental underlying law of both classical and neo-classical economic thought is that the central 108Ibid., p. 557. 109Ibid., p. 558. 110Ibid., p. 561. li:LIbid., p. 564. 95 problem in economics is overcoming scarcity. Throughout neo-classical writings, statements such as Professor Vallich's "growth will not repeal economics because our 112 wants always grow faster than our resources" are in evidence. Consistent with this is Professor Wright's "there can never always be enough of everything to satisfy every person, no matter how high the living 1 1 3 standard may rise." So the introduction of automation, because it increases the ability to produce, is to be regarded as a blessing for society in its struggle to overcome scarcity. Types of Automation One of the most complete studies made of auto mation by a neo-classicist has been done by Professor Yale Brozen. He classifies automation into two main types: automation as adaptation, and automation from invention. Automation as adaptation. Automation as adapta tion is that type wherein capital is substituted for 114 labor because it is cheaper to do so. This increase ^^Wallich, Cost of Freedom, p. 158. 113Vright, Capitalism, p. 24. il4Yale Brozen, Automation— The Impact of Technological Change (Washington, D.C.: American Enterprise institute, 1963), p. 11. 96 in the stock of capital will increase wages, according to Dr. Brozen, because it increases the capital-labor ratio, making labor more productive (increasing the marginal revenue product of labor). Should this wage increase be caused by an increase in the demand for labor and an attempt by each firm to bid away resources from others, then it is argued that there will be no 1 1 5 unemployment. But if the wage increase is caused by a minimum wage law or union bargaining, it is then maintained that the resulting automation will release 1 X 6 manpower to inferior alternative uses. Dr. Brozen cites an example of the latter situation wherein Chicago elevator operators were replaced by automatic elevators < when the union insisted upon a wage of $2.40 per hour. The cost of an automatic elevator was $40,000. The annual wage on a two-shift manually operated elevator was $10,000 after the wage increase; but taxes, insur ance, maintenance cost, interest, and depreciation oh the automatic elevator amounted to about $8,000 per 1 1 7 year, making it profitable to automate. The unfor tunate circumstance of this type of automation, accord ing to this professor, was that many unemployed 115Ibid.. p. 12. 116Ibid.. p. 13. 117Ibid. 97 teen-agers would have been willing to run the elevators for $1.00 to $1.25 per hour. Thus, this case saw auto- nation adopted where it lost jobs for teen-agers when they had no alternative enploynent opportunity, while it drained capital fron expansion of production where 1 1 8 it could have provided nore jobs. Autonation fron invention. Autonation fron invention shifts the production function to the point that it is possible to save both capital and labor or 1 1 9 only labor. This type of autonation will occur without an increase in the price of labor relative to capital. If capital is released by the industry adopting this type of autonation, it can be used in other industries increasing enploynent there even though it decreases enploynent in the original indus- 120 try. If this type of autonation nerely saves labor, enploynent could increase if the cost of production decreased enough to decrease the price of the output, 121 and denand for the output were price elastic. If an industry autonates and enploynent in it decreases, according to Dr. Brozen, the industry will absorb capital which will decrease the flow of capital 118Ibid. 119Ibid. 120Ibid., p. 15. 121Ibid., p. 16. 98 available to other industries, with which they could have expanded. If the decreased flow of capital is large enough to equip the released workers, fron the industry being autonated, with the sane anount of capital as workers have in other industries, it is clained there will be no problen absorbing the workers 122 at the current wage levels. However, if the decreased capital flow is inadequate, then workers will only be absorbed at a lower wage, or unenploynent will occur.*23 He argues that fron 1929 to 1938 too snail a flow of capital occurred when net saving averaged only 2.5 per cent of Net National Product. During this period, wages increased 36 per cent fron an average of 770 per hour in 1929 to $1.04 per hour in 1938, while enploynent decreased fron 47,600,000 to 44,200,000.*2* Conversely, fron 1946 to 1955 net saving was 9 per cent of Net National Product, wages increased 26 per cent fron an average of $1.30 per hour in 1946 to $1.64 per hour in 1955, but enploynent 125 increased fron 57,500,000 to 65,800,000. He there fore concludes that the effect of labor saving auto nation on enploynent depends upon the elasticity of 122 Ibid 123Ibid.. p. 17 Ibid Ibid 99 demand for the product and the flow of savings available for investment. Unemployment will not occur if the elasticity of demand is high or savings are high. Both must be low for unemployment to result. He also adds that the freer the labor market, the easier will be the adjustment.126 Short-Run Adjustment to Automation The question of minimizing displacement fron automation in the short run to the neo-classist involves keeping wages from increasing faster than productivity, maintaining a high flow of savings, and the use of normal attrition. Professor Brozen dis tinguishes automation used for expansion, which adds to employment, from automation used for modernization, which displaces labor. Even if more jobs are created than are lost because of automation, as this professor 127 believes, the new jobs are in new plants frequently in different localities from the jobs that were lost. Thus, automation changes who is employed in a way similar to tariff repeal. 126Ibid. 127Ibid., p. 20. 100 Stable wage rates* Higher wage rates induce investment in modernization, and thus cause more dis placement than necessary. Dr. Brozen asserts that if wages remained stable, or rose more slowly, a greater portion of investment would go into expansion in the same area where automation was being used for modern ization, thus aid the displaced workers to find jobs. He infers employers will be more willing to train 128 workers for new jobs in the same area. In addition, normal attrition, which is silent firing, could be used where the new jobs were insufficient to absorb the displaced. A higher rate of saving and investment can also help reduce displacement according to this analyst, because high savings make capital available for modern ization and leave enough capital for expansion, which 129 decreases displacement. Shorter work week. A shorter work week has not been looked upon with favor by neo-classicists because they are cost conscious and output conscious. Dr. Gabriel Hauge, President of Manufacturers Hanover Trust Company and former economics professor, maintains that a shorter work week is a deliberate effort to increase jobs which will end up decreasing jobs because it 128Ibid., p. 25. 129Ibid., p. 26. 101 increases labor costs and encourages autonation. He also believes it night create shortages of skilled labor and price the United States out of nany world narkets.130 Dr. Vallich argues that efforts should be nade to resist the cut in the work week because it is 1.31 inpossible to grow nore and work less. In addition, he clains a thirty-five hour week without a cut in pay would increase hourly wages alnost 15 per cent, and with a 3 per cent annual increase in productivity, it would take five years to make a non-inflationary transition. He does not think workers would be willing to wait that long for increases in take-hone pay in order to get nore leisure, so the effect of a shorter 1 3 2 work week would be inflationary. Long-Run Ad.iustnent to Autonation Taking the long run view, neo-classicists con sider autonation to be the continuation of an evolu- i3®Gabriel Hauge, "Is the Individual Obsolete?" Challenge. XIII (Decenber, 1964), 7. 13iWallich, Cost of Freedon. p. 164. | "TO Henry C. Wallich, Proceedings of a Symposium on F.wpi oyment (Washington, b.fi.: American Hankers Jssociation, 1964), p. 119. 102 tionary process which began in ancient tines. According to Dr. Brozen, the first technological revolution ended about 3000 B.C. It raised productivity enough so that societies could afford an aristocracy, like priests, arnies, and a bureaucracy. The Greek system was a democracy for the few resting on slaves. The second technological revolution did away with slavery because it was cheaper to use mechanical power. This is the present system of democracy for the many. Professor Brozen hopes automation will usher in an era of mass aristocracy.*33 The above economist believes the primary effect of automation is not a reduction of jobs, but rather the ability to perform jobs that were too costly or 1 3 4 impossible before. Dr. Gabriel Hauge agrees with Dr. Brozen that automation has not made man more ignorant nor the world more complex, but has given nan greater ability to cope with the complexity that was 1 3 5 already there. Disputes of man are partly over values and partly over facts; while autonation can do nothing about values, it can enhance the availability *33Brozen, op. cit., p. 2. *34Hauge, loc. cit. 135Ibid., p. 8. 103 and accuracy of facts. Dr. Brozen argues that those who fear unemploy ment from automation do so because they think in terms 136 of a given amount of goods to be produced. Professor Wright agrees that world population and world consump- 137 tion evidence a large need for more investment, and that abundance is an illusion. Growth and stability. Professor Wright cautions that while capitalism is highly productive in the long run, it is subject to short run instability. He agrees with Karl Marx that the revolutionizing of the means of production is indispensable for capitalism, but goes further than Marx by asserting it is indispensable for 1 3 8 any growing system. So instability and insecurity are a certainty if we are to have a higher standard of living. However, Professor Wright argues that this instability must be confined within reasonable bounds unless much of the social gain of growth is dissipated 1 3 9 into unemployment or other wastes. But his method of easing the burden of change on those adversely 1 3 6 Brozen, oj>. cit.. p. 8. *3^Wright, Capitalism, p. 207. 138Ibid.« p. 133. 139Ibid.. p. 42. affected is by use of transfer payments and not by any planning of a smooth, aggregate growth by the various sectors of the economy. He asserts that this type of planning would result in each group underestimating the demands for their product or service, and thus the group will refuse to expand for fear of glutting the market. This economist is of the opinion that the choice between more goods and nore leisure in an advanced, highly industrialized economy is always made by the least ambitious occupational group strong enough to make its wishes felt.^4® Consistent with the thesis that growth involves instability and change is the study made by Professor Brozen of the decline and growth of various types of industries in the United States from 1870 to 1960. Table VI shows the relative importance of the five types of industries in four different years in history. Or. Brozen's classification of various industries under the headings of specialization aiding, personal service, and life enriching will be accepted without qualifica tion by this study. The key to the decline or growth of an industry, according to the above professor, is the income 140Ibid., pp. 188-189. 105 TABLE VI RELATIVE IMPORTANCE OF FIVE MAJOR TYPES OF INDUSTRIES IN THE UNITED STATES, 1870 TO 1960 Type of Industry Per 1S76" Cent of ..1366. Total r w Output 1956 Extractive 54.4 41.3 24.5 9.9 Fabricating 21.9 27.3 29.2 31.8 Specialization Aiding 10.9 16.9 26.3 31.9 Personal Service 10.3 10.5 13.1 15.2 Life Enriching 2.6 3.9 7.0 11.1 NOTE: Extractive Includes agriculture and mining. Fabricating includes all manufacturing. Specialization aiding includes radio, television, restaurants, public utilities, transportation, and communication. Personal service includes domestic workers, barbers, mechanics, and the like. Life enriching includes education, travel, and research. SOURCE: Through 1930, U.S. Bureau of the Census, Historical Statistics of the United States (Washington, D.C.: Government Printing Office, 1966) and George J. Stigler, Trends in Employment in Service Industries (Princeton, New Jersey: Princeton University Press, 1956); for 1960, Survey of Current Business. July, 1961. elasticity of demand it faces. Thus, a 1 per cent increase in output in extractive industries was met with a 0.5 per cent increase in demand, while in fabricating industries a 1 per cent increase in output was met with a 2 or 3 per cent increase in demand, so prices fell in agriculture and mining and rose in 1 4 1 manufacturing. The falling farm prices released funds in the family budget for other things and the workers released from farming were available to go into manufacturing and produce those goods demanded, and were enticed to do so by a higher wage. At present, however, he asserts that the income elasticity of demand facing manufacturing foods is much lower and so addi tional output can only be sold at lower prices and thus 142 employment must decrease or wages must fall. At present he looks for increases in demand for personal service and life enriching industries. He anticipates employment in these industries will expand faster than employment will contract in manufacturing and agri culture.^** Automation and concentration. The impact of technological change on the plant size depends upon 1 ii Brozen, op. cit., p. 29. 142Ibid., p. 30. 143Ibid., p. 32. 107 whether the change is an automatic method of manufacture like automobiles, or an automated method, according to 144 Dr. Brozen. The former method, while not adaptable to change, is good for duplicating identical products like automobiles, and thus increase the optimum plant size, and decreases the number of firms in the indus- 145 try. Automated tools, run by computer tapes, can be adapted to changing requirements at low cost and hence tend to decrease the optimum scale of plant, and hence 146 increase the number of firms in the industry. From 1950 to 1962, the number of firms in the United States grew by 17 per cent, which was approxi- 147 mately the increase in the population. However, the slow growth of employment in manufacturing was accom panied by a slight decrease in the number of firms, while the rapid growth of employment in contract con struction and service industries was accompanied by a 148 rapid growth in the number of firms. Thus the impact of automation on the incidence of oligopoly is uncertain. Professor Stigler, while maintaining that 144Ibid. 145Ibid., p. 34. 146Ibid., pp. 34-35. 147lbid.. p. 35. 148Ibid. there is a serious amount of oligopoly in the economy, states that between one-tenth and two-tenths of the industries, measured either by employment or income originating in them, have a high degree of concentra- 149 tion at present. VI. SUMMARY Neo-classical thought strongly adheres to market solutions for unemployment problems because of the belief that labor mobility is essential for solution. While it is recognized by most neo-classicists that extreme instability is undesirable, the role assigned to the government in economic affairs is limited to preventing complete collapse because further government intervention may cause discouragement of net new private investment, which they believe is the only hope for economic progress and full employment. These theorists, while not strictly believing that supply creates its own demand, strongly disagree with others who claim that demand creates its own supply. Merely maintaining consumption will not provide full employment, according to these analysts, because full employment for an expanding labor force requires growth of capacity which can only cone from new Investment. To provide the proper environment for new private investment, they urge an unequal distribution of income which provides incentives for risk-taking and the amount of savings needed to finance the new capital. Even when the new capital is of the labor-saving type, they do not fear long run unemployment because society's desires always outstrip its ability to satisfy them. With proper mobility of the factors of production, unemployment from automation will be temporary as new products to satisfy new desires employ more workers in new plants in different areas. Neo-classicists claim that those who fear that unemployment from automation will be permanent think in terms of a fixed amount of goods to be produced. The danger of unemployment from automation to a neo-classicist comes from attempts by those adversely affected to prevent change; these attempts inhibit growth. It is growth that can provide addi tional employment opportunities. CHAPTER IV NEO-KEYNESIAN THEORY AND THE MODERN UNEMPLOYMENT PROBLEM As in Chapter III, a school of thought on economic problems will be examined to show that its members have a similar approach to studying the unemployment problem facing the United States. This chapter is devoted to the school known as Neo-Keynesians, latter-day followers of the principles of John Maynard Keynes. As in the previous chapter, differences on certain issues will appear among the individual econo mists, but it is argued that enough of a similarity exists to classify these thinkers in the same school. I. THE KEYNESIAN BACKGROUND Any discussion of the Neo-Keynesians must necessarily begin with Lord Keynes himself. Writing his major work in 1936,1 he was influenced by the depression with which England had been suffering for over a decade. Although schooled himself on classical and neo-classical teaching, Lord Keynes argued that i this doctrine was applicable only to a special case *John Maynard Keynes, General Theory of Employ ment. Interest and Money (NewTorET Hare our F7 Brace and Company, 1986). Ill of full employment and that reliance upon "misleading" neo-classical theory to solve the problems of an economy faced with large domestic unemployment would be "dis- 2 astrous." His central hypothesis was that there was no automatic tendency for an economy to achieve full- employment equilibrium. Attack upon Neo-Classical Principles Lord Keynes' criticism of neo-classical prin ciples is limited to the latter's theory of employment and in no way attacks neo-classical price or distribu tion theory. The two postulates upon which the neo classical employment theory was based, according to Lord Keynes, were: first, the wage is equal to the marginal product of labor; and second, the utility of the wage when a given volume of labor is employed is equal to the marginal disutility of that amount of employment.3 While accepting the first postulate under competitive conditions, Lord Keynes rejected the second. The second principle assumed that there could be no involuntary unemployment under competitive conditions because the utility of the marginal product of labor 2Ibid., p. 3. 3Ibid., p. 5. 112 was supposed to balance the disutility of the marginal employment. Therefore, any worker was supposed to be able to get a job by offering to work for a wage equal to his marginal revenue product. The employer's demand for labor was said to be a function of the worker's marginal revenue product and the real wage. However, Lord Keynes asserted that the real wage was not deter mined by the employment bargain between employer and worker because, under competitive conditions, the real wage was beyond the control of any group of workers to determine on account of the effect of offsetting changes 4 in the price level. In addition, he challenged the classical assumption that the supply of labor was deter mined by the real wage on empirical grounds that a moderate increase in the price level, with money wages constant, did not cause workers to withdraw from the e labor force on the grounds that the real wage decreased. Say's Law. Both classicists and early neo- classicists assumed that all the costs of producing the aggregate output must necessarily be spent, either directly or indirectly, on purchasing that output; or more popularly, that supply creates its own demand. If people saved, this was said to be a demand for 4Ibid., p. 12. 5Ibid., p. 13 113 investment goods, and thus total spending would not be diminished. Lord Keynes argued that these statements would only be applicable to a Robinson Crusoe barter- type economy, wherein individuals keep or consume their 6 output in kind. He insisted that the classicists confused an equilibrium equation with the mere identity that total income in a period is equal to total output: . . • The conclusion that the costs of output are always covered in the aggregate by the sale-proceeds resulting from demand, has great plausibility, because it is difficult to distinguish it from another, similar-looking proposition which is indubitable, namely that the income derived in the aggregate by all the elements in the community concerned in a productive activity necessarily has a value exactly equal to the value of the output.7 Saving. Lord Keynes stated that when neo- classicists assumed that an act of individual saving inevitably led to a parallel act of investnent, they confused another equilibrium condition with an identity; that an addition to an individual's wealth, without diminishing the wealth of anyone else, must necessarily 8 add to the wealth of the community. However, an act of individual saving, he reasoned, was merely a decision not to consume, and in no way meant a future decision to consume or to invest, and thus saving depressed 6Ibid.. p. 20. 7Ibid. 8Ibid., p. 21. 114 demand.9 Rate of interest. The classical position that the rate of interest was the price that equated the denand for funds to invest with the desire to save was attacked by Keynes on the grounds that the rate of interest could not be a reward for saving since a holder of cash receives no interest yet saves just the sane.10 He argued that the rate of interest was the price one received for parting with liquidity for a specified period. Thus, the rate of interest was considered a monetary and not a real phenomenon. Emphasis on Denand Instead of the heavy emphasis on increasing supply like the neo-classicists, Lord Keynes took the aggregate supply function as given; that is, the existing quality and quantity of labor, capital, technology, and the degree of competition in the economy, as well as the existing income distribution and social structure.11 With this framework given, the problem to him was to increase aggregate demand to the level that would fully employ the labor force. 9Ibid., p. 210. 10Ibid., p. 167. 11Ibid.. p. 245. 115 The volume of employment was felt to depend upon the propensity to consume and the amount of investment. The latter was said to depend upon the prospect for profits (marginal efficiency of capital) and the 12 interest rate. Thus, whatever the level of aggregate demand happened to be would determine how many would be employed to produce the total output. Because of the volatility of private investment, Lord Keynes advocated that the government act as a balancing factor by increasing investment until the level of demand was sufficient to employ the whole labor force: "1 conceive, therefore, that a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full 13 employment.” He envisioned that a developed economy, with a relatively stable population, would be able to increase the supply of capital through government investment to such an extent that the marginal effi ciency of capital would approach sero within a genera tion.14 He argued that this would be the best way of getting rid of some of the more objectionable features of capitalism, because when capital is no longer scarce, 12Ibid., p. 248. 14Ibid., p. 220. 13lbid., p. 378. 116 the "euthanasia of the rentier" would automatically follow because the rate of interest would be too low to allow people to live solely by receipt of interest* He could see no intrinsic reason for the scarcity of capital. Unequal wealth and incomes. Lord Keynes thought that abundance of capital would remove one of the justifications for the unequal distribution of wealth and incomes because the abstinence of the rich would 16 no longer be necessary. However, he emphasized that there were other justifications for this inequality, such as an outlet for human aggression and acquisitive ness: "It is better that a man should tyrannise over 17 his bank balance than over his fellow-citizens." Direction of employment. Lord Keynes had no quarrel with the manner in which a society employs its work force; only with the volume of employment offered. If nine-tenths of the work force were able to secure employment, he found no fault with the tasks those men performed; rather he complained only that the remaining tenth should not be able to find jobs: "It is in 15Ibid., p. 376. 16Ibid., p. 373. 17Ibid.. p. 374. 117 determining the volume, not the direction, of actual 18 employment that the existing system has broken down." Effect of Money The classicists divided economics into a dichotomy of value theory on the one hand and monetary theory on the other. The effect of money was reflected only in the price level and not on the real factors of output or employment of resources. Lord Keynes argued that this was a false division; that the correct dichotomy should be between the theory of the firm (microeconomics) with the alternative costs of the different uses of given amounts of resources and the theory of output and |Q employment as a whole (macroeconomics). It was in the latter division that he thought that a complete monetary theory was needed because money served as a link between present and future, and therefore the discussion of changing expectations which affected economic decisions could only be discussed in monetary 18Ibid., p. 379. 20Ibid.. p. 294. 19Ibid., p. 293. 118 Flexible Versus Stable Money Wages The self-adjusting character of the classical system rested upon flexible prices and wages so that maladjustments were explained by the existence of rigidities. It was in this area that Lord Keynes took strongest objection to the classicists. He argued that stable money wages were essential in a free economy because of the expectations that future sags in wages would have on profit expectations. Only in a dictator ship would he agree that cuts in money wages could be effected with a guarantee that real wages would also fall.21 Not only did he maintain that the stronger bargaining units would gain in relation to the weak under a flexible wage system, but also that it was more socially just that labor, as well as management and rentiers, have its compensation fixed in money 22 terms to lessen class conflict. As for the argument that the interest rate could be lowered if money wages were decreased, he insisted that the interest rate could be loweTed more directly by increasing the supply 2 3 of money with wages held constant. 