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F o r R e l e a s e on D e l i v e r y T h u r s d a y , A p r i l 1 3 , 1972 12:30 p . m . , C . S . T . (1:30 p . m . , E . S . T . ) A NEW AMERICAN DILEMMA T h e T a s k of R e c o n c i l i n g G r o w t h in Productivity and Employment Remarks By Andrew F. Brimmer Member B o a r d o f G o v e r n o r s of the Federal Reserve System At a Luncheon S p o n s o r e d b y the J o i n t B o a r d s o f D i r e c t o r s o f the F e d e r a l Reserve Bank of S t . Louis U p o n the D e d i c a t i o n of the Memphis Branch Building Memphis, Tennessee April 13, 1972 A NEW AMERICAN DILEMMA T h e T a s k o f R e c o n c i l i n g G r o w t h in Productivity and Employment by Andrew F. Brimmer A t t h i s j u n c t u r e in o u r h i s t o r y , w e a r e c o n f r o n t e d w i t h a vital question involving multiple choices: how can w e increase the r a t e of r e a l g r o w t h in the e c o n o m y , r e d u c e the p e r s i s t e n t l y h i g h rate of u n e m p l o y m e n t , a n d — s i m u l t a n e o u s l y - - p r e s s check inflation? o n w i t h the c a m p a i g n to T h a t w e find a n a n s w e r to the q u e s t i o n is I n its A n n u a l R e p o r t for 1 9 7 2 , the C o u n c i l of E c o n o m i c imperative. Advisers a n t i c i p a t e s t h a t - - a l t h o u g h r e a l o u t p u t is e x p e c t e d to i n c r e a s e b y a b o u t 6 p e r c e n t - - t h e u n e m p l o y m e n t r a t e p r o b a b l y w i l l s t i l l b e in the n e i g h b o r h o o d o f 5 p e r c e n t a s the y e a r d r a w s to a c l o s e . A t the s a m e t i m e , the t a r g e t s e t f o r the p r i c e s t a b i l i z a t i o n p r o g r a m v i s u a l i z e s t h a t the r a t e o f i n f l a t i o n w i l l d e c l i n e to a r a n g e of 2 - 3 p e r c e n t b y the e n d o f 1 9 7 2 — c o m p a r e d w i t h a r i s e in p r i c e s o f 4 . 3 p e r c e n t in 1 9 7 1 . — * M e m b e r , B o a r d o f G o v e r n o r s o f the F e d e r a l R e s e r v e System. I a m g r a t e f u l to s e v e r a l m e m b e r s of the B o a r d ' s s t a f f for a s s i s t a n c e in the p r e p a r a t i o n of t h e s e r e m a r k s . M r . L a w r e n c e S l i f m a n h e l p e d w i t h the a n a l y s i s o f t r e n d s in o u t p u t , p r o d u c t i v i t y , a n d employment; h i s c o n t r i b u t i o n i n c l u d e d a n e c o n o m e t r i c a n a l y s i s o f the r e s p o n s e of p r o d u c t i v i t y to c h a n g e s in r e a l o u t p u t . M r s . D i a n e S o w e r p r o v i d e d m a t e r i a l o n the p e r f o r m a n c e o f the P u b l i c E m p l o y m e n t P r o g r a m . M r . D a v i d W y s s d i d the c o m p u t e r - b a s e d s i m u l a t i o n s o f the n a t i o n a l e c o n o m y to e s t i m a t e the d i f f e r e n t i a l e f f e c t s o f p u r s u i n g a l t e r n a t i v e a p p r o a c h e s to r e d u c e u n e m p l o y m e n t . N e e d l e s s to s a y , the v i e w sf e x p r e s s e d h e r e a r e m y o w n a n d s h o u l d n o t b e a t t r i b u t e d to the B o a r d s s t a f f — n o r to m y c o l l e a g u e s o n the B o a r d . 1/ ~~ T h i s is the a n n u a l r i s e in the C o n s u m e r P r i c e I n d e x . The W h o l e s a l e P r i c e I n d e x a d v a n c e d b y 3 . 2 p e r c e n t , a n d the G N P implicit deflator rose b y 4.7 per cent. -2T h u s , a c h i e v e m e n t of the g o a l set w i t h r e s p e c t to the r a t e of i n c r e a s e in p r i c e s w o u l d r e p r e s e n t a s i g n i f i c a n t in the f i g h t a g a i n s t i n f l a t i o n . accomplishment So too w o u l d the r e d u c t i o n in the unemployment rate represent genuine progress. In M a r c h , those w i t h o u t j o b s butt l o o k i n g for w o r k t o t a l e d 5.2 m i l l i o n , a n d unemployment h a s l i n g e r e d in the n e i g h b o r h o o d of 5 m i l l i o n for m o r e t h a n a y e a r . A n d if the j o b l e s s r a t e s h o u l d s t i l l b e a r o u n d 5 p e r c e n t a t the e n d o f the c u r r e n t y e a r , it w o u l d m e a n t h a t p e r h a p s m o r e t h a n 4 - 1 / 2 million people would be unemployed. W h y m i g h t w e b e f a c i n g that p r o s p e c t ? In searching for a n a n s w e r to t h a t q u e s t i o n , I r e a c h e d the f o l l o w i n g c o n c l u s i o n : the g r o w t h in e m p l o y m e n t this y e a r m a y b e g r e a t l y d a m p e n e d b y the r i s e in o u t p u t p e r m a n h o u r ( p r o d u c t i v i t y ) a s the e c o n o m y e x p a n d s . Since the c i v i l i a n l a b o r f o r c e m a y a l s o e x p a n d m o r e r a p i d l y , the l e v e l o f u n e m p l o y m e n t c a n b e e x p e c t e d to d e c l i n e o n l y m o d e r a t e l y . T h e s e c o n c l u s i o n s w e r e r e a c h e d o n the b a s i s o f a fairly d e t a i l e d a n a l y s i s o f the i n t e r r e l a t i o n s a m o n g the g r o w t h in o u t p u t , p r o d u c t i v i t y , a n d e m p l o y m e n t d u r i n g the last two d e c a d e s . h i g h l i g h t s o f the e x a m i n a t i o n c a n b e s u m m a r i z e d The here: - - P r o d u c t i v i t y in the p r i v a t e n o n f a r m e c o n o m y r o s e a t a n a n n u a l a v e r a g e r a t e o f 2.6 p e r c e n t d u r i n g the period 1 9 4 8 - 1 9 7 1 . H o w e v e r , w h i l e the r a t e o f i n c r e a s e w a s j u s t o v e r 1.0 p e r c e n t in the y e a r s 1 9 6 7 - 7 0 , it j u m p e d to 3.4 p e r c e n t l a s t y e a r . - 3- - T h e d a m p e n i n g e f f e c t of r e d u c e d g r o w t h and d e c l i n e s in o u t p u t on w a g e i n c r e a s e s and u n i t l a b o r c o s t s d u r i n g the r e c e s s i o n p h a s e of p o s t W o r l d W a r II b u s i n e s s c y c l e s has b e e n n o t i c e a b l e . B u t this i m p a c t w a s far less e v i d e n t in the c a s e of the 1 9 7 0 - 7 1 c y c l e . T h u s , e m p l o y e r s have been counting heavily on increased productivity in the c u r r e n t r e c o v e r y to h e l p r e s t r a i n u p w a r d pressure on labor costs. - - C o n s e q u e n t l y , l a s t y e a r , w h e n the e c o n o m y w a s a c h i e v i n g s o m e e x p a n s i o n in o u t p u t , a large s h a r e of the r i s e in p r o d u c t i o n w a s a c c o u n t e d for b y h i g h e r o u t p u t p e r m a n h o u r , a n d o n l y m i n o r b e n e f i t s a c c r u e d in the f o r m of h i g h e r employment. - - T h e o u t l o o k is for a f u r t h e r l a r g e r i s e in p r o d u c t i v i t y in 1 9 7 2 - - p e r h a p s in the n e i g h b o r h o o d of 3 - 1 / 2 - 4 per c e n t . T h e n e t r e s u l t s m i g h t be a n i n c r e a s e in e m p l o y m e n t o n l y m o d e r a t e l y m o r e than the g r o w t h in the l a b o r f o r c e - - a n d thus o n l y a m o d e s t r e d u c t i o n in unemployment. S i n c e the n a t i o n d e f i n i t e l y c a n n o t a f f o r d to c a l l a h a l t to i m p r o v e m e n t s in p r o d u c t i v i t y , w e m u s t s e a r c h for a l t e r n a t i v e w a y s to s t i m u l a t e e m p l o y m e n t - - i f w e a r e to c u t s u b s t a n t i a l l y into the p e r s i s t e n t l y h i g h l e v e l of u n e m p