1.7 Trillion Weeks of Unemployment Benefits

In the past four years Federal and state unemployment insurance programs paid about 1.7 trillion weeks  (32.7 million years) of unemployment insurance benefits to jobless workers as they continued their job search.  32.7 million years is a remarkably long time period that is usually reserved for events measured on the geologic time scale (South America fully detached from Antarctica about 32.7 million years ago during the Oligocene Epoch).  Unemployment benefits were paid to an average of nearly 8.2 million workers per week, every week, for the past four years.  The unemployment insurance rolls have been quite high for an unusually long time because of the depth of the recession, the weakness of the recovery and because Congress and the President extended unemployment benefits so that job losers could collect benefits for up to 99 weeks. 

More generous benefits undoubtedly provided greater financial support for job losers and their families, but also encouraged jobless workers to be more selective in their job search and remain unemployed longer.  Many Democrats and Keynesian economists view the unemployment insurance program, food stamps and other social safety net programs as economic stimulus.  On the other hand conservatives, such as Casey Mulligan of the University of Chicago, argue that the work disincentives of the unemployment insurance program and other safety net and entitlement programs increased the depth and length of the recession.

One way to quantify the opportunity cost of providing unemployment insurance benefits to approximately 8.2 million jobless workers per week is to consider how many employees could have been hired using those resources.  Although unemployment insurance benefits vary by state, the typical weekly benefit is about one half of a worker’s previous weekly wage.  This means that the cost of insuring 8.2 million jobless workers per week is about the same as the wage and salary costs of employing 4.1 million workers per week. 

Many economists have complained that the government stimulus didn’t include enough investment in infrastructure or purchases of goods and services.  Our representatives in the Federal government chose to pay people to search for work rather than employ them directly for public works projects.  But how many roads, bridges, schools and other valuable public sector investments could have been completed instead of paying for 1.7 trillion weeks of job search?  Instead of paying half of the typical weekly salaries of 8.2 million people looking for work each week, we could have instead:

• Paid the salaries of every worker employed in the construction and repair of streets, highways and bridges for the next century
• Paid the salaries of every elementary and secondary school teacher in the U.S. for four years.
• Paid the salaries of all workers in the motor vehicle (and parts) industry for two decades.

Democrats and Keynesian economists lament that state and local government employment has fallen 1.8% over the past five years instead of the 3.9% growth from 2002 to 2007.  The relatively small decrease in state and local government payrolls pales in comparison to the cost of jobless benefits over the past four years.  The money paid to unemployed workers per year over the past four years is equal to about 1/5 of the annual salaries of all state and local government employees combined.

Hoover Dam, The Grand Coulee Dam, LaGuardia Airport, The Lincoln Tunnel and many other public works projects were built during the Great Depression when many of the workers on these projects had few other job options.  The economic approach to dealing with the 2008-2009 recession has been quite different.  In 2013 we will reach 2 trillion weeks of unemployment benefits paid since the recession began.  When the history of this recession and recovery is written it will be clear that we did not use this time of excess capacity and idle workers to re-build and re-tool our infrastructure.  We will not be able to point to the dams, bridges, highways, schools and hospitals that were built during the recovery even though about two million construction workers lost their jobs after the residential real estate market collapsed and many of them are still out of work.  Instead the approach of this Administration and this Congress has been to pay people who lost their jobs to look for work, even though many of the jobs that were lost in the recession are no longer there.

Shovel-Ready

In 2009 President Obama and the Democratic-controlled Congress passed an $800 billion stimulus package that was supposed to mitigate the impact of the recession.  There has been much debate about the effectiveness of the stimulus spending and the cost per job “created or saved.”  Other criticism focused on government’s failure to identify and fund shovel-ready jobs that would have improved and updated our infrastructure.  Much of the stimulus money helped fund state and local government positions for teachers, firefighters and other public employees.  It appears that the stimulus legislation did little, if anything, to stop the decline in certain types of construction employment, most notably street, highway and bridge construction.

Proponents of the stimulus package argue that public investments help foster greater economic growth.  Skeptics argue that projects are funded are based on cronyism and political paybacks rather than priorities for economic growth.  Economists on both sides of the argument should examine employment in private-sector construction industries during the recession and recovery.  Many Keynesian economists lament the fact that employment in state and local government has lagged during the recovery despite the stimulus package.  However, large increases infrastructure spending are not expected to result in big gains in public sector jobs.  Infrastructure investment will instead re-direct resources to private sector government contractors that build and repair the infrastructure.

