Failing on Two Fronts: The U.S. Labor Market Since 2000

For almost four decades and by almost all available measures, economic inequality has been increasing in the United States. For a portion of this period, the United States could console itself, in part, by celebrating its success as a “jobs machine.” Indeed, the two issues were often linked in the standard economics account of the post-Reagan era: widening wage inequality rewarded the skills of those at the top, while providing job opportunities for those at the bottom.

In countries where inequality did not increase, the story went, employment suffered. But, for almost 15 years, that story has not held. The U.S. jobs machine has broken down.
The employment-to-population rate at the peak of the business cycle in 2007 was substantially lower than it had been at the peak of the preceding business cycle in 2000. The employment rate has barely increased in the five years since the official end of the “Great Recession” in the summer of 2009. And almost the entirety of the decline in the unemployment rate since 2010 is the result of workers giving up on job search rather finding new jobs.

The long-standing rise in inequality, now joined by an extended period when the economy has been unable to generate jobs for the country's growing population, constitutes a deep failure on two fronts: steeply rising inequality combined with a poor employment performance. This paper argues that a key driver of both of these developments is conscious economic policy, with a particularly important and under-appreciated role for macroeconomic policy. The paper first demonstrates the remarkable “flexibility” of U.S. labor markets relative to the situation in other rich economies. The paper then links this policy-induced flexibility to high and rising inequality and shows that such flexibility ceased long ago to contribute --if it ever did-- to greater job creation.

The recent experience of the United States stands as a sober warning for European economies seeking to escape from their own immense employment problems.

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