l o y m e n t . Among several w h i c h m i g h t b e c o n s i d e r e d , a n e x p a n s i o n of the P u b l i c P r o g r a m a p p e a r s to b e e s p e c i a l l y Employment promising. The major points summarized above are explored in the r e s t of these alternatives further remarks. L o n g - R u n T r e n d s in P r o d u c t i v i t y During the l a s t two d e c a d e s , p r o d u c t i v i t y in the p r i v a t e n o n f a r m s e c t o r of the A m e r i c a n e c o n o m y r o s e a t a n a v e r a g e a n n u a l r a t e of 2.6 p e r c e n t . (See T a b l e 1 , a t t a c h e d . ) of p r o d u c t i v i t y h a s b e e n far from s t e a d y . H o w e v e r , the g r o w t h F o r e x a m p l e , in the -4f i r s t h a l f o f the 1 9 5 0 ' s , o u t p u t p e r m a n h o u r in p r i v a t e nonfarm a c t i v i t y g r e w a t a r a t e e q u a l to the l o n g - r u n a v e r a g e . B u t in the c l o s i n g y e a r s of the s a m e d e c a d e , the r i s e in p r o d u c t i v i t y s u b s t a n t i a l l y b e l o w the p o s t w a r p e r y e a r f r o m 1 9 5 5 to 1 9 6 0 . was t r e n d , a v e r a g i n g o n l y 1.8 p e r Growth rates considerably above l o n g - r u n t r e n d w e r e a c h i e v e d d u r i n g the 1 9 6 0 ' s . cent the F r o m 1 9 6 0 to 1966, private nonfarm output per manhour climbed at an average annual rate of 3«4 per c e n t . performance In the s u c c e e d i n g five y e a r s , the of productivity slackened noticeably. O v e r the y e a r s 1967-71, o u t p u t p e r m a n h o u r r o s e a t a n a v e r a g e a n n u a l r a t e of 1.7 p e r per year. In f a c t , nonfarm productivity actually declined 1 9 6 9 a n d in the f i r s t q u a r t e r of cent through 1970. In the m a n u f a c t u r i n g s e c t o r o f the e c o n o m y , p r o d u c t i v i t y h a s r i s e n m o r e r a p i d l y t h a n in the p r i v a t e n o n f a r m s e g m e n t a s a whole. D u r i n g the l a s t 20 y e a r s , the a v e r a g e a n n u a l i n c r e a s e w a s 2.8 per c e n t . B u t the p a t t e r n of g r o w t h h a s b e e n r o u g h l y to t h a t o f the n o n f a r m s e c t o r t a k e n a s a u n i t . Large, above-trend gains were posted from 1962 through 1965, and below-trend r a t e s w e r e r e c o r d e d in the l a s t h a l f o f the C y c l i c a l B e h a v i o r of parallel growth f 1960 s. Productivity T h e b e h a v i o r o f p r o d u c t i v i t y is g r e a t l y i n f l u e n c e d b y the p h a s e o f the b u s i n e s s c y c l e t h r o u g h w h i c h the e c o n o m y m i g h t b e passing at a particular time. T h e c l o s e l i n k a g e b e t w e e n the cyclical -5b e h a v i o r of total o u t p u t arid the g r o w t h of p r o d u c t i v i t y c a n be in C h a r t I ( a t t a c h e d ) . seen In the c h a r t , o n e c a n trace the two m e a s u r e s o v e r the y e a r s 1 9 4 7 - 7 1 , and p e a k s a n d t r o u g h s of the five W a r II business cycles are also identified. post-World It w i l l b e n o t e d that, in the c o n t r a c t i o n p h a s e of the c y c l e , g r o w t h in p r o d u c t i v i t y typically slowed down--and sometimes there was a d e c l i n e . f a c t o r s h e l p to e x p l a i n this p a t t e r n : t h e s e i n c l u d e the Several intentional a n d a c c i d e n t a l h o a r d i n g of l a b o r ( e s p e c i a l l y w h i t e - c o l l a r labor), the time that l a p s e s a f t e r the c y c l i c a l p e a k is r e a c h e d in the e c o n o m y a n d i n d i v i d u a l e m p l o y e r s r e c o g n i z e this fact in t h e i r o w n b u s i n e s s e s , a n d s h i f t s in the i n d u s t r i a l m i x of o u t p u t from h i g h sectors productivity (which tend to b e s e n s i t i v e to c y c l i c a l v a r i a t i o n s ) the m o r e s t a b l e b u t r e l a t i v e l y low p r o d u c t i v i t y s e c t o r s . n e e d to m a i n t a i n a m i n i m u m l a b o r force to m e e t f u t u r e needs. toward Employers production C o n s e q u e n t l y , they tend to m a i n t a i n e m p l o y m e n t e v e n a f t e r the g r o w t h o f o u t p u t b e g i n s to m o d e r a t e , and t h e y p e r s i s t in d o i n g so u n t i l t h e y a r e c o n v i n c e d t h a t the e c o n o m i c s l o w d o w n is n o t temporary. M o r e o v e r , e v e n a f t e r it is e v i d e n t that a c o n t r a c t i o n is in p r o c e s s , e m p l o y e r s h a v e o f t e n b e e n r e l u c t a n t to r e d u c e o v e r h e a d a s a d m i n i s t r a t i v e and p r o f e s s i o n a l labor--such staff. In the e a r l y r e c o v e r y p h a s e of a b u s i n e s s c y c l e , p r o d u c t i v i t y g r o w t h tends to a c c e l e r a t e a s o v e r h e a d a n d o t h e r r e l a t i v e l y l a b o r c o s t s d e c l i n e p e r u n i t of o u t p u t . Having adopted fixed cost-cutting -6p r o g r a m s to t r i m e x c e s s p e r s o n n e l d u r i n g t h e r e c e s s i o n , e m p l o y e r s hesitate to a d d n o n - p r o d u c t i o n e m p l o y e e s w h e n n e w o r d e r s a n d b e g i n to p i c k u p , a n d there is l i t t l e n e e d for a d d i t i o n a l personnel. output overhead T h i s p a t t e r n o f b e h a v i o r is c l e a r l y e v i d e n t in t h e statistical record. F o r e x a m p l e , in the 1 9 5 8 r e c o v e r y , e m p l o y m e n t o f p r o d u c t i o n w o r k e r s in m a n u f a c t u r i n g r o s e b y 8 . 8 p e r c e n t the f i r s t f o u r q u a r t e r s a f t e r the c y c l i c a l t r o u g h w a s during reached w h i l e e m p l o y m e n t of n o n - p r o d u c t i o n w o r k e r s i n c r e a s e d b y o n l y per cent. S i m i l a r l y , in the r e c o v e r y f r o m the m o s t r e c e n t 2.9 recession, employment of factory production workers grew by 0.4 per cent between the f o u r t h q u a r t e r o f 1 9 7 0 a n d the f o u r t h q u a r t e r o f 1 9 7 1 . o v e r the s a m e p e r i o d , j o b s h e l d b y n o n - p r o d u c t i o n w o r k e r s Yet, declined b y a f u r t h e r 2.7 p e r c e n t . T h e e x t e n t to w h i c h i n c r e a s e s in p r o d u c t i v i t y c a n b e a c h i e v e d d u r i n g the r e c o v e r y f r o m a r e c e s s i o n d e p e n d s o n the r a t e of g r o w t h o f r e a l o u t p u t . significantly T h i s l i n k a g e c a n b e s e e n in T a b l e 2 , s h o w i n g the b e h a v i o r o f o u t p u t a n d p r o d u c t i v i t y the r e c o v e r y p h a s e of b u s i n e s s c y c l e s . e v i d e n c e in a d i f f e r e n t f o r m . during C h a r t I p r e s e n t s the same In g e n e r a l , the s h a r p e r the u p t u r n i n o u t p u t d u r i n g a r e c o v e r y the l a r g e r the j u m p i n o u t p u t p e r m a n h o u r . H o w e v e r , the r e l a t i o n s h i p h a s v a r i e d s o m e w h a t in e a c h p o s t w a r recovery. F o r e x a m p l e , d u r i n g the f i r s t y e a r o f r e c o v e r y f r o m the 1 9 5 3 - 5 4 r e c e s s i o n , g r o s s n a t i o n a l p r o d u c t (GNP) in r e a l t e r m s c o r r e c t e d f o r p r i c e c h a n g e s ) r o s e b y 8.6 p e r c e n t ; (i.e., productivity - 7i n c r e a s e d b y 4 . 