The following chart shows the changes in quarterly employment in two of the biggest heavy construction industries: construction of utility systems (other than oil and gas pipelines) and construction of streets, highways and bridges.  Employment in both industries has been normalized to 100 as of the first quarter of 1990.  There are fewer employees building and fixing highways and bridges than at any time in the past 20 years.  Employment in street, highway and bridge construction is down 5.3% in the past two years and 18.5% in the past five years, and the share of total employment in this industry is at a record low.  Employment in the construction of utility systems dropped from 2007 through the end of 2009 and this industry has recovered almost 25% of its job losses.  In contrast construction in the booming oil and gas pipeline construction industry is up almost 35% in just two years.  This boom in energy construction is not the result of 2009 stimulus program, however.

 

Government spending largely redistributes resources through the entitlement system which is why the government budget is a much higher fraction of GDP than the public sector’s share of total employment.  Even when governments devote resources to infrastructure projects, the workers are typically private sector employees of government contractors.  Government spending over the past five years has been primarily on transfer programs and not infrastructure.  This is best seen by examining employment in the heavy construction industries.  Employment in highway and bridge construction is well below pre-recession levels and has even dropped in the past two years.  The situation is somewhat better for employees of firms that build and repair utility systems where about 25% of the job losses during the recession have been reversed.

Forward?

I am not a political consultant, but if I worked for President Obama’s re-election campaign I would be concerned about the impression commuters in northern Virginia might be forming about the campaign’s “Forward” slogan.  “Forward” is also the slogan used by the Washington Metropolitan Area Transit Authority (WMATA) to explain why it is taking so long to repair the escalators at WMATA stations.  The sign on an escalator at the Rosslyn station pictured above indicates that it will take from July to October to repair.  To some commuters the unreliable escalators in Metro stations, and the length of time it takes to repair them, may symbolize inefficient and wasteful government spending.

The connection between public investment in projects like WMATA escalators and President Obama’s reelection campaign was reinforced when the President told us that successful small business owners and entrepreneurs owe credit for some of their success to public investment in transportation infrastructure.  Recall that one month ago today in Roanoke, Virginia, President Obama said:

If you were successful, somebody along the line gave you some help…. Somebody invested in roads and bridges.  If you’ve got a business — you didn’t build that.  Somebody else made that happen.

There is no doubt that many transportation infrastructure projects have benefits that far outweigh their costs and require both public and private investments.  Other projects, promoted by politicians from both parties, are laden with political pork.  Still others, like WMATA escalators, are valuable to the community but seem to be completed at a glacial pace (and probably exorbitant cost).

Virginia is an important swing state, and the President must do well among independent voters in northern Virginia to carry the state.  I suspect that few of the independent voters credit much of their professional success to the efficiency of WMATA.  The President is correct in saying that these independent voters didn’t build the Metro system or its escalators, but they are also not responsible for the system’s inefficiencies and state of disrepair.

Should President Obama Suspend the Davis Bacon Act?

Professor Robert Frank argues for more government spending on infrastructure in an opinion piece in the New York Times.  Frank writes that both Mitt Romney and President Obama should be “willing to take the one politically feasible step that could help mend the economy quickly: an accelerated program of infrastructure repairs.”  Frank’s column is quite similar to one written in October 2011 by informal Obama advisor Richard Thaler, who wrote that infrastructure investments are “on sale” because of low interest rates.  Frank seconds this argument by writing “many skilled people who can do these jobs are unemployed today. If we wait, we’ll have to bid them away from other useful work. And with much of the world still in a downturn, the required materials are cheap.”

The problem, as I noted in an earlier blog post, is that labor costs for government construction projects are dictated by the Davis Bacon Act and not by competitive labor market conditions.  The Davis Bacon Act states:

every contract in excess of $2,000, to which the Federal Government or the District of Columbia is a party, for construction, alteration, or repair, including painting and decorating, of public buildings and public works … and which requires or involves the employment of mechanics or laborers shall contain a provision stating the minimum wages to be paid various classes of laborers and mechanics.

minimum wages shall be based on the wages the Secretary of Labor determines to be prevailing for the corresponding classes of laborers and mechanics employed on projects of a character similar to the contract work in the civil subdivision of the State in which the work is to be performed . . .

The prevailing wages set by the Secretary of Labor are generally substantially higher than the median wage in BLS surveys, even in areas where the construction industry has been decimated by the recession.  The following chart shows the change in construction employment in four counties especially hard hit by the recession.

One would expect that construction workers would be willing and able to work on infrastructure projects for relatively low rates of pay in these counties.  In Clark County, Nevada, for example. construction employment fell by more than one half.  Unfortunately the prevailing wages set by the Secretary of Labor for heavy construction projects in Clark County do not reflect the slack in the labor market:

• Flagperson                                                      $41.44 per hour
• Carpenter                                                        $45.11 per hour
• Structural Ironworker                                   $56.74 per hour
• Crane Operator                                               $66.75 per hour

These hourly wages are, on average, about 12.8% higher than they were in 2007 when the construction sector in Las Vegas and Clark County was booming.  The prevailing wages in Riverside, Maricopa and Miami-Dade counties are similarly high and have also increased over the past few years even though the demand for construction labor has plummeted.