21Ibid., p. 269. 23Ibid., p. 267. 22Ibid., p. 268 119 In summarizing the doctrines of Lord Keynes, it must be noted that his primary concern was with increas ing the actual output of the economy to equality with the potential and not with increasing the potential. His analysis was short-run and macroeconomic rather than long-run and microeconomic. It must be remembered, however, that while he differed with the classicists on the basic underlying assumption of a fully employed economy, he did believe that once full employment were achieved by whatever means, the classical system would come into its own and operate microeconomically as the classicists said it would. II. NEO-KEYNESIAN CONCERN WITH LACK OP DEMAND Present-day Neo-Keynesians place the primary cause of unemployment on deficiency of aggregate demand. Professor Walter W. Heller, former Chairman of the Council of Economic Advisers, states that vigorous measures to expand consumer and investment demand must be taken if the economy is to reduce unemployment to 4 per cent or below. It is the view of this economist that even if the cause of unemployment were primarily structural, a substantial increase in aggregate demand would cause much of the existing unemployment to melt 120 away.24 Aggregate Demand and Labor Force Adaptability Dr. Heller, as most Neo-Keynesians, believes in the ability of the labor market to adjust to changes in supply or demand. He argues that large increases in aggregate spending would set in motion forces that tend to match job vacancies with applicants. On the supply side, he envisions that occupations that experi enced labor shortages would see rising wage rates that would induce both new and old workers to train them selves for the work and motivate employers to set up 25 training programs. Furthermore, it is his opinion that changes in relative wage rates would make the use of more available labor attractive to producers. On the demand side, the former adviser reasons that labor shortages would generate increased recruiting efforts by employers, while premium wages would induce workers 26 to move to areas of increasing demand for labor. Walter W. Heller, wThe Administration's Fiscal Policy," Unemployment and the American Economy, edited by Arthur M. Ross ^New York: John Wiley and Sons, Incorporated, 1964), p. 96. 25Ibid. 26Ibid. 121 Dr. Heller theorizes that if all wages and prices were flexible, full employment might be achieved as a result of declines in the sectors of the economy experiencing a decrease in demand. However, because wages and prices are much less flexible downward in the present American economy, he maintains that the only way to cause the market mechanism to allocate job 2 7 seekers among job openings is by monetary expansion. Wages and prices would then increase in sectors experi encing labor shortages and rising demand and would remain fairly stable, or decline slightly when the opposite occurred. Professor Lowell E. Gallaway concludes that the labor market is a reasonably good allocator between the various sectors of the economy but, unfortunately, mobility often takes the form of a decline in the number of workers attempting to enter the less desirable 28 sectors of the labor market. His conclusion is based on the fact that statistics show unemployment to be as widely dispersed throughout the economy now as it was 27Ibid., p. 97. 28 Lowell E. Gallaway, "Labor Mobility, Resource Allocation, and Structural Unemployment." American Economic Review. LI1I (September, 1963), 71^-?lS. 122 before 1957. However, he states that barriers to mobility of workers between occupations are more than the product of individual evaluations of the opportunity costs because professional workers had three times the absolute increase in pay that unskilled workers had from 1948 to I960.29 His view is that the time for training professional workers is too long for the unskilled to undertake, and thus it may be the next generation that makes the change. The weakness of the labor market as an allocative mechanism, according to the above economist, is in the interfactor process— adjusting the price of labor to 3 0 the price of capital. The downward rigidity of both union and non-union wages prevents the labor market from making the proper adjustment. Union demands for higher wage rates can hasten the substitution of capital for labor while the inflexibility of wages in non-union sectors can limit the ability of these sectors to absorb workers excluded from the union sectors, accord- 3 1 ing to this analyst. Professor Robert M. Solow reaffirms the Neo- Keynesian belief in the ability of the labor market to 29Ibid., p. 713. 31Ibid., p. 715. 30Ibid.. p. 694 adjust to changes in demand for labor just as the neo- classicists said. He accuses conservative spokesmen, such as Congressman Thomas Curtis and Chairman Villiam McChesney Martin of the Federal Reserve, of declaring that the unemployment in the United States is caused by structural imbalance merely to provide an alternative explanation to the Keynesian argument that demand is 32 deficient. This professor points out the paradox that these conservatives reject the neo-classical belief in the ability of the labor market to adjust. He main tains, instead, that even if the demand for highly skilled labor exceeded the available supply, that pro duction would not stop expanding but merely be forced to make marginal substitutions of lesser skilled workers for the highly skilled.33 He believes that the cost of the substitution would be justified by the relative wage rates; the wages of the highly skilled workers would have risen compared to those of the lesser skilled. In addition, consumers would find it economical to adjust their purchases because goods heavily weighted with the productive services of the highly skilled 32 Robert SoIqw, The Nature and Sources of Unemployment in the United States (Wicksell Lectures. Stockholm: Almqvist and Wiksell, 1964), p. 17. 124 workers would have increased in price relative to goods produced by the lesser skilled. A similar view is expressed by Ewan Clague, economist for the Department of Labor. He believes that a free-market economy has a great potential for adaptation if demand is adequate. He cites the example of World War II, wherein skills were broken down into simpler parts and every worker was utilized at his 3 5 highest skill. HeyTurther notes that, since that time, a large growth of technicians has relieved the shortage of scientists and engineers, while in medicine the shortage of doctors and dentists has been partly met by increasing the supply of medical and dental 3 6 technicians and hospital aides. His fear of institu tional rigidities, however, is similar to the analysis of professor Gallaway. Dr. Clague points out that service industries are expanding in employment oppor tunities while goods-producing industries are contract ing, but that the relative wage signals are pointing g4Ibid. g®Ewan Clague, "A Profile of Unemployment in the Early 1960's,w Address before the 45th Economic Con ference, National Industrial Conference Board, New York, May 18, 1961, p. 8. (Mimeographed.) 36md. 125 37 in the wrong direction. It was Professor Gallaway who argued that the spill-over of workers from the restricted union sector would depress wages in the non-union sector.38 Professor Paul A. Sanuelson would like to see more wage flexibility, especially for older or part- time workers. His argument is that a man today cannot get a job in a large firm and draw a wage different from others performing like tasks unless there happened to be an incentive program. This professor would like to see a system wherein an older worker could slow down and work at two-thirds of the productivity of the standard worker and draw two-thirds of his wage instead 39 of zero. Fear of Excessive Thrift It has been a hallmark of this school of thought that the amount of saving in a highly-developed economy, unlike in a lesser-developed economy, may exceed the 37Ibid., p. 9. 3®Gallaway, loc• cit•, p. 713. 39 U.S. House of Representatives, Hearings before the Subcommittee on Unemployment and the* Impact of----- Intonation. of The Committee on Education and LaSor. 87th Congress, 1st Session (Washington, D.C.: Government Printing Office, 1961), p. 144. 126 amount investors wish to utilize for capital formation. The acknowledged dean of American Neo-Keynesians, Professor Alvin Hansen, considers the United States a high-savings economy. He lists depreciation, corporate retained earnings, pension funds, life insurance reserves, savings accounts, and mutual funds as sources of savings and declares that no society will be able to maintain its current achieved level of income 40 unless all these savings funds can find borrowers. The alternative, as he sees it, would be wasted savings and declining national income, because he believes no 41 growth will occur unless borrowing exceeds saving. A similar view is taken by Professor Abba P. Lerner. While he recognizes that in a fully employed economy resources are scarce and therefore must be economized in their use to produce output, he argues that just the reverse is true in an economy with a 42 marked degree of unemployment. In the latter situa tion, he asserts that money and jobs are scarce, while 4 0 Alvin Hansen, The Postwar American Economy (New York: W. W. Norton and Company, Incorporated, 1964), p* 35. 41Ibid. 4 2 Abba P. Lerner, Economics of Employment (New York: McGraw-Hill Book Company, 1951), p. 143. 127 goods are not, and therefore thrift can impoverish the community. This argument stems from his belief that the total amount of employment in a society depends upon the level of aggregate spending in a particular period, and that increasing the propensity to save during a depression would decrease total spending and thus intensify the problem. A view expressed by Lord Keynes as well as by many of his present-day adherents concerns the problem of economic maturity or stagnation. While it was pointed out earlier that Keynes envisioned a possibility of increasing the supply of capital to the extent that it would lose its scarcity, Neo-Keynesians discuss the possibility of investment opportunities diminishing but without a concurrent diminishing of the propensity to save. Professor Lerner states that the concept of a mature economy is worth considering regardless of whether or not it is within reach. To him, the amount of realized investment depends upon inventions not yet 44 made and the future need for more capital. He con siders maturity an optimistic rather than a pessimistic possibility because it would require less sacrificing of present consumption in order to build for the future. 43Ibid., p. 147. 44Ibid.. p. 249. 128 As long as the economy were fully employed, economic maturity would cause this professor no alarm because less investment would automatically mean more consump tion spending if the government undertook the task of insuring that total spending were adequate to maintain 45 full employment. Professor Samuelson gives the opinion that stagnation is too dramatic a term to describe the present-day American economy, but that it is possible that a recurring slack period of investment may have 46 arrived. These periods, characterized by a lessening of the degree of utilization of economic resources, have appeared at fifteen to twenty-five year intervals in the United States the last seventy-five years. However, this economist does not regard these swings as immutable facts of nature that man can do nothing about, like the medieval plagues. He argues that appropriate fiscal and monetary policies can moderate, and perhaps even compensate, for such tendencies toward 47 sluggish investment opportunities. 45Ibid., p. 250. 46 Paul A. Samuelson, "Functional Fiscal Policies for the 1960's," The Battle Against Unemployment. edited by Arthur M. Okum (New York: W. W. Norton and Company, 1965), p. 109. 47ib±d. 129 Professor Hansen Mentions that it is possible that recent institutional changes have caused the propensity to save to shift upward in the United States. He cites accelerated depreciation, pension plans, savings and loan shares, and low break-even points in J Q oligopoly industries as examples. He states that realized saving is normally a larger percentage of the Gross National Product in a year when employwent is full than in years when it is slack, but that realized saving was 15 per cent of the Gross National Product in 1929 (a year of full employment) but averaged 15.3 per cent of the Gross National Product from 1957 to 49 1961, when considerable unemployment existed. He concludes that a slightly larger per cent of National Income being saved during periods of unemployment and much higher tax rates is a reasonable assumption that 50 the saving function has shifted upward. Role of the Government Unlike neo-classicists, Neo-Keynesians prescribe a significant role for the government because of their disavowal of Say's Law and its automatic adjustment. 48Hansen, op. cit., p. 53. 49Ibid. 50Ibid. Professor Lerner believes that a mechanism is needed that regulates economic activity to prevent 51 - overuse or underuse of resources. The mechanism suggested is government fiscal and monetary policy designed to maintain the level of spending needed to prevent depression or inflation; or functional finance, as it is called by this economist. Under this theory the government would decrease taxes and increase spend ing in a depression and lower the rate of interest by lending money or repaying loans; while in an inflation ary period the government would increase taxes and reduce spending and raise the interest rate by borrowing 52 money but holding the funds idle. The sole aim of this policy would be to control the amount of aggregate spending in the economy by adjusting the government's contribution to aggregate demand to whatever amount is needed to complement consumption and private investment. Should these rules conflict with the philosophy of a balanced budget or ceiling on the national debt, the 53 latter two would have to be forgotten. This professor declares it is not necessary to know why there is too much or too little spending in the economy in order to 51 Lerner, op. cit., p. 5. 52Ibid., pp. 10-11. 53Ibid., p. 11. 131 be able to correct it.*** Functional finance requires only a knowledge of the direction of the required change and some notion of the magnitude needed. His chief complaint is the obsession people have with the fear of a government deficit during prosperity even when this 55 deficit may be the chief cause of the prosperity. Professor John M. Culbertson agrees with Dr. Lerner that complete knowledge of the ultimate causes of unemployment need not be known in order to have a corrective government policy. While Professor Culbertson considers lack of effective demand the obviously imme diate cause, he admits the ultimate causes are more eg obscure and a matter of dispute. However, he is adamant about the reason the United States has had 5.6 per cent unemployment in the early 1960's instead of the preferred 4 per cent. To him the reason employ ment fell short of its target is because total demand for the output of the economy was at least $25 billion 57 a year less than potential output. The specific goal for government policy, as far as he is concerned, is 54Ibid., p. 307. 55Ibid.. p. 310. ee John M. Culbertson, Full Employment or Stagnation? (New York: McGraw-bill Book Company, l924)“p7 23. 57Ibid. 132 to supplement consumer and investment demands so the total of those demands plus foreign purchases vould be 58 $25 billion a year greater. He concludes that the performance of the economy is inescapably dependent upon government policy: NA superior economic performance 59 is a social achievement, not a gift from the Gods." Tax cuts. The policy of cutting taxes to increase aggregate demand is a pure Keynesian idea according to Professor James Tobin, formerly on President Kennedy's Council of Economic Advisers. He estimates the gap between the actual and the potential output 60 from 1962 to 1964 to be about $30 billion per year, even though aggregate spending increased 5 per cent * annually in this period. He argues that this indicates that the 5 per cent increase merely absorbed the normal increases in productivity, the labor force, and prices but left unemployment untouched. His view is that the economy must run that much faster just to stay in the same place, but if the $30 billion gap is to be elimi nated, spending would have to increase by 7 or 8 per 58Ibid. 59Ibid.. p. 54. 60James Tobin, "The Tax Cut Harvest," The New Republic. CL (March 7, 1964), 14. 133 61 cent for a couple of years. His estimation of the manner in which the 1964 tax cut could eliminate the $30 billion gap is as follows: the $11 billion tax cut would increase consumption by $9 billion, and with a multiplier of two, would add $18 billion aggregate spending into the economy, leaving the other $12 billion to be made up from either $6 billion private investment 62 or government spending. He considers a tax cut good for economic growth only in the sense that prosperity is beneficial for private investment. Tax cuts help consumption, not 6 3 investment, except as an accelerator. What worries him is that he considers an increase in government spending politically unfeasible and an increase in private investment economically unfeasible because of the tight money policy the balance of payments problem 64 has thrust upon the economy. Professor Samuelson takes the position that there is no great potency in reduction of corporate 65 income taxes with regard to stimulating investment. High corporate rates mean that the government becomes 61Ibid.. p. 15. 62Ibid. 63Ibid. 64Ibid., p. 16. 65 Samuelson, oj>. cit., p» 108. 134 a senior partner to an established firm, sharing in its losses as well as its gains, while underwriting a.good part of the cost of investment. A reduction of the high rate could increase the riskiness of investment 66 without increasing the after-tax return. His reason ing is that if a firm could expect a 10 per cent yield on an investment of $1,000, the $100 return before taxes would be equivalent to a $50 return with a tax rate of 50 per cent because $500 of the original cost could be deducted from taxable income. The effectiveness of the tax cut is seriously questioned by John Regan Stark, Counsel to the House Banking and Currency Committee, because it may easily be offset by increases in Social Security taxes. He points out that the amount pulled out by this regressive tax, even before the addition of Medicare, weighs heavily upon the lower income groups who have a high propensity 67 to consume. It is his contention that such a tax is pointless, except in the case of inflation, because only 66 Paul A. Samuelson, "Fiscal and Financial Policies for Growth," Proceedings of a Symposium on Economic Growth (Washington, D.C.: American Bankers Association, February 25, 1963), p. 94. 67 John Regan Stark, "Social Security Taxes: A Drag on the Economy?" Challenge. XII (November, 1963), 31. 135 an Individual can save out of current incone against save except by investing in increased productivity, and therefore this tax results only in a sacrifice of current purchasing power because the benefits could have been paid by the governnent without collection of this tax.®® Monetary nolicv. Professor Culbertson believes that the fundanental flaw in the narket econoay is that it is unable to develop without the use of noney, but contains no device for controlling the behavior of 70 noney. While it is his opinion that the total noney supply nust increase sufficiently over tine to finance a growing full-enploynent output, he stipulates that the supply nust not grow too rapidly when total denands are excessive nor decline when the econony is slack, 71 thus aggravating the fluctuation. He cites the fact that the noney supply contracted 3 per cent, or $4 72 billion, fron nid-1959 to nid-1960. In his opinion, had the noney supply increased $3 billion instead of future consunption requirenents 68 A society cannot 68Ibid., p. 33 69 Ibid., p. 34 "^Culbertson, oj>. cit., p. 48 72 Ibid., p. 127 136 declining by $4 billion, the extra $7 billion of noney supply could have financed an increase in National Incone of $25 to $30 billion, because he assunes a cash ratio of 25 per cent and thus a money multiplier of four.73 The belief that the econonic perfornance of the nation is strongly correlated to the quantity of noney is very sinilar to the monetary theories of the neo classical, Professor Milton Friedman, as discussed in Chapter III. However, the Neo-Keynesians base their theory on the public's liquidity preference, or desire to hold noney as an asset. Professor Culbertson nain- tains that the econony's increase in liquidity during the severe contraction of 1929-1933 resulted not fron the nonetary authority increasing the money supply, but from the desire of people and firms to increase their cash holdings by reducing their expenditures even more 74 than the monetary contraction. Professor Lerner also takes the position that the public's liquidity preference is a significant factor in the performance of the economy through the effect it has on the interest rate. Completely reject ing the savings-investment theory of the* rate of 73Ibid. 74Ibid., p. 131. 137 interest, this econonist argues that the interest rate increases whenever the public tries to increase their cash balances and decreases whenever they try to reduce 75 them. His reason is that any net addition to lending can only cone fron someone's reduction of his cash 76 balances and not out of saving. Fron the nacro point of view, he concludes that a net increase in the will ingness to lend or a net decrease in the eagerness to borrow can only cone fron someone's willingness to allow 77 his cash balances to diminish. Fiscal policy. Professor Alvin Hansen states that the anount of growth needed to provide full employ ment requires increases in expenditures and not merely 78 the maintenance of currently high levels of spending. While he admits that either increases in private invest ment or government spending would provide the impetus needed, he predicts that government will have to carry an increasingly larger share of the load in the future. He bases this prediction on the fact that private investment since 1957 has not been able to maintain its » 75 ''Lerner, op. cit•, p. 113. 76Ibid. 77Ibid., p. 114. 7®Hansen, op. cit., p. 36. 138 79 high levels of 1948-1956. He does not feel that private investment opportunities have dried up, but is of the opinion that the largest growth area is new in the service sector, which requires less capital invest- 80 ment per dollar of output. It is his contention that if government fiscal policy were coordinated with private investment to undertake planned development programs, that maximum effectiveness could be achieved. He suggests the government undertake projects like schools, hospitals, technical training centers, urban transit, parks, and civic cultural centers which may stimulate complementary private investment because he believes that present scarcities are not in consumer durables but in new needs connected with the heavy 81 urbanization of the population. This professor does not want to wait for the renewal of spontaneous forces like increased family formation or space exploration to provide enough autonomous investment to fill the gap between the potential and actual output. Nor does he think tax cuts alone are sufficient because of the 82 leakages. But he does maintain that a planned development program by business and government could 80Ibid.. p. 51. 82Ibid., p. 38. 79Ibid., p. 37. 81lbid. 139 marshal both the spontaneous and discretionary forces needed to raise national income. Professor Lerner mentions the fact that govern ment investment need not depend upon profit expectations and therefore may be the only area of increased autono mous spending in a depression. It is his opinion that even wasteful spending can be beneficial in a serious 83 depression. He does not discuss the possible effects that government investment may have on private invest ment, however. Public goods. On the subject of public goods, there is a direct conflict between most neo-classicists and Neo-Keynesians because the latter theorists tend to look upon the public sector as somewhat impoverished in relation to public services, while the former school relies upon consumer sovereignty as the sole determinant of proper allocation. Professor Francis II, Bator argues that the doctrine of consumer sovereignty does not imply that privately-produced goods, are necessarily more efficient in catering to consumer tastes than publicly-produced goods. In order to have optimum efficiency on the private market, price should be equated to marginal cost. However, this economist ®3Lerner, op. cit.. p. 92. 140 points out that many public utilities have such high initial fixed costs relative to variable costs that at the output people desire, marginal cost is less than average cost, and thus if price were equated to Q J marginal cost, losses would be incurred. It is his contention, therefore, that the profit and preference- seeking market calculation will not provide the proper incentive for production of the capital equipment nor 85 the distribution of the services of the public goods. In addition, he asserts that voluntary contribu tions from users will not work out if they are used to finance the necessary subsidy that decreasing cost industries require if they are to sell their goods or services at a price equal to marginal cost. His reason is that consumers share private goods in relation to their contributions (purchases) because their consump tion is a function not only of the supply of these 86 goods but also of the amount they spend on them. But the consumption of many public goods, such as public libraries or paved streets, is a function only of their supply and thus rational consumers, according to this ®4Francis M. Bator, The Question of Government Spending (New York: Harper and Brothers, 196<l), p. 94. 85Ibid., p. 95. 86Ibid. 141 theorist, would understate their preferences, hoping other contributors would bear a larger portion of the cost without causing these consumers to receive less benefit.87 Professor Bator counters Professor Friedman's argument that transfer payments are the best method of providing income compensation to particular groups in all cases by stating that equivalent transfer payments to veterans would not have resulted in the construction of hospital facilities even if the veterans expressed 88 a preference for such an allocation. On other qualitative grounds, Professor Bator justifies public housing and community redevelopment expenditures because these have a partially public nature since other people care about the type of neighborhood in which they live. However, he does agree with Dr. Friedman that relief and old-age benefits are best 89 handled by transfer payments. ~ III. NEO-KEYNESIAN PREFERENCE FOR FULL EMPLOYMENT OVER PRICE STABILITY Most economists agree that full, employment and price stability are incompatible because the intense 87Ibid., p. 97. 