3 p e r c e n t , a n d m a n h o u r s c l i m b e d b y 5.6 p e r c e n t . In the 1958 r e c o v e r y , the r i s e in o u t p u t in the f i r s t y e a r f o l l o w i n g the t r o u g h w a s e s p e c i a l l y l a r g e - - 9 . 2 p e r c e n t . w h i l e t h e r e w a s a s u b s t a n t i a l i n c r e a s e in p r o d u c t i v i t y cent), manhours worked also rose appreciably However, (4.6 per (5.6 p e r c e n t ) . In c o n t r a s t , the s t r o n g a d v a n c e in o u t p u t in the f i r s t y e a r of r e c o v e r y from the 1 9 6 0 - 6 1 r e c e s s i o n (7.6 p e r c e n t ) g e n e r a t e d e x c e p t i o n a l l y s t r o n g i n c r e a s e in p r o d u c t i v i t y the r i s e in m a n h o u r s w a s r a t h e r m o d e r a t e an (6.0 p e r c e n t ) , w h i l e (2.2 p e r cent). T h e m a g n i t u d e of p r o d u c t i v i t y i n c r e a s e s a c h i e v e d during the s l u g g i s h 1 9 7 0 - 7 1 r e c o v e r y w a s n o t t y p i c a l of t h a t r e c o r d e d other recovery periods. D u r i n g the four q u a r t e r s f o l l o w i n g in the c y c l i c a l t r o u g h (which o c c u r r e d in the l a s t q u a r t e r o f 1 9 7 0 ) , r e a l o u t p u t r o s e b y o n l y 3.5 p e r c e n t ( s u b s t a n t i a l l y less than in e a r l i e r periods). Productivity rose by 4.1 per cent, and manhours rose b y 1.2 p e r c e n t . d u r i n g this p e r i o d M o r e o v e r , the g r o w t h o f o u t p u t a n d productivity (1971) w a s s t i m u l a t e d b y the r e c o v e r y from the General Motors strike. A f t e r c o r r e c t i n g the data to a l l o w for this f a c t o r , the s l o w e r g r o w t h o f p r o d u c t i v i t y t h a n in p r e v i o u s r e c o v e r i e s is m o r e evident. A n o t h e r a s p e c t o f the c y c l i c a l b e h a v i o r o f (shown in T a b l e 2) s h o u l d b e n o t e d . productivity D u r i n g the s e c o n d y e a r of r e c o v e r y , the r a t e of g r o w t h of o u t p u t , p r o d u c t i v i t y , a n d m a n h o u r s -8s l o w e d d o w n a p p r e c i a b l y in the t h r e e e a r l i e r p e r i o d s . However, the t y p i c a l s e c o n d - y e a r b e h a v i o r m a y b e d i f f e r e n t a s the recovery progresses: current r a t h e r t h a n a m o d e r a t i o n in the r a t e o f growth of p r o d u c t i v i t y , we m a y witness a n acceleration in o u t p u t p e r m a n h o u r . anticipated T h i s m a y c o m e a b o u t b e c a u s e o f the f a s t e r g r o w t h i n r e a l o u t p u t this y e a r - - i n contrast to the s l o w i n g in g r o w t h i n the s e c o n d y e a r in e a c h o f the o t h e r periods. T h e i m p l i c a t i o n s o f s u c h a n o u t c o m e for e m p l o y m e n t w i l l b e d i s c u s s e d a t a l a t e r p o i n t in these Productivity and Unit Labor remarks. Costs P r o d u c t i v i t y g r o w t h is a k e y e l e m e n t in c h e c k i n g inflation. T h i s is t r u e b e c a u s e the r e l a t i o n s h i p o f the i n c r e a s e in o u t p u t p e r m a n h o u r to c o m p e n s a t i o n p e r m a n h o u r d e t e r m i n e s u n i t costs. T h e r e c o r d o f c h a n g e s in p r o d u c t i v i t y a n d u n i t labor labor c o s t s d u r i n g the y e a r s 1 9 4 8 - 7 1 is p r e s e n t e d in T a b l e 3 . The c y c l i c a l b e h a v i o r o f u n i t l a b o r c o s t s is s k e t c h e d in C h a r t II. T h e t y p i c a l c y c l i c a l p a t t e r n h a s b e e n for u n i t l a b o r c o s t p r e s s u r e s to e a s e d u r i n g the r e c e s s i o n p h a s e o f the c y c l e a s s l a c k l a b o r m a r k e t s d a m p e n the r i s e in c o m p e n s a t i o n p e r m a n h o u r . During the r e c o v e r y p h a s e o f the c y c l e , it h a s b e e n the a b o v e - a v e r a g e p r o d u c t i v i t y g a i n s w h i c h h a v e t e n d e d to o f f s e t r i s e s in c o m p e n s a t i o n a n d to l i m i t u n i t l a b o r c o s t increases. - 9H o w e v e r , the e x p e r i e n c e d u r i n g the 1 9 7 0 - 7 1 recession a n d r e c o v e r y so far h a s n o t c o n f o r m e d to that t y p i c a l pattern. C o m p e n s a t i o n p e r m a n h o u r c o n t i n u e d to r i s e a t a r a p i d p a c e 1970 a n d i n t o e a r l y 1 9 7 1 . throughout T h i s o c c u r r e d e v e n as u n e m p l o y m e n t rose. In a d d i t i o n , p r o d u c t i v i t y showed l i t t l e c h a n g e in 1 9 7 0 , and it did n o t g r o w n e a r l y as f a s t a s is u s u a l l y the case d u r i n g the 1 9 7 1 recovery period. A s a r e s u l t , u n i t l a b o r c o s t s c o n t i n u e d to a d v a n c e f a i r l y r a p i d l y p r i o r to the i m p o s i t i o n of the W a g e - P r i c e F r e e z e in A u g u s t of last y e a r . Productivity and Employment A s i n d i c a t e d e a r l i e r , the d r i v e to i m p r o v e poses a dilemma: productivity w h i l e p r o d u c t i v i t y g r o w t h h e l p s to d a m p e n c o s t p r e s s u r e s , it a l s o h a s a r e t a r d i n g i m p a c t o n e m p l o y m e n t g a i n s . T h e s o u r c e o f this d i l e m m a is e a s i l y u n d e r s t o o d . For a given amount o f e x p a n s i o n in p r o d u c t i o n , the l a r g e r the i n c r e a s e in l a b o r the s m a l l e r the i n c r e a s e in m a n h o u r s r e q u i r e d . productivity In a r e c o v e r y period, s t r o n g p r o d u c t i v i t y g r o w t h and i n c r e a s e s in the w o r k w e e k tend to limit employment gains. The interrelations among output, productivity and employment during the recovery phase of business cycles in T a b l e 4 . are shown It w i l l b e n o t e d t h a t , in r e c o v e r y p e r i o d s , p r i v a t e n o n f a r m o u t p u t tends to g r o w r a p i d l y in the f i r s t few q u a r t e r s the c y c l i c a l t r o u g h is r e a c h e d : after b u t so d o e s o u t p u t p e r m a n h o u r . D u r i n g the f i r s t h a l f - y e a r f o l l o w i n g the low p o i n t in o u t p u t , p r o d u c t i v i t y g a i n s a n d i n c r e a s e d h o u r s tend to a c c o u n t for m u c h o f -10the o u t p u t g r o w t h . B u t for a v a r i e t y of r e a s o n s w h i c h n e e d n o t b e c a t a l o g u e d h e r e , t h e r e is a l i m i t to the i n c r e a s e d production that can be obtained through higher productivity and overtime w o r k . A t s o m e p o i n t , a s the d e m a n d for o u t p u t c o n t i n u e s to e x p a n d , a d d i t i o n a l w o r k e r s m u s t b e a d d e d to the p a y r o l l . T h e d a t a in T a b l e 4 a l l o w o n e to t r a c e t h i s o f c h a n g e s in o u t p u t , p r o d u c t i v i t y a n d e m p l o y m e n t . interplay Essentially, t h e f i g u r e s s h o w the w a y s in w h i c h the e c o n o m y w a s a b l e to a c h i e v e the g r o w t h i n o u t p u t r e c o r d e d in the f u l l y e a r o f r e c o v e r y the t r o u g h o f the l a s t f o u r b u s i n e s s c y c l e s . following In g e n e r a l , o n e c a n v i s u a l i z e c h a n g e s in p r o d u c t i v i t y , h o u r s o f w o r k , a n d employment a s t h r e e s o u r c e s o f i n p u t s r e q u i r e d to g e n e r a t e the o b s e r v e d in o u t p u t . T h e s p e c i f