The huge jump in unemployment to 7.2% in December (as reported this morning by BLS) simply underscores what President-elect Obama said yesterday: we are in deep economic trouble.
The hidden part of the crisis is even worse. In December, the involuntary underemployed (employed part-time because of economic conditions) jumped increased by about 700,000. In the past year, the number of involuntary underemployed has almost doubled -- from 4.75 million to 8.25 million. As the Wall Street Journal reports:
By some broader measures, labor-market conditions are even worse than the main numbers suggest. When marginally attached and involuntary part-time workers are included, the rate of unemployed or underemployed workers reached 13.5% last month, up almost six percentage points from a year earlier.
And that does not even count those workers with reduced pay. In some ways, reduced pay might be a preferred alternative. It is often referred to as "sharing the pain." For a good discussion of this, see Steven Pearlstein's column a couple of weeks ago - Universal Pay Cuts May Lighten Recession - washingtonpost.com.
However, while such pay cuts may avoid layoffs, there are still macroeconomic consequences. Just as with reduced hours, reduced pay cuts income -- which cuts spending. There is a similar (although some would argue smaller) decline in aggregate demand. (One could argue the decrease in aggregate demand is the same. A company needs to trim $1 million in payroll. Whether the million is cut through laying off X number of workers or cutting the pay or hours of X plus Y workers, the macro economic effect is the same. Others would say that the shock and uncertainty of unemployment - as opposed to lower pay - tends to cause a person to cut back spending even more.)
I have previous argued that one solution to this problem is a reduction in or a " tax holiday" on payroll taxes [update - to be clear, the proposal is for an income tax credit to offset payroll taxes - so that money still flows to the trust funds]. With a cut in the amount of withholding for payroll taxes, all workers, including part time, would get an immediate boost. I understand that the Chairman of the Senate Budget Committee, Kent Conrad, has criticized this proposal. I greatly respect Senator Conrad -- he has one of the toughest jobs in town. But I would urge him to reconsider. [Update: I've talked to Senator Conrad's office about this. The Senator feel that the small amount of stimulus is not worth the expense. He would rather spend the funds on investment. I agree on the investment - but still would like to see if there is a more targeted way of replacing the lost income of the newly involuntary underemployed.]
The second piece of the stimulus package I would advocate for is the knowledge creation tax credit - specifically a tax credit for worker training. That credit should cover not only the cost of direct cost of the training but also the wages paid to the worker while they are undergoing the training. To repeat what I have said before, such a knowledge tax credit helps in a number of ways:
1) it addresses the macro economic stimulus of boosting individual spending;
2) it targets directly the problem of the involuntary underemployed (those who are part time for economic reasons), which is the hidden factor in the current slowdown;
3) it makes companies (and the economy) more competitive; and,
4) it facilitates the transition to the I-Cubed Economy.
The training tax credit would help both the unemployed and the underemployed. If companies are going to either cut back a worker's hours or lay the person off completely, wouldn't it be better to send them to the classroom instead?
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