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The original documents are located in Box 61, folder "1976/09/01 - Economic Policy Board"
of the James M. Cannon Files at the Gerald R. Ford Presidential Library.
Copyright Notice
The copyright law of the United States (Title 17, United States Code) governs the making of
photocopies or other reproductions of copyrighted material. Gerald Ford donated to the United
States of America his copyrights in all of his unpublished writings in National Archives collections.
Works prepared by U.S. Government employees as part of their official duties are in the public
domain. The copyrights to materials written by other individuals or organizations are presumed to
remain with them. If you think any of the information displayed in the PDF is subject to a valid
copyright claim, please contact the Gerald R. Ford Presidential Library.
Digitized from Box 61 of the James M. Cannon Files at the Gerald R. Ford Presidential Library
EPB MEETING
Wednesday, September 1, 1976
8:30 a.m.
the -
what is
Comis upat
EPB. Today ?
FORD & LIBRARY 07V830
August 27, 1976
ECONOMIC POLICY BOARD
EXECUTIVE COMMITTEE
Proposed Agenda
Monday, August 30, 1976
No EPB Executive Committee Meeting
Tuesday, August 31, 1976
1. Report of EPB/NSC Commodities Policy
Lesch
Coordinating Committee
State-Treasury
2. Assessment of U.S. Performance in
Implementing Multilateral Aid Commitments
State
Wednesday, September 1, 1976
1. Policies to Deal With Structural and
gave
Induced Unemployment
Malkiel
2. Treasury Regulations Concerning Bonds
Issued on Behalf of a State or Political
Subdivision
Treasury
Thursday, September 2, 1976
No EPB Executive Committee Meeting
Friday, September 3, 1976
No EPB Executive Committee Meeting
COUNCIL OF ECONOMIC ADVISERS
WASHINGTON
ALAN GREENSPAN, CHAIRMAN
PAUL W. MACAVOY
BURTON G. MALKIEL
August 31, 1976
MEMORANDUM FOR THE EXECUTIVE COMMITTEE OF
THE ECONOMIC POLICY BOARD
Subject: Policies to Deal with Structural and Induced
Unemployment
At last week's EPB meeting the discussion focused on the
issues of targeting CETA funds under Titles II and VI to
the long-term unemployed, that is, to workers who had exhausted
their unemployment insurance benefits and youth who have been
unemployed for a long duration. At the September 1st meeting
of the EPB we will focus on the remaining three issues covered
in our memorandum of August 20, 1976.
Issue 2 --- Youth Unemployment
This issue is concerned with alternative means of expanding
employment opportunities for youths through a reduction in the
barriers to employment created by other government policies.
Policy Recommendations
1. Propose a youth differential in the minimum wage or
exempting the earnings of youths paid near the minimum wage
from payroll taxes.
2. Establish an inter-agency group to work with the
Department of Labor for expanding experimentation with exemptions
to the minimum wage within the current FLSA framework.
2. Request that the Commission on Paperwork undertake
a study of the impact of the paperwork burdens on the summer
employment of youths, and consider ameliorative policies.
AMERICAN REVOLUTION INDENTENNAL
1776-1976
@
-- 2 -
Issue 3 -- Unemployment Compensation System
This issue is concerned with the increase in the unemploy-
ment rate induced by the current regular state unemployment
compensation system.
Policy Recommendations
1. Require states to increase the extent of experience
rating of firms in the unemployment compensation tax.
2. Treat unemployment compensation benefits as if they
were labor market earnings in the Federal income tax and for
the determination of social security benefits for retirees
receiving both benefits.
Issue 4 -- Reducing Barriers to Occupational and
Geographic Mobility
This issue is concerned with expanding productive job
opportunities by reducing barriers to mobility that result
in a less efficient utilization of labor resources. Reducing
these barriers would lower frictional and structural unemployment.
Policy Recommendation
1. Establish a task force to examine:
(a) The extent to which Federal and state occupational
licensing laws and other regulations can be
modified to provide a more efficient utilization
of labor resources.
(b) The effect on employment of Federal efforts to
reduce discrimination in the public and private
sectors of the economy.
(c) Federal programs that are intended to facilitate
geographic and job mobility.
BRC
BGY
Barry Chiswick
Burton G. Malkiel
EPB
THE WHITE HOUSE
WASHINGTON
August 21, 1976
MEMORANDUM FOR THE ECONOMIC POLICY BOARD
EXECUTIVE COMMITTEE
FROM:
ROGER B. PORTER RBP
SUBJECT:
Policies to Cope with Structural and Induced
Unemployment
Last May, at the request of the EPB Executive Committee, the
Council of Economic Advisers prepared a paper on a "Profile
of the Unemployed." Since the discussion of that paper last
spring, several Executive Committee members have expressed an
interest in exploring policy alternatives to address structural
and induced unemployment.
Burt Malkiel and Barry Chiswick of the CEA have prepared an
options paper on "Policies to Cope with Structural and Induced
Unemployment" which is attached. This paper is scheduled for
discussion at the Tuesday, August 24, EPB Executive Committee
meeting.