i c s h a r e o f e a c h in the i n c r e a s e d varied substantially, but several clear tendencies are growth output observable. A m o n g the t h r e e , i n c r e a s e d p r o d u c t i v i t y a p p e a r s to t a k e the lead, a c c o u n t i n g for h a l f o r m o r e o f the o u t p u t g a i n in the f i r s t s i x months of recovery. I n c r e a s e d e m p l o y m e n t w a s of s o m e w h a t i m p o r t a n c e , a n d l o n g e r w o r k i n g h o u r s a c c o u n t e d for the proportion. less smaller A s the r e c o v e r y p r o g r e s s e s , the s h a r e of o u t p u t growth a t t r i b u t a b l e to p r o d u c t i v i t y a n d l o n g e r w o r k w e e k s tends to d i m i n i s h a n d the s h a r e c o n t r i b u t e d b y i n c r e a s e d e m p l o y m e n t climbs. A g a i n , h o w e v e r , the e x p e r i e n c e d u r i n g the 1 9 7 1 r e c o v e r y v a r i e d s i g n i f i c a n t l y f r o m the t y p i c a l p a t t e r n s k e t c h e d above. I n the f i r s t s i x m o n t h s f o l l o w i n g the t r o u g h of the 1 9 7 0 recession, -11the r i s e in o u t p u t p e r m a n h o u r a c c o u n t e d for t h r e e - q u a r t e r s of the a d v a n c e in o u t p u t , a n d the p r o p o r t i o n r o s e f u r t h e r o v e r the n e x t half year. T h e s h a r e a t t r i b u t a b l e to l o n g e r w o r k i n g h o u r s f l u c t u a t e d c o n s i d e r a b l y , b u t o n b a l a n c e the n e t r e s u l t s w e r e a p o s i t i v e c o n t r i b u t i o n of a b o u t o n e - s i x t h of the o u t p u t g a i n in the f i r s t six m o n t h s a n d a n o f f s e t o f r o u g h l y the s a m e m a g n i t u d e the n e x t h a l f y e a r . in H i g h e r e m p l o y m e n t p r o v i d e d l e s s than o n e - t e n t h o f the n e t r i s e in o u t p u t in the f i r s t six m o n t h s a n d j u s t o v e r o n e - f i f t h in the s u c c e e d i n g h a l f y e a r . Thus, from an analysis the d a t a p r e s e n t e d h e r e , o n e o v e r r i d i n g c o n c l u s i o n e m e r g e s : of last y e a r , w h e n the e c o n o m y m a d e o n l y m o d e r a t e p r o g r e s s in r e c o v e r i n g from the 1 9 7 0 - 7 1 r e c e s s i o n , a d i s p r o p o r t i o n a t e s h a r e of the r i s e in o u t p u t w a s a c c o u n t e d for b y h i g h e r p r o d u c t i v i t y , and o n l y m i n o r b e n e f i t s a c c r u e d in the form of h i g h e r employment. In p a s s i n g , I m i g h t n o t e t h a t the output-productivity- u n e m p l o y m e n t d i l e m m a is n o t u n i q u e to the U n i t e d S t a t e s . In the United K i n g d o m , industrial productivity rose 4.9 per cent between 1970 a n d 1 9 7 1 - - c o m p a r e d f the m i d d l e 1 9 6 0 s . to a n a v e r a g e i n c r e a s e o f 3 . 8 p e r c e n t d u r i n g P r o d u c t i v i t y g r o w t h w a s a l s o l a r g e a n d in p a r t w a s r e f l e c t e d in a s h a r p i n c r e a s e in u n e m p l o y m e n t . For example, in M a r c h , 1 9 7 2 , the u n e m p l o y m e n t r a t e w a s 1 - 1 / 2 t i m e s g r e a t e r 2/ its late 1970 a v e r a g e . — 2/ than A l t h o u g h p r o d u c t i v i t y g r o w t h in the U . K . has B r i t i s h l a b o r s t a t i s t i c s a r e c a l c u l a t e d on a s o m e w h a t d i f f e r e n t conceptual basis than U . S . data and are not strictly comparable. -12had w e l c o m e implications for c o s t s a n d p r i c e s , it h a s a l s o a m a j o r f a c t o r in c r e a t i n g t h e i r l a r g e s t u n e m p l o y m e n t s i n c e the b e g i n n i n g of W o r l d W a r been problem II. A s f a r a s the U n i t e d S t a t e s is c o n c e r n e d , this m e a n s t h a t if e m p l o y m e n t is to e x p a n d s u f f i c i e n t l y to r e d u c e s i g n i f i c a n t l y in 1 9 7 2 — a n d if l a b o r c o s t i n c r e a s e s a r e to b e moderated--large output gains will be required. O u t l o o k for P r o d u c t i v i t y a n d I m p l i c a t i o n s for 1 9 7 2 G i v e n t h e s e r e c e n t t r e n d s in p r o d u c t i v i t y a n d w e o u g h t to r a i s e q u e s t i o n s a b o u t the p r o s p e c t s for the I have raised unemployment employment, future. some o f t h e s e q u e s t i o n s , a n d the a n s w e r s I o b t a i n e d can be summarized here. In u n d e r t a k i n g t h i s t a s k , m y p u r p o s e w a s n o t to m a k e a n i n d e p e n d e n t a s s e s s m e n t o f the o u t l o o k for the e c o n o m y as a whole. R a t h e r , I t o o k a s a p o i n t of d e p a r t u r e the g e n e r a l e c o n o m i c o u t l o o k c o n t a i n e d in the E c o n o m i c R e p o r t o f t h e C o u n c i l of Economic Advisers (CEA). T h a t f o r e c a s t is for a n acceleration o f r e a l e c o n o m i c g r o w t h d u r i n g 1 9 7 2 to s o m e w h e r e in the of 6 per c e n t , compared in 1 9 7 1 . neighborhood to the 2.7 p e r c e n t r a t e o f g r o w t h achieved In p a r t i c u l a r , the e x p e c t e d s t r e n g t h e n i n g of a c t i v i t y in the m a n u f a c t u r i n g s e c t o r (in w h i c h p r o d u c t i v i t y g r o w t h is p a r t i c u l a r l y h i g h ) is o f s p e c i a l i n t e r e s t . T h u s , the q u e s t i o n to w h i c h I w i s h to a d d r e s s m y s e l f a t this p o i n t is t h i s : H o w w i l l this for the n a t i o n a l e c o n o m y as a w h o l e a f f e c t p r o d u c t i v i t y employment? outlook and - 13 In s e e k i n g a n a n s w e r to this q u e s t i o n , I p u r s u e d avenues. F i r s t , o n the b a s i s of i n f o r m a l s o u n d i n g s a m o n g I have gotten a clear impression that many manufacturing m o v i n g c a u t i o u s l y in e x p a n d i n g t h e i r p a y r o l l s . several businessmen, firms a r e Among other a s t r o n g d e s i r e to c o n t r o l c o s t s by m e e t i n g i n c r e a s e d factors, output demands through higher productivity rather than higher employment a p p e a r s to h a v e m o d e r a t e d the p a c e a t w h i c h f a c t o r y j o b s g r e w t h r o u g h o u t 1 9 7 1 a n d into the e a r l y m o n t h s of the y e a r . T h e s e q u a l i t a t i v e i m p r e s s i o n s a r e r e i n f o r c e d b y the s t a t i s t i c s r e l a t i n g to e m p l o y m e n t . In M a r c h , 18.8 m i l l i o n p e o p l e w e r e e m p l o y e d in m a n u f a c t u r i n g i n d u s t r i e s . T h i s w a s a n i n c r e a s e of 3 1 0 , 0 0 0 f r o m the low p o i n t r e a c h e d in A u g u s t , 1 9 7 1 . Y e t , this w a s a b o u t the s a m e n u m b e r a s a y e a r e a r l i e r a n d s t i l l n e a r l y 1.6 m i l l i o n b e l o w the p e a k s e t in the third q u a r t e r of 1 9 6 9 . F o r the e c o n o m y a s a w h o l e , the o u t l o o k this y e a r is for c o n s i d e r a b l e i m p r o v e m e n t in the job s i t u a t i o n . H o w e v e r , the c i v i l i a n l a b o r f o r c e is a l s o e x p e c t e d to r i s e a p p r e c i a b l y , a n d the n e t e f f e c t o n u n e m p l o y m e n t is c l o u d y . In M a r c h , the c i v i l i a n labor (seasonally adjusted) totaled 86.3 m i l l i o n . 2.4 m i l l i o n a b o v e the l e v e l a y e a r a g o . — ^ to 8 1 . 