A recent International Monetary Fund (IMF) consultation to the U.S. emphasized “raising productivity growth and labor force participation” as the first of five goals necessary to strengthen America’s economic recovery and improve its long-term outlook. Despite a correct diagnosis to plagued economic and labor market recovery, the IMF offers the wrong solutions.
It’s true that low labor force participation is dragging down economic growth. The labor force participation rate in the U.S. is lower today than it was in 1978, when significantly fewer women participated in the labor force. Fewer people working not only lowers economic output; it also strains the federal budget by reducing tax revenues and drawing down resources through government transfers.
The IMF report goes on to advocate “proactive labor market policies that lower long-term unemployment and raise participation.” While the IMF does not outline specific policies, proactive usually means more government intervention in the market, which would only translate to higher costs for employers and thus fewer jobs. High costs are already impeding job creation. According to the April 2014 survey by the National Federation of Independent Business, only 8 percent of small and independent businesses say it is a good time to expand facilities. They cite taxes and government requirements and red tape as their two biggest concerns.
Unlike the federal government, which effectively has access to an unlimited credit card, private businesses operate under budget constraints. If a business, for example, is required to pay workers 15 percent more, provide mandated benefits, or insure itself against costly litigation, it will have to cut some jobs. In contrast, Washington has become accustomed to passing higher costs on to future generations through a massive accumulation of debt.
So what is the correct solution to getting more people to work? There are plenty of ways the U.S. can help stimulate employment and workplace empowerment without increasing costs on employers or adding to the size and scope of the federal government. Some of these solutions include:
- Reducing unnecessary and costly regulations,
- Rewarding work through lower taxes while minimizing disincentives to work through government transfers,
- Allowing private businesses to make their own employment decisions, and
- Looking to the successes of new, innovative businesses that are flourishing under minimal government regulations as ways to reduce costs for other businesses.
According to the IMF’s mission statement, one of its goals is to provide policy advice to “facilitate the growth of international trade, thus promoting job creation, economic growth, and poverty reduction.” Yet the “pro-active” advice the IMF is currently offering to the U.S. would do just the opposite.
The IMF should revise its assessment, dropping its counter-productive recommendations, and incorporate solutions such as those outlined above.