"PRINCIPALS ONLY"
Jim Cannon
I'me given copie A heach
LISSY & asked fn then comments.
Since Dis principles only" I assumed
Attachment
you mould be attending
Art
8/20/76
MEMORANDUM TO EPB EXECUTIVE COMMITTEE
FROM: Barry R. Chiswick and Burton G. Malkiel
SUBJECT: Policies to Cope with Structural and Induced Unemployment
The Nature of Unemployment
There is a popular misconception, all too often reinforced by misguided
public policy, that if 7-1/2 million Americans are unemployed on average in a
year, it is the same 7-1/2 million persons who are unemployed throughout
the year. In fact, most unemployment is of relatively short duration. The
situation is more like having 25 million Americans unemployed for some part
of the year with the typical duration of unemployment being something like
7 to 8 weeks. This is why the Administration generally has not favored
public service employment or public works programs. Such programs are
not a solution for the problem of short duration unemployment. Indeed, by
taking workers out of the job search process, they may actually inhibit the
finding and acceptance of productive private sector employment.
We must not, however, be misled by averages. There is, to be sure,
considerable long duration unemployment at the present time. For example,
while only 32 percent of the unemployed in July 1976 were out of work for
15 weeks or longer, 17 percent were unemployed for 27 weeks or longer. It
is this group that suffers the most serious hardship from unemployment and
to which public policy must be especially concerned. And some demographic
groups have relatively high rates of unemployment. Although the unemployment
rate in July was 7.8 percent, it was 16.3 percent for white teenagers and
34.1 percent for black teenagers.
-2-
Some of the unemployment in our economy is "frictional," that is,
arising from normal economic change -- the growth or decline of firms,
changing productive techniques, labor force entry and the search for
better wages and working conditions. Some unemployment is "cyclical,"
a result of the recent recession. Another part might be considered "induced."
The availability of unemployment benefits, including long duration benefits, and
the difficulty of effectively enforcing a work test may have induced some to be
unemployed who otherwise might have been employed or dropped out of the
labor force. Finally, some unemployment is "structural," that is, resulting
from a lack of training, the obsolescence of a skill, old age, geographic
mismatches of jobs and workers, or artificial barriers to wage rate adjustments.
The available data do not allow us to distinguish among the different
types of unemployment. We do, however, have a breakdown of the demographic
characteristics of the unemployed. Older workers are more likely to be
unemployed for a long duration than workers age 25 to 54. While it is
true the very high youth unemployment rates are largely the result of
a very high incidence of short duration unemployment, the considerable
amount of long duration unemployment among youths, especially black youths,
is clearly an important policy concern.
This paper sets out several issues concerning structural and induced
unemployment. Issue (1) is related to the more immediate Presidential
decision regarding the extension of public service jobs under CETA Title VI.
It discusses limiting CETA PSE jobs to unemployment insurance exhaustees.
-3-
Issues (2) to (4) are concerned with more long-term policy decisions to
increase employment opportunities and reduce the unemployment rate. Alter-
native means of reducing the minimum wage barrier to youth employment are
discussed in issue (2) Unemployment induced by the present unemployment
insurance system and ameliorative policies are considered in issue (3) ,
while issue (4) is concerned with identifying means of reducing barriers
to occupational and geographic mobility.
Presidential Decisions
In early June, the EPB presented to the President a discussion of
several employment related bills. At that time, he decided to hold to the
policy of phasing out the CETA Title VI (emegency employment) public
service jobs, as there was continuing improvement in the economy. However,
from May to July, although employment increased by 210,000, unemployment.
increased by 560,000, and the unemployment rate increased by 0.5 percentage
point. This has heightened concern for the pace of improvement in job
opportunities and in the unemployment situation.
The most immediate issue coming before the President is likely
to be his position on the bill (H.R. 12987) to reauthorize Title VI of
CETA, emergency public service jobs. House-Senate Conference is
scheduled for August 24-25. The Senate version is a doubling of the
program size to 520,000 slots. It would convert current slots as they
become vacant, plus all new slots, to time-limited projects reserved for
persons unemployed 15 weeks or longer or who have exhausted UI entitlement
and who have family income below $6,700. The House version is a "such
sums" reauthorization of the present design with technical amendments, one
of which (allowing 15 percent vs. the present 10 percent of the grant to be
used for non-wage costs) could reduce the total number of jobs funded.
Current informal indications are that the Conference will come out close
1/ When the President proposed the emergency CETA PSE expansion in October
1974, he requested that the slots be reserved for unemployment insurance
exhaustees. At that time, there was little Congressional sympathy for
this requirement. With the change in economic circumstances, the Senate
action indicates that such a proposal may have more support at this time.
-5-
to the House version and that there is a possibility that the total
slot size which the report will suggest might not exceed the current
260,000. Within the next two weeks therefore there could be a Conference
bill before the President, and if that becomes law, a 1977 supplemental
appropriation bill of somewhere between $700 million and $2.8 billion
shortly thereafter.
Issue (1) discusses the CETA PSE program and a means of targeting
it to the long-term unemployed.