2 m i l l i o n . force This was an increase of Total employment amounted T h i s w a s a l s o a y e a r - t o - y e a r g a i n of 2.4 m i l l i o n in the n u m b e r of p e o p l e w i t h j o b s . The n u m b e r of u n e m p l o y e d t o t a l e d 5 . 2 m i l l i o n in M a r c h , a n i n c r e a s e o f a b o u t 4 0 , 0 0 0 persons since March, 1971. 3/ T h i s i n c r e a s e a l l o w s for a n e x p a n s i o n due to the 1970 C e n s u s p o p u l a t i o n c o n t r o l a d j u s t m e n t i n t r o d u c e d into the h o u s e h o l d s u r v e y in J a n u a r y , 1 9 7 2 . - 14 T o l o o k b e y o n d the e m p l o y m e n t e x p e r i e n c e s d u r i n g the e a r l y m o n t h s of 1 9 7 2 to the r e s t o f the y e a r is n e c e s s a r i l y difficult. In t h e i r A n n u a l R e p o r t , C E A n o t e d that: "Our estimate implies a n increase of 6 per c e n t in r e a l G N P b e t w e e n 1 9 7 1 a n d 1 9 7 2 . This is a b o u t the r a t e of i n c r e a s e a c h i e v e d in the f o u r t h q u a r t e r o f 1 9 7 1 . T h e r e is n o e a s y w a y to s e p a r a t e the f o r e c a s t r a t e o f r e a l g r o w t h i n t o e m p l o y m e n t a n d p r o d u c t i v i t y g a i n s . C l e a r l y , it s h o u l d y i e l d s u b s t a n t i a l i n c r e a s e s in b o t h . The e x t e n t to w h i c h the e m p l o y m e n t g a i n s w i l l r e d u c e t h e u n e m p l o y m e n t r a t e d e p e n d s o n the s i z e o f the i n c r e a s e in the l a b o r f o r c e . It is e s t i m a t e d t h a t the u n e m p l o y m e n t r a t e s h o u l d d e c l i n e f r o m the 6 p e r c e n t l e v e l of D e c e m b e r 1 9 7 1 to t h e n e i g h b o r h o o d o f 5 p e r c e n t b y the e n d of 1 9 7 2 . (Report, 1972, p . 108). I a g r e e t h a t it is d i f f i c u l t to u n r a v e l the e f f e c t s g a i n s in o u t p u t , e m p l o y m e n t , a n d p r o d u c t i v i t y . However, as shown a b o v e , the b e h a v i o r of p r o d u c t i v i t y h a s a s i g n i f i c a n t b e a r i n g the a m o u n t o f e m p l o y m e n t w e s h o u l d e x p e c t to r e s u l t f r o m increase in real G N P . of on a given T h u s , if w e a r e to f o r m a r e a s o n a b l e idea o f the p r o s p e c t s for e m p l o y m e n t in 1 9 7 2 , w e m u s t s e a r c h for e v e n rough c l u e s to the p r o b a b l e t r e n d o f p r o d u c t i v i t y in the c u r r e n t T o a i d in t h i s s e a r c h , I m a d e u s e of year. computer-based econometric techniques which are becoming increasingly useful tools of economic analysis. insight T h e r e s u l t s o f the a n a l y s i s p r o v i d e a n i n t o the p r o d u c t i v i t y - e m p l o y m e n t for 1972. contour which might be expected -15T h e s t a t i s t i c a l a n a l y s i s took as a p o i n t of d e p a r t u r e the C E A f o r e c a s t of a 6 p e r c e n t i n c r e a s e in r e a l G N P d u r i n g P a s t e x p e r i e n c e s u g g e s t s a 3 - 1 / 2 - 4 per c e n t p r o d u c t i v i t y c o n s i s t e n t w i t h a 6 p e r c e n t i n c r e a s e in r e a l o u t p u t . 4/ 1972.— growth In u s i n g this e s t i m a t e , I m u s t e m p h a s i z e that it is o n l y a r o u g h approximation. B u t it d o e s s e e m to b e b r o a d l y c o n s i s t e n t w i t h the g r o w t h of r e a l output expected this y e a r . U s i n g the 4 p e r c e n t figure for p r o d u c t i v i t y , - ^ it w a s e s t i m a t e d that n o n f a r m p a y r o l l e m p l o y m e n t m i g h t r i s e b y a b o u t 2 p e r c e n t in 1 9 7 2 . T h i s w o u l d m e a n a n i n c r e a s e in j o b s of r o u g h l y 6/ 1.5 m i l l i o n . — U n d e r t h e s e c o n d i t i o n s , the g r o w t h o f total e m p l o y m e n t w o u l d b e g r e a t e r t h a n 1.5 m i l l i o n — b e c a u s e o f i n c r e a s e s in the n u m b e r of s e l f - e m p l o y e d w o r k e r s , p r i v a t e h o u s e h o l d w o r k e r s , a n d other workers not on nonfarm payrolls. In r o u g h t e r m s , the in t h e s e c a t e g o r i e s m i g h t a m o u n t to 0.5 m i l l i o n . T h u s , the rise increase in t o t a l e m p l o y m e n t i m p l i e d b y a 6 p e r c e n t g r o w t h in r e a l G N P in 1972 m i g h t b e in the n e i g h b o r h o o d of 2 m i l l i o n . W h a t d o e s this m e a n for the u n e m p l o y m e n t rate? Normal l a b o r f o r c e g r o w t h of a b o u t 1 - 1 / 2 m i l l i o n p e r y e a r is c u r r e n t l y 4/ 5/ 6/ F o r t h o s e i n t e r e s t e d , the s t a t i s t i c a l m e t h o d f o l l o w e d w a s to e s t i m a t e a p r o j e c t i o n e q u a t i o n by m u l t i p l e r e g r e s s i o n a n a l y s i s . U s i n g f o r e c a s t e d c h a n g e in r e a l G N P , the c h a n g e in p r i v a t e n o n f a r m o u t p u t p e r m a n h o u r w a s p r o j e c t e d for the p e r i o d from the fourth q u a r t e r of 1971 to the f o u r t h q u a r t e r of 1972. It w a s a l s o a s s u m e d t h a t the a v e r a g e w o r k w e e k w o u l d c h a n g e v e r y l i t t l e a n d that no c h a n g e w o u l d o c c u r in the d i s t r i b u t i o n o f G N P b e t w e e n the p r i v a t e a n d p u b l i c s e c t o r s . In c o n t r a s t , a 3.5 p e r c e n t i n c r e a s e in p r o d u c t i v i t y i m p l i e s a 1.8 m i l l i o n r i s e in p a y r o l l e m p l o y m e n t . -16e s t i m a t e d as a result of p o p u l a t i o n growth and other and economic factors. relatively depressed demographic But labor force p a r t i c i p a t i o n rates w e r e in 1 9 7 1 - - e s p e c i a l l y a m o n g a d u l t to s l a c k l a b o r m a r k e t c o n d i t i o n s . males—due Consequently, a rebound in p a r t i c i p a t i o n r a t e s w o u l d l e a d to a s o m e w h a t l a r g e r t h a n n o r m a l labor force growth. I n a d d i t i o n , the D e f e n s e D e p a r t m e n t estimates s o m e f u r t h e r r e d u c t i o n s i n the a r m e d f o r c e s w h i c h w o u l d a d d a n a d d i t i o n a l 1 0 0 , 0 0 0 to the c i v i l i a n l a b o r f o r c e . I n civilian labor force could be expected t o t a l , the to g r o w b y a b o u t 1 - 3 / 4 m i l l i o n 8/ in 1 9 7 2 . T h u s , a n i n c r e a s e in t o t a l e m p l o y m e n t o f 2 m i l l i o n w o u l d m e a n a d e c l i n e in u n e m p l o y m e n t o f a b o u t 2 5 0 , 0 0 0 . a d e c l i n e o f this m a g n i t u d e m i g h t s t i l l l e a v e the u n e m p l o y m e n t r a t e somewhat above 5 per cent. Alternative projections through 1973 were also performed u s i n g t h r e e d i f f e r e n t g r o w t h r a t e a s s u m p t i o n s for r e a l G N P - - 5 , 6 , and 7 per cent. (Table 5.) A s the t a b l e s h o w s , a n a c c e l e r a t i o n in the g r o w t h of real GNP b y 2 percentage points (from 5 per cent to 7 p e r c e n t ) is a s s o c i a t e d w i t h a n i n c r e a s e o f o v e r 1.0 p e r c e n t a g e p o i n t in the g r o w t h rate of p r o d u c t i v i t y . If t h e r e is n o change in t h e w o r k w e e k , T a b l e 5 s u g g e s t s t h a t p a y r o l l e m p l o y m e n t m i g h t increase b y 1.2 m i l l i o n under a 5 per cent real G N P a s s u m p t i o n and b y 1.5 m i l l i o n u n d e r a 6 p e r c e n t a s s u m p t i o n — o r b y o n e - q u a r t e r m o r e d u e to t h e a d d i t i o n a l r e a l G N P . f] "" 8/ "" T h e r i s e in e m p l o y m e n t associated I n the U . S . b u d g e t , the D e f e n s e D e p a r t m e n t e s t i m a t e s a r m e d forces strength of 2.4 m i l l i o n in fiscal year 1 9 7 3 . The a r m e d f o r c e s t o t a l e d o v e r 2 . 