88Ibid., p. 100. 89Ibid., p. 101. 142 competition for scarce factors and goods will lead to rising prices. While neo-classicists tend to prefer price stability at the cost of moderate unemployment! Neo-Keynesians tend to prefer full employment at the cost of mild inflation. The High Cost of gnemplovment Neo-Keynesians consider the cost of unemployment to be higher than the cost of mild inflation because unemployment involves loss of goods and services that were not produced as well as personal hardship and tragedy for the jobless. Dr. William H. Miernyk, Director of the Bureau of Economic Research at the University of Colorado, views the pursuit of price stability at the expense of full employment as a result of the Benthamite bias of the American public. His opinion is that because unemployment affects only a small minority while inflation affects everyone, the major concern of public opinion has been over price stability. However, such a policy could lock the unemployed minority into permanent joblessness while ^William H. Miernyk, Discussant, Unemployment and the American Economy. tfdited by Arthur U. Ross XNew York: JohxTViley and Sons, Incorporated, 1964), p. 192. 143 the affluent majority remains apathetic. In addition, he maintains that the heavy cost of unemployment is compounded by the sacrifice of $40 to $50 billion annually in goods and services foregone while the expenditure of only a fraction of that sum would reduce 91 unemployment to tolerable levels. It is his opinion that this problem will remain unsolved until the American people become aroused about the plight of the unemployed minority and worry less about the affluent majority. * * 2 This view was shared by the late Dr. Jack Downie, former Chief Economist for Economic Cooperation and Development in Paris, France, who believed that Euro peans were more intolerant of unemployment than the Americans. However, this economist believed that the pursuit of stable prices was merely a cover for the 93 avoidance of government intervention in the economy. He stated that no European nation, not even West Germany that has an inflation neurosis, was willing to sacrifice growth and full employment merely to stop 91Ibid.. p. 194. 92Ibid. Q«* Jack Downie, "Importance of Knowing What You Want," Unemployment and the American Economy, edited by Arthur M. Ross (New York: John Wiley and Sons, Incorporated, 1964), p. 161. 144 prices from rising. His conclusion was that the American choice of price stability was an ex-post oversimplification; that the real reason was the belief _ Q A in "sound economic policies." Professor Albert Rees argues that unemployment has a higher cost than inflation for four main reasons: first, the loss of output is almost always a higher number of percentage points than the decline in employ ment because the lack of demand causes shorter hours to be worked, which decreases the output per worker, and results in excess capacity in many industries; second, high unemployment reduces future output because it retards the flow of excess labor out of declining industries, such as agriculture, intensifies union opposition to innovation, and leads to demands fer a shorter work week; third, the increase in long-term unemployment leads to deterioration of skills and may impair the willingness to work (he cites figures to show that between 1957 and 1962 unemployment increased 36 per cent while long-term unemployment, over twenty- 95 seven weeks, increased 145 per cent ); and fourth, he 94Ibid., p. 163. 95 Albert Rees, Discussant, Unemployment and the American Economy, edited by Arthur M. Ross (Mew York: John Wiley and Sons, Incorporated, 1964), p. 136. 145 notes the social costs of unemployment, such as loss of respect for the father and high rate of juvenile crimes. The Lower Cost of Inflation Professor Rees maintains that gently rising prices improve the allocation of resources now that so many prices are sticky downward, because increases in demand can cause some prices to increase while others 97 remain stable. He further argues that inflation does not cause decreases in output like unemployment does* The real case against inflation, to him, is that it causes unintended transfers of real wealth from creditors to debtors. However, he concludes that this •cost will only occur when inflation is unanticipated because, otherwise, this can be corrected by a higher 98 interest rate. His policy recommendations include taxing the gainers to reimburse the losers, such as increasing Social Security payments. He wants to aim for the smallest price increase consistent with some independently defined full-employment goal and not at the lowest unemployment rate consistent with price stability 99 "ibid., p. 137 "ibid. 97Ibid. "ibid., p. 138 Professor Hansen believes that the extreme amount of inflation consciousness of the public stems from the pressure of rising state and local taxes combined with a rising consumer price index and the urges created by "extravagant" advertising.100 This economist is of the opinion that the purchasing power of the average citizen's money after taxes is higher than it has ever been before, and thus much of the complaining about inflation is a result of a powerful propaganda campaign against increases in government expenditures.101 It is his view that the public can be persuaded that the cause of price increases must be the increase in government spending and not any increase in private spending. He further maintains that personal savings have a higher purchasing power now than at any previous time, and that talk of the 102 erosion of family savings is erroneous. He argues that full employment, such as occurred from 1950 to 1957, led to much greater increases in the real value of family savings than would have occurred if the period had been one of absolute price stability coupled 100Alvin Hansen, Economic Issues of the 1960*8 (New York: W. W. Norton and Company, Incorporated, 1960), p. 23. 101Ibid. 102Ibid.. p. 30. with unemployment, because it is in the latter cir- 103 cumstances that savings are depleted. In addition, he even argues that the purchase of Series E Savings Bonds by small savers over the period from 1948 to 1958 would have resulted in an increase in the real value of savings despite the rise in the price level. His reasoning is that the purchase of a $1,000 bond for $750 in 1948 would (on the old basis before interest rates were raised) have accumulated to $1,000 in 1958 for an increase of 33 1/3 per cent in nominal dollars. But since the 1958 consumer price index was 20 per cent higher than it was in 1948, the savings bond would have had an increased purchasing power of better than 10 per cent by 1958, indicating that as long as the rate of interest exceeds the rate of price inflation, the pur chasing power of accumulated savings will continue to 104 rise. This economist concludes his argument by citing the Economic Report of the President, January 1960, which states that the purchasing power (after correcting for increases in the consumer price index) of the net financial assets of individuals per capita 1 0 5 increased nearly 100 per cent from 1948 to 1959, 104Ibid.. p. 29. 103Ibid. 105Ibid., p. 30. 148 a decade considered to contain inflationary pressures. Flexible Versus Stable Money Wages Neo-Keynesians almost universally reject the policy of flexible wages and prices to solve the unemployment problem. The objection to flexible wages and prices is not that it would be theoretically impossible to solve unemployment with that policy, but that it is institutionally impossible today in the era of strong unions and large corporations. Professor Samuelson calls Professor Friedman's Utopian situation of a constantly rising money supply, flexible prices and wages, floating exchange rates, and the absence X 0 6 of interest rate ceilings a "never-never land." Professor Lerner, in partial agreement with the neo-classical Professor Don Patinkin, states that flexible wages and prices could not bring about full employment because of the expectations of further price and wage decreases, and because the public's liquidity 1 0 7 preference increases as prices fall. He believes Paul Samuelson, "The Folly of Monetary Rules," The Battle Against Unemployment. edited by Arthur M. Okum (New York: W. W. Norton and Company, 1965), p. 202. 107 Lerner, op. cit.. p. 205. 149 the real balance effect is much too weak to restore full employment because the amount of bank money would have to decline to an incredibly low figure in order for the price level to fall enough to entice holders 1 0 8 of currency to increase their expenditures. This professor then argues that any wage policy for high employment must be directed at money wages and not at real wages because it is impossible for a 1 0 9 group of workers to adjust their real wage. He recognizes the impossibility of stabilizing both wages and prices because of increases in productivity, and therefore he prefers to stabilize prices and allow money wages to increase rather than to stabilize wages and permit prices to fall.1*® In this way he argues that the social function of wages as an allocation mechanism can be maintained, as higher relative wages entice workers to enter an occupation or industry.111 It is his contention that a wage-price plan similar to President Kennedy's "Guidelines" is the only way to achieve a high level of full employment without an intolerable amount of inflation. He describes a high level of full employment as a situation wherein only 110Ibid., p. 212 108 Ibid 109Ibid., p. 20IT. m ibid., p. 213. 150 2 per cent are unemployed as opposed to a low level of full employment wherein 6 per cent might be jobless. Therefore, he prefers a stable price level to a stable wage level. However, he concludes that a high level of full employment will result in a decrease in the percentage of National Income going to labor, as profits rise, but that the absolute amount of labor's income is 112 greater under this condition. Professor Culbertson believes that, as a matter of pure arithmetic, full employment would have been possible with the existing level of Gross National Product, if either output per man-hour decreased or if wages fell, but discards these two cases as beyond the 113 realm of possibility. He then states that the contest over income distribution must be carried out through the political process as it affects government policy toward taxes, anti-trust policy, and other related matters. He envisions the implementation of such a policy will require either government regulation or government exertion of persuasive force to marshal public opinion against wage increases in excess of productivity so that wages will not involve aggression ^ Ibid.. p. 235. 113 Culbertson, op. cit., p. 29. 151 114 against either profit margins or the prive level. He then states that with wages rising only at such a non-inf1ationary rate, the government should, through anti-trust and anti-tariff policy, protect workers and 115 consumers against excessive profit margins. Professor Hansen realizes that giant corporations and large unions are here to stay, but asserts that the public should be represented at the bargaining table because price and wage decisions have such far-reaching 1 1 6 effects in a highly interdependent economy. He would even go so far as to have the government recommend a settlement if none can be reached, and to disallow any corporation's price increase for six months after 1 1 7 settlement. Because suggestions of this type have been met with resistance by both management and unions, this professor maintains that public opinion will not long tolerate such disdain of the public interest. His argument is that the government has offered both management and labor the protective canopy of stimu lating fiscal policies which have created a favorable environment, and thus these firms and unions should 114Ibid., p. 54. I15Ibid. **®Hansen, Economic Issues of the I9601s. p» 38. 117Ibid. 152 not claim the right to raise prices and wages indis criminately.118 IV. NEO-KEYNESIAN ATTACK ON THE STRUCTURAL HYPOTHESIS The Neo-Keynesians maintain that the chief cause of unemployment is deficient aggregate denemd even though they recognize that the incidence of unemployment is very uneven. Professor Robert Solow declares that his hypothesis is not that there is no such thing as structural employment, but that there has been no sub- 1 1 9 stantial increase in it. Unemployment on an Industrial and Occuoational Basis Professor Walter Heller claims that the struc tural theorists believe that the increase in unemploy ment since 1957 has been due to automation, which has caused job loss among blue-collar workers, the unskilled, and decline in employment in the goods-producing indus tries. It is his contention, however, that declines among these occupations and industries can be explained 118Ibid. 118Solow, op. cit., p. 19. 153 by natural factors. He argues that the Incidence of unemployment is never evenly spread; that skilled workers will be kept on the payroll in recessions because they have become part of overhead costs; that goods-producing industries are the most cyclically sensitive; and that the unskilled and semi-skilled operatives are the hardest hit, not only because they are vulnerable themselves, but also because of the 120 industries in which they work. It is this econo mist 's argument that the increase in the rate of unemployment in these industries and occupations must be compared with the rise in the overall rate of unemployment in order to determine if the rate in these industries and specific occupations were abnor mally high in the 1957-1962 period as compared with the 1948-1957 period. This comparison is shown in Table VII. He concludes that the changes in the overall unemployment rate explain most of the fluctuations in employment in specific industries and occupations; in fact, the actual rate was less than expected in most cases. 120Heller, o£. cit., p. 100. 121ibid. TABLE VII UNEMPLOYMENT RATES IN INDUSTRIES AND OCCUPATIONS MOST LIKELY TO BE AFFECTED BY AUTOMATION, 1957-1962 (PER CENT) Industry or Occuuation 1957 1962 Percentage Point Change from 1957-1962 Actual fexnected All Workers 4.3 5.6 1.3 Experienced Wage and Salary Workers 4.5 5.5 1.0 -- Workers in Goods-Producing Industries 5.4 6.4 1.0 1.3 Mining, Forestry, and Fisheries 6.3 8.6 2.3 1.8 Construction 9.8 12.0 2.2 1.8 Durable Goods Manufacturing 4.9 5.7 0.8 1.4 Non-Durable Goods Manufacturing 5.3 5.9 0.6 1.0 Transportation and Public Utilities 3.1 3.9 0.8 1.0 Experienced Workers 3.9 4.9 1.0 Blue-Collar Workers 6.0 7.4 1.4 1.7 Craftsmen, Foremen, and Skilled 3.8 5.1 1.3 1.3 Operatives and Semi-Skilled 6.3 7.5 1.2 1.6 Laborers, except Farm and Mine 9.4 12.4 3.0 2.6 NOTE: The expected unemployment rates are calculated by use of correlations of (a) unemployment rates by industry with the rate for all experienced wage and salary workers for the period 1948-1957 and (b) unemployment rates by occupation with the rate for all experienced workers, using the data for the period 1948-1957. SOURCE: U.S. Department of Labor and Council of Economic Advisers as cited in Walter B. Heller, "The Administration's Fiscal Policy," Unemployment and the American Economy, edited by Arthur M. Ross (New York: John Wiley cued Sons, Incorporated, 1964), p. 99. 154 155 In addition, Dr. Heller contends that the structural argument is further weakened by evidence that unemployment has increased, not fallen, during the 1957-1962 period in many service and white-collar industries which were supposed to be experiencing an 122 increase in demand. He attributes the increase in unemployment in the service industries and occupations to slack growth in the overall economy, the high rate of interindustry mobility, and to the attraction that new entrants to the labor force have to white-collar 123 and service industries. Table VIII shows the com parison of the actual and the expected unemployment rates in these industries and occupations. This economist also points out another weakness in the structural argument occurred when unemployment decreased by 16.4 per cent from 1961 to 1962; the overall rate declined from 6.7 per cent in 1961 to 5.6 per cent the following year. During this interval the Gross National Product increased by 5.4 per cent in 1962 prices from $525.5 billion to $553.9 billion and the unemployment rate in the goods-producing indus tries and in most blue-collar occupations decreased by more than the 16.4 per cent decrease in the overall 122Ibid. 123Ibid., p. 101 TABLE VIII UNEMPLOYMENT RATES IN INDUSTRIES AND OCCUPATIONS LEAST LIKELY TO BE AFFECTED BY AUTOMATION, 1957-1962 (PER CENT) Industry or Occupation 1957 1962 Percentage Point Change from 1957-1962 Aciual Expected Selected Industries Wholesale and Retail Trade 4.5 6.3 1.8 0.8 Finance, Insurance, Real Estate 1.8 3.1 1.3 0.3 Service Industries 3.4 4.3 0.9 0.7 Public Administration 2.0 2.2 0.2 0.4 Selected Occupations Professional and Technical 1.2 1.7 0.5 0.3 Managers, Officers, and Proprietors (except Farm) 1.0 1.5 0.5 0.3 Clerical Workers 2.8 3.9 1.1 0.7 Sales Workers 2.6 4.1 1.5 0.5 Private Household Workers 3.7 4.9 1.2 1.0 Service Workers (except Private Household) 5.1 6.4 1.3 1.0 NOTE: The expected unemployment rates cure calculated by use of correlations of (a) unemployment rates by industry vith the rate for all experienced wage and salary workers for the period 1948-1957 and (b) unemployment rates by occupation with the rate for all experienced workers, using data for the period 1948-1957. SOURCE: U.S. Department of Labor and Council of Economic Advisers as cited in Walter B. Heller, "The Administration's Fiscal Policy," Unemployment and the American Economy, edited by Arthur M. Ross (New York: John Wiley andH>ons, Incorporated, 1964), p. 101, 156 157 124 unemployment rate. The conclusion he draws is that the declines in unemployment occurred in the cyclically- affected occupations and industries when aggregate demand increased, and thus structural changes have not left whole categories of workers out of reach of the benefits of an increase in demand.1 * 25 Professor Solow argues that increases in aggre gate demand will reduce unemployment even for the unskilled without the undertaking of specific labor- market policies, as the structuralists assert. He cites the case of Denmark, wherein specific labor-market policies were a failure from 1950 to 1958. However, when the terms of trade turned in the Danish favor in 1959, the increase in aggregate demand melted away the 126 hard-core unemployment. According to this economist, the overall unemployment rate was 7.8 per cent in the spring of 1957, while it was 13.5 per cent for the unskilled. But in the fall of 1962, the overall rate in Denmark dropped to 1.5 per cent and the unskilled 127 rate to 2.6 per cent. Not only did the hard-core 124Ibid., p. 102. 125Ibid. 12®Solow, oj>. cit., p. 13. 127Ibid.. p. 14. 158 problem disappear, but no shortage of skilled labor appeared to develop, as many people predicted, because it was easier to attract labor when demand was brisk. Youth unemployment. Professor Robert A. Gordon argues that even if unemployment increased in a particu lar sector of the labor force, structural unemployment would not deepen if that sector became a much smaller segmen^<of the total labor force, because its contribu- 1 2 9 tion to overall unemployment would be less. In the case of youth unemployment, he declares that while there is a structural problem for teen-agers, it did not worsen appreciably from 1948 to 1962 because their contribution to total unemployment did not change 13 0 much. However, as Table IX shows, the relative position of teen-agers worsened markedly between 1962 and 1963. Professor Gordon cautions against generaliz ing from one year's experience, and cites the Monthly Report on the Labor Force for December 1963, which states that about 150,000 of the increase was among 128ibia. 129 Robert A. Gordon, "Has Structural Unemployment Worsened?" Industrial Relations. Ill (May, 1964), 56. 130Ibid., p. 59. 159 TABLE IX RELATIVE CONTRIBUTIONS TO CIVILIAN LABOR FORCE AND TO UNEMPLOYMENT AGE GROUP, FOURTEEN-NINETEEN, 1948 TO 1963 Year Percentage Share of Age Groun in Percentage Point Difference Unemployment Labor Force 1948 20.1 8.6 11.5 1953 19.5 7.6 11.9 1956 20.0 7.8 12.2 1959 19.0 7.9 11.1 1962 20.4 8.5 11.9 1963 23.5 8.6 14.9 NOTE: The difference is an attempt to measure the extent to which the structural component of total unemployment has changed. For example, in 1948 teen agers accounted for 20.1 per cent of all the unemploy ment but only 8.6 per cent of the labor force, thus the difference of 11.5* On this basis, it is possible to state that this component did not worsen appreciably until 1963. SOURCE: A Report on Manpower Requirements. Resources. Utilization an5 Training. U.S. Department of Labor (Washington, D.C.) Statistical Appendix, U.S. Bureau of Labor Statistics (1963) as citSd in Robert A. Gordon, "Has Structural Unemployment Worsened?1 1 Industrial Relations. Ill (May, 1964), 59. 160 sixteen and seventeen year-olds, nearly half of whom 1 31 were seeking part-time jobs. However, he does state that the problem of teen-age employment may indeed be worsening because official projections estimate the teen-age portion of the labor force to be 10 per cent 1 3 0 in 1970 as opposed to 8.5 per cent in 1963. Non-white unemployment. Professor Gordon again argues that the structural unemployment attributed to higher jobless rates among non-whites is not worsening; in fact, he cites statistics to show that the relative unemployment rate for non-whites actually fell from 1 3 3 1.98 per cent in 1956 to 1.91 per cent in 1963. This relative unemployment rate measures the relation ship between the non-white and the white unemployment rates. In addition, he shows that the non-whites made up a slightly smaller percentage of the total unemploy ment in 1963 than they did in 1956. In 1956, non-whites accounted for 21.5 per cent of the total unemployed, while in 1963 they were 21.2 per cent of the unem ployed.134 He is dealing only with actually reported unemployment, and not with discouraged workers who may have dropped out of the labor force. 131Ibid.. p. 60. 132Ibid. 133Ibid.. p. 70. 134Ibid., p. 71. 161 Unemployment in ' Depressed Areas It is Neo-Keynesian theory that adequate aggre gate demand will cause sufficient nobility of the labor force to prevent pockets of hard-core unemployment. Professor Otto Eckstein cites figures to show that, by 1962, fewer areas of the United States had extreae amounts of unemployment than in 1959; in 1959, twenty- two areas had more than 8 per cent unemployment, and in 1962 only fourteen areas had that high an unemployment 135 rate. In addition, fewer of the unemployed were in the extreme areas in 1962; in 1959, 20 per cent of the unemployed were in areas with more than 8 per cent unemployment, while in 1962 only 8 per cent of the 136 unemployed were in these areas. Table X, which was taken from an unpublished study by Professor Edward P. Dennison, was the one used by Dr. Eckstein. This study shows the change in unemployment in the 150 largest labor-market areas in the United States for the years 1959 and 1962, and it substantiates the above conclu sions. 135 Otto Eckstein, "Aggregate Demand and the Current Unemployment Problem," Unemployment and the American Economy, edited by Arthur M. Ross (hew York: John Wiley and Eons, Incorporated, 1964), p. 120. 136Ibid. I TABLE X DISTRIBUTION OF UNEMPLOYMENT IN 150 MAJOR LABOR MARKET AREAS OF THE UNITED STATES, 1959 AND 1962 Number of Persons Perceniage of Total Percentage of Number of Areas (thousands) in 150 Areas Unemployment 195$ 1962 1959 1962 l6S9 1&6& 16 or more 1 14.8 _ 0.59 14.0 to 15.9 2 1 32.0 13.1 1.28 0.54 12.0 to 13.9 4 3 31.1 17.0 1.24 0.71 10.0 to 11.9 4 4 51.4 39.4 2.05 1.63 8.0 to 9.9 11 6 379.5 126.4 15.14 5.24 6.0 to 7.9 30 32 441.0 579.7 17.60 24.04 4.0 to 5.9 60 73 1,327.3 1,407.4 52.96 58.36 2.0 to 3.9 38 31 229.1 228.4 9.14 9.47 0 to 1.9 - — — - - — Total 150 150 2,506.2 2,411.4 100.0 100.0 SOURCE: Unpublished studies by Eduard F. Dennison, "The Incidence of Unemployment by States and Regions, 1950 and I960" and "The Dispersion of Unemployment among Standard Metropolitan Areas" as cited in Otto Eckstein, "Aggregate Demand and the Current Unemployment Problem," Unemployment and the American Economy. edited by Arthur M. Ross (New York: John Wiley and Sons, Incorporated, 1964), p. 120. i 162 In addition, Professor Eckstein argues that depressed areas do not regain depressed forever; that structural does not mean permanent. He points out that the New England states had high unemployment rates in the early 1950's but have improved a great deal since 137 then. These figures can be seen in Table XI. He further asserts that change has occurred in Vest Virginia, which had only 4.3 per cent of its work force unemployed in 1956; it suffered 8.3 per cent unemployment in 1959, and improved in 1962 to the 138 point where only 6.8 per cent were jobless. However no mention was made of the possibility of discouraged workers leaving the labor force. He concludes, there fore, that the large increase in unemployment from 1958 to 1962 was not structural but was diffused throughout ali areas, even though it is possible to argue that all segments of the economy will not respond uniformly to 139 increases in aggregate demand. Duration of Unemployment Professor Solow, recognizing that the number of workers unemployed for long periods has been increasing 137Ibid., p. 121. 138Ibid.. pp. 122-123. TABLE XI INSURED UNEMPLOYMENT IN THE SIX NEW ENGLAND STATES, SELECTED YEARS 1950 TO 1962, AND RANKING WITH REGARD TO ALL THE STATES 1950 AND 1962 State Rates of Insured Unemployment for Rankins 1&£ 1959 1956 1952 1950 1962 1950 Maine 5.5 7.3 4.4 4.5 8.3 7 2 Vermont 4.8 4.2 2.7 3.9 5.4 21 13.5 New Hampshire 3.5 4.1 4.5 5.2 8.5 35.5 1 Massachusetts 4.9 4.5 2.8 3.8 5.4 17 13.5 Connecticut 3.5 4.4 2.3 1.9 3.8 35.5 32 Rhode Island 5.0 5.5 5.1 6.6 7.2 13 4 NOTE: Where the ranking is shown by other than a whole number, the state in question tied for that position. SOURCE: U.S. Department of Labor, as cited in Otto Eckstein, "Aggregate Demand and the Current Unemployment Problem," Unemployment and the American Economy, edited by Arthur M. Ross (New York: John Wiley and Sons, Incorporated, 1964), pp. 122-123. 