-6-
Issue 1 -- Long Duration Unemployment
Policy Recommendation
1. Reserve PSE job slots (CETA Titles II, VI) for persons with work
experience who have exhausted their unemployment insurance entitlement.
2. Reserve CETA PSE job slots not filled for youths with long-term
unemployment.
3. Target more of the CETA Title I training funds to UI exhaustees.
Discussion
Although most unemployment is characterized by high turnover and
short spells of unemployment, some individuals are unemployed for a long
period of time. During the very high level of unemployment of 1975 about
1.2 million persons (1.3 percent of the labor force) were unemployed 26
weeks or longer, 687,000 persons (0.7 percent) reported unemployment lasting
at least 39 weeks, 157,000 (0.2 percent) reported 65 weeks or more and
79,000 (0.1 percent of the labor force) reported 99 weeks or more.
With the economic recovery there has been a sharp decline in long
duration unemployment. After reaching a peak of 3.3 percent in December
1975, the long duration unemployment rate (those unemployed 15 weeks or
longer as a percent of the labor force) has declined to 2.4 percent in
July. In the coming months there will be a continued economic recovery
and a continued gradual termination of very long duration unemployment
benefits under the Federal Supplemental Benefits program as state insured
unemployment rates decline. Both factors can be expected to lower the
extent of long duration unemployment as reported in the Current Population
Survey.
The nature and magnitude of any persisting long duration unemployment
problem as the economy continues to recover from the recent recession are
-7-
unclear. It is not likely to be skill specific, but it may be somewhat
regional if the automobile industry lags behind the rest of the economy.
Far more likely, however, it will not be concentrated on the basis of
occupation, industry or region, but may be experienced throughout the
country by individual older workers with few skills or obsolete skills,
and little incentive for retraining.
It is sometimes believed that public service employment is a useful
remedy for this long duration unemployment. However, based on the
characteristics of persons placed in CETA funded PSE job slots, it
would appear that the current program is not addressing the problem
of the long-term or hardcore unemployed. Rather, it appears that
state and local governments tend to select persons with favorable
employment characteristics -- they tend to be prime age, male, and at
least high school graduates (Table 1) In addition, they are not parti-
cularly handicapped in finding employment because of a physical disability,
criminal record or limited knowledge of English:
Only 13 percent were
receiving unemployment insurance benefits prior to starting PSE employment.
This suggests that if they had in fact been unemployed it was either
voluntary or of a very short duration. Thus, it appears that most of
the persons currently in CETA PSE job slots would not have substantial
difficulty finding private sector employment during the current economic
expansion.
One policy to aid unemployment compensation exhaustees would be to
limit PSE job slots to persons who had exhausted their entire entitlement,
Persons whose public employment was created because of the PSE funding
need not be the same persons the prime sponsors report as being in PSE job slots.
2/ Of the CETA Titles II and VI participants from July 1975 to December
1975, 3 percent were physically handicapped, 3 percent were offenders and
4 percent had a limited English speaking ability.
-8-
Table 1. Characteristics' of Participants in CETA Titles II and VI and
the Unemployed, Fiscal Year 1975 (percent)
CETA
U.S.
Characteristics
Title II
Title VI
unemployed
Total
100.0
100.0
100.0
Sex:
Men
65.8
70.2
54.9
Women
34.2
29.8
45.1
Age:
Under 22 years
23.7
21.4
34.8
22 to 44 years
62.9
64.8
46.0
45 years and over
13.4
13.8
19.1
Education:
8 years and under
9.4
8.4
15.1
9 to 11 years
18.3
18.2
28.9
12 years and over
72.3
73.3
56.0
Race:
White
65.1
71.1
81.1
Black
21.8
22.9
American Indian
1.0
1.1
18.9
Other
12.1
4.9
Spanish speaking
16.1
12.9
6.5
Limited English-speaking ability
8.0
4.6
--
Veterans:
Special Vietnam era
11.3
12.5
7.5
Other
12.6
14.6
9.4
Source: Employment and Training Report of the President, 1976.
-9-
including Federal Supplemental Benefits. Since this would be a temporary
measure, not a permanent haven for the "unemployables," these jobs should
have a finite duration (e.g., one year or 18 months). The expectation
is that at the end of this period labor markets would be sufficiently
tight for all but the very hardcore unemployed to find a regular job.
Even if the replacement effect (i.e., using CETA funds for Jobs that would
exist in any case) would be as large under a PSE program limited to exhaustees
as it is currently, limiting it to exhaustees would have a stronger net job
creating impact for the economy as the program would be biased in favor of
those with the greatest difficulty in finding regular employment. It would
also demonstrate Administration concern for the long-term unemployed.
Limiting the PSE job slots to unemployment compensation exhaustees
would, in effect, be a return to the President's original proposal in
October 1974 which was rejected by Congress. At that time, however, unemploy-
ment was rising sharply, the depth of the recession was uncertain, and state
and local government budgets were showing large deficits. Given the continued
expansion of job opportunities, and the improved situation for state and
local government budgets, more attention will focus on those with the
greatest difficulty finding work. As a result, these recommendations may
To discourage persons with little work experience, and hence a very
short UI entitlement, from becoming unemployed so as to join the PSE
program, there should be a minimum entitlement requirement. The program
could, for example, be limited to persons with at least ten weeks of entitle-
ment under the regular 26 week unemployment insurance program.
