Pearson-Shoyama Institute
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"JOBS FIRST ECONOMY" IS POSSIBLE 

By: Louis Musto

Pearson-Shoyama Institute

1. Synopsis

The recent announcement that the national unemployment rate hit 10 percent in June made headline news. This rise, while it confounded many experts, confirmed what Canadians have known for some time -- the job market is grim. It seems from statements made by politicians across the country in response to the increase that the best approach to address the problem is to do as little as possible. This position is based on erroneous assumptions that are doing irreparable damage to the economy, giving little hope to tens of thousands of people looking for work, and putting a strain on national unity.

2. Analysis

Increasingly, politicians and experts contend that it is up to people who want employment to obtain the necessary skills to meet the requirements of the available jobs. It is true that rapid structural changes in the economy have increased the mismatch between the requirements of jobs and the qualifications of the unemployed. This, however, does not alone explain why unemployment is so high. It is a hollow argument for people who have participated in retraining programs, but still cannot find employment.

Much of the unemployment today can be attributed to a torpid economy. Government expansive fiscal and monetary policies were successfully used in the past to deal with this problem. The conventional wisdom of the day, however, dismisses government stimulus based on several fallacious arguments.

Some critics contend that demand management policies are ineffective in reducing unemployment. This view is clearly not supported by the experience of recent years. For example, fiscal restraint measures undertaken by all levels of government to reduce budget deficits, and the application of high real interest rates to control inflation, have dampened economic growth and increased unemployment. It follows that stimulative fiscal and monetary policies can encourage consumption and investment which help to create jobs.

Another common argument is that expansive fiscal policies have an adverse effect on the budget deficit. This perspective does not take into consideration the relationship between high unemployment and deficits. Widespread unemployment depresses government revenues and increases its social assistance outlays, such as for employment insurance and welfare. This combination increases government deficits and debt. Massive spending cuts do more harm than good. It makes more sense to lower government deficits and debt by spurring aggregate demand and putting people back to work.

Those who espouse conservative views often object to government spending because it is seen as wasteful and an obstruction to the operation of the market. This ignores the important contribution that the public sector has made to building a wealthy country with a high standard of living. Government expenditures in physical capital assets, such as roads, airports, seaports, housing, water and sewage treatment plants, schools and universities, contribute to the prosperity of current and future generations. Human capital investments, as in education and job training, are especially important for Canada to compete in a knowledge-based global economy. If we forgo these investments we will eventually pay the cost through diminished productivity and income growth, and elevated unemployment.

Monetary policy is the other important tool that can be used to reduce unemployment. The dominant view, however, is that the primary focus of monetary policy must be to maintain price stability, and not to create jobs. This assumes that inflation is strictly a monetary phenomenon when in fact the price level can rise for reasons other than "too much money chasing too few goods." Regardless, controlling inflation through stringent monetary practices is very costly in terms of lost output, and higher unemployment and government debt. An easier money policy would boost consumer spending and investment which would create more jobs and augment national income. This would also help to cut deficits and debt by increasing government revenues and lowering social expenditures that are the result of unemployment.

The unemployment situation is further putting a strain on national unity. The collective anxiety that has gripped the nation is in large part the consequence of a loss of faith in the economic future. Canadians are far to concerned about the unemployment situation and their own financial security to think about constitutional issues. The public is not prepared to see national unity overtake the economy as the centre of attention. This can prove to be very contentious when the national unity question is rekindled.

The focus on downsizing government, rather than creating jobs, also harms national unity by eroding the symbols that are important to Canadians. Our infrastructure of social programs, and institutions like the CBC, play a large part in defining Canadians' self-image and pride. They represent a strong thread in the overall fabric of the nation. Government cutbacks in these areas weaken important bonds of Canadian nationhood.

A "Jobs First Economy" is possible. It requires the political will to stimulate the economy through sensible fiscal and monetary policies.

3. Experts and Further Reading

Robert C. Allen and Gideon Rosenbluth (editors). False Promises. New Star Books. Vancouver, 1992.

Duncan Cameron. Alternative Federal Budget, 1996. Canadian Centre For Policy Alternatives. Ottawa, 1996.

Tom Kierans. C.D. Howe Institute. Toronto.

William Krehm. Economic Reform. Committee On Monetary and Economic Reform . Toronto, 1996

Lars Osberg and Pierre Fortin (editors). Unnecessary Debts. James Lorimer and Company. Toronto, 1996.

Thomas I. Palley and Robert A. Levine. "Recipe for a Depression." Atlantic Monthly Magazine. July 1996.

Louis-Philippe Rochon . Economics In Crisis. Robert Davies Publishing. Toronto, 1994.

Michael Walker. The Fraser Institute. Vancouver, B.C.