6 m i l l i o n in 1 9 7 1 : 4 . The civilian labor force in the first quarter of 1972 w a s about 2 m i l l i o n a b o v e its y e a r e a r l i e r l e v e l . H o w e v e r , it is u n l i k e l y to c o n t i n u e to g r o w a t t h i s r a t e . - 17 w i t h a 7 p e r c e n t g r o w t h in real G N P m i g h t be a p p r o x i m a t e l y 1.8 m i l l i o n , a d i f f e r e n c e o f 3 0 0 , 0 0 0 c o m p a r e d w i t h a 6 p e r cent a d v a n c e in r e a l G N P . The c o n c l u s i o n I r e a c h f r o m the f o r e g o i n g a n a l y s i s be stated succinctly: can the s u b s t a n t i a l g r o w t h in o u t p u t e x p e c t e d for 1972 should a l s o lead to a s i z a b l e e x p a n s i o n in e m p l o y m e n t . H o w e v e r , the s i g n i f i c a n t i n c r e a s e in p r o d u c t i v i t y w h i c h is a l s o e x p e c t e d w i l l d a m p e n the g r o w t h of j o b s , and o n l y a m o d e r a t e i m p a c t c a n be e x p e c t e d o n the level of u n e m p l o y m e n t . A l t e r n a t i v e A p p r o a c h e s to E x p a n d i n g Employment G i v e n this p r o s p e c t , I a s k e d m y s e l f w h e t h e r a n y t h i n g c o u l d b e d o n e to q u i c k e n the g r o w t h of j o b s . In p o s i n g the q u e s t i o n , I o b v i o u s l y had to k e e p in m i n d the c o n f l i c t t h a t m i g h t e m e r g e b e t w e e n a d d i t i o n a l e f f o r t s to s t i m u l a t e e m p l o y m e n t a n d the c a m p a i g n to r e d u c e i n f l a t i o n . M o r e o v e r , the s u b s t a n t i a l continuing changes t h a t h a v e o c c u r r e d in the s t r u c t u r e of the l a b o r force in r e c e n t years ( i . e . , p r o p o r t i o n a t e l y m o r e w o m e n a n d t e e n a g e r s in the l a b o r f o r c e ) m a k e the t a s k of g e n e r a t i n g m o r e e m p l o y m e n t e v e n m o r e Nevertheless, I am personally convinced s i m p l y take n o t e o f these d i f f i c u l t i e s ; that we difficult. cannot we should also be prepared to p u r s u e a l t e r n a t i v e a p p r o a c h e s w h i c h show p r o m i s e o f h e l p i n g us reconcile our competing objectives. the p u b l i c e m p l o y m e n t program. One such a p p r o a c h is to e x p a n d -18T h e E m e r g e n c y E m p l o y m e n t A c t of 1 9 7 1 (EEA) established a t w o - y e a r m a n p o w e r p r o g r a m w h i c h is d e s i g n e d to p r o v i d e transitional p u b l i c s e r v i c e j o b s in S t a t e o r l o c a l g o v e r n m e n t s for u n e m p l o y e d and underemployed persons. The Public Employment Program (PEP) is a u t h o r i z e d b y the E E A to m a k e a v a i l a b l e u p to 90 p e r c e n t F e d e r a l f u n d i n g for a v a r i e t y o f t e m p o r a r y j o b s to go into e f f e c t w h e n the n a t i o n a l u n e m p l o y m e n t r a t e e q u a l s o r e x c e e d s 4 . 5 p e r c e n t for a t h r e e - m o n t h p e r i o d . A s p e c i a l p r o g r a m for l o c a l a r e a s w i t h j o b l e s s r a t e s o f 6 p e r c e n t or a b o v e for t h r e e m o n t h s is a l s o consecutive provided. All unemployed and underemployed persons are eligible for the public service employment w i t h priority consideration a c c o r d e d to V i e t n a m v e t e r a n s a n d l o w - i n c o m e g r o u p s . Jobs created under this p r o g r a m m u s t be transitional--that is, they m u s t lead to p e r m a n e n t j o b s in p u b l i c s e r v i c e o r i n p r i v a t e i n d u s t r y , a n d t h e y m u s t p r o v i d e p r o s p e c t s for s k i l l d e v e l o p m e n t a n d advancement. T h e p r o g r a m i n c o r p o r a t e s s a f e g u a r d s w h i c h a t t e m p t to i n s u r e f u n d s a r e u s e d to create n e w j o b s t h a t w o u l d n o t h a v e b e e n financed by local revenues or existing Federal that otherwise programs. T h e F e d e r a l funds a r e a p p o r t i o n e d a m o n g the s t a t e s b y a f o r m u l a w h i c h t a k e s i n t o a c c o u n t n u m b e r of u n e m p l o y e d a n d s e v e r i t y o f u n e m p l o y m e n t in a g i v e n a r e a . States and the localities ( a c t i n g a s a g e n t s u n d e r the p r o g r a m ) c o n t r i b u t e 10 p e r c e n t m a t c h i n g funds. - 19 F u n d l n g p r o v i d e s a t o t a l F e d e r a l o u t l a y of $2.25 over a two-year period ending June 30, 1973, as billion follows: G e n e r a l funds a r e t r i g g e r e d by a n a t i o n a l u n e m p l o y m e n t r a t e o f 4 . 5 o r a b o v e . A t o t a l of $1.75 billion has been appropriated: $750 m i l l i o n for f i s c a l 1972 a n d $1 b i l l i o n d u r i n g fiscal 1973. (2) S p e c i a l funds of $ 2 5 0 m i l l i o n in e a c h of the two y e a r s a r e a v a i l a b l e for a r e a s w i t h p a r t i c u l a r l y s e v e r e u n e m p l o y m e n t . A c c o r d i n g to d a t a s u p p l i e d b y the M a n p o w e r A d m i n i s t r a t i o n in the D e p a r t m e n t of L a b o r , $ 9 8 1 m i l l i o n (of total F e d e r a l funds) 1 have been allocated. A g e n t s shares account for a n a d d i t i o n a l $105 m i l l i o n . In J a n u a r y of this y e a r , t h e r e w e r e a t o t a l of f u n d e d j o b o p e n i n g s a p p r o v e d u n d e r the p r o g r a m . month, current enrollment same (people a c t u a l l y a t w o r k ) u n d e r the p r o g r a m a m o u n t e d to 1 0 2 , 8 5 8 . to d a t e . In the 134,374 There have been about 8,000 terminations T h e M a n p o w e r A d m i n i s t r a t i o n e s t i m a t e s that a total of 1 4 5 , 0 0 0 j o b s w i l l b e c r e a t e d in f i s c a l 1972 a t a n a v e r a g e annual salary of $7,200. A s t u d y of the first 4 5 , 0 0 0 p e o p l e h i r e d u n d e r the P E P i n d i c a t e d that 30 p e r c e n t w e r e V i e t n a m v e t e r a n s , a n d a b o u t 30 p e r cent were d i s a d v a n t a g e d — i n c l u d i n g recipients. 