164 165 argues that this still does not mean that the cause of unemployment is structural imbalance in the economy. Instead he maintains that deficient aggregate demand can still leave the burden of unemployment resting on 140 a few individuals or families. He contends that the relevant factors in determining the amount of unemploy ment for periods longer them fifteen weeks are the present quarter's unemployment rate and the previous quarter's rate. That is, if the present unemployment were 6 per cent and had just jumped up from 4 per cent, there would be fewer workers jobless for periods longer than fifteen weeks than if the rate had been 6 per cent all along. As verification of this thesis, Professor Solow examines the figures for unemployment in excess of fifteen weeks for the third quarter of five different years. The evidence shows that there is a higher percentage of long-term unemployment relative to total amount of unemployment in the years with higher rates of joblessness than in years when the economy is expanding. For example, the relative percentage of long-term unemployment in the third quarter of each 140 Solow, op. cit., p. 43. 141Ibid., p. 44. 166 of the years examined was as follows: 1957, 17.4 per cent; 1958, 34 per cent; 1960, 22.0 per cent; 1961, contends that long-term unemployment is a function, not of structural imbalance, but of overall deficient demand. In determining the cause of very-long-term unemployment, over twenty-six weeks, the above economist declares that this phenomenon is not such much a factor of the present unemployment rate but rather of the two previous quarters' jobless rate and the lag effects. ' 143 The percentage of unemployed in this category increased from 8.4 per cent in the third quarter of 1957 to 11.2 per cent in the third quarter of 1960, and then to 144 13.5 per cent in the third quarter of 1963. He ie of the opinion that there has been some shift from moderately long-term to very-long-term unemployment in 145 recent years. Professor Norman J. Simler's theory of long-term unemployment is based on the premise that the longer a worker is unemployed, the greater the probability of 31.4 per cent; and 1963, 23.8 per cent.142 He therefore Ibid 143Ibid., p. 46 145Ibid., p. 47 144 Ibid., p. 44 167 146 his remaining unemployed. His thesis is that when ever the unemployment rate rises, and subsequently never falls to zero, some workers must remain unemployed. Because employers are able to pick whom they want when the labor market is soft, they prefer not to take the old workers or those who have been unemployed the longest, on the chance that their skills may have deteriorated. If this were the actual case, then a hard core of unemployed will develop. However, this professor maintains that the increase in unemployment caused the structural change rather than the other way 147 around. He recommends both an increase in demand and specific labor-market policies as the course of action the government should follow, but argues that pure labor-market policies, unaccompanied by increases in aggregate demand, would merely give the unemployed an equal chance at the scarce number of jobs, without 1 dfl making more jobs available. Automation and Productivity Changes Neo-Keynesians do not concur unanimously on the 1 ifi Norman J. Simler, "Long-Term Unemployment, the Structural Hypothesis, and Public Policy," American Economic Review. LIV (December, 1964), 997. 147Ibid., p. 998. 148Ibid. 168 subject of automation but generally take the position that adequate demand in the economy can provide an environment in which displaced workers can find new jobs. Professor Culbertson declares that whenever unemployment occurs, people blame it on the machine. Even in the 1930's, when the problem to him was clearly lack of demand, workers chose to blame their troubles 149 on something close at hand. Today, he claims the computer has replaced the machine as the villain. However, he is of the opinion that increased produc tivity as a result of automation only intensifies the need for an increase in aggregate demand to take the full-employment output off the market, but recognizes 150 the essence of added labor mobility and retraining. Professor Solow, on the subject of increases in output per man-hour, argues that recent spurts may have been more impressive because of the excess capacity that existed in 1963. His figures show that the increase per year in output per man-hour averaged 2 per cent from 1919 to 1947 but increased, on the 149 Culbertson, oj>. cit., p. 55. 150Ibid., p. 56. 169 151 average, to 2.6 per cent from 1947 to 1963. While he admits the rate was actually 3.2 per cent from 1960 to 1963, he cautions that short-run figures and the propositions from them are subject to transitory influ- 1 5 2 ences such as the pace of capital investment. He also points out that, at present, there are two separate sources of information about the man-hours used in production, the one from the survey of the labor force and the other from payroll reports, and that over a short period the two sets of figures can give different 1 5 3 results. While he recognizes that if there is a sudden sharp increase in productivity it can strain the ability of the labor force to adjust, he feels that the immediate need is an increase in aggregate demand. As he puts it: 1 don't think cliches about automation and structural unemployment are very productive in analyzing the problem or bring the remedy any closer. Like any fireman, when you are trying to put out a fire, you are not helped much by people who go around claiming it is not really a fire but only the end of the world.154 Professor Eckstein takes the position that the combination of a slow rate of growth in goods-producing industries, combined with a rapid rate of automation, X5XSolow, oj). cit., p. 48. 152Ibid. X53Ibid. 154Ibid.. p. 51. has made it inevitable that long-run employment oppor tunities in those industries are diminishing. He is of the opinion that many workers displaced in these sectors will never again be re-employed in that type 155 of work or at those wages. He recommends that collective bargaining be used to influence the pace of automation so that readjustment allowances can be provided as well as some selective reduction of the work week in order that the remaining work can be 156 spread further, particularly for the older men. Professor Simler states that decreasing the participation rate in the labor force of older workers would decrease reported unemployment directly because those now jobless would no longer be counted. In addition, such a measure would indirectly decrease the unemployment rate because those older workers now employed would leave openings for some younger unem- 157 ployed workers. However, he cautions that imposing earlier retirement, a shorter work week, or extended vacations on society can decrease the potential output, rather than raise the actual output of the economy. 155 Eckstein, 0£. cit., p. 131. 156Ibid. 171 While such a step can bring the actual and potential output into equality, it requires a knowledge of society's preference for work or leisure. This pro fessor would prefer a policy wherein the public nay choose between the two, rather than have the choice made for them.15® Professor Arthur M. Ross argues* that automation has caused more problems where demand has not picked up to absorb the displaced workers than it has in expanding industries. He considers the re-employment potentials of individuals in general to be determined by the condition of the economy, but adds that there are some exceptions. He believes that a skilled secretary could find a job even in a period of declin ing employment, while a middle-aged coal worker may never have a full-time job again even if conditions were favorable.159 However, this economist does not think that work itself is being replaced nor does he think that man's sole duty will be to consume, as some writers 158Ibid., p. 1000. 159Arthur M. Ross (editor), Unemployment and the American Economy (New York: John Wiley and Sons, Incorporated, 1964), p. 14. 172 160 on automation have predicted. With regard to increases in productivity, he argues that American history does not reveal any positive correlation between increases in productivity and the rate of 161 unemployment. In addition, he claims that pro ductivity increases in Japan and in Western Europe have exceeded those in the United States without an 162 accompanying unemployment problem. Professor Sidney C. Sufrin argues that automation and unemployment are brute facts of life that must be faced by action on both sides of the market. He dis agrees strongly with trade-union attempts to decrease the work week or bargain for extended leaves of absence in an effort to spread the work, because these measures 163 concentrate solely on the supply side of the market. It is his contention that this activity is undertaken because it is institutionally impossible to decrease wages. However, he predicts that such policies will increase labor costs, cause more overtime to be paid during periods of peak demand, and lead to accelerated 160Ibid., p. 15. 161Ibid. 162Ibid. 163Sidney C. Sufrin, "Spreading the Work Won't Create Jobs," Challenge. XII (November, 1963), 30. 173 164 automation. This economist asserts that the demand side has been neglected. He would like to see technological research concentrate on innovational developments that would make each new product obsolete within a short 1 6 5 period of time. He points out that buildings designed to last forty to sixty years actually do last that long, but that buildings constructed more recently are vastly superior. The same argument is applied to automobiles that run 100,000 miles, or furniture that 1 6 6 lasts thirty years. To him, this is not a call for shoddy goods or poor workmanship, but a plea for innovational research to come up with better products and a summons for superior salesmanship. He does not want this country to be an economy of abundance in all 1 6 7 things, including unemployment. V. SUMMARY Neo-Keynesians' disagreements with neo- classicists can be summed up in two main propositions: first, Say's Law, or supply creates its own demand, is only applicable to a food-gathering society; second, 164Ibid. 166Ibid. 165Ibld.. p. 31. 167Ibid. 174 the deficiency in demand must be compensated for by government. This compensation may take the form of direct payments or deficit spending via tax cuts or increased outlay on capital goods. These economists insist historical data confirm their faith in the use of aggregate demand and refute the contention of permanent and increasing pockets of unemployment, as contended by the structuralists. Professor Solow defends the use of the term "general level of demand" against those who claim there are only particular expenditures on the empirical grounds that the short- run multiplier in the United States is two whatever 1 fifi the composition of expenditures. He argues that the steel beams in schools could have been used in stoves; that glass in windows could have been used for bottles; and thus, particular expenditures are igQ not too important for employment aspects. A final disagreement with some of the more extreme structuralists revolves around opulence and scarcity. The Neo-Keynesians assert that the age of scarcity is not at an end, and that work will still be the main source of income for the foreseeable future. i68Solow, op. cit., p. 19. 169Ibid., p. 20. CHAPTER V THE STRUCTURALISTS AND THE MODERN UNEMPLOYMENT PROBLEM Because the structuralists are the newest of the three schools of thought on the unemployment problem, it is difficult to state a single hypothesis broad enough to include the many diverse opinions within the school. It is generally easier to state what they do not believe rather than what they do believe. The structuralists do not believe that increases in aggregate demand are sufficient to restore full employment without an intolerable amount of inflation because of the existence of a hard core of unemployed who respond slowly, if at all, to the stimulus of increased aggregate demand. In addition, the struc turalists do not believe that there is an automatic mechanism that works to restore an equilibrium between the supply of and the demand for labor. Some of these theorists take the extreme position that full employment must be abandoned as a national goal because techno logical changes, such as automation, have made many lesser-skilled workers redundant. The latter group of thinkers argues that the classical goal of overcoming scarcity has been accomplished, and that only the problem of distribution remains. Practically all 176 structuralists offer policy recommendations aimed at adjusting the supply of labor, rather than increasing the demand for labor. I. STRUCTURALISTS' CONCERN OVER AUTOMATION Behind practically all analyses by structural theorists lies the argument that great changes have been brought about by automation. It is because of these changes that structuralists maintain that classical and Keynesian theories are no longer adequate to cope with the problems that a highly automated society faces, and that a new approach must be tried. How Automation Differs from Past Economic Changes Professor Charles C. Killingsworth, considered by many to be the most prominent structural economist, uses a definition of automation that goes beyond the popular phrase, "automatic operation." He defines automation as the "mechanization of sensory, control and thought processes"^ which can be completely as self-regulating as a thermostat on a furnace. This ^Charles C. Killingsworth, Hearings before the Subcoiimittee on Employment and Manpower of the Committee on Labor and Public Welfare. 88th Congress. 1st Session. September &0, ld&3 (Washington, D.C.: Government Printing Office, 1963), p. 1463. professor admits that the basic elements required for automation are not new, but asserts that the explosive growth of scientific knowledge since World War II, coupled with the far-reaching success in the application of this knowledge, have made automation different from 2 previous economic change. A significant difference, he argues, is the use of cybernetics, the science of communication and control in connection with automation. In this regard, he points out that it is now possible to equip measuring instruments which transmit large amounts of information to computers that can generate instructions to the automated machinery. As a result, human intervention is not needed. He maintains that the type of automation wherein the computer takes the center of the stage is the type in which enormous amounts of inputs can be handled and an equally large 3 amount of outputs can be generated. This type would be what Professor Yale Brozen calls "automated" type of manufacture, as noted in Chapter III. Uses of this kind include examination and diagnosis of human illnesses, translation of languages, performance of navigational duties in an airplane, and decisions regarding inventory control. The other type of 2Ibid. 3Ibid., p. 1464 178 automation, which Professor Brozen calls "automatic" manufacture or "Detroit automation," is used without a computer because the instructions are designed in the huge metalworking machines which work on fairly uniform raw material and turn out duplicated products.* Professor Killingsworth asserts that there is a difference between automation and technological change, even though many economists use the terms interchangeably. Actually, this economist compares four types of change, and lists them in order from the most general to the most specific. The broadest term is economic change, which includes the other three types of change, namely, technological change, mechanization, and automation. What economic change includes that the others do not are things such as the formation of the Common Market or exhaustion of 5 natural resources. Technological change naturally involves economic change, but includes such things as the invention of man-made fibers which could not be classified as mechanization or automation. Mechaniza tion is a type of technological change that involves physical machinery, and while practically all mechani zation has some automatic features, the machinery 4Ibid. 5Ibid., p. 1465 179 would have to be completely self-regulating as a complex oil-refining unit in order to be classified as automa tion.** In addition, Professor Killingsworth argues that automation differs from previous technological change in that automation has much broader applicability. He cites the example of the steam engine, whose use was limited to factories and transportation, while other innovations, such as the spinning-jenny, the cotton gin, and the linotype, had substantial impacts, but 7 only on a single industry. On the other hand, he maintains that the computer can invade practically any a area of industrial activity. Another difference between automation and past economic change, noted by the above professor, is that automation is the product of the laboratory scientist rather than tinkering by the production man. Henry Ford’s assembly line was a result of the pressure that sales put on production, while automation occurs today in a world of excess capacity as a byproduct of the o very rapid growth of scientific knowledge. 6 Ibid 7Ibid.. p. 1470 8Ibid 9Ibid 180 Ben B. Seligman, Director of Research and Education for the Retail Clerks International, and author of a text on economic doctrines,1 ' 0 argues that automation does mark a complete break with past trends because, with automation, man is reduced to a mere observer of a flow process.1' 1' He asserts that pre viously man was always the center of the whole business, but now the computer has invaded areas that were tra ditionally hand-operated, as foundry work. Furthermore, it is his opinion that worker displacement is not limited to blue-collar sectors*, that automation is often doing precisely the work that has been the 12 prerogative of junior executives and middle management. It is his opinion that not only blue-collar workers, but also middle management men may face serious job loss in twenty years. The Pace of Automation It is generally agreed that automation's effect on employment will depend upon the speed with which it i0Ben B. Seligman, Main Currents in Modern Economics (Chicago: Free Press of tilencoe, id62). ^Ben B. Seligman, "Man, Work and the Automated Feast," Commentary. XXXIV (July, 1962), 10. 12Ibid. 181 is introduced. Statistics have often been quoted by non-structuralists that show that an individual firm or industry either increased or did not reduce its labor force after automating a phase of its operation. Struc turalists, however, counter that the employment effect on a single firm is likely to be more favorable than that for the entire industry, or the economy as a whole. Professor Thomas Kennedy asserts that automation replaces not only directly, but also indirectly; that firms slow to automate suffer loss of sales through higher costs. Professor Walter Buckingham points out that vertical integration of a firm can be an indirect source of displacement. He cites the case of Murry Body Company that supplied parts to Ford Motor Company. When the latter firm automated a process, no one at Ford lost a job, but five thousand were laid off at 14 Murry. Professor Buckingham is concerned that the indirect displacements or silent firing, by letting 13 Thomas Kennedy, Automation Funds and Displaced Workers (Cambridge: Harvard University Graduate School of Business Administration, 1962), p. 338. 14 Walter Buckingham, Automation: Its Impact on Business and Peonle (New York: Harper and Brothers, 1561), p.”1 2 3 ' : 182 normal attrition reduce the work force, have been significant when automation has proceeded slowly. He is alarmed by the short-run displacements that might occur as the pace is accelerated, particularly in office work. He predicts that unemployment will be severe should a cyclical downturn occur, because he is of the opinion that businessmen install automation equipment in upswings, but wait for downturns to lay off workers so the dismissal can be blamed on the IS business cycle. He does not think many will be rehired during the following recovery. Professor Richard W. Graves argues that the speed with which automation is approaching will cause serious unemployment among unskilled and minority groups by 1970. It is his view that when output can be doubled with the new equipment but very little expansion of the market seems likely, that unemployment 16 must result. Professor Killingsworth is also of the opinion that automation is spreading more rapidly than past *®Walter Buckingham, "White Collar Automation," Nation. CXC1V (January 6, 1962), 11. 16 Richard W. Graves, "Automation and Unemploy ment," Address before the Kiwanis Club, Los Angeles, August 28, 1963. 183 forms of technological change. While he recognizes that it is difficult to measure the diffusion of technology in quantitative terns, he points out that the time it took former changes to be adopted was much longer than the time elapsed since automation was introduced. A century was needed for general adoption of the steam engine, and fifty years were needed for 1 7 electric power. However, he states that seven or eight years after the first automatic accounting systems were installed in banks, about half the banks 1 8 were using them. Further evidence is given by the fact that, in 1963, over 4,000 computers were in use \ in the United States, but in the early 1950's, when the first giant ones were introduced, it was estimated that only ten or fifteen would ever be needed in this country. He testified before the Clark Subcommittee in September 1963 that, as of that date, about 8,000 giant computers were on order, indicating that the number will continue to increase at an increasing rate.*® Professor Killingsworth counters the argument of those who say the increase in output per man-hour ^Killingsworth, ©j>. cit., p. 1470. 18Ibid. 19Ibid. 184 has been slight by stating that automation installations require a heavy investment of man-hour preparatory work which has been charged against current output, thereby resulting in an understatement of the current rate of 20 increase in productivity. In addition, he argues that excess capacity in a sluggish economy has helped 21 hold down increases in output per man-hour. Automation and the Demand for Labor Structuralists practically all believe that automation will either decrease the total number of jobs or at least cause changes in the demand for par ticular skills of labor that will result in serious maladjustment. Harold A. Volf and Henry I. Kester believe that displaced labor caused by long-run growth appears to be permanently obsolete. They argue that the labor force must be upgraded because rapid technological change puts a strain on the ability of the labor force to adjust, especially with the various institutional 22 limitations now in effect. However, the above 20Ibid. 21Ibid. 22Harold A. Volf and Henry I. Kester, "High Level Stagnation and Economic Growth,M Business Topics. X (Vinter, 1962), 50. 185 professors claim that automation can only be blamed for unemployment insofar as it causes more rapid growth. Dean William Haber believes that the United States is in a major period of job adjustment which is an ordeal for the displaced and a real test to the educational, training, and placement services of the nation because of declining job opportunities in agri culture, coal, railroads, steel, autos, rubber, and 23 longshoremen. It is his view that, to too many Americans, unemployment has become a way of life; that the displaced who are unskilled are often on the 24 economic scrap pile. His disagreement with govern ment policy centers around the issue of the hard-core unemployed— the unskilled, some of whom are illiterate. He thinks that the government has yet to face the problem of the marginal worker of this type and has 25 concentrated on skills that are in short supply. Professor Graves argues that automation upgrades labor skills whereas nineteenth century mechanization downgraded them, and therefore automation creates unemployment among the unskilled, the high school 23William Haber, "Next Steps in Labor Market Policy,” Unemployment and the American Economy. edited by Arthur M. Ross (Wew York: John Wiley and Sons, Incorporated, 1964), p. 36. 24Ibid., p. 37. 25Ibid. 186 dropout, and older workers. He views the displacement occurring simultaneously with job vacancies among 26 scientists, engineers, and technicians. To him, a discrepancy exists between what people can do and what society wants them to do. Professor Killingsworth agrees with Professor Graves that automation "twists" the pattern of demand for labor, pushing up the demand for the well-educated and highly skilled while it pushes down the demand for 27 workers with poor education and little training. Dr. Killingsworth believes that automation, coupled with growing consumer preference for services over goods, has stimulated the demand for educated workers while leaving a surplus of the uneducated to such an extent that overstimulation of demand by monetary and fiscal policies will lead to bottlenecks in the supply of the educated and skilled without reducing the supply of the unskilled.28 As for evidence of the labor market twist, the above economist points out that the overall unemployment rate in 1950 was almost the same as it was in 1962, 26 Graves, loc. cit. ^Killingsworth, ©£. cit.. p. 1475. 28Ibid.. p. 1787. 187 yet there was a substantial redistribution of unemploy ment between the two years; the figures show significant increases in unemployment among those with lower educa tion while they show a large decrease for college graduates. This evidence is reproduced in Table Xll. When Dr. Heller testified before the Clark Subcommittee, at the same time that Professor Killingsworth did, that the unemployment rate for college graduates increased from 0.6 per cent in 1957 to 1.4 per cent in 1962, an increase of more than 100 per cent, while the employment rate for men with less them eight years of schooling only increased by 50 per cent over the same period, Professor Killingsworth countered that when a number is so close to zero, small absolute increases produce 29 large relative increases. The latter economist pre fers to state that the surplus of male college graduates went up by eight per 1,000 while the surplus of males with less than eight years of schooling increased by 30 twenty-seven per 1,000. Furthermore, he claims that Dr. Heller took the wrong side of the picture by rxamining a period of decrease in employment. Dr. Killingsworth prefers to analyze periods of decrease in unemployment, such as the period from 1950 to 1957. 29Ibid., p. 1788. 30Ibid 188 TABLE XII EDUCATION AND UNEMPLOYMENT, APRIL 1950 AND MARCH 1962 (MALES EIGHTEEN YEARS OF AGE AND OVER) Years of School Completed Unemployment Rates Percentage Chance 1950 1962 1950 to 1962 0 to 7 8.4 902 + 9.5 8 6.6 7.5 +13.6 9 to 11 6.9 7.8 +13.0 12 4.6 4.8 + 4.3 13 to 15 4.1 4.0 - 2.4 16 and over 2.2 1.4 -36.4 All Groups 6.2 6.0 - 3.2 SOURCES: 1950 data— U.S. Department of Commerce, Bureau of the Census, 1950 Census, Special Reports (Washington, D.C.: Government Printing Office, idSo), Table 9, 5B-73; 1962 data—-Denis F. Johnston, "Educa tional Attainment of Workers, March 1962," Monthly Labor Review. LXXXVI (May, 1963), 510. 