Government infrastructure projects are expensive because prevailing wages are above the market wages measured by the Bureau of Labor Statistics.  High labor costs make infrastructure projects much less of a bargain than Professors Thaler and Frank have argued.

What can President Obama do? He can suspend the Davis Bacon Act until the economy, especially the housing market and construction sector, has recovered.  Suspension of the Davis Bacon Act is not without precedent in the case of a national emergency.  President George W. Bush suspended Davis-Bacon in Alabama, Florida, Louisiana and Mississippi in the fall of 2005 as the region recovered from Hurricane Katrina.

Mr. President, we face an emergency in the construction sector.  Housing prices have not recovered from the recession and employment in the construction sector is far below its pre-recession levels.  Professors Frank and Thaler are correct – it makes sense to invest in infrastructure projects when they are “on sale.”  The Davis Bacon Act stands in the way of getting important construction projects completed at a reasonable cost to taxpayers.  In addition, a bold move like suspending Davis Bacon could encourage Republicans in Congress to support other job initiatives that you favor.

Infrastructure Spending and the Davis-Bacon Act

It’s been three years since the American Recovery and Reinvestment Act was signed into law.  Only 7% of the $840 billion in stimulus funds were allocated to transportation and infrastructure projects.  White House Budget Chief of Staff Jack Lew  recently said that a “crumbling infrastructure is not the way to build an economy that can last.”  The Obama Administration  has proposed spending hundreds of billions of additional dollars on roads, bridges and schools.  Common sense says that the Federal government should undertake those infrastructure projects where the benefits exceed the costs.  Unfortunately the Davis-Bacon Act inflates costs by requiring Federal contractors to pay the prevailing wage (plus fringe benefits) on construction projects.

Government infrastructure spending makes sense because borrowing costs are low; the 10 year Treasury bond rate is about 2%.  This argument would be bolstered if labor costs were also relatively low.  The Davis-Bacon Act, however, forces government contractors to pay artificially high wages and benefits.  This means that fewer projects will be completed for each billion dollars budgeted for infrastructure.

If the wages paid on government construction projects could freely adjust to market conditions, labor costs would be much lower in many parts of the U.S.  The following figure shows construction employment in three states particularly hard hit by the 2008 recession: Florida, Michigan, and Nevada.  Construction employment is down 40% to 62% from its pre-recession peak in these states.

The large demand reductions in the Florida, Michigan and Nevada construction industries put downward pressure on construction wages.  Davis-Bacon prevents this from lowering labor costs for Federal projects.  The U.S. Department of Labor sets the prevailing wage in each area based on surveys of unions and employers that are administered by its Wage and Hours Division (not the Bureau of Labor Statistics).

The 2012 prevailing wage in Las Vegas (Clark County) is about $50 per hour for carpenters and $60 per hour for electricians and power equipment operators.  I presume there are thousands of unemployed and underemployed construction workers in Las Vegas who would be willing to work for less than $50 per hour.

Prevailing wages that are unresponsive to current labor market conditions are not limited to Las Vegas.  The following figures show prevailing wages for plumbers and elevator mechanics in Wayne County, Michigan (Detroit) and Broward County, Florida in 2004 and 2012.  Since 2004, the prevailing wages of elevator mechanics increased by about 80% in Wayne County and by 90% in Broward County.  Over the past 8 years, plumbers’ wages increased by 40% in Broward County and by 67% in Wayne County.  These substantial increases occurred despite the collapse of the construction industries in Michigan and South Florida in the past decade.

The Works Progress Administration (WPA) had a much different approach for infrastructure projects from 1935 to 1943.  WPA wages were twice welfare benefits, but far less than the union pay scale, so that more workers could be employed.  The WPA also used excessively labor intensive methods to increase employment per project.

Inflated infrastructure costs are undesirable whether they are due to artificially high wages or an inefficient production process.  Ultra-Keynesians, like Paul Krugman, may advocate infrastructure spending as a stimulus even if production is inefficient or labor costs are inflated.  After all, Krugman recently argued that government spending for protection from imaginary space aliens would be beneficial.

The Federal government should undertake infrastructure projects where benefits exceed costs, allocate resources efficiently, and pay market wages.  The projected benefits of infrastructure projects should be based on the merits of each project not supposed stimulus effects.  Project costs should reflect market conditions.  Requiring contractors to pay their employees inflated prevailing wages produces no more stimulus than would a requirement that domestic bondholders receive 5% rather than 2% interest.  Davis-Bacon prevailing wage requirements were suspended in the aftermath of Hurricane Katrina.  The Obama Administration should consider suspending Davis-Bacon again so that contractor wages reflect market conditions, more unemployed construction workers can be hired and more worthwhile infrastructure projects can be funded.