The maximum entitlement in FY 1977 will vary among the states from 39 to
65 weeks depending on whether FSB is operative in the state. If Special
Unemployment Assistance is still in effect, the maximum duration under this
program will remain 39 weeks. These different durations may raise equity
issues in a program limited to exhaustees.
-19-
receive did more sympathetic hearing, as is suggested by the Senate attempt
to limit the program extension to persons with at least 15 weeks of
unemployment.
There are presently. 50,000 PSE slots under CETA Title II and 260,000
under
Title VI Although the President has proposed a gradual reduction
in the size of the Title VI program, it appears that Congress will soon
Bass an extension that will retain the 260,000 level.
8RE response to this Congressional action would be to propose limiting
eligibility in Titles II and VI 8 UI exhaustees, and adding funds only up
E8 the level of the present Title VI. This would add $0.7 billion to the
Budget outlays in 1877 and $2.1 billion in 1978. If phased in as the
present Titles II and VI stops were vacated, and if the turnover were
complete by the end 8f 1977; 310,000 slots would become available for this
purpose: If it were limited to Title VI, 260,000 slots would be available.
It is important that this program not encourage workers to remain
8R UI until they exhaust their beneifts and that the program not discourage
participants from searching for du regular job. For these reasons, the jobs
should have as finite life (e.g., add maximum of one year or 18 months) and offer
18W wages: There are several different procedures for setting a maximum
wage: including a tie E8 the minimum wage, au fixed dollar amount, or a propor-
tion 8f prevailing wages in the CETA area: While the first two procedures
I/ Title II was intended 8 be a permanent program for areas with unemployment
Fates 8VSF 6:5 percent, providing transitional public service employment as a
manpower development device. Title VI was the emergency program enacted in
Blace 8E the President's 1974 proposal, and was intended to be countercyclical
188 creation. Locally, the programs are generally indistinguishable in terms
8f who they employ and f8f what reasons.
FORD
31, IE should be however, that with more restrictive eligibility
requirements: it will take longer $ fill the job slots.
GERALD
ANNUALT
3/1 In the Bresident's 1974 Bronosal, the wage limit was $7,000.
Congress Congress has shown little sympathy for limiting wage rates on PSE jobs below
$10,000, $10,000; and the current average is about $7,800.
-11-
imply a uniform maximum wage across the country, the last implies a
maximum wage that is higher in higher wage areas. The implications of
alternative formulas warrant study.
It is difficult to estimate the number of persons who would be eligible
for and wish to accept these public service jobs. The Department of Labor
estimates that about 1.8 million persons will exhaust their entitlements
(FSB, SUA and EB in states in which FSB has triggered off) in 1977. If
the program excludes persons age 65 and over and excludes those whose
regular UI entitlement was very short (say less than ten weeks), the number of
participants may be reduced by 25 to 30 percent. Some of the exhaustees
would take a private sector job as these job opportunities continue to expand,
while others would drop out of the labor force because of family responsi-
bilities and school. Among those still unemployed or discouraged workers,
some proportion would prefer to remain unemployed rather than accept a low
wage PSE job. Our limited knowledge of the behavior of exhaustees does not
provide guidance as to the size of this proportion. If 70 percent would accept
the low wage PSE job, the number of UI exhaustees in 1977 eligible for and
interested in the program would be about 380,000.
However,
if
only
50
percent would accept these jobs, the number would be about 270,000. At this
stage in our knowledge, these estimates are not firm.
The 1975 paper "Special Report to the Secretary of Labor on the
Characteristics of Exhaustees," indicates that about 75 to 80 percent of
FSB exhaustees were age 22 to 64. Some adults, particularly married women,
have short entitlements because of limited work experience.
2/ We lack adequate data on the experiences of recent exhaustees. One
study of exhaustees in 1971-72 suggests that two months after exhausting
benefits about 40 percent were still unemployed or were discouraged workers.
3/ This is obtained from the following assumptions: 1.8 million exhaustees,
of whom 75 percent are eligible, of whom 40 percent are still unemployed
or discouraged workers, of whom 70 percent would take the job.
BERALD FORD LIBRARY
-12-
PSE job slots that are not filled by UI exhaustees may be set aside for
out-of-school youths who, although eligible for at most only a short duration
of benefits because of an insufficient work history, have experienced a
long period of unemployment. There is, however, the concern that a dependency
relationship would develop. To reduce the dependency relationship these
jobs should be for a relatively short fixed term (e.g., up to six months),
used only once by a youth and pay no more than the Federal minimum wage. This
would be a small supplement to CETA Title I which provides job training,
including some work experience, for about 1 million youths, exclusive of the
summer youth program.