189 He shows that during this seven year period the unem ployment rate for college graduates went down 73 per cent from 2.2 per cent to 0.6 per cent, or an absolute decline of sixteen per 1,000, but for those with less than eight years of schooling the relative decline in unemployment over the same period was only 25 per cent, from 7.6 per cent to 5.7 per cent, while the absolute 31 decrease was nineteen per 1,000. * Professor Killingsworth sbuscribes to the dis couraged worker hypothesis, particularly for the poorly educated. Not only he, but the Council of Economic Advisers also believes that a large invisible reserve labor force exists which would reappear if the employ ment picture improved, but is not counted as presently unemployed because they are not actually looking for 32 work. While the Council estimates the number of discouraged workers at 800,000 and Professor Killings worth estimates the number at 1,500,000, neither can establish the extent to which automation has caused this decline in participation. 31Ibid. 32 Council of Economic Advisers, Annual Report of the Council of Economic Advisers (Washington, D.C.: Government Printing Office, January, 1963), pp. 38-39. 190 Professor Killingsworth does believe, however, that automation has reduced the demand for unskilled by eliminating a large number of simple, repetitive jobs, while it has caused an increase in the demand for scientists, programers, engineers, and mathema- 3 3 ticians. He cites figures to show that, between 1957 and 1962, production workers in manufacturing decreased by 969,000 while non-production workers increased by 335,000.34 Even though he admits that not all of this change was caused by automation, he argues that in an economy where so many patterns are changing rapidly, total figures may conceal more jthan they reveal. _As an example, he cites the fact that employment increased by ten million from 1949 to 1963, yet the unemployment rate climbed during this period also; from a low of 3 per cent in 1951 and 1952, to 5# per cent to 6 per cent in 1963. 33 Professor Buckingham argues that automation decreases the demand for labor per unit of output and thus increases the share of capital in production, hence raising the demand for capital. This, to him, is destabilizing because: first, automation has been 33Killingsworth, oj>. cit.. p. 1471. 34Ibid., p. 1472. 35Ibid. 191 ■ore adaptable to capital goods and consumer-durable goods industries where production and employment fluctuate more; second, the ratio of capital-goods industries to total manufacturing has increased 8 per cent in the 1950's, largely because of automation, in his opinion; and third, automation has stimulated an increase in primary investment but not in a secondary wave of investment such as the automobile and railroad 36 industries did. He concludes that automation has made total employment and production depend more on capital goods and consumer durables which can be postponed, and therefore, the richer a nation becomes, 37 the more precarious is its stability. Automation and Scarcity Professor Buckingham hints at the problem that abundance might create when he mentions that automation can increase productivity to such an extent that the resulting affluence will free consumers from spending all of their incomes. Full employment, he reasons, will then rest upon luxury spending, or that portion 38 of spending which relies upon confidence and not need. However, he does not explore the consequences of this 36 Buckingham, Automation . . . , p. 153. 37Ibid., p. 154. 38Ibid., p. 161. 192 trend. Professor Robert Lekachman states that abundance is close at hand; that excessive advertising is needed to coax, frighten, or "bulldoze" people into spending their incomes; that eager consumers are not waiting to 39 snatch up the products of the factories. Yet, even though he maintains that the American dream of abundance can be realized by the proper degree of known technology, he discusses only the problems involved in training the labor force for more highly-skilled service indus tries.40 Apparently the task of coping with the problem of abundance has been left to the non-academic economist. In somewhat Utopian fashion, Robert Theobald, free-lance economic consultant, has argued that automation has increased productive ability to such an extent that much of the labor force, particularly the unskilled and uneducated, will be permanently redundant, and hence income should be separated from work in order to provide purchasing power for the vast amount of commodities 39 Robert Lekachman, "Two Centuries of Techno logical Change: Automation Is Nothing New," Challenge. XI (April, 1963), 16. 40Ibid. 193 41 society can produce. He reasons that increases in productivity have led to severe competition to increase sales, particularly between industries, such as steel and aluminum. This intense competition, in his view, has led to price decreases, which compel the firms to 42 decrease costs of production by increasing automation. It is his contention, therefore, that abundance will lead to fewer and fewer jobs at the very time the labor force will be expanding in the mid-1960's. Theobald charges that the fundamental principle upon which present capitalist societies are based is scarcity. He attributes the ability to charge high prices, make large profits, earn high salaries, and extract high rents or interest are all a result of 43 scarcity, much of it artificially contrived. The coming of abundance, which he takes for granted is technologically possible at the present time, is a threat not only to the vested interests but to pro fessional economists as well, because society will be able to pay less attention to the economizing of 41 Robert Theobald, Free Men and Free Markets (New York: Clarkson N. Potter, Incorporated, p. 20. 42Ibid., p. 54. 43Ibid.. pp. 55-56. 194 44 scarce resources. His solution for this dilemma is | for the government to give a constitutionally guaranteed basic income for everyone that will prevent then from 45 becoming paupers. In addition, he would grant a sup plementary amount, called "Committed Spending," to prevent those in the middle class from falling too 46 abruptly should their jobs be automated. His idea is that the insurance of sufficient incomes to allow individuals a free choice of action could enhance per sonal freedom and still not involve the government interfering in the market system. He would finance these transfer payments by government borrowing, but is of the opinion that a portion of then would be self- financing in that increased incomes and profits would raise government tax revenues without changing the tax rates.47 Professor Killingsworth, while not taking as extreme a position as Mr. Theobald, does argue that the economic environment today in the United States is far different than when Henry Ford introduced his assembly line in 1913. Even though the assenbly line reduced the labor requirements by 90 per cent per car, 45Ibid., p. 145. 47Ibid., pp. 160-162. 44Ibid.. p. 121. 46Ibid., p. 148. Dr. Killingsworth points out that there was only one car per 100 people then; by 1923 there were ten cars 48 per every 100 people. In addition, he points out that the growth of the market was stimulated by Ford's price cuts because demand was elastic. However, this economist now argues that when automation began in the auto industry in the early 1950's, it reduced the labor content also by 90 per cent per car, but there were then forty million cars in the United States, or one 49 car for every four people. The increase in automobile sales was much smaller in the decade of the 1950's than from 1913 to 1923; by 1960 there was one car for every 50 three people. His conclusion is that a labor-saving invention, introduced in the early growth stages of an industry, can expand total employment and output through price cuts, but that when an industry has reached maturity, it is not possible to achieve further dramatic increases in sales and employment, even with large price cuts. When exploring other consumer durables, he asserts that not much prospect for employment increases are possible there either. For example, he cites figures to show that about 99.5 per cent of the homes ^Killingsworth, oj>. cit.« p. 1466. 49Ibid., p. 1468. 50Ibid. 196 wired for electricity have refrigerators, 93 per cent have televisions, 83 per cent have washing machines, 51 and there are more radios than homes. While he recognizes that sales of electric toothbrushes and can openers are rising rapidly, he argues that the growth of employment in these industries will fall far short 52 of offsetting the decline in the others. In comparing the United States with Western Europe and Japan, Professor Killingsworth points out that the latter countries are in the early stages of a mass-consumption society, and thus automation will have a far different effect on their employment situa tion. He claims that many of these countries are in the position the United States was in before or during the 1920's, and therefore it will be several decades before they reach the saturation that the United States has.33 Automation and the Shorter Work Week Regardless of their feelings toward abundance, very few of the structuralists advocate the shorter 51Ibid. 53Ibid. 52Ibid. 197 work week as a solution to the unemployment problem. i | Even Mr. Theobald recognizes that relative factor i prices would dictate the substitution of more capital for labor if the cost of labor were to rise relative to capital, as he believes would happen if the work week were shortened without a reduction in pay. The fact that Theobald recommends substantial government transfer payments indicates that he believes private employment cannot pay workers more than their marginal revenue products without raising that product by reduction of the work force and increasing the comple mentary factors. Professor Hans Apel believes that it might be advisable for production workers to take part of their increased productivity in the form of more leisure instead of all of it in more pay. He reasons that the work week could be reduced by forty minutes a year for three years, so that, at the end of that time, the two hour reduction would not increase the average cost of labor, because of increases in the growth of produe- 54 tivity. He maintains that such a move would increase the number of jobs-by 1,400,000. ®*Hans Apel, "Should We Shorten the Work Week?" | Challenge« X (March, 1962), 30. 198 It has been labor anions that have pressed for an abrupt shortening of the work week without pay reductions. For example, Ben B. Seligman, Economic Adviser to the Retail Clerks Union, argued that the action of the New York electricians in bargaining for 55 a twenty-five hour week will provide over 1,000 jobs. There was no reference to marginal analysis in making this estimation, however. II. STRUCTURALIST ATTACK ON NEO-CLASSICAL UNEMPLOYMENT THEORY Homogeneity of the Labor Force The classicists assumed that all labor was homogeneous and therefore only ignorance, inertia, or some institutional restriction prevented the movement of workers from one industry to another when consumer demand changed. Structuralists, on the other hand, contend that this is far from the case; that all labor is no more alike than all capital is homogeneous. Seymour Wolfbein, Director of the Office of Manpower, Department of Labor, shows from the decennial census data how the relative importance of certain 55 Seligman. Commentary. p. 15. 199 occupations has changed from 1910 and 1950 to 1960. This information is shown in Table XIII. He points out, however, that these broad categories conceal changes that have been occurring within specific occu pations. For example, he states that the professional group in 1910 consisted primarily of doctors, lawyers, teachers, and clergymen, but that in 1960 it embraced large numbers of engineers, technicians, and those in the physical sciences.'*** In addition, he notes that skilled craftsmen have also undergone substantial changes. In 1910, six skilled occupations (engravers, locomotive engineers, brickmasons, blacksmiths, metal molders, and shoemakers) made up 25 per cent of the skilled labor force, but in 1960 these six occupations 57 accounted for only 5 per cent. Conversely, car penters, plumbers, mechanics, electricians, cranemen, telegraphers, and telephone repairmen accounted for 67 per cent of the skilled workers in 1960 as opposed 58 to only 40 per cent in 1910. It is his opinion that these changes illustrate the rising skill requirements 58Seymour L. Wolfbein, "Automation and Skill," The Annals of the American Academy of Political and Social Science. CCCXL (March, 1962), 55. 57Ibid. 58Ibid., p. 56. 200 TABLE XIII CLASSIFICATION OF WORKERS BY OCCUPATION, 1910, 1950, AND 1960 (PER CENT) 1910 1950 1960 All Workers 100 100 100 White Collar 22 37 43 Professional and Technical 5 9 11 Proprietory and Managerial 7 9 11 Clerical and Sales 10 19 21 Blue Collar 37 41 36 Skilled 12 14 13 Semi-Skilled 14 21 18 Unskilled 11 6 5 Service 10 10 13 Farm 31 12 8 SOURCE: U.S. Bureau of the Census, as quoted in Seymour L. Wolfbein, "Automation and Skill," The Annals of the American Academy of Political and Social Science. rccSnrCMarcK, l9$2), 04 •------------------------------- 201 that economic changes have forced on the labor force; should the rate of change accelerate, the adjustment of labor supply to the demand for labor may be more difficult.59 , Professor Killingsworth takes the position that the increase in service employment will make demands upon the labor force that the latter will be unable to meet. While he agrees that a displaced assembly-line worker may be readily adaptable to work in a gas sta tion, this economist doubts whether such displaced workers can become white-collar clerks and emphatically denies they can become teachers or other professional 60 workers without years of schooling. Professor Paul Sultan argues that the difficulty in adjusting labor supply to labor demand is a product of the "tempo of change" barrier and the "gestation 61 barrier." By the former he means the speed with which changes are taking place; by the latter he means 59Ibid. ^Killingsworth, o£. cit.. pp. 1469-1470. 91Paul Sultan, "The Skill Impact of Automation,” Readings in Exploring the Dimensions of the Manpower Revoiutfon. Compiled for the Subcommittee on Employment and Manpower of the Committee on Labor and Public Welfare, 88th Congress, 2nd Session, 1964 (Washington, D.C.: Government Printing Office, 1964), p. 547. 202 the length of time required to develop the skills demanded. The acceleration of the pace of automation, in his mind, compounds the problem of vocational train ing because he believes that future manpower require ments will change too fast to allow educational programs 6 2 to be established to teach the exact skills. It is his opinion that the 7,500,000 predicted high-school dropouts in the 1960's will be unable to adapt to these 6 3 changing requirements. As far as the "gestation barrier" is concerned, he believes that the skills needed will take years of training and education, and therefore cannot be learned on a year's training pro gram. He maintains that the pressures to obtain such talent today may complicate the task of providing for the talent tomorrow because many qualified professors of science and mathematics are being lured into private industry. As an example of the latter case he cites Louis N. Ridenour, now a research director with Lockheed, who testified before a Congressional Committee that, in 1957, he paid more in federal income tax than he earned five years earlier as Dean of the Graduate College at 6 4 the University of Illinois. 62Ibid. 63Ibid., p. 548. 64Ibid., p. 547. 203 Professor Graves also agrees that the pace of technological change is so rapid that it is inpossible to train a person for a specific job and expect him to be able to retire in that job. He maintains that education has to be a continuing process because job requirements will shift and whole professions will ge vanish almost overnight. Insatiable Consumer Demand The classicists believed that man's wants could never be satisfied in the aggregate, and therefore his wants would always exceed his ability to satisfy them. Professor Buckingham, however, maintains.that modern- day neo-classicists who assume that automation will not decrease employment base their assumption on non existent conditions. His interpretation of the neo classical argument is that the expansion of automation will enable producers to increase output which will force prices down, allowing the quantity demanded to increase, and this will encourage more output which 66 will require more employment to produce it. Dr. Buckingham rejects this theory completely because he 65Graves, loc. cit. 66 Buckingham, Automation . . . , p. 113. 204 maintains price competition is largely absent, labor mobility is hampered by its heterogeneous make-up, and 67 prices and wages are not flexible downward. Robert Theobald takes the position that man could never produce all he could use, but that in our present economy it is possible to produce more than 68 could be sold at a profit. He justifies his use of the term "abundance" in describing the present situa tion in the United States by declaring that abundance is largely a state of mind and constitutes an acceptance of some reasonable standard of living. He notes that, in the late nineteenth century, the Burmese allowed their crops to rot in the fields rather than market them because they had enough for their immediate con- 69 sumption. Therefore, when he makes statements to the effect that, in a society of abundance, goods can be taken for granted because they would simply be avail- 70 able, he has in mind some reasonable standard of living, and not solid-gold bathtubs for everyone. 67Ibid. 68 Robert Theobald, The Challenge of Abundance (New York: The New American Library, 1&6TJ* P* 93. 69Ibid. 70Ibid.. p. 37. 205 III. STRUCTURALIST ATTACK ON NEO-KEYNESIAN UNEMPLOYMENT THEORY The chief target of the structural economists has been the Neo-Keynesians, because it is this school of thought that has influenced the economic advisers to the Kennedy and Johnson Administrations. In addition, the Neo-Keynesians have concentrated most of their attacks on the structuralists, as was noted in Chapter IV, and therefore the structuralists have much to rebut. The Structuralist Hypotheses The various economists of the structural school have never agreed exactly on a single hypothesis. Professor Sultan tried to include the various theories under the loose definition that structural unemployment was that which was not caused by lack of aggregate demand, and therefore reflects the lag of adjustment 71 of labor supply behind the demand for labor. As noted previously, Professor Killingsworth offers the thesis that automation represents a break with past trends because it comes at a time when many goods industries have reached maturity, with the result that the demand for labor is shifted in favor of highly 71 Sultan, cit., p. 542. 206 skilled and well-educated workers and away from the unskilled.72 A hypothesis attributed to structuralists by the Neo-Keynesians is that unemployment has remained at high levels since 1957 despite the fact that suffi cient jobs were available because the unemployed were 73 not suited for these openings. Structuralists them selves admit this is a highly doubtful statement, and accuse their adversaries of striking down a "straw man" because this thesis is advocated normally by non economists such as Congressman Thomas B. Curtis of 74 Missouri. Professor Harold Demsetz combines three separate hypotheses into a single statement, which he claims cannot be rejected and tends to be confirmed by the available evidence: There exists a hard-core of unemployables that prevents the unemployment rate from falling 72Killingsworth, oj>. cit., p. 1475. 7 3 U.S. Senate, Hearings before the Subcommittee on Economic Statistics ot the Joint Economic Committee. 57th Congress, 1st Session (Washington, D.C.: Govern- ment Printing Office, 1961), p. 9. 74Thomas B. Curtis, 87 Million Jobs (New York: Duell, Sloan, and Pearce, 1552X1 207 to frictional levels, grows secularly, and currently accounts for a significant percentage of the unemployed.75 Shortage of Well-Educated. Highly Skilled Labor Professor Killingsworth argues that the changing pattern of demand for labor brought about by automation and the shift of consumer tastes to services will cause labor market imbalance because the supply of qualified labor has lagged behind these changes. He examines the statistics of unemployed males over eighteen years of age for the years 1950 and 1962 when the overall unemployment rate was virtually the same, as noted previouslyo These data are shown in Table XIV. This professor points out that not only did employment decrease for the poorly educated, but that their participation in the labor force also declined. Recalling Table XII, page 188, he argues that the unemployment rate worsened for all educational groups except the 20 per cent of the labor force with college training. It is this combination of figures that he believes substantiates his thesis that the patterns 75 Harold Demsetz, "Structural Unemployment: A Reconsideration of the Evidence and the Theory," Journal of Law and Economics, IV (October, 1961), 81. 208 TABLE XIV CHANGING STRUCTURE OF THE LABOR FORCE, PARTICIPATION, EMPLOYMENT, AND UNEMPLOYMENT BY EDUCATION, APRIL 1950 AND MARCH 1962 (MALES EIGHTEEN YEARS OF AGE AND OVER) Years ef Participation Eaployaent Uneaplovnent Change in Participation Change in Eaployaent Change in Uneiployaent School (1000's) (1000's) (1000's) 1950 1962 1950-1962 _ _ _ _ _ _ 1950-1962 Coanleted 1950 1962 1950 1962 1950 1962 Absolute Percentage Absolute Percentage Absolute Percentage 0 - 7 10,773 6,936 9,867 6,301 906 635 (lOOti's) -3837 -35.6 -3566 -36.1 -271 + 9.5 8 8,563 6,373 7,997 5,895 566 478 -2190 -25.6 -2102 -26.3 -88 +13.6 9-11 8,151 8,826 7,589 8,137 562 689 + 675 + 8.3 + 548 + 7.2 +127 +13,0 12 9,062 12,922 8,647 12,308 415 614 +3860 +42.6 +3661 +42.3 +199 + 4,3 13-15 3,135 4,686 3,005 - 4,498 130 188 +1551 +49.5 +1493 +49.7 + 58 -2.4 16 or over 3,009 5,268 2,941 5,193 68 75 +2259 +75.1 +2252 +76.6 + 7 -36,4 SOURCES; 1950 data--educational attainnent distribution froa U.S. Departaent of Coaaerce, Bureau of the Census, 1950 Census, Special Reports (Washington, D.C.; Government Printing Office, 1950), Table 9, 5B-73; other 1950 data froa 1950 CurrentTopulation Reports— Labor Force, Series P-57, No, 93, May 5, 1950, Table 6; 1962 data— Denis F, Johnston, "Educational Attainment of Workers, March 1962," Monthly Labor Review, LXXXVI (May, 1963), as cited in Charles C, Killingsworth, Hearings before the Subcommittee on Employment and Manpower!? the Committee on Labor and Public Welfare, 88th Congress, 1st Session, Septeaber 2~1963 (Washington, D.C.; Governaent Printing”Office), p, 14817 209 of demand for labor have been twisted faster than the patterns of supply have changed, causing more labor 76 market imbalance in 1962 than in 1950. He further documents his argument of imbalance by showing the percentage change in the labor force participation rates by educational attainment for males eighteen and over between the years 1950 and 1962. This information is shown in Table XV. It is his opinion that the seemingly heavy withdrawal from the labor force by the poorly educated would be countered by a large return should employment opportunities for this group improve. Thus, he maintains that, with larger labor force participation, the unemployment rates would possibly increase, even with increased 77 demand. The very small increase in participation rates for the college men indicates to him that it would be impossible to count on flexibility of supply for this category of workers, and therefore bottle- 78 necks could appear if demand increased substantially. Professor Killingsworth further examines the possibility of an invisible labor force, which has resulted from withdrawal from participation for lack ^Killingsworth, oj>. cit. p. 1477.- 77Ibid. 78Ibid.. p. 1478 210 TABLE XV LABOR FORCE PARTICIPATION RATES AND EDUCATIONAL ATTAINMENT, APRIL 1950 AND MARCH 1962 (MALES EIGHTEEN AND OVER) Years of School Completed Labor Force ticioation Par- Rates Percentage Change in Rate 1956 1962 1956-1462 0 to 4 74.6 58.2 -22.0 5 to 7 85.0 74.6 -14.4 8 88.1 78.2 -12.7 9 to 11 92.1 88.8 - 3.9 12 94.0 90.7 - 3.7 13 to 15 79.6 83.0 + 5.4 16 or more 92.1 92.3 + 0.2 All Groups 87.6 83.5 - 4.7 SOURCES: 1950 data— U.S. Department of Commerce, Bureau of the Census, 1950 Census. Special Reports (Washington, D.C.: Government Printing 6££ice, 1950); 1962 data— ‘ from unpublished figures supplied by U.S. Bureau of Labor Statistics as cited in Charles C. Killingsworth, Hearings before the Subcommittee on Employment and Manpower of the Committee on Labor and Public Welfare. 8&xh Congress, lsi Session, September 26, 1&63 (Washington, D.C.: Government Printing Office), p. 1477. 211 of jobs, by a statistical technique as follows. He takes the participation rates for the 1950 labor force, broken down into age and educational attainment, and applies these rates to the corresponding age and educa tional groups in the 1962 population; then he reduces the participation rates for the age sixty-five and over category by 22.7 per cent, because this was the per centage decline for the college group that was over sixty-five during this twelve year period, reflecting, in his view, the extent to which pensions and social security caused labor force withdrawal for reasons 79 other than job shortages. This means that he assumes that all other labor force withdrawals for other age groups occurred because of lack of employment oppor tunities. He states that this method reveals a labor force 920,000 higher than was reported in the official 80 employment statistics. By adding these "hidden unemployed" to the official unemployment figures, Professor Killingsworth arrives at a "real" unemployment rate for 1962, higher for all educational levels except 81 those with college training. These data are shown in Table XVI. His conclusion is that these figures 79Ibid., pp. 1789-1790. 80Ibid., p. 1790. 81Ibid. TABLE XVI OFFICIAL AND BEAL UNEMPLOYMENT RATES AND EDUCATION, 1950 AND 1962 (MALES EIGHTEEN YEARS OF AGE AND OVER) Years of School Completed Real 16S0 Unemployment Rate® ■"TOcffl'nm.. Unemployment Rate ""Bs T l M S. Unemployment Rate® Percentage Change in Real Unemploy ment Rates 1950-1962 0 - 4 8.6 10.4 17.2 +100 5 - 7 8.3 8.5 12.2 + 47 8 6.6 7.5 10.1 + 53 9-11 6.9 7.8 8.7 + 26 12 4.6 4.8 6.6 + 43 13 - 15 4.1 4.0 4.0C - 2 16 or more 2.2 1.4 1.4C - 36 All Groups 6.2 6.0 7.8 + 26 aSince 1950 labor force rates cure used as the basis for comparison, by definition the official and real employment rates are the same that year. Calculated thusly: apply to 1962 population, classified by age and educa tion, the 1950 labor force participation rates at all levels of education and at each age (with the over 65 participation rates at all education groups reduced by 22.7 per cent to allow for normal retirement). This yields adjusted labor force for each group. Actual employment is then deducted in each category, leaving real unemployment (except for the two top categories, see c below) which is expressed as a percentage of adjusted labor force. cThese figures are the same as the official unemployment rates for 1962 because their labor force participation rates were higher in 1962 than in 1950, indicating no reserve labor force in these groups. 