10 p e r c e n t w h o w e r e w e l f a r e A l t o g e t h e r , a b o u t 30 p e r c e n t of the n e w l y h i r e d w e r e m i n o r i t i e s , a n d a b o u t 88 per c e n t of the jobs w e r e f i l l e d by u n e m p l o y e d p e r s o n s w h o h a d n e v e r w o r k e d for the l o c a l g o v e r n m e n t them. A s u m m a r y o f t h e s e c h a r a c t e r i s t i c s is s h o w n in T a b l e 6. hiring -20The jobs created reflect a w i d e spectrum of public service employment, although State and local agents m u s t give h i g h e s t p r i o r i t y to c r e a t i n g j o b s in a r e a s w h e r e the n e e d a d d i t i o n a l s e r v i c e is the g r e a t e s t . The first 101,000 jobs f u n d e d w e r e d i s t r i b u t e d a m o n g the p r i n c i p a l o c c u p a t i o n s in T a b l e for shown 7. I n o r d e r to m a x i m i z e the n u m b e r o f j o b s c r e a t e d , 90 p e r c e n t o f the a l l o c a t e d F e d e r a l f u n d s m u s t b e u s e d f o r w a g e s a n d b e n e f i t s , so f u n d s f o r t r a i n i n g a n d s u p p o r t i v e s e r v i c e s a r e H o w e v e r , the Manpower Administration estimates that about 16,000 p a r t i c i p a n t s w i l l r e c e i v e s o m e t r a i n i n g u n d e r the p r o g r a m . a d d i t i o n , m a n y m o r e m a y receive training and supportive t h r o u g h l i n k a g e s b e t w e e n the P E P a n d o t h e r m a n p o w e r limited. In services programs. G i v e n this f a v o r a b l e e x p e r i e n c e w i t h the P E P , I a s k e d m y s e l f w h a t i m p a c t o n t o t a l e m p l o y m e n t m i g h t o n e e x p e c t if the a m o u n t o f f u n d s b e i n g s p e n t o n the p r o g r a m w e r e i n c r e a s e d significantly. A s i n d i c a t e d a b o v e , the E E A is c u r r e n t l y f u n d e d for $ 7 5 0 m i l l i o n in f i s c a l 1 9 7 2 a n d a t $1 b i l l i o n in f i s c a l 1 9 7 3 - - w i t h a n e x t r a $ 5 0 0 m i l l i o n for e x c e p t i o n a l l y d e p r e s s e d areas. T o a s s e s s the c o n s e q u e n c e s o f s u c h a n e x p a n s i o n , I a g a i n m a d e u s e of the c o m p u t e r - b a s e d e c o n o m e t r i c t e c h n i q u e s to u s . 9/ In t h i s c a s e , the b e h a v i o r o f the e c o n o m y w a s available 9/ simulated— T h e s i m u l a t i o n s w e r e p e r f o r m e d w i t h the a i d o f a m o d i f i e d v e r s i o n o f the S o c i a l S c i e n c e R e s e a r c h C o u n c i l - M I T - P E N N quarterly econometric model. o n the a s s u m p t i o n t h a t F e d e r a l o u t l a y s w o u l d b e r a i s e d b y $1 b i l l i o n above those already anticipated in the b u d g e t . This would a n a p p r o x i m a t e d o u b l i n g o f the a m o u n t s c u r r e n t l y a v a i l a b l e the E E A . represent under T h e s i m u l a t i o n s w e r e m a d e on the a s s u m p t i o n that $1.0 b i l l i o n w e r e a d d e d to the e x i s t i n g level of F e d e r a l o u t l a y s e a c h o f the f i s c a l y e a r s 1972 a n d 1 9 7 3 . for T h u s , the t a s k w a s to e s t i m a t e the d i f f e r e n t i a l e f f e c t s o n the e c o n o m y of u s i n g the f u n d s in s e v e r a l a l t e r n a t i v e w a y s . T o s t a r t the simulations, a B a s e P r o j e c t i o n w a s m a d e b y a p p l y i n g the G N P a s s u m p t i o n s the C E A R e p o r t for 1 9 7 2 . in T h e e f f e c t s of a l t e r n a t i v e p o l i c i e s t h e n b e c a l c u l a t e d b y c o m p a r i n g the r e s u l t s o f e a c h s i m u l a t i o n w i t h the B a s e P r o j e c t i o n . successive Four alternatives were (1) a r e d u c t i o n in F e d e r a l p e r s o n a l i n c o m e tax r a t e s ; i n c r e a s e in F e d e r a l p r o c u r e m e n t ; could studied (2) a n (3) a n i n c r e a s e in r e g u l a r F e d e r a l g r a n t s - i n - a i d to S t a t e and l o c a l g o v e r n m e n t s , a n d a m o u n t s a v a i l a b l e for the p u b l i c e m p l o y m e n t (4) a n i n c r e a s e in program. S e v e r a l c o n c l u s i o n s stand o u t in the r e s u l t s . The l a r g e s t a n d m o s t r a p i d , s h o r t - r u n i m p a c t o n e m p l o y m e n t w o u l d be p r o d u c e d b y the P E P . The number of additional jobs provided would a p p r o x i m a t e 2 0 0 , 0 0 0 - - t w i c e the n u m b e r g e n e r a t e d by e a c h of the o t h e r a l t e r n a t i v e s a t the end of one y e a r . T h e P E P w o u l d a l s o h a v e the l a r g e s t a n d m o s t r a p i d i m p a c t on u n e m p l o y m e n t . By f o l l o w i n g r o u t e , the u n e m p l o y m e n t r a t e m i g h t b e r e d u c e d b y 0 . 2 point after one year; this percentage a n i n c r e a s e in F e d e r a l p r o c u r e m e n t or a n -22e x p a n s i o n in r e g u l a r g r a n t s - i n - a i d m i g h t r e d u c e the u n e m p l o y m e n t r a t e by 0 . 1 p e r c e n t a g e p o i n t — w h i l e a c u t in p e r s o n a l i n c o m e r a t e s w o u l d p r o b a b l y h a v e l i t t l e if a n y e f f e c t o n unemployment. H o w e v e r , the e x p a n s i o n in the P E P m i g h t a l s o exert relatively m o r e upward pressure on prices. tax eventually T h e fact that t h e u n e m p l o y m e n t r a t e d e c l i n e s e a r l i e r a n d falls f a r t h e r u n d e r t h e P E P a p p r o a c h i m p l i e s t h a t the m a r g i n of u n u s e d c a p a c i t y w o u l d b e s h a v e d e a r l i e r in the p r o c e s s . C o n s e q u e n t l y , a s the p r o c e s s c o n t i n u e s , available resources would eventually come under pressure. W i t h a g i v e n a v a i l a b i l i t y o f f u n d s , i n t e r e s t r a t e s w o u l d tend rise—thus i n c r e a s i n g the c o s t o f i n v e s t m e n t . If p e r m i t t e d c o n t i n u e l o n g e n o u g h , the r a t e o f g r o w t h in r e a l G N P w o u l d moderated. B u t in the n e a r - t e r m , g i v e n the s u b s t a n t i a l to to be amounts o f u n u s e d r e s o u r c e s t h a t a c t u a l l y e x i s t , the m a i n r e s u l t s o f a n e x p a n s i o n in the P E P w o u l d b e a n i n c r e a s e in e m p l o y m e n t a n d a d e c l i n e in u n e m p l o y m e n t . A n i n c r e a s e o f $ 1 . 0 b i l l i o n in F e d e r a l g r a n t s - i n - a i d to S t a t e s a n d l o c a l i t i e s w o u l d a l s o p r o d u c e a s i z a b l e r i s e in G N P ( $ 1 . 9 b i l l i o n v s . $ 2 . 4 b i l i i o n for the P E P ) . on employment would be much less H o w e v e r , the e f f e c t s (0.1 m i l l i o n v s . 0 . 2 m i l l i o n ) . T h e o b s e r v e d d i f f e r e n c e s s e e m to b e e x p l a i n e d b y the f a c t that-- u n d e r the r e g u l a r F e d e r a l g r a n t s - i n - a i d p r o g r a m s — S t a t e s a n d w o u l d p r o b a b l y u s e the a d d i t i o n a l f u n d s for less projects than under PEP. localities labor-intensive A s i n d i c a t e d a b o v e , the P E P h a s provisions - 23 d e s i g n e d to l i m i t this p o s s i b i l i t y . In p r a c t i c e , h o w e v e r , these l i m i t a t i o n s m i g h t n o t be c o m p l e t e l y e f f e c t i v e , a n d the a c t u a l o u t c o m e m i g h t l i e b e t w e e n the two a l t e r n a t i v e s Federal involving larger grants. U n d e r a l l o f the a l t e r n a t i v e p o l i c i e s , the d e f i c i t in the F e d e r a l b u d g e t w o u l d b e i n c r e a s e d — b u t in n o c a s e b y as m u c h as the r i s e in F e d e r a l o u t l a y s . T h e e x p a n s i o n in the d e f i c i t w o u l d b e a b o u t the s a m e ($0.7 b i l l i o n ) for a tax r e d u c t i o n a n d a n i n c r e a s e in the P E P ; it w o u l d a l s o b e r o u g h l y the same ($0.4 b i l l i o n ) for a r i s e in F e d e r a l p r o c u r e m e n t and a n i n c r e a s e in r e g u l a r F e d e r a l grants-in-aid. T h e size o f the i n c r e a s e in the d e f i c i t related to the tax r e d u c t i o n c a n b e traced to the f a i r l y s m a l l r i s e p r o d u c e d in the G N P