Another policy would be to target more of the CETA Title I
training funds, including some part of those used for work experience, to
the exhaustees of the unemployment compensation system. However, the
greater the number of constraints placed by the Federal Government on
state and local government prime sponsors, the further we have moved away
from the original intent of the CETA program to allow prime sponsors to
administer the program so as to satisfy what they perceive to be local
manpower requirements. Since we now have had some experience with the
CETA program, this may be an appropriate opportunity to reevaluate this
policy. Even if it is decided to stay with the original intent of the
CETA program, it would still be possible to provide financial incentives
to local prime sponsors to use more of their CETA resources for UI
exhaustees.
LIBRERY GERALD R. FORD
-13-
The FV 1977 budget includes $1.3 billion for Title I block grants, and
about $50 to $150 million could be available in combined Title I and III
discretionary funds. Within the current budget estimates the targeting could
be done in the following ways,
(a) Reverse current Belley on the block grant approach for CETA and
seek legislation to;
r
establish in the statute a mandatory first preference for
exhaustees, or the use of mandatory percentage of the Title I
block grants for exhaustees; or
establish in the statute the right of the Secretary to set
preferences for who gets served and with how much.
(b) Reserve the Secretary's discretionary funds in whole or part for
providing training for UI exhaustees.
(8) Bevelop atd procedure for using the discretionary funds to provide
incentives to Title È SPORSORY to use greater percentages of their block
grant funds to serve exhaustees,
LIDERAY GERALD FORD
-14-
Issue 2 -- Youth Unemployment
Policy Recommendations
1. Propose a youth differential in the minimum wage or exempting
the earnings of youths paid near the minimum wage from payroll taxes.
2. Establish an inter-agency group to work with the Department of
Labor for expanding experimentation with exemptions to the minimum wage within
the current FLSA framework.
3. Request that the Commission on Paperwork undertake a study of the
impact of the paperwork burdens on the summer employment of youths, and consider
ameliorative policies.
Discussion
The Administration's policy response to the high youth unemployment
rate, beyond the general efforts to restore full employment has been manpower
programs, including the Job Corps (CETA Title IV), and summer employment programs
Our manpower training programs have typically addressed the problem
of poor training either on the job or in school that may ultimately lead to
low earnings. Particularly for youths, they also seek to temporarily reduce
unemployment during the period of training or work experience. Such programs,
however, are not necessarily designed to reduce unemployment permanently.
The training programs may increase unemployment in the future if the training
is for a high unemployment occupation (e.q., construction) or if it encourages
a new round of job exploration after the training is completed.
Youths who appear to have the most Bevere learning disabilities or
problems of adaptation to the school or work environment tend to have
the most severe unemployment problem. The very characteristics that
result in failure in school and in the labor market are likely to
result in failure in specific government training programs. Thus far,
-15-
however, we lack adequate evaluations of the economic impact of the youth
training programs.
The Summer Youth Employment Program provides work experience (averaging
20 hours per week) for disadvantaged youths who cannot find private sector
employment. It is expected that about $560 million will be spent this summer
for almost 900,000 job slots at about the mínimum wage for disadvantaged
youths age 14 to 21. Although the summer youth programs are well liked by
local governments, their net effect on teenage employment is not as large as
the number of program participants since an unknown proportion of the youths
would have found a private sector job if the program did not exist. It is
expected that as the economy improves, the number of slots in the Summer
Youth Employment Program will decrease.
There would be less need for Federal training and summer employment
programs for teenagers if it were not for the job limiting impact of the
Federal minimum wage. In the last decade, the Federal minimum wage for
jobs covered prior to 1966 has increased at about the same rate as the
adjusted average hourly earnings index. By itself, however, this would
tend to contract relative job opportunities for youths since with a growing
proportion of the labor force consisting of youths, one would expect a slower
rise in youth wages than im average wages.¹/ More important, perhaps, has been
the dramatic expansion of coverage of the Federal minimum wage from 62 percent
of private nonsupervisory workers im 1961 to about 85 percent in 1976, with the
1/ This will tend to have a reverse effect in the 1980's as youths become a
smaller proportion of the labor force.
-16-
expansion primarily concentrated in the youth-intensive service and farm
worker sectors.
On the basis of research studies, the CEA estimates that a youth
differential in the minimum wage of 10 percent (currently 23 cents) is
likely to increase teenage employment by about 2 percent, or by about
150,000 jobs. With the youth differential it would be easier for teenagers
to find jobs offering one-the-job training that would increase future
earnings, thereby decreasing the need for federally subsidized training
programs. The effect on adults of the increase in teenage employment is
unclear.
It may not be feasible to introduce a youth differential in the
minimum wage. The minimum wage is not only an economic issue, but also
a highly emotional and political issue. Many adult workers are concerned
with competition from youths who do not have family responsibilities.
Others believe that each job should provide earnings sufficient to support
a family. These concerns need to be addressed when considering a teenage
differential, or an alternative policy instrument with the same objective.
One means of achieving a favorable employment impact by lowering
the effective minimum cost of employing a worker without lowering the
minimum wage would be a reduction of employer paid social security taxes.
This could be accomplished by permitting an exemption of employer contri-
butions for teenagers earning near the minimum wage or through funding the
employer contribution out of general revenues. The latter would explicitly
introduce the far broader issue of general revenue financing of social security.