212 213 show a correlation between low educational attainment, rising unemployment from 1950 to 1962, and declining labor force participation rates over the same period; and the figures'show a correlation between high educa tional attainment, falling employment from 1950 to 1962, and rising labor force participation rates over this period.8^ A further conclusion from these data by this economist is that the decrease in unemployment rates for the poorly educated that would be necessary to bring the overall rate down to 4 per cent is beyond the ability of the economy. He assumes that an overall 4 per cent unemployment rate is compatible with a 5 per cent rate among men with eight years of schooling and 83 a 7.5 per cent rate for men with less than that. He argues that the economy would have to provide sixty jobs for every 1,000 now held by men with an eighth grade education and eighty-two for every 1,000 now held by men with less schooling than that in order to get their unemployment rates to 5 per cent and 7.5 per cent 84 respectively. In addition, he maintains that the supply of college men could expand less than 1 per cent, 84Ibid.* 83Ibid., p. 1792. 214 85 thus causing bottlenecks of highly trained people. Youth and Female Component of the Labor Force Structuralists have advanced the argument that certain groups of the labor force, such as youth, females, and non-whites, are unemployed because there has been a rapid increase in the supply of workers offering highly substitutable services to prospective employers. In addition, this school of thought claims that these categories prevent the overall unemployment rate from falling to 4 per cent. Professor Howard Demsetz maintains that females and youth under twenty represent a hard core of unem ployed who remain unemployed after others have found jobs. Therefore, it is his opinion that this hard core would be a higher percentage of the total unemploy ment in a high employment year than in a low employment year, when others have regained their jobs. To sub stantiate this hypothesis, he takes the 1957 labor force segregated by sex and by under twenty and over twenty years of age, and applies the appropriate 1960 unemploy ment rates to these figures in order to determine what unemployment would have been in 1960, if the structure 85Ibid 215 of the labor force had not changed. He then estimates the percentage distribution of unemployment by age and sex for I960, with the 1957 labor force structure, and compares this with the actual 1957 relative unemployment figures, grouped the same way, and concludes that females and youth accounted for a lesser percentage of the total unemployment in 1960 than they did in 1957.88 This information is shown in Table XVII. What surprises Professor Demsetz is that the Council of Economic Advisers takes similar information (they failed to take into consideration the changes in the growth of youth in the labor force) and denies there is a structural problem on the basis that youth and females accounted for a smaller percentage of total unemployment in 1960 than they did in 1957. To this professor, the Council has made a "serious” logical error because the very stubbornness of the hard-core problem would, in his view, tend to make the females and youth a higher percentage of total unemployment in a year of prosperity than in one of recession, such as 8 7 1960. Furthermore, even if the additions to unem ployment from 1957 to 1960 were all structural, and 86 Ddoistcz ^ Xo^« cljt • | p • 83. 87Ibid., p. 84. TABLE XVII ESTIMATED 1960 AND ACTUAL 1957 UNEMPLOYMENT RATES Labor Groups Number of Persons in 1957 (1000's) Percentage of Each Group Unemployed 1960 Rates Estimated Number Unemployed in 1000's in 1960 Percentage of Total Unemployment Estimated Actual 1960 1957 Male 45,882 5.4 2,470 65.2 64.4 Under 20 3,102 14.0 434 11.4 12.0 Over 20 42,780 4.6 2,036 53.8 52.4 Female 22,064 5.9 1,320 34.8 35.6 Under 20 2,192 12.9 283 7.5 7.6 Over 20 19.872 5.1 1,037 12.3 28.0 Total 67,946 — 3,790 100.0 100.0 SOURCES: Column (2) from U.S. Bureau of Labor Statistics, The Extent and Nature of Frictional Unemployment. Study Paper No. 6 (Washington, b.C.: Government Printing Office, November 19, 1959), p. 34; Columns (3) and (6) from the Council of Economic Advisers' Statement, The American Economy in 1961, Problems and Policies. Supplement B, as quoted in Harold Demsetz, ^Structural Unemployment: A Reconsideration of the Evidence and the Theory," Journal of Law and Economics. IV (October, 1961), 83. 216 217 all unemployment in the prosperous year of 1957 were structural, it would be impossible to raise the per centage of structurally unemployed in 1960 over 1957. Yet this is what this professor naintains the Council DQ has attributed to structural theorists. It is possible to extend Professor Demstez' analysis to more recent unemployment figures, classified in the same way as he did, using the years 1961 and 1964 instead of 1957 and 1960. In this way, the analy sis compares the changes in hard-core unemployment from a recession year to a year of partial recovery. The overall unemployment rate in 1961 was 6.7 per cent and 89 in 1964 it was 5.2 per cent. This comparison will use the 1961 structure of the labor force as a base rather than the 1957 structure which Professor Demstez used. The results can be seen in Table XVIII. Once again, the above professor's method of analysis shows youth and female unemployment to be a higher percentage of total unemployment in a year with a lower unemployment rate for all workers. Conversely, these selected rates are a higher percentage of total 88Ibid., p. 85. 89 Council of Economic Advisers, oj>. cit., 1965, p. 217. TABLE XVIII ESTIMATED 1964 AND ACTUAL 1961 UNEMPLOYMENT RATES Labor Groups Number of Persons in 1961 (1000»s) Percentage of Each Group Unemployed 1964 Rates Estimated Number Unemployed in 1000's in 1964 Percentage of Total Unemployment Estimated Actual 1964 1961 Male 47,378 4.5 2,175 59.1 63.6 Under 20 3,518 14.5 510 13.8 11.3 Over 20 43,860 3.8 1,665 45.3 52.3 Female 24,225 6.2 1,505 40.9 36.4 Under 20 2,560 15.0 382 10.4 7.9 Over 20 21,665 5.2 1,123 30.5 28.5 Total 71,602 3,680 100.0 100.0 SOURCE: Council of Economic Advisers, Annual Report of the Council of Economic Advisers (Washington, D.C.: Government Printing Office, 1&6$), Table B-22, p. £16. 219 unemployment in a year with a lower overall unemployment record. ffage Levels and Structural Unemployment A good many structural economists use the neo classical argument of wage rigidity as a cause of structural unemployment^ For example, Professor Demsetz maintains that minimum wage laws and union wage rates make it very difficult for a growing component of the labor force, namely young workers and females, to offer its services at a wage low enough to coincide with its 9 0 marginal productivity. It is his opinion that auto mation will accelerate as wages increase, and that if these young workers and women attach themselves to occupations covered by either union pressures or exten sions of minimum wage laws, the hard-core problem will 9 1 become worse. His thesis of the hard-core problem is this*. The level of aggregate demand sufficient to bring about full employment with completely flexible prices and wages is insufficient with highly inflexible (downward) wages and prices, and that the degree of insufficiency increases as the component of the labor force containing persons with low productivity increases.92 9 0 Demsetz, loc. cit., p» 90. 91Ibid., p. 91. 92Ibid. 220 Professor Robert L. Raimon agrees with Dr. Demsetz that the labor market will not be efficient with wage inflexibility because the price of capital to labor will not fluctuate as a true market economy would dictate. It is Professor Raimon's opinion that even increases in labor mobility are thwarted by wage increases which deepen worker attachment to industries 93 where employment opportunities are unfavorable. He believes that high wages in manufacturing have deepened worker attachment to a sector which will be declining in employment, because workers who have been laid off seem to prefer to wait to be recalled to their old jobs rather than seek new work in the service sector, where 94 wages are lower. This economist also believes that increases in aggregate demand will lead to inflation before unemployment is reduced to 4 per cent because: first, unions force employers to pay wage increases while firms still face a perfectly elastic supply of workers at the old wage level; second, the level of demand needed to decrease unemployment among skilled workers would be too low to decrease it among the 93 Robert L. Raimon, "Labor Mobility and Wage Inflexibility," American Economic Review, LIV (May, 1964), 133. 94Ibid.. p. 134. 221 unskilled; and third, the minimum wage rises faster than the average wage but the productivity of the average worker rises faster than that of the marginal 9 5 worker, making it economical to automate. He main tains that either wages must be flexible downward or more emphasis must be placed on labor mobility. He discounts the effectiveness of the "Guidelines" because, 9 6 in his view, they call for "patsies" in that they admonish unions and oligopolistic firms for taking action which would be in their own best interest, and extol them to think only of the good of the nation as a whole. Professor Clarence D. Long believes that modern technology has increased the productivity of the skilled or educated employee, while working adversely on the 9 7 contributions of the less educated. It is his opinion that the heavy incidence of unemployment among the unskilled is caused by insufficient wage differentials between them and the skilled. While all three professors— Demsetz, Raimon, and Long— appear to be advocating that the price system be 95Ibid., pp. 136-137. 96Ibid., p. 142. 9 7 Clarence D. Long, "An Overview of Postwar Labor Market Developments," Studies in Employment and Unem ployment (Kalamazoo: W. E. Upjohn Institute for Employ ment Research, July, 1962), p. 42. 222 allowed to operate without artificial barriers, not all structuralists believe that this would be sufficient to restore full employment, especially among the unskilled. Professor Richard G. Lipsey maintains that the production function might be such that the range of substitutibility would be insufficient to provide full employment of all factors at widely acceptable prices. In addition, he believes it is possible that unused supplies of cheap laborjmay remain unemployed even if they were free because future inventions may 98 make their contribution negative. Professor Paul Sultan argues that upgrading skill may be overstated because automation, in his view, can economize on the skilled, supervisory, and 99 middle management employees as well as the unskilled. He points out that even if the ratio of skilled to unskilled is higher after automation, it is still possible that fewer jobs for skilled people will be available. As an example, he declares it would be possible for a firm before automating to have seventy QQ Richard G. Lipsey, "Structural and Deficient Demand Unemployment Reconsidered," F-mpiayment Policy and the Labor Market, edited by Arthur M. Ross (Berkeley: University of California Press, 1965), p. 253. 99 Sultan, op. cit., p. 552. 223 unskilled and thirty skilled employees, and after to have seven skilled and three unskilled.100 IV. SUMMARY All three schools of thought appear to attribute the unemployment of certain workers to the fact that their real wage exceeds their marginal revenue product. However, all three schools of thought have their own separate methods for correcting this disequilibrium. The neo-classical school, with some noted exceptions, would like to decrease the money wage of the marginal worker in the hope that this will decrease the real wage. The Neo-Keynesians desire to increase the price level through increased aggregate spending, so the real wage will fall if the money wage remains stable or rises more slowly than the price level. The struc turalists, with some noted exceptions, prefer to increase labor mobility and to upgrade the skill of the marginal worker, which would act in the same way as a decrease in the real wage because it decreases the average cost of labor to the employer by giving him a more efficient worker for the same wage. Struc turalists hope that the demand for labor is elastic 100Ibid. 224 so that increasing the marginal productivity of labor will increase employment. Structuralists also claim that increases in aggregate demand will give too little help too late for those unemployed for non-cyclical reasons. Pro fessor Demsetz argues that aggregate demand can re employ only those who are jobless for cyclical reasons because the reversal of the cycle can restore their marginal revenue productivity since the industries in which these workers were employed generally have excess capacity in other factors to complement their re-employ ment. On the other hand, he maintains that those who lose their jobs because of automation or because they are working in declining or defense-oriented industries will not benefit from increases in aggregate demand because of the following reasons: first, in the automation case the industry is often at full capacity when the workers were dismissed; second, in the declin ing industry, the workers are not needed regardless of how prosperous the rest of the economy is; and third, in the defense industry, only more government contracts 102 will re-employ those workers. ^■^Demsetz, loc. cit•, p. 91. 102ibid. 225 The emphasis on retraining and education seems to predominate in solutions offered by structural economists. Professor Killingsworth believes that crucial shortages of educated people will occur, and therefore advocates reduction of the college dropout 103 rate. He is of the opinion that a good many drop from college for financial reasons, and even some academic failures are a result of the student working too many hours a week. He argues that the main cost to a student in college is the living expenses while not working, and therefore he advocates that the Federal Government make loans up to $12,000 to college students for a period of forty years, at a subsidized 104 rate of interest of 2 per cent per year. The reason this professor puts the chief emphasis on remedying shortages at the top of the skill ladder rather than on the surplus at the bottom is because he believes that the key to the solution of the manpower dilemma in the age of automation is invest ment in human beings. Professor Theodore W. Schultz believes that the Neo-Keynesians have made the sane mistake the KN*Killingsworth, cit., p. 1794. 104Ibid., p. 1480. 105Ibid.. p. 1794. 226 neo-classicists made in treating all labor as homoge neous. He believes that educated workers are a form of human capital, a produced means of production, and the product of investment just as much as non-human 106 capital. It is his view that looking upon human beings as having equal capacity to do manual work is as much an error as counting all machines as equally 107 productive. Finally, it must be noted that because the structuralist school is comparatively new, some of its disciples came to it from the neo-classical school and others from the Neo-Keynesian school. Many of those advocating reliance upon the market system, such as Professor Demsetz, are more likely former neo-classicals. On the other hand, those who predict problems of maturity or stagnation, such as Professor Killingsworth or Robert Theobald, are probably former Neo-Keynesians. This may account for the difficulty in developing a single, positive hypothesis which includes all adherents of this school. 106 Theodore W. Schultz, "Investment in Human Capital," American Economic Review. LI (March, 1961), 3. 107Xbid. CHAPTER VI SUMMARY AND CONCLUSIONS At this point, the principal arguments of the three schools of thought on the modern unemployment problem should be reviewed as to their strengths and weaknesses. In many cases, the differences among the three views are unduly exaggerated primarily because the protagonists prefer to present the least plausible arguments of their opponents as typical of the opposing school of thought. This chapter is devoted to pointing out the real differences among these groups and evaluat ing the separate arguments. Following this analysis, the policy recommendations and conclusion of this dis sertation are presented. I. ANALYSIS OF THE NEO-CLASSICISTS The environment in which the neo-classical economist desires the economy to operate in is one of effective competition, because he believes that capital formation is best stimulated by this condition. The employment outlook for this school of thought depends mainly on the prospects for increased capital investment and thus any interference with this process, be it government intervention in the market, trade union action to raise wages, or business monopolistic 228 practices designed to protect the status-quo, are looked upon with disfavor. Importance of New Investment Neo-classicists emphasize the need for change and improvement in production standards because they strongly believe man's wants will always exceed his ability to satisfy them. Therefore, increased capital formation is justified by the insatiability of human wants. In addition, these theorists emphasize that full employment depends upon new net private investment and that the business cycle is caused by fluctuations in investment. Professor Wright takes a Schumpeterian stand that innovative investment will cause not a smooth progression, but spurts of growth followed by recessions. However, each recession apparently bears the seeds of its own inevitable upturn because capital eventually wears out and human desires are never fully satisfied. The only obstacle to the inevitable upturn, as seen by this school of thought, is the possibility of interference with the market system by government, private monopoly, or labor unions, which could cause the economic system to stagnate. The monopoly or union tactics with which the neo-classicists disagree are discussed below in con nection with the problem of labor mobility. The 229 government policies that the neo-classical economists dislike are those antirecessionary measures which somehow discourage private investment, the one component considered essential to recovery. Professors Wright, Wallich, Friedman, and Burns all advocate the use of transfer payments in the form of unemployment insurance as the best way to keep consumption from falling too low, but deny that merely maintaining consumption will provide the stimulus needed for investment. Investment, to this group of economists, depends upon the rising expectation of profits, and thus the government should try to maintain a climate favorable to business expan sion. Apparently the accelerator effect can be relied upon more to produce a recession than a recovery. Neo-classicists urge government to create a climate favorable to businessmen, even though the latter are more laisses faire than the economists. If govern ment were to rely upon the policy recommendations of the business and financial press, such a policy would almost certainly lead to deflationary measures. Govern ment spending is practically always attacked as infla tionary, even during the 1930's. Tight money is regarded as prudent; unemployment as a sound corrective for the high wages during the previous prosperity and bankruptcies of the marginal firms are described as 230 being competitive. Even though neo-classical economists rarely sub scribe to these views, their advocacy of an atmosphere favorable to business confidence appears to suggest policies with a strong deflationary bias. In any case, the crux of their arguments is that private investment will inevitably stop decreasing and begin to increase, and thus employment will expand. It is the opinion of a few of these theorists, such as Professors Wright, Patinkin, and Burns, however, that the above condition cannot be guaranteed to occur within a time period short enough for government to avoid taking any positive action. Lack of Concern over Autonation In reviewing Professor Brozen's study of automa tion, one cannot help but be struck by the heavy reliance upon pure competition in the product and resource markets, and by his tacit assumption of the homogeneity of labor and capital. His statement that a flow of capital released by an industry automating its factories can be used to employ workers elsewhere infers not only homogeneity of capital, but also full employment. The use of capital resources by other 231 industries to expand employment can only depend upon the release of capital by some other industry if all resources were fully utilized. But with idle factors, expansion by one firm or industry need not depend, as Professor Brozen seems to indicate, upon the release of resources by other sectors of the economy. In addition, the above professor states that automation that releases only labor may still not cause unemployment if the cost of production decreased enough to lower the price of the output, and if demand for the output were price elastic. This is a good example of what Professor Killingsworth said occurred in the auto mobile industry after 1913 and in the telephone industry since the 1920's, but one may question its applicability to today's oligopolistic industries. Professor Brozen's differentiation between auto mation used for expansion and that used for moderniza tion determines whether or not employment will increase as a result of the change. According to his analysis, only automation used for modernization will decrease employment, and since he predicts automation will create mere jobs than it destroys, it must be assumed that he envisions that the past demand for capital will continue into the future, and therefore automation for expansion will exceed automation for modernization. This assumption is given farther credence by his insistence upon the need for higher saving in order to insure a constant flow of capital and to raise the marginal revenue product of labor. He advocates more favorable tax treatment for property owners on the ground that this will lead to more saving, which would then be available for capital formation. Apparently Professor Brozen believes that present saving is inadequate and that it must be increased from private sources. How ever, in view of the large amount of government capital expenditure, investment funds can be provided by sources other than private saving. Most economists acknowledge that investment funds can be provided by tax revenues on state and national levels and by increasing the money supply or deficit finance on the federal level, thereby avoiding the public protest that most likely would result from Professor Brozen's proposed favored treatment of the rich. Furthermore, should the future demand for real investment goods decline, must of the private saving could end up being hoarded, thus reducing national income, and eventually private saving as well. Mobility of Labor The strongest contribution to an understanding of the modern unemployment problem made by the neo- classicists concerns the restrictions upon labor 233 mobility* Even though this school of thought is con sidered by many to be the most representative of business thinking, these economists spare no sector, not even business, from severe criticism when that sector tries to secure an advantage for itself by interfering with the free-market allocating mechanism. Professors Wright and Stigler point out that the strongest threats to competition come from business groups seeking protective shelter from competition by petitioning legislatures for restrictive measures. The desire for security and uninterrupted routine is seen as a real threat to progress because the latter requires dynamic change which is the very antithesis of security. The measures which restrict the free flow of labor from surplus to shortage areas are attacked almost universally by neo-classical economists. The policies of craft unions which restrict supply by high initiation fees and the need for a license to work in such occupations as watchmaking, commercial photography, tree surgery, and guide-dog training are found to be especially obnoxious to neo-classicists. Any inter ference with the production function, whether by indus trial union bargaining or uinimum-wage legislation, is considered to be an uneconomical use of scarce 234 resources because an employer will substitute other factors of production for labor should the wage of the latter be increased above its marginal revenue product. Professor Brozen's example of the installation of automatic elevators when the operators' union insisted upon a wage of $2.40 per hour is a case in point when labor was displaced without an alternative opportunity, and capital was used in a place that would not have been profitable had the ratio of labor to capital prices not risen. Heavy Reliance upon Transfer Payments The advocacy of transfer payments by neo- classicists in order to supplement the income dis tribution of the market reflects not only their strong aversion to interfering with relative factor prices, but also their realization that the distribution of income by the market leaves some recipients with an income inadequate to live above the poverty level. The most significant feature of the policy proposals of these theorists is that the transfer payments should be financed by increasing the money supply rather than through taxation or borrowing. These economists, particularly Professor Friedman, strongly believe that transferred money, such as funds raised by taxation or 235 borrowed from the public, will not raise aggregate spending unless the economy is faced either with a liquidity trap or a perfectly inelastic investment function. Their reasoning is that individuals and firms have certain preferences among cash and the other assets in their portfolios, and if taxed or induced to buy government bonds they will decrease their purchases of other assets to compensate for this. The conclusion they reach is, therefore, that only when transfers are the result of newly-injected money will they have an expansionary effect. One significant feature of Professor Friedman's policy recommendations regarding the use of transfers is that they replace public goods as a means of elimi nating poverty. It is his view that money is more desirable to the poor or unemployment than payment in kind, such as public housing, health care, hospitals, or special schooling provided by government subsidy. He reasons that with money individuals will buy the goods and services they want rather than what the government thinks they ought to have. However, one may question this reasoning on the ground that transfers could increase the effective demand for the existing housing of the recipients with the result that higher rents may dissipate the transfers. It is also possible 236 that some recipients nay have been culturally, educa tionally, and socially deprived to such an extent that some paternalism on the part of the government may be more desirable them complete reliance upon the market system. II. ANALYSIS OF THE NEO-KEYNESIANS A large percentage of the writings of the Neo- Keynesians has been devoted to attacking the "conserva tive" or business press with its "orthodox" recommenda tions for monetary and fiscal policy. However, as pointed out in the previous section, many neo-classicists advocate monetary expansion when all resources are not fully utilized. Few neo-classical economists adhere to balanced federal budgets as an end in itself; still fewer believe that the economy can operate frictionlessly without any government intervention whatsoever. Con versely, most Neo-Keynesians believe that if aggregate demand were adequate, the labor market would be a good allocator of workers among the various sectors. There fore, the essential differences between these two schools of thought on the unemployment problem revolve around issues of degree— the degree of government intervention, the degree of saving needed, and the degree of price stability that is desirable. 