as w e l l as to the l o w e r tax r a t e s o n a g i v e n level of personal income. U n d e r the P E P , the u l t i m a t e expenditures by State and local governments would represent primarily wages a n d s a l a r i e s p a i d to l o w e r - i n c o m e e a r n e r s . Among these, effective tax r a t e s w o u l d p r o b a b l y be l o w e r than those a p p l i c a b l e to t h o s e w h o w o u l d r e c e i v e p a y m e n t s u n d e r e i t h e r the r e g u l a r F e d e r a l grants- i n - a i d p r o g r a m s o r t h r o u g h i n c r e a s e d F e d e r a l p r o c u r e m e n t of g o o d s and services. F r o m the f o r e g o i n g a n a l y s i s , it is c l e a r t h a t a n enlargement of the P E P w o u l d b e a p r e f e r a b l e r o u t e to t r a v e l - - i f the n a t i o n is s e a r c h i n g for r a p i d p r o g r e s s in s t i m u l a t i n g e m p l o y m e n t a n d m a k i n g a f u r t h e r r e d u c t i o n in u n e m p l o y m e n t . - 24 Concluding Observations A s I s t r e s s e d a t the o u t s e t , w e d e f i n i t e l y n e e d to a s u b s t a n t i a l i n c r e a s e in p r o d u c t i v i t y . If w e f a i l in t h a t foster goal, w e a r e u n l i k e l y to m a k e m u c h p r o g r e s s in c h e c k i n g i n f l a t i o n in the s h o r t - r u n a n d in i m p r o v i n g o u r s t a n d a r d o f l i v i n g in the y e a r s ahead. O n the o t h e r h a n d , the c o n s i d e r a b l e r i s e in p r o d u c t i v i t y e x p e c t e d t h i s y e a r m a y d a m p e n the g r o w t h o f e m p l o y m e n t . Thus, the m a j o r t a s k i m m e d i a t e l y a h e a d of us is to a s s u r e — a s a m i n i m u m — t h a t w e a c h i e v e t h e r a t e o f r e a l g r o w t h p r o j e c t e d b y C E A for the current year. B u t - - i f w e w a n t to m a k e a l a r g e r d e n t in the p e r s i s t e n t l y h i g h l e v e l of u n e m p l o y m e n t — t h e P E P a p p e a r s to o f f e r a promising approach. TABLE 1 TRENDS IN O U T P U T A N D P R O D U C T I V I T Y 1948-1971 (Percentage C h a n g e ) Gross National Product (1958 d o l l a r s ) P r o d u c t i v i t y in Private Nonfarm Sector P r o d u c t i v i t y in Manufacturing 1948 1949 4.5 0.1 3.0 4.0 5.8 3.8 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 9.6 7.9 3.1 4.5 -1.4 7.6 1.8 1.4 -1.2 6.4 6.3 2.0 0.9 2.9 2.3 4.4 -0.6 2.2 2.5 3.4 6.8 2.6 0.3 5.9 -0.7 5.9 -1.1 2.1 -0.1 5.6 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 2.5 1.9 6.6 4.0 5.5 6.3 6.5 2.6 4.7 2.6 1.2 3.0 4.6 3.1 3.7 2.9 3.5 1.6 2.9 -0.1 1.8 2.4 5.9 4.0 4.9 4.1 1.5 0.1 4.7 1.3 1970 1971 -0.6 2.7 0.7 3.4 1.5 3.6 4.7 4.3 2.2 5.1 2.4 4.4 2.5 1.8 3.4 1.7 5.5 2.7 1.6 3.8 2.2 1947-50 1950-55 1955-60 1960-66 1966-71 U 1/ A v e r a g e a n n u a l r a t e of g r o w t h ( c o m p o u n d e d ) . Sub-periods a r e i n f l e c t i o n p o i n t s for p r i v a t e n o n f a r m productivity. TABLE 2 B E H A V I O R OF O U T P U T A N D P R O D U C T I V I T Y D U R I N G T H E R E C O V E R Y P H A S E OF B U S I N E S S C Y C L E S (Percentage Quarter of Cyclical Trough 1954:3 C h a n g e s in G N P ( c o n s t a n t 1 9 5 8 d o l l a r s ) 1st year after trough 2nd y e a r a f t e r t r o u g h C h a n g e s in O u t p u t - p e r - M a n h o u r 1st year a f t e r trough 2nd y e a r a f t e r trough C h a n g e s i n m a n h o u r s 1/ 1st year after trough 2nd y e a r a f t e r t r o u g h 1/ Private nonfarm sector. Change) 8.6 0.5 1/ 4.3 -1.3 5.6 1.9 1958:2 1961:1 1970:4 2.0 9.2 7.6 4.2 3.5 4.6 6.0 4.1 0.7 3.5 5.6 2.2 1.0 1.0 1.2 TABLE 3 P R O D U C T I V I T Y A N D L A B O R COSTS IN THE PRIVATE N O N F A R M S E C T O R , 1 9 4 8 - 1 9 7 1 (Percentage Productivity Change) Compensation Per Manhour Unit Labor Cos ts 1948 1949 3.0 4.0 9.0 2.9 5.8 -1.0 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 6.3 2.0 0.9 2.9 2.3 4.4 -0.6 2.2 2.5 3.4 1.2 5.5 8.7 5.5 5.6 3.?. 3.5 5.8 5.7 3.8 4.3 4.1 -0.8 6.6 4.5 2.6 0.9 -0.9 6.4 3.4 1.3 0.9 2.8 1961 1962 1963 1964 1965 1966 1967 1968 1969 3.0 4.6 3.1 3.7 2.9 3.5 1.6 2.9 -0.1 3.2 4.0 3.6 4.7 3.7 6.1 5.7 7.3 6.9 0.2 -0.5 0.5 1.0 0.8 2.5 4.0 4.3 7.1 1970 1971 0.7 3.4 7.0 6.9 6.3 3.4 1947- 5 0 ^ 1950-55 1955-60 1960-66 1966-71 4.4 2.5 1.8 3.4 1.7 5.8 5.3 4.7 4.2 6.8 1.3 2.7 2.9 0.7 5.0 1/ A v e r a g e a n n u a l g r o w t h rate ( c o m p o u n d e d ) . S u b - p e r i o d s are i n f l e c t i o n points for private n o n - f a r m p r o d u c t i v i t y . TABLE 4 INTERRELATIONS AMONG OUTPUT, PRODUCTIVITY, AND EMPLOYMENT D U R I N G THE R E C O V E R Y P H A S E OF B U S I N E S S C Y C L E S Output ( p e r c e n t a g e change)"" Trough: Percentage change in p r o d u c t i v i t y Percentage change in o u t p u t Percentage change in w o r k w e e k Percentage change in o u t p u t P e r c e n t a g e chanf in e m p l o y m e n t Percentage change in o u t p u t 1954:3 1954:4 1955:1 1955:2 1955:3 4.5 9.7 15.8 8.7 6.6 140.0 26.8 54.4 48.3 28.8 -20.0 20.6 12.0 - 8.0 0.0 17.8 50.5 29.1 56.3 68.2 Trough: 1958:2 1958:3 1958:4 1959:1 1959:2 2.7 11.6 10.9 7.0 12.3 298.3 57.8 46.8 34.3 34.1 -18.5 16.4 16.5 11.4 8.1 -166.7 22.4 3.-J.9 52.8 54.5 Trough: 1961:1 1961:2 1961:3 1961:4 1962:1 - 1.3 10.1 8.2 8.5 6.6 110.9 78.0 43.5 47.0 46.2 - 2.0 - 3.7 4.7 1.5 61.5 - 8.9 24.4 50.6 48.5 1970:4 1971:1 1971:2 1971:3 1971:4 - 5.6 8.8 3.7 1.8 7.5 26.8 75.0 73.0 127.8 65.3 17.9 1.1 32.4 -50.0 10.7 55.4 22.7 - 8.1 22.2 22.7 Trough: 1/ A l l percentage changes are from previous quarter at annual rates compounded. a d d to 100 d u e to r o u n d i n g and cross p r o d u c t s . Columns 2, 3, and 4 may not TABLE 5 ALTERNATIVE OUTPUT, PRODUCTIVITY AND E M P L O Y M E N T P R O J E C T I O N S FOR 1972 G r o w t h in R e a l GNP ($ 1958) 5 per c e n t 6 p e r cent 7 per c e n t C h a n g e in p r i v a t e n o n f a r m o u t p u t p e r m a n h o u r (per cent) 3.3 3.9 4.4 C h a n g e in n o n f a r m p a y r o l l e m p l o y m e n t (millions) 1.2 1.5 1.8 TABLE 6 C H A R A C T E R I S T I C S OF P E R S O N S H I R E D U N D E R THE P U B L I C E M P L O Y M E N T P R O G R A M C h a r a c t e r i s t i c s of F i r s t 45,000 Hired Sex Male Female Percentage Distribution 72.0 28.0 21 or y o u n g e r 11.0 22-44 72.0 45 o r o l d e r 16.0 Group White Nonwhite 70.0 30.0 Public assistance recipient 10.0 Education L e s s than h i g h s c h o o l High school graduate Some college College graduate 22.0 45.0 18.0 16.0 Vietnam veterans Previously employed by agent 30.0 12.0 TABLE 7 O C C U P A T I O N A L D I S T R I B U T I O N OF PERSONS H I R E D U N D E R THE P U B L I C E M P L O Y M E N T P R O G R A M Occupation Percentage Distribution Public works and transportation 23.0 Education 18.0 Law enforcement 12.0 H e a l t h and h o s p i t a l services 11.0 P a r k s and r e c r e a t i o n 7.0 Social services 6.0 Environment 5.0 Fire protection 3.0 Administrative and miscellaneous 15.0 CHART 1 OUTPUT and PRODUCTIVITY 19U7 19h9 1951 1953 1955 1957 1959 1961 1963 1965 1967 1969 1971 CHART 2 CYCLICAL BEHAVIOR OF UNIT LABOR COSTS, PRIVATE NONFARM SECTOR Per Cent Change from year earlier 0 ^ — a a r t e r s Before h 3 2 1 -5 Qgartif^a Bp,| -After " 1 2 Quarters After 1 2 3 k q^apt^^B ter- Quarters A f t e r 2 U~ -5
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