1/ In recent years, there has been an increase in job specific minimum
wage exemptions authorized by the Department of Labor. The growth in
exemptions is small compared to the expansion in coverage. Most of the
exemptions are for students working in educational institutions.
2/ Although studies have found a significant adverse effect of the minimum
wage on teenage employment, no net effects have been fou..d for adults. However,
these studies have not examined the impact of a teenage differential.
=17=
The waiver of the employer contribution would be the equivalent of
a reduction in the minimum wage, and the CEA estimates that this would
expand teenage employment by about 90,000 jobs, If the waiver were
limited to youths in the neighborhood of the minimum wage, based on the
hourly earnings of teenagers as reported in the May 1976 CPS, the less in
payroll tax revenue would be about $250 million per year. The revenue
loss per job created would then be about $2,800 per year.
social security taxes are only one of several non=wage costs of
employment that are imposed by governments at various levels. Frequently,
the paperwork burden and administrative sest of adding someone to the payroll
are substantial in relation to earnings, particularly for low wage and
part-time workers. In addition to social security taxes, adding someone
to the payroll involves determination and paperwork with respect to Federal
and state income tax withholding, unemployment insurance, workmen's sember=
sation, Federal and state child labor laws, work permits, safety regulations,
etc. No clear estimates appear to have been made ef such in relation
to part-time and summer employment @f youths,' They appear to be signi=
ficant particularly for small firms that cannot afford automated data
systems or personnel departments, It would be useful to have a task force
to identify these costs, estimate their impact and analyze the feasibility
of streemlining or eliminating some of these burdens, In particular, it
would be useful for the Commission on Paperwork to undertake a specifie
1/ This is based on the 5.85 persent social security tax rate paid by
the employer and am estimated elasticity of 0.2.
2/ This is based on the following assumptions: For the 2.5 million teenagers
reported as earning between $2,00 and $2.50 per hour, the average wage is $2.30
per mour, they work 1,000 hours per year, the tax rate is 5.85 persent and 75
percent are in covered employment.
LIGRANY GERALD
-18-
study of the paperwork burdens attendant to employing youths part-time
or during the summer.
Another approach may be to expand Department of Labor exemptions
from the minimum wage (i.e.; reductions in the applicable minimum wages)
for part-time or full-time workers with low levels of productivity, such
as youths and the disabled. This would circumvent the adverse effects of
the minimum wage without an explicit violation of the minimum wage principle
and without linking this issue to others, such as social security policy.
Under current legislation the Department of Labor issued 802,000 exemptions
in FY 1976 of which 614,000 were for students employed part-time in their
educational institutions.
Although the Fair Labor Standards Act would permit an expansion of
exemptions through changes in regulations, the economic and political
impacts of such changes need to be examined. It may be useful to establish
an inter-agency group to work with the Department of Labor for an expansion
of experimentation with exemptions within the existing FLSA framework.
Although black teenagers have a higher incidence and @ longer duration
of unemployment than white teenagers, the racial difference narrows drama-
tically as the youths age a few years. Black youths tend to have fewer
skills and earn lower wages than white youths. Job Corps-type training
programs, summer employment programs, and a reduction in the effective
minimum cost of employing youths may be particularly important instruments
in providing black teenagers with job and training opportunities currently,
and in providing the foundation for greater wages and employment security
in the future.
In the absence of economic impact evaluations of the youth oriented
training programs, it is not clear if program redesigns could result in more
permanent benefits.
-19-
Issue 3 -- Unemployment Compensation System
Policy Recommendations
1. Require states to increase the extent of experience rating of firms
in the unemployment compensation tax.
2. Treat unemployment compensation benefits as if they were labor
market earnings in the Federal income tax and for the determination of
social security benefits for retirees receiving both benefits.
Discussion
One major source of unemployment is the temporary layoff. About
one-half of unemployed job losers (or about one-quarter of all of the
unemployed) are on a temporary layoff. Persons on a temporary layoff are
automatically counted as unemployed in the Current Population Survey (CPS)
regardless of whether they search for work. Most do not search for other
employment because they expect to return to their previous job, and they
receive unemployment compensation in the interim. The incidence of temporary
layoffs is greater, and the duration of the layoff when it occurs is longer,
because of the incentives built into the unemployment compensation system.
The benefits under the regular state program are financed by taxes
on the base wages of workers (currently, generally the first $4,200 of
earnings). However, the system has very weak experience rating and in
some instances, no experience rating at all. That is, for most
1/ Some states have no experience rating, that is, all employers pay the
same tax rate (e.g., Washington, Hawaii, District of Columbia). For states
with experience rating, the bands are typically quite narrow, from 1.5 to
3.3 percent of taxable wages. Some states, however, have wider bands.
For example, the bands in Michigan are from 0.8 to 6.6 percent.
There is apparently more experience rating in the workmen's compensation
system in which large firms, whether self-insured or not, are fully experience
rated. The greater experience rating may arise because in most states private
firms provide the insurance, and the states generally allow large firms to
self-insure. Self-insurance is not a feasible alternative in the unemployment
compensation system since a worker may be entitled to benefits on the basis
of work experience with several employers.