237 In their disagreement with the structuralists, Neo-Keynesians argue from a macroeconomic vantage point while the structuralists take a microeconomic position. Neo-Keynesians, for the most part, do not deny the existence of structural unemployment, but merely assert that it is not worsening. They often single out the least plausible structural arguments and refute them, thereby exaggerating the actual differences between the two positions. Neo-Keynesian Disagreements with the Neo-Classicists There is a close connection between the issue of the proper role for the government and the desira bility of saving. Neo-Keynesians fear that the pro pensity to save may exceed the propensity to invest in a highly-developed economy and thus advocate government investment to take up the slack. Neo- classicists, on the other hand, encourage saving on the grounds that this will provide available funds for private investment if only there were no barriers imprudently imposed. The higher the level of private investment, the less the need for government inter vention, and the closer the system will approximate the neo-classical ideal. Neo-Keynesians do not appear 238 to have any special preference for government investment as the neo-classicists have for private, but the former take a more pragmatic, less doctrinaire, position that the purpose is to achieve a level of aggregate demand sufficient to employ the labor force regardless of the composition of that demand. On the subject of full employment versus stable prices, the Neo-Keynesians emphasize the evils of unemployment and minimize the costs of inflation, while the neo-classicists do just the reverse. Neo-Keynesians argue that increases in aggregate demand will reduce unemployment to frictional levels, and that inflation has been mild since 1957, and therefore the cost to society of reducing unemployment is very low while the benefits promise to be high. Neo-classicists, on the other hand, counter with structuralist-type arguments that unemployment among married men is about 2.5 per cent, and thus any further attempt to reduce unemploy ment by general increases in demand will result in inflation. While the latter school of thought admits that price increases have been mild since 1957, they nevertheless harp on the fact that institutional rigidities have made price increases irreversible, and therefore claim that a lesser degree of inflation can be tolerated now because there are no compensating price decreases in recessions. However, neo-classicists do not offer much more in the way of compensation to those who must suffer unemployment in order for the economy to have stable prices than what is now being provided. On the other hand, Neo-Keynesians have made various proposals, such as an "incomes policy," to compensate those on fixed incomes who must suffer some erosion of purchasing power if the economy is to enjoy full employment. It can therefore be concluded that the Neo-Keynesians have considered more carefully the economic costs involved in pursuing the goals they advocate than have the neo-classicists. Neo-Keynesian Disagreements with the Structuralists When the Neo-Keynesians attack the various structural arguments, the point emphasized is that structural unemployment is not becoming worse, and therefore any increase in unemployment can be explained by lack of demand. The evidence presented by Professors Heller and Gordon indicates that unemployment is higher in all sectors of the economy, but that specific indus tries or occupations that are normally associated with structural unemployment accounted for a smaller per centage of all unemployment in the years after 1957 240 than before. The conclusion they draw from these data is that sufficient labor force mobility exists to cause workers to leave declining industries and occupations and move into expanding sectors. Neo-Keynesians claim that their position is further strengthened by the fact that unemployment in expanding industries and occupations not only increased, but was a greater percentage of all unemployment in the period after 1957 than before. They maintain that this indicates that unemployment is less concentrated now than it was before 1957, and therefore general increases in, demand will eliminate it. As support for the latter statement, Professor Heller cites statistics to show that unemployment in the goods-manufacturing industry decreased by a larger percentage than the overall unemployment rate from 1961 to 1962. The overall rate decreased by 16.4 per cent from 6.7 per cent to 5.6 per cent, while the rate for the goods-producing sector decreased by 22.9 per cent from 8.3 per cent in 1961 to 6.4 per cent in 1962.^ However, no evidence is available to show how many long-term unemployed workers Walter B. Heller, "The Administration's Fiscal Policy," Unemployment and the American Economy, edited by Arthur M. Ross (New York: John Wifey and Sons, Incorporated, 1964), p. 99. 241 withdrew from the labor force by becoming discouraged. Nevertheless, it is possible to show the other side of the picture. Prom 1961 to 1962 Gross National Product increased in real 1964 dollars from $541.6 billion to $575.7 billion, or 6.3 per cent, but total wage and salary employment in manufacturing increased by only 3.7 per cent, from 16.3 million in 1961 to 16.9 million 2 in 1962. Neo-Keynesians may claim that this indicates that the labor force is sufficiently mobile because fewer workers are trying to enter a declining sector, and thus the unemployment rate there will decrease when the overall rate drops. However, structuralists may counter with data to show that employment increased in all sectors from 1961 to 1962 by less than the increase in Gross National Product, and that the sectors which are supposed to be expanding in employment did not fare much better than, if as well as, manufacturing in this period. For example, the increase in the finance and insurance sector was the same as in manufacturing; the increase in trade was less, only 2.6 per cent; and the increase in the service sector, while more than manu- 2 Council of Economic Advisers, Annual Report of the Council of Economic Advisers (Washington, D.C.: Government PriniTng bffice, 1&65), Table B-2, p. 190 and Table B-26, p. 220. 242 3 facturing, was still less than 4 per cent. Professor Solow cites the cas of Denmark as an example of a nation that tried structural remedies for its unemployment problem for several years, and was unsuccessful in reducing its unemployment rate until aggregate demand increased substantially. When he draws a parallel analysis for the United States, one must bear in mind that few structuralists claim that high aggre gate demand is unimportant; most structuralists assume an adequate level of demand as the first prerequisite, and then proceed to discuss the microeconomic problem of adjustment of labor supply. In addition, some structuralists could counter Professor Solow1s use of Denmark by claiming that the Danes are not as highly developed as the United States and therefore have not reached the level of consumer saturation that the United States has. With respect to depressed areas, the Neo- Keynesians present a convincing case to show that these regions do not stay depressed forever. Not only have fewer areas in the United States reported unemployment in excess of 8 per cent in recent years, but fewer of the unemployed are in these regions now. While much 3Ibid. 243 attention is given areas like Appalachia in the popular press, few structural economists have offered this argument as evidence of increasing structural unemploy ment . 111. ANALYSIS OF THE STRUCTURALISTS The structuralists are the most pessimistic of the three schools of thought on the unemployment problem because they do not believe that a system of workable competition, which the neo-classicists advocate, nor a mere stimulation of aggregate demand, such as the Neo- Keynesians espouse, will solve the unemployment problem facing the economy. These theorists propose specific labof-market policies on a microeconomic level as the only way to match the supply of labor with the demand for it. Even the minority of structuralists who assume that abundance has arrived can be called pessimistic because they realize that all of the economic institu tions of society are geared to a world of scarcity, and will resist any change. Education and Unemployment One of the most significant structuralist argu ments is that the portion of the labor force with limited education has suffered more unemployment in recent years and faces cm even bleaker future. Professor 244 Killingsworth deals with this subject at great length, showing not only how unemployment has increased from 1950 to 1962 among the poorly educated, but also that their participation in the labor force has declined. Professor Gordon, a Neo-Keynesian, has taken Professor Killingsworth*s data and attempted to refute the latter's contention that the workers without a high school diploma account for a larger percentage of the unemployed since 1957 than before* Professor Gordon applies the formula ^i - ^i to these data, wherein U U ” E“ and L stand for unemployment and the labor force, respectively, and the subscript i denotes a particular sector of the labor force. The formula can be used to determine the difference between the relative contribu tions to unemployment and to the labor force of any segment of the population in any two separate years. For example, according to the data supplied by Pro fessor Killingsworth, males over eighteen with less than an eighth grade education accounted for 32.5 per cent of the unemployed in 1957 but only 19*2 per cent of the labor force, for a difference of 13*3 percentage points. In 1962 this group accounted for 23.7 per cent of the unemployed and only 15.4 per cent of the labor force, for a smaller difference of 8.3 percentage points, with the conclusion that structural unemployment for 245 this group did not worsen over the period, but actually diminished. Another variation of the formula of Dr. between a sector's fraction of total unemploymont and its share of the labor force. From this formula the ratio for the above group in 1957 was 1.69, but in 1962 it fell to 1.54, again indicating that structural .unem ployment for this group was less in 1962 than it was in 1957. However, one of the problems with this analysis, and one recognized by Professor Gordon, is that it does not take into consideration the discouraged worker hypothesis, so heavily relied upon by Dr. Killingsworth. Therefore, when the calculations show that the lesser educated workers accounted for a smaller percentage of all the unemployed workers in 1962 than they did in 1957, and conversely, college educated workers accounted for a slightly higher percentage of the total unemployed workers in 1962 than they did in 1957, the drop in participation must be considered. In Table XIX it can be seen that those with only a grammar school education were a smaller percentage of the labor force in 1962 than in 1957, and those with some college training were a larger percentage in 1962. Since Professor Gordon's formula shows the structural position of the poorly Gordon's is i wherein one may determine the ratio TABLE XIX RELATIVE CONTRIBUTIONS TO CIVILIAN LABOR FORCE AND TO UNEMPLOYMENT, MALES EIGHTEEN AND OVER, BY EDUCATIONAL ATTAINMENT, 1957 AND 1962 Years of School Completed Percentage Share of Each Group In Unemployment In Labor Force Difference Ui U 1957 1962 1957 Li L 1962 ui U 1957 L 1962 0 - 7 32.5 23.7 19.2 15.4 13.3 8.3 8 18.4 17.8 17.1 14.2 1.3 3.6 1 9-11 22.8 25.7 19.6 19.6 3.2 6.1 12 19.3 22.9 26.2 28.7 - 6.9 - 5.8 13 - 15 5.6 7.0 8.3 10.4 - 2.7 - 3.4 16 and over 1.5 2.8 9.6 11.7 - 8.1 - 8.9 SOURCE: Charles C. Killingsworth, Hearings before the Subcommittee on Employment and Manpower of the Committee on Labor and Public Welfare 7~ 88th Congress, 1st Session,"September-November, 19f>3 (Washington, D.C.: Government Printing Office, 1963), Part 5, p. 1481. 246 247 educated to be practically unchanged in the five year period, the crux of the structuralist case, as pre sented by Dr. Killingsworth, rests upon the discouraged worker hypothesis. The large decrease in participation for all educational groups except those with college training between 1950 and 1962 was shown in Table XV, page 210. It is the opinion of the structuralists that many of these discouraged workers would return to the labor force if the job picture improved, thus causing the unemployment rate to decrease more slowly, if at all. A conclusive answer to this question must wait until aggregate demand increases sufficiently in order to determine if enough discouraged workers re-enter the labor force to keep unemployment rates from falling to frictional levels. Youth and Unemployment Even Neo-Keynesians admit that the upsurge in supply of teen-agers in 1963 caused an undue structural change, but they caution against generalizing from one year's experience. Even so, Neo-Keynesians associate the large amount of unemployment among teen-agers with the great expansion in the population reaching that age coupled with the slow rate of economic growth. Structuralists, on the other hand, maintain that the large amount of youthful unemployment is caused either 248 by technology eliminating many starting positions for youngsters or by minimum wage laws or trade union agreements which cause the wage to exceed the marginal revenue product of the worker. Regardless of the reason, however, it has been shown by Professor Demsetz that young workers do represent a higher percentage of all unemployment in years that have lower overall rates of unemployment than they do in years of recession. The conclusion reached in January 1961 by the Council of Economic Advisers, that because youngsters and females represented a smaller portion of the total unemployed in the recessionary year of 1960 than they did in the boom year of 1957 and therefore structural unemployment decreased, was faulty. It is not possible to dis tinguish between unemployment caused by structural change and that caused by falling level of demand merely by examining the structure of the unemployed workers. The reason is that if employers use layoffs indiscriminately, then the structure of employed and unemployed labor will not change. But if employers do keep the skilled or experienced workers and release the unskilled and youngsters, the structural hypothesis is still not verified. The reason is that employers may consider skilled workers as part of overhead capital and not dismiss them when demand slackens, 249 or trade union policy nay compel employers to keep the workers with seniority. However, the return to pros perity should give an indication of the extent of structural unemployment because it is then that one can examine the employed workers to see if the original structure has been restored. The upswing is needed not only to determine the amount of structural unem ployment, but also to see if a greater amount of infla tion is needed to get unemployment to frictional levels. The Question of Abundance Only a minority of the writers of the struc turalist school have attempted to deal with the complex and statistically unverifiable problem of abundance. While non-economists such as Edward T. Chase in 4 5 Progressive. George G. Kirstein in Nation. Thomas 6 7 O'Toole in The Reporter, and Irving Howe in Dissent 4 Edward T. Chase, "The Coming Economic Revolu tion," Progressive. March 6, 1961, p. 11. ^George G. Kirstein, "The Manpower Revolution," Nation. February 2, 1964, p. 140. g Thomas O'Toole, "White Collar Automation," The Reporter. December 5, 1963, p. 24. ^Irving Howe, "Cybernation: The Trauma That Awaits Us," Dissent. Spring, 1964. have tried to cope with the question of incone for the redundant workers, only Robert Theobald among economists has written extensively on the subject, and he is not an academic economist. The concept of paying people for not working conflicts drastically with the Protestant Ethic, and therefore is shocking to most of the American public. However, one may question how much this ideal differs from many of the practices that have been forced on our present economy by labor unions, trade associa tions, the farm bloc, and professional societies. Standby bands, extensive licensing of occupations that require little skill such as real estate brokers, payment for not growing crops on certain parcels of land, and restrictions upon entry into medical schools with the intent to limit the supply of doctors are all attempts to prevent workable competition from taking place on the assumption that there is insufficient work to go around. Quite clearly, such restrictions do hamper labor mobility and could lead to structural problems. However, this has been difficult to quantify and no known work has been done on it. It is an area that academic economists may be forced to study should the level of unemployment not respond to increases in aggregate demand. 251 A final question posed by the structuralists concerns the possible effect that a structural change may have on aggregate demand. If a skilled worker replaces two unskilled at 150 per cent of the wage of one unskilled, there will be a redistribution of income from unskilled to skilled and from wages to profits, unless prices are correspondingly lowered. Should the propensity to consume be affected by this change in income distribution, structural changes can be said to have caused cyclical effects. IV. POLICY RECOMMENDATIONS Separate Solutions for Poverty and Unemployment As mentioned in Chapter II, the poverty problem, while related, is nevertheless different from the unemployment problem. Attempts to solve these problems should not become intermingled because these efforts could end up missing both objectives. A case in point involves minimum wage legisla tion. If poverty is defined as having an income less than $3,000 per year for a family, then it is possible to say that a family head who works for the present minimum wage lives in poverty because $1.25 per hour on a forty-hour week amounts to about $2,600 per year. 252 Labor union spokesmen have thus advocated raising the minimum wage and extending its coverage to more workers, on the premise that this would reduce poverty. However, private employers will not pay a wage that exceeds a worker's marginal revenue product, and thus will be forced to reduce their work force or increase its pro ductivity. In the latter case, this is done normally by substituting capital for labor, which usually results in fewer man-hours needed. Under these conditions, the workers remaining in the employ of the firm will be better off, but those released will be worse off. Only in the case of monopsonistic exploitation will passage of a minimum wage law increase employment, and even then the increase in employment will only occur if the minimum wage is less than the worker's marginal revenue product before passage of the law. If the announced goal of the economy is to pro vide an environment favorable to full employment, then it is surely preferable to allow the market wage to prevail even if persons employed full time earn only poverty-level incomes. Poverty can then be attacked directly by use of transfer payments without disrupting the production function. Transfers, either in the form of unemployment insurance or welfare payments to those not in the labor 253 force, are not as simple to administer as Professor Friedman implies. For example, should the criteria be based on wealth or income? What would be the status of the sMf-employed? However, it is the opinion of this dissertation, regardless of the problems involved, that a highly developed economy, subject to cyclical and structural changes, must rely upon transfer payments because economic stability is inverse to the level of development. A mass-consumption society can easily afford welfare and unemployment benefits since it has great productive capacity which will prevent inflation common to lesser-developed nations. In fact, it is preferable that these benefits be too high than too low because the cost to a wealthy economy of malingering workers or welfare "chiselers" is less than severely contracted consumption standards. However, selling such an idea to the public will be left to the political scientists. Aggregate Demand Versus Structuralist Policies It is generally agreed upon by most economists that the best policy to overcome the present unemploy ment is to increase aggregate demand until unacceptable degrees of inflation occur, and then see how much 254 structural unemployment remains and take steps to remove it. The only disagreements appear to occur over the precise level of unemployment at which inflation will occur. It is the opinion of this dissertation that the possibility of incurring a slight degree of inflation, even if irreversible, is a small price to pay to dis cover how much unemployment can be reduced by expan sionary monetary and fiscal policy. Contrarily, if policy makers refuse to increase aggregate demand sufficiently to reduce unemployment below 5 per cent, what is to be lost by applying structural labor-market policies? It would appear that little can be gained by carping theoreticians attempting to determine precisely the amount of unemployment caused by deficient demand as opposed to structural change when both schools of thought, by and large, recognize the need for adequate aggregate demand and do not negate the useful ness of labor-market policies on a microeconomic level. The policy recommendations of this study, however, will be separated according to aggregate demand or struc turalist remedies. Aggregate demand policy recommendations. This dissertation maintains that the United States, without conscious government policy to the contrary, suffers from a recessionary bias in that ex-ante aggregate 255 supply normally exceeds ex-ante aggregate demand. Therefore, expansionary monetary and fiscal policies should be pursued to reduce the gap as much as possible. More specifically, the tight money policy of the Federal Reserve should be abandoned; interest rates should be lowered to encourage private domestic investment and the money supply should be increased, especially in the financing of transfer payments. Inflation in a mild degree is much less of an ill than a poor growth rate coupled with an unemployment rate in excess of 5 per cent. Too much emphasis has been placed on avoiding inflation and too little on achieving full employment, primarily because the popular press portrays a 0.2 percentage point increase in the consumer price index as financial imprudence. In addition, any inflation, no matter how slight, affects everyone even though these effects are diffused and not concentrated. However, unemployment affects only a minority even though its effects are concentrated entirely upon this unfortunate minority. It appears that the general public, as if influenced by neo-classical thought, accepts the solution that moderate unemployment is preferable to any inflation because the unemployed often have unem ployment insurance while price increases are irre versible. However, it was pointed out in Chapter II 256 that in the relatively prosperous year of 1963 only about one-third to two-fifths of the unemployed received any unemployment benefits. It is constantly pointed out that the United States balance of payments problem prohibits further expansionary monetary and fiscal policy. However, it may be argued that the imbalance occurs not on the current account, but on the capital account, which has been caused primarily by private American firms invest ing in Europe. Private decisions are made on the basis of profit. Therefore, it may be assumed that this outflow would be halted if it were more profitable to invest in the United States* Even if an expansionary monetary and fiscal policy did increase imports and decrease exports, it is possible that such a policy would encourage enough private domestic investment to offset the reversal on the current account. It is the opinion of this dissertation that the most enlightened fiscal policy has been advocated by Professor Abba P. Lerner, namely, functional finance. As explained in Chapter IV, this policy is designed to use the taxing, spending, credit, and monetary powers of the federal government for the sole aim of achieving a fully-employed economy with as little inflation as possible, rather than to follow what would be considered 257 prudent policy if one were running a private firm. In this vein, therefore, the first tax to be eliminated, or drastically reduced, should be the social security tax because it is perhaps one of the most regressive taxes now in existence. Private life insurance companies need a reserve to meet future liabilities, but the federal government does not. It may be wise policy, however, to eliminate all of the employer contribution and all but a small fraction of the employee's contribu tion in order to be able to resort to this tax at some future date should inflationary pressures appear. In addition, the federal income tax should be greatly reduced, both as to absolute rates and as to progres- sivity, until a satisfactory level of employment is reached and maintained. The steeply progressive rates appear to be a punitive measure