Many people are beginning to wrap their minds around the House Republicans’ proposed destination-based cash-flow tax and what it means for tax reform. Most people are still looking into the tax’s impacts on trade and how...
- The Tax Policy Blog
- Unemployment Numbers – Good But Not Great
Unemployment Numbers – Good But Not Great
The Labor Department reports a reduction in the November unemployment rate to 7.0 percent from 7.3 percent in November, a five-year low. The labor force and the number of jobs increased. This is important, because the unemployment rate can decline if enough people become discouraged and drop out of the workforce. This number improved for the right reasons. The stock market rose, and many favorable press reports have been issued.
Before we get too excited about the labor market improvement, however, it is important to remember where we are. An unemployment rate of 7 percent this late in an economic recovery is the worst in the post-World War Two period. The number of discouraged workers and the number of people working part-time for economic reasons remain very high. The Labor Department reports that the civilian labor force rose by 455,000 in November, after declining by 720,000 in October. It is barely above its pre-recession peak reached in October, 2008. The labor force participation rate stayed stuck at 63.0 percent in November, well below its level of 66.4 percent at the start of 2007. The recovery still has a long way to go.
We can do a lot better than 7 percent unemployment without risking a renewal of inflation. Unemployment rates were under 6 percent in 1987 through 1989, with inflation averaging 4.2 percent, down sharply from its double digit rates of 1979 through 1981. Unemployment was under 6 percent from 1995 through 2008, when inflation averaged 2.7 percent. There were even long stretches of 4 percent to 5 percent unemployment in 1997-2001 and 2006-2007. Inflation in those years averaged 2.7 percent.
The keys to a low unemployment rate without inflation are:
- lower taxes on capital income to promote investment and productivity gains;
- lower tax rates on labor income to raise the incentive to work while lowering the cost of hiring;
- government spending reductions to free up money to pay for the tax cuts, and to redirect employment from the public to the private sector;
- fewer costly government regulations and mandates (including in the health care sector);
- redirecting the Federal Reserve to make inflation control its primary target, rather than attempting to pump up the economy with easy money.
This policy mix worked in the Reagan, G. H. W. Bush, Clinton, and G. W. Bush administrations, and will work again if we can find the political will to adopt it.
The policy mix that has never worked, and is not working now, and will never work, is relying on the Fed to print money while Congress and the President raise taxes and boost government spending.
Get Email Updates from the Tax Foundation
Join the Tax Foundation's fight for sound tax policy Go
About the Tax Policy Blog
The Tax Policy Blog is the official blog of the Tax Foundation, a non-partisan, non-profit research organization that has monitored tax policy at the federal, state and local levels since 1937. Our economists welcome your feedback. If you would like to send an e-mail to the author of a blog post, please click on that person's name to locate his or her e-mail address or visit our staff page here.