-20-
firms an increase in layoffs (and hence unemployment insurance
benefits for its workers) will have no effect or a very small effect on
the firm's unemployment insurance taxes, largely because tax rates are
set within very narrow bands. In addition, unemployment benefits are
exempt from both Federal income and payroll taxes and are not treated as
earnings in the social security test for persons who are "retired" and are
receiving both benefits.
These factors provide an incentive for firms to have more frequent
layoffs, each of à longer duration, rather than keeping workers on the
firm's payroll during slack periods. These provisions also benefit the
firm's workers as they can receive higher wages when they are employed and
tax-free unemployment benefits when the are on a layoff. This, in effect,
subsidizes firms with high layoff experiences due to seasonal, cyclical
or random events at the expense of firms with stable employment. It
thereby increases the magnitude of measured unemployment consistent
with noninflationary full employment by artificially reducing the cost
of unemployment to workers and employers.
If firms were required to pay higher UI taxes if they used temporary
layoffs more frequently, there would be a greater incentive to retain workers
on the payroll during periods of slack work. If workers had to pay taxes
on their unamplexement compensation benefits, the net monetary gain from
being unemployed compared to working would be reduced, and workers would have
an incontive to discourage the use of temporary layoffs. It would also reduce
the incomitive off returees and others to become and remain unemployed.
1/1 The Treasury Department estimated that in FY 1974 the revenue loss from
not turenthing any unemployment compensation benefits as taxable income in
the Pederal income thanx was $1.05 billion, under an implicit marginal tax
rate on umomployment bonefits of 18 percent. About 40 percent of the loss
in revenues was incom families earning $15,000 or more (AGI) in 1974. The
estimated thank loss iss $3.0 billion for FY 1976. and $2.4 billion for FY 1977.
C FORD LIB
-21°-
By itself, full experience rating would not mean an increase in taxes
on average. It would, however, mean an increase in taxes for firms whose
workers are subject to relatively high levels of unemployment, and lower
taxes for firms with better unemployment records. To the extent that the
movement to full experience rating lowers unemployment insurance claims,
payroll taxes could be reduced.
The unemployment insurance system was developed during the depression
when payroll taxes were small, and the income of nearly all payroll workers
was below the exemption level of the Federal income tax. In that environment
the Treasury Department regulation (1938) exempting unemployment compensation
benefits from taxation was a reasonable administrative convenience. Currently,
however, the tax exemption creates inefficiencies in the incentive for greater
unemployment. It also creates inequities since for two persons with the same
weekly wage the benefits replace a greater proportion of lost wages for the
person from the higher income (higher marginal tax bracket) family.
If benefits were taxed as earnings, and benefit levels were unchanged,
after-tax benefits would decline for recipients in families with a non-zero
marginal Federal income tax rate. The decline would be larger the higher
the recipient's family income. Under present legislation, there is no
Federal standard for unemployment compensation benefits. However, one
This situation often arises when a secondary wage earner in a multi-
worker family goes on unemployment insurance.
-22-
would expect that at least some state governments would raise the benefit
levels to "offset" the tax effect. Several different formulas could be
used. For example, benefits could be increased by the extent of the marginal
Federal income tax rate applicable to the average recipient from a low-income
family, or alternatively, the rate applicable to the average recipient.
The latter would, of course, imply a larger increase in pre-tax benefits
and a larger increase in the tax rate. To the extent that average after-tax
benefits decline, the perverse incentive effects in the unemployment insurance
system are reduced.
The Administration should encourage the forthcoming National Commission
on Unemployment Compensation to study intensively the issues of experience
rating and the taxation of benefits.
This rate may be zero, depending on the definition of "low income."
-23-
Issue 4 -- Reducing Barriers to Occupational and Geographic Mobility
Policy Recommendation
1. Establish a task, force to examine:
(a) The extent to which Federal and state occupational licensing
laws and other regulations can be modified to provide a more
efficient utilization of labor resources.
(b) The effect on employment of Federal efforts to reduce
discrimination in the public and private sectors of the
economy.
(c) Federal programs that are intended to facilitate geographic
and job mobility.
Discussion
One means of expanding productive job opportunities is to reduce
barriers to job mobility that result in a less efficient utilization of
labor resources. This would tend to lower frictional and structural
unemployment. Some barriers to job mobility are warranted. For example,
there clearly need to be some restrictions on who can be a physician.
Other barriers to job mobility are clearly inefficient and are either
anachronisms or are intended to maintain artifically high wages for
persons in the "protected" sector.
Although occupational licensing had been largely a state function, the
increased Federal intervention in the workplace ((OSHA),, training subsidies (CETA,
health practitioners), and subsidies to industries (maritime, railroads,
FORD is GERALD LIBRARY
-24-
health care reimbursement) have increased the Federal interest and role in
this area. And, the government clearly has an important role to play in
reducing discrimination in training and employment, that is, on the use
of criteria not related to productivity. The purpose of the task force
would be to identify areas where Federal or state legislation and
regulations can be modified to generate a more efficient allocation
of labor resources.
