Getting America to full employment again won’t be easy. As a recent study by the University of Chicago’s Becker-Friedman Institute shows, the COVID-19 lockdown has changed the dynamic of working. Some workers are now collecting more dollars under the CARES Act, the law that funds payroll protection, than they did when they worked. Those workers may not be eager to return to jobs. Whatever temporary funds they are receiving, employers for their part hesitate to rehire because they don’t know whether they will have cash for wages when their COVID-19 benefits expire. This mismatch suggests unemployment will linger.
What’s the best way to proceed? And what pitfalls must be avoided? The past can be a guide. The record of both the United Kingdom and the United States a century ago offers revealing evidence — and suggests the basics of a plan for strong recovery.
As World War I ended, workers in Britain and the United States struggled to find their footing. Then, as now, a pandemic compounded the recovery challenge; influenza ravaged both nations. Many veterans were mildly or seriously disabled.
Britain attempted to move out of its labor crisis by creating and expanding payments for the unemployed, then a new idea. Authorities viewed such payments as unlikely to generate huge costs — they expected the equivalent of the “V” recovery discussed today in the U.S. But work in Britain at the time was tough, with shop conditions few would live with today. “The dole,” as the unemployment payments were known, made returning to the factory floor even less alluring. English workers didn’t have to be lazy — just logical — to choose to stay home. And since the booming recovery anticipated didn’t materialize, sustaining those workers proved very expensive.
A second factor slowed rehiring in the United Kingdom: newly powerful unions, and the governments behind them. Determined young labor leaders demanded and got relatively high wages. Employers found they could not sell their products at prices high enough to offset their higher-wage contracts. So employers simply adjusted by rehiring fewer workers. The result of these two ostensibly pro-worker conditions — relatively generous unemployment payments and relatively high wages — was double-digit unemployment for the United Kingdom throughout the 1920s.
The United States chose a different path. Presidents Warren Harding and Calvin Coolidge pushed no national dole, and gave no strong federal support for trade unions. Because not working was relatively unattractive, and working relatively attractive, Americans did work. The economy grew fast enough to make work conditions easier: The 1920s, for example, were the decade when productivity hit levels that allowed workers to take Saturday off. The results were in the numbers — American unemployment ran around half that of England.
The contrast between Britain and the U.S. did not go unnoticed. In the decades that followed, politicians the world over pointed to the UK dole experiment as a failure. Even President Franklin Roosevelt used the term “dole” as a pejorative.
The 1930s brought America’s turn to slip up. Job creation depends on employers, too. The big American error was the federal government’s decision to push companies to pay high wages just when, because sales were down and losses, up, companies could not afford higher wages. After the 1929 stock market crash,
President Herbert Hoover bullied companies into paying higher wages on the theory that high wages would encourage workers to spend, and so stimulate the economy. Franklin Roosevelt compounded the higher-wage problem by signing into law a minimum wage as part of the National Recovery Act, as well as backing the Wagner Act, a strong union law that enabled unions to extract wage commitments. Companies in America did what companies in Britain had done before them: hired, or rehired, more slowly. Now the U.S. suffered its own decade of double-digit unemployment.
Later presidents took note. In the 1970s and 1980s, the federal government saw that heavy payroll taxes, the money workers pay for Social Security, lowered take-home pay so much that they deterred workers from returning to work or working more hours when they did return. Congress introduced an offset, the Earned Income Tax Credit for workers, which made take-home pay higher again. In a bipartisan effort, President William (Bill) Jefferson Clinton and Congress expanded the Earned Income Tax Credit and did their part with welfare reform that channeled workers back to work.
When the worst of COVID-19 recedes, the main challenge for our political leaders is to recognize the crucial importance of the relationship between the value of unemployment benefits and the wages that companies can afford to pay.
The current plan to create a payroll tax holiday for workers and companies could help to make work more attractive. A solution favored by one of us, Mr. Lehrman, would be to build off the success of and bipartisan support for the Earned Income Tax Credit (EITC). A federal Earned Income Matching Program — think of it as a supercharged variant of the EITC — can help to ensure small business owners operating at 50 percent of capacity can restart with the teams they need and that employees earn the take-home pay their families depend on.
Here’s how an Earned Income Matching Program could work. Hourly workers earning below a certain threshold, say $25,000 per year, would be eligible to receive matching income from the federal government on a sliding scale for a limited period of time. For example, hourly workers earning less than $15,000 per year would have their wages matched 100 percent by the federal government, those earning $15,000 to $20,000 would receive a 50 percent match, and those earning $20,000 to $25,000 would earn a 25 percent match. Workers would receive funds under this program quickly by submitting their pay stubs through banks, their payroll providers, or the IRS. The EITC matching program should run for 12 months, time for the economy to get on its feet.
The long-term solution is to make employing less expensive and more profitable for America’s now-beleaguered companies. A constructive step forward would be permanent changes that make companies productive enough that they can pay workers better wages: cuts in business taxes, corporate income taxes, or capital-gains taxes. Business tax cuts often are portrayed as “tax cuts for the rich.” What business tax cuts do in reality is free up cash for employers to create jobs. Lower taxes lure entrepreneurs and American investors alike to start and fund new, job-creating companies.
Where lawmakers, companies and workers settle among these tradeoffs is up to them. But our own vote would be to combine whatever temporary measures our government takes with permanent changes that make employment a win-win for workers and companies. Low unemployment looked like the new normal before COVID-19 hit. The right policy can make it the permanent normal after the pandemic passes.
Thomas D. Lehrman is managing partner of Teamworthy Ventures, an early and growth-stage venture investment firm. He directed the State Department’s Office of WMD Terrorism from 2005 to 2007 and is executive producer of a forthcoming documentary, “John Marshall: The Man Who Made the Supreme Court.”
Amity Shlaes is author of four New York Times bestsellers and, most recently, “Great Society: A New History” (HarperCollins).