for being rich or, as Professor Milton Friedman puts it, for attempting to become rich. These rates cause too much effort to avoid them; effort that results in endeavors to achieve capital gains through real estate or stock transactions rather than through real investment that would result in ordinary income. In addition, the philosophy that decrees that it is essential to tax the rich in order to help the poor takes the wrong view of national income. The latter is not some fixed sum waiting to be split 258 by the populace. More for one person does not mean less for someone else. The national income can and will expand as long; as idle resources are put to work. Government policy should further rely a good deal less on borrowing than is done at present. Much short term borrowing is a substitute for printing money. The late Professor Henry Simons asked: "Why should needed increases in money be given the handicap of being a near-money?N It was his opinion, and is the opinion of this study, that no such handicap is necessary; that ninety-day treasury bills are imperfect substitutes for money, and therefore should be replaced by the real thing. It is far better government debt.policy to use this weapon of borrowing as an anti-inflationary measure than as an anti-recessionary measure. Government bonds can be sold to relieve inflationary pressure by competing with private investment opportunities. The price of the bonds should be allowed to fall as low as necessary for them to be sold, which will raise interest rates enough to deter excessive private investment. The above measures should be used to get unem ployment as low as a 2 per cent per year inflation will allow. From that point, microeconomic, or structural labor-market policies should attempt to reduce any further unemployment above frictional levels. — 259 Structuralist policy recommendations. The most urgent need in the United States with regard to struc tural unemployment is a uniform labor-market policy. At present, labor-market policies are piecemeal. They are: the Area Redevelopment Act, which restricts retraining to those in a depressed area; the Manpower Development and Retraining Act, which restricts retrain ing for those who have a reasonable expectation of employment in jobs currently vacant; the Trade Expansion Act, which limits assistance to those who were displaced by tariff reduction; and the Youth Conservation Act, which restricts training to young people. It is not socially just to have an unemployed person's aid depend upon the area of the nation in which he lives, the reason for his joblessness, nor upon his age. Workers are not responsible for either structural or cyclical changes, but they frequently suffer hardships when others, particularly in the case of structural change, either are no worse off or actually have their positions improved. If the structural changes result in a net improvement in society's welfare, the gain can be more unambiguously recognized when some elements of society are made better off without anyone else being made any worse off. Particularly in the case of tariff repeal, the increase in total welfare might not have occurred 260 but for the involuntary sacrifices of the adversely affected minority. This type of structural change can occur more rapidly when the adversely affected sectors do not resist the change* and therefore additional grounds can be found for assisting the displaced. Microeconomic measures mainly designed to deal with structural unemployment attack the problem by adjusting labor supply to labor demand. These measures perform this function either by improving the quality of labor available or by reducing the supply of labor. The former include retraining for older workers, the job corps for young workers, educational assistance and relocation allowance, which have as an ultimate goal increased economic growth, removal of bottlenecks, and increasing the potential aggregate output. Those measures designed to reduce the supply of labor, such as early retirement, shorter work weeks, or increased holidays, are aimed solely at reducing potential output in order to equate it with the actual output. Information about job vacancies is quite limited. Even more obscure is an accurate method of forecasting future job requirements. Therefore, it is difficult to expect retraining programs to be able to place a person in a job which he may keep until he retires because it is to be expected that many of the skills taught now, 261 even at public expense, will later become obsolete. It has often been suggested that the federal government offer subsidies to private firms to undertake the task of retraining rather than for the government to attempt to do it itself, because large corporations are better equipped for the job. A labor department survey in the spring of 1962, conducted among 710,000 firms, found that 2,500,000 a employees were being trained. It can therefore be assumed that, if private employers were not training enough to fill the job vacancies, either these job vacancies did not exist or there were insufficient promising employees. It would seem probable that if firms fail to upgrade their own employees, they would require a substantial subsidy to train the unemployed. Only if the subsidy is large enough to entice an employer to fill a job vacancy he otherwise would not have, can retraining be said to create employment. Training programs under the auspices of private firms, but subsidized by the federal government, should concentrate on long range projects, such as grounding a Gerald G. Somers, Unemployment and the American Economy, edited by Arthur M. Ross (New Yorks John Wiley and Sons, Incorporated, 1964), p. 85. 262 in the basic sciences upon which the new industrial processes will rest. In this way the problem of train ing for narrow specialties that may become quickly obsolete can be avoided. The difficulty of teaching poorly educated workers basic sciences may discourage programs of this nature, but it is preferable to pro longed idleness. One area neglected by the federal government, but one which may have more promising results, is subsistence aid for needy college students. Professor Killingsworth's proposal for long-term, low-interest loans for college students up to $12,000 has merit. While such a loan has to be shbsidized, it nevertheless could prove a bargain not only to the recipient but also to the community at large, should such a plan enable capable persons to obtain a college education who otherwise would not. The amount of $12,000 for four years is not large when one considers that the government of Iraq gives its citizens who study in the United States $30,000 for five years. The above measures are attempts to raise the productivity of workers to make them more employable. Measures should also be taken to make workers more mobile. Mobility assistance to workers is less costly than attempting to entice new firms, or branch plants, 263 into depressed areas. To begin with, as pointed out in Chapter IV, unemployment is not as heavily con centrated geographically as the public has been led to believe. In addition, regionally depressed areas have an unattractive image that 4eters firms from entering. Many of these areas have an aging population, low income, dilapidated capital, and exhausted resources. The older workers are less adaptable and more poorly educated than young workers, for the most part. Even if firms are enticed into an area that has 20,000 unemployed, and these firms provide 20,000 jobs, the unemployment rate still may not decrease because the contraction may not have run its course, and the population may increase through immigration from surrounding areas when word was received that a new firm was hiring. Furthermore, the opportunity cost of moving firms compared to moving workers is much higher. The real economic cost to the firm of moving into a depressed area is the difference between oper ating efficiency in the depressed area and the optimum location. This cost is a recurring one because the loss of efficiency is continuous. The movement of labor will decrease in cost over time because the employables eventually die off and the young can grow up where jobs are available. Any firm moving into a 264 depressed area would have to receive a substantial grant from the government because there are few labor- shortage areas In the country; a plentiful labor supply is the chief inducement to a firm considering such a move. Inducements from the government to individuals to move should be patterned after European systems, that of West Germany in particular. In that nation moving assistance is given not only to all unemployed workers, but also to all those who have been given notice of dismissal or to those employed but who are unsuited for their work or who are working for inade- g quate wages and want to find a new job. Instead of limiting aid to the unemployed in labor-surplus areas, this is an example of a comprehensive labor-market policy that does not favor workers in a particular area. The government could insist that all firms that receive federal contracts place their openings with a type of national employment agency, and simultaneously encourage other employers to do likewise. The Swedish government uses the radio to advertise job vacancies,^ Q International Labor Office, Unemployment and Structural Change (Studies and Reports, New Series No. 65. Geneva: International Labor Office, 1962), p. 166. 10Ibid., p. 169. 265 an idea which could also be applied here. The greatest problem of labor mobility concerns older workers who, in the words of Professor Paul Sultan, are often asked to get a new skill, a new job, a new employer, in a new industry, and in a new com munity all at once.1:1 When an employer has a choice he practically always chooses the younger worker, not only because of better education and adaptability, but also because of retirement contributions. Private pension plans not only discourage employed workers from changing jobs but also prevent the older, unem ployed persons from acquiring work. This subject leads into the second category of structural labor-market policies, that of reducing labor supply and thus reduc ing potential output rather than increasing the actual. Even if social security benefits were granted to workers at age sixty, society would be attempting to solve its unemployment problem at the expense of its poverty problem, because present benefits under social security would leave many families below the Paul Sultan, "The Skill Impact of Automation,” Readings in Exploring the Dimensions of the Manpower Revolution. Compiled for the Subcommittee on Employment and Manpower of the Committee on Labor and Public Welfare, 88th Congress, 2nd Session, 1964 (Washington, D.C.: Government Printing Office, 1964), p. 549. level at which poverty has been defined. However, as mentioned previously, this latter problem can be attacked more easily by increased transfer payments, while the unemployment problem is much more involved. Therefore, reduction of labor supply by early retire ment as well as by postponed entry into the labor force can be worthwhile measures. Should the huge increase in new entrants into the labor force in the late 1960*s coupled with increased productivity in the goods sector outstrip increases in growth of demand for goods, it might be necessary to share available work and the increased benefits in technology by more leisure in the form of a shorter work week, sabbatical leaves, or earlier retirement. What is essential, however, is that these decisions be worked out between management and labor in each industry, and that such reduction in hours not be made mandatory universally. A 10 per cent increase in productivity in the automobile industry, for example, should be divided partially between a wage increese and a reduction in hours worked. But if a reduction in the work week were compulsory in all industries, labor costs could increase to such an extent that the pace of automation could be uneconomi- cally accelerated. 267 Occupational Licensing It is the opinion of this dissertation that one of the greatest roadblocks to labor mobility and to the opportunity for individuals to improve themselves is the excessive licensing and restrictive entry into many occupations that ordinarily do not require formal education. While Professor Friedman wants to go to the extreme and not require any form of official qualifica tion for doctors, dentists, or lawyers, there are intermediate positions between complete laissez-faire and the medieval guild system. The state laws and municipal ordinances that erect fences around existing jobs are the reflection of a depression phobia that jobs are scarce and therefore outsiders must be kept out to insure high incomes for those within the occupa tion. The general public is either apathetic to or uninformed of the fact that future occupational choices are being severely limited. For example, in Jew Jersey, bait-fishing boats, beauty shops, chain stores, florists, insurance adjusters, photographers, and master painters all attempted to be licensed during 12 one session of the state legislature. Exclusive Walter Gellhorn, Individual Freedom and Government Restraints (Baton Rouge: Louisiana State University Press, 1^56), p. 110. 268 policies such as these are the very antithesis of the former American spirit of striking out anew. The choice of occupation, as well as the geographical freedom to practice the one already possessed, are becoming drastically limited. Parochialism, formerly the mark of a static, status-conscious society, is now conspicuous in the United States. Individuals must remain where they are if they wish to enter licensed occupations because of residence requirements during apprenticeship; or if they possess a license in one state, they may have to wait quite a while before becoming eligible to practice in another state. Such is the parochial practice presently used to keep local 13 residents from having to compete with outsiders. An example of the extent to which organized occupations can go is the Louisiana beauty-shop opera tors. In 1924 a mild law "protected" lady patrons by reducing the competition for their, patronage when it defined and regulated the practice of cosmetic therapy- A state board was set up, headed by the President of State Board of Health, and consisted of three members, only one of whom was a member of the profession in question. However, by 1940, the board contained six 13Ibid., p. 127 269 members, five of whom were beauticians. The board now had the power to fix prices and prevent "unfair competition." In addition, closer supervision of the beauty schools, which prospective members of the pro fession were compelled to attend, was instigated by fixing a minimum tuition fee,to be charged, thus 14 limiting future supply. In addition, boards of this nature maintain the power to supervise, direct, and discipline members of the occupation. Once successful restriction of supply drives up the incomes of the members, then it is essential to place even greater restrictions upon entry in order to prevent the occupa tion from becoming flooded with applicants. Trade unions are also notorious for their restrictive measures, which are so commonly known that there is no need to discuss the matter further. Indus trial unions have also bargained for restrictive measures to protect a nucleus of senior members, to the detriment of new entrants and outsiders. John L. Lewis' coal miners and Harry Bridges' dock workers have cooperated with management in the establishment of automation in return for guaranteed incomes for their senior members, but have closed off entry into 14Ibid., p. 116. 270 their respective occupations. Should this practice become universal, Robert Theobald's guaranteed income without work may be closer than many anticipate. V. CONCLUSION Modern industrial societies have provided more benefits to more people than ever dreamed possible a half century ago. The temptation to resist change must be overcome in order to avoid the stagnation that affected societies of the past. The chief problem of any highly industrialized nation is that of fluctuations in output and in employment. In primitive societies, any shortage of goods or cessation in their flow results in starvation and death. Since this problem can be avoided in a highly-developed economy, the loss of income caused by unemployment should be a much less serious, much easier solved problem. It is the opinion of this dissertation that a relatively small percentage of the national income can make an enormous contribu tion to those suffering either unemployment or poverty, regardless of cause. Increases in aggregate demand are essential to achieve growth and full employment. However, even if this condition were achieved, it is highly probable that the same persons would end up with the poorest 271 jobs and in the least enviable circumstances then as now occupy these positions. Therefore, the labor-market policies discussed previously, regardless of their effect on increasing the number of jobs in the absence of an expansion of demand, can be useful in granting some of the less fortunate an e^ual chance at the more desirable positions. The policy of increasing demand through expansion of easy money, transfer payments financed by increasing the money supply, and government spending have a cost to society in the form of inflation, however mild or severe. Therefore, a type of income policy should be adopted in connection with transfer payments so that the minority who are better off with price stability do not suffer at the expense of the majority who benefit from full employment. It would be much worse to hold the entire economy back just to prevent the fixed-income people from suffering an erosion of purchasing power. As mentioned by Professor Rees, only unexpected infla tion disturbs the creditor-debtor relationship. Antici pated inflation can be offset by raising interest rates. In the last analysis, economic arguments must be supported by economic facts. To use an analogy from the field of business, those firms which are the loudest in proclaiming "honesty is the best policy" will admit that they do so not for moral, religious, or ethical reasons hut because, in the long run, honesty pays greater dividends than dishonesty. The same is true in the present argument. It is tempting to plead that a rich country should reduce poverty and unemployment to a practical minimum simply because it can afford the expense and because to do so would gratify those desires, immanent in all men, to espouse causes they consider noble and high-minded. The truth is, however, that the basic reason a rich country should reduce poverty and unemployment to a practical minimum is that to do so will make a rich nation richer. The conclusions of this dissertation are thus doubly gratifying to an economist. Not only do the recommenda tions made here bring results which satisfy the loftier ambitions, of welfare, but they are also confirmed by the maximizing principles of economics. BIBLIOGRAPHY BIBLIOGRAPHY A. BOOKS Bagdikian, Ben H. In the Midat of Plenty. the Poor in America. Boston: Beacon Press, 1964. Bator, Francis M, The Question of Government Spending. New York: Harper and brothers, I960. Brozen, Yale. Automation— The Impact of Technological Change. Washington,D.C.: American Enterprise Institute, 1963. Buckingham, Walter. Automation: Its Impact on Business and People. New Ttork: Harper and Brothers, 1961. Culbertson, John M. Full Employment or Stagnation? New York: McGraw-Hill Book Company, 1964. Curtis, Thomas B. 87 Million Jobs. New York: Duell, Sloan, and Pearce, 1962. Friedman, Milton. Capitalism and Freedom. Chicago: The University of tihicago Press, l66<S. Gellhorn, Walter. Individual Freedom and Government Restraints. Baton ftouge: Louisiana State University Press, 19.56. 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"Labor Mobility, Resource Alloca tion, and Structural Unemployment," American Economic Review, LIII (September, 196^), 6^4-716. Gordon, Robert A. "Has Structural Unemployment Worsened?" Industrial Relations. Ill (May. 1964). 53-77. Patinkin, Don. "Price Flexibility and Full Employment," American Economic Review. XXXVIII (September, 1948), 543-^64. Raimon, Robert L. "Labor Mobility and Wage Inflexi bility," American Economic Review. LIV (Mav. 1964). 133-143. Schultz, Theodore W. "Investment in Human Capital," American Economic Review. LI (March, 1961), 1-17. Simler, Norman J. "Long-Term Unemployment, the Struc tural Hypothesis, and Public Policy," American Economic Review. LIV (December, 1964), 96$-166l. Wolfbein, Seymour L. "Automation and Skill," The Annals of the American Academy of Political and Social Science. CCCXL (March, 1§1>2), 53-60. C. PERIODICALS Apel, Hans. "Should We Shorten the Work Week?" Challenge. X (March, 1962), 28-31. Buckingham, Walter. "White Collar Automation," Nation, CXCIV (January 6, 1962), 10-13. Burns, Arthur F. "The Federal Tax Cut and the National Economy," Challenge. XIII (October, 1964), 4-8. Dernburg, Thomas, and Kenneth Strand. "Manpower Gap," Challenge. XIII (December, 1964), 41-44. Hauge, Gabriel. "Is the Individual Obsolete?" Challenge. XIII (December, 1964), 6-10. 277 Johnston, Denis F. "Educational Attainment of Workers, March 1962," Monthly Labor Review. LXXXVI CMav. 1963), 504-5157^ Lekachman, Robert. "Two Centuries of Technological Change: Automation Is Nothing New," Challenge, XI (April, 1963), 14-18. Martin, William McChesney. Speech before the Fortieth Annual Conference of the Association of Mutual Savings Banks on May 10, 1960, reported in Commercial and Financial Chronicle. CXCI CMav 19. 1960), 10. Schmidt, Emerson P. Interview in Challenge. XII (March, 1964), 17-23. Seligman, Ben B. "Man, Work and the Automated Feast," Commentary, XXXIV (July, 1962), 9-19. Stark, John Regan. "Social Security Taxes: A Drag on the Economy?" Challenge. XII (November, 1963), 31—34. Stigler, George J. Interview in Challenge. XII (January, 1964), 18-21. Sufrin, Sidney C. "Spreading the Work Won't Create Jobs," Challenge. XII (November, 1963), 29-31. Time, LXXIII (January 26, 1959), 77. Tobin, James. "The Tax Cut Harvest," The New Republic, CL (March 7, 1964), 14-18. U.S. News and World Reoort. LVIII (Anril 19. 1965). IGTJOT. Wallich, Henry C. Newsweek, LXV (May 3, 1965), 80. _______. Newsweek. LXV (May 17, 1965), 85. Wolf, Harold A., and Henry I. Kester. "High Level Stagnation and Economic Growth." Business Topics. X (Winter, 1962), 49-56. 278 D. PUBLIC DOCUMENTS Council of Economic Advisers. Annual Report of the Council of Economic AdvisersT Washington, D.C.: Government Printing Office, 1963, 1964, 1965. U.S. Bureau of Labor Statistics. The Extent and Nature Frictional Unemployment. Study Paper tfo. 6. Washington, D.C.: Government Printing Office, November 19, 1959. U.S. Bureau of the Census. Historical Statistics of the United States. Washington, O.C.: CovernmeiTF Printing Office, 1960. Statistical Abstract of the United States. 1964. Washington, D.C.: Government Printing Office, 1964. U.S. Congress. Hearings Before the Subcommittee on Economic Statisticsof the Joint"Economic CommTttee, 87th Congress, 1st Session, 1961. Washington, D.C.: Government Printing Office, 1961. U.S. Department of Commerce, Bureau of the Census. 1950 Census. Special Reports. Washington, D.C.: Government Printing Office, 1950. U.S. House of Representatives. Hearings Before the Subcommittee on Unemployment~ahd the Impact of Automation of "The Committee on Education and"Tabor. 87th Congress, 1st Session, X56XT Washington, D.C.: Government Printing Office, 1961. U.S. Senate. Hearings Before the Subcommittee on Economic Statistics of TKe Joint Economic Committee. 87th Congress, 1st Session, lW6l. Washington, D.C.s Government Printing Office, 1961. Hearings Before the Subcommittee on Employment Manpower of the Committee on Labor and public Welfare. 88th~Congress. 1st feession, September- November, 1963. Washington, D.C.: Government Printing Office, 1963. Hearings on Economic Conditions Before the Senate~Finance Committee, 72nd Congress, <Jnd Session, February, 1936. Washington, D.C.: Government Printing Office, 1933. 279 . Readings in Exploring the Dimensions of the Manpower feevolutTon. Compiledfor the Subcommittee on Employment and Manpower of the Committee on Labor and Public Welfare, 88th Congress, 2nd Session, 1964. Washington, D.C.: Government Printing Office, 1964. E. REPORTS AND LECTURES Burns, Arthur F. "Inflation and Economic Progress." Address before the Graduate School of Business Administration, University of Southern California, Los Angeles, March 31, 1960. (Mimeographed.) Clague, Ewan. "A Profile of Unemployment in the Early 1960's." Address before the 45th Economic Con ference, National Industrial Conference Board, New York, May 18, 1961. (Mimeographed.) Gainsbrugh, Martin R. Proceedings of a Symposium on Employment. Washington, D.CV: Government Printing Office, February 24, 1964. Graves, Richard W. "Automation and Unemployment•" Address before the Kiwanis Club, Los Angeles, August 28, 1963. International Labour Office. Unemployment and Struc tural Change. Studies and Reports, New Series No. 651 Seneva: International Labour Office, 1962. Long, Clarence D. "An Overview of Postwar Labor Market Developments," Studies in Employment and Unemploy ment. Kalamazoo: W. £1.Upjonn Institute for Employment Research, July, 1962. Samuelson, Paul A. "Fiscal and Financial Policies for Growth," Proceedings of a Symposium on Economic Growth. Washington, 57c7: American Bankers Associa tion, February 25, 1963. Solow, Robert. The Nature and Sources of Unemployment in the UnitecTBtates. Wicksell Lectures. Stockholm: JTmqvist and Wiksell, 1964.

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Creator Wells, Donald Roger (author)

Core Title The United States Unemployment Problem--Structural Or Lack Of Demand?

Degree Doctor of Philosophy

Degree Program Economics

Publisher University of Southern California (original), University of Southern California. Libraries (digital)

Tag Economics, General,OAI-PMH Harvest

Language English

Contributor Digitized by ProQuest (provenance)

Advisor Anderson, William H. (committee chair), Graves, Richard W. (committee member), Morgner, Aurelius (committee member)

Permanent Link (DOI) https://doi.org/10.25549/usctheses-c18-192018

Unique identifier UC11359711

Identifier 6603834.pdf (filename),usctheses-c18-192018 (legacy record id)

Legacy Identifier 6603834.pdf

Dmrecord 192018

Document Type Dissertation

Rights Wells, Donald Roger

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Source University of Southern California (contributing entity), University of Southern California Dissertations and Theses (collection)

Access Conditions The author retains rights to his/her dissertation, thesis or other graduate work according to U.S. copyright law. Electronic access is being provided by the USC Libraries in agreement with the au...

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