The task force would also examine the effectiveness of current
Federal programs, both regular and experimental, that are intended to
facilitate geographic mobility or job mobility within a geographic area.
These include the Employment Service, the computer job matching program,
trade adjustment assistance and migration assistance.
MEMORANDUM TO EPB EXECUTIVE COMMITTEE
FROM: Barry R. Chiswick and Burton G. Malkiel
SUBJECT: Policies to Cope with Structural and Induced Unemployment
The Nature of Unemployment
There is a popular misconception, all too often reinforced by misguided
public policy, that if 7-1/2 million Americans are unemployed on average in a
year, it is the same 7-1/2 million persons who are unemployed throughout
the year. In fact, most unemployment is of relatively short duration. The
situation is more like having 25 million Americans unemployed for some part
of the year with the typical duration of unemployment being something like
7 to 8 weeks. This is why the Administration generally has not favored
public service employment or public works programs. Such programs are
not a solution for the problem of short duration unemployment. Indeed, by
taking workers out of the job search process, they may actually inhibit the
finding and acceptance of productive private sector employment.
We must not, however, be misled by averages. There is, to be sure,
considerable long duration unemployment at the present time. For example,
while only 32 percent of the unemployed in July 1976 were out of work for
15 weeks or longer, 17 percent were unemployed for 27 weeks or longer. It
is this group that suffers the most serious hardship from unemployment and
to which public policy must be especially concerned. And some demographic
groups have relatively high rates of unemployment. Although the unemployment
rate in July was 7.8 percent, it was 16.3 percent for white teenagers and
34.1 percent for black teenagers.
-2-
Some of the unemployment in our economy is "frictional," that is,
arising from normal economic change -- the growth or decline of firms,
changing productive techniques, labor force entry and the search for
better wages and working conditions. Some unemployment is "cyclical,"
a result of the recent recession. Another part might be considered "induced."
The availability of unemployment benefits, including long duration benefits, and
the difficulty of effectively enforcing a work test may have induced some to be
unemployed who otherwise might have been employed or dropped out of the
labor force. Finally, some unemployment is "structural," that is, resulting
from a lack of training, the obsolescence of a skill, old age, geographic
mismatches of jobs and workers, or artificial barriers to wage rate adjustments.
The available data do not allow us to distinguish among the different
types of unemployment. We do, however, have a breakdown of the demographic
characteristics of the unemployed. Older workers are more likely to be
unemployed for a long duration than workers age 25 to 54. While it is
true the very high youth unemployment rates are largely the result of
a very high incidence of short duration unemployment, the considerable
amount of long duration unemployment among youths, especially black youths,
is clearly an important policy concern.
This paper sets out several issues concerning structural and induced
unemployment. Issue (1) is related to the more immediate Presidential
decision regarding the extension of public service jobs under CETA Title VI.
It discusses limiting CETA PSE jobs to unemployment insurance exhaustees.
-3-
Issues (2) to (4) are concerned with more long-term policy decisions to
increase employment opportunities and reduce the unemployment rate. Alter-
native means of reducing the minimum wage barrier to youth employment are
discussed in issue (2) - Unemployment induced by the present unemployment
insurance system and ameliorative policies are considered in issue (3),
while issue (4) is concerned with identifying means of reducing barriers
to occupational and geographic mobility.
-4-
Presidential Decisions
In early June, the EPB presented to the President a discussion of
several employment related bills. At that time, he decided to hold to the
policy of phasing out the CETA Title VI (emegency employment) public
service jobs, as there was continuing improvement in the economy. However,
from May to July, although employment increased by 210,000, unemployment
increased by 560,000, and the unemployment rate increased by 0.5 percentage
point. This has heightened concern for the pace of improvement in job
opportunities and in the unemployment situation.
The most immediate issue coming before the President is likely
to be his position on the bill (H.R. 12987) to reauthorize Title VI of
CETA, emergency public service jobs. House-Senate Conference is
scheduled for August 24-25. The Senate version is a doubling of the
program size to 520,000 slots. It would convert current slots as they
become vacant, plus all new slots, to time-limited projects reserved for
persons unemployed 15 weeks or longer or who have exhausted UI entitlement
and who have family income below $6,700. The House version is a "such
sums" reauthorization of the present design with technical amendments, one
of which (allowing 15 percent VS. the present 10 percent of the grant to be
used for non-wage costs) could reduce the total number of jobs funded.
Current informal indications are that the Conference will come out close
1/ When the President proposed the emergency CETA PSE expansion in October
1974, he requested that the slots be reserved for unemployment insurance
exhaustees. At that time, there was little Congressional sympathy for
this requirement. With the change in economic circumstances, the Senate
action indicates that such a proposal may have more support at this time.
-5-
to the House version and that there is a possibility that the total
slot size which the report will suggest might not exceed the current
260,000. Within the next two weeks therefore there could be a Conference
bill before the President, and if that becomes law, a 1977 supplemental
appropriation bill of somewhere between $700 million and $2.8 billion
shortly thereafter.
Issue (1) discusses the CETA PSE program and a means of targeting
it to the long-term unemployed.
-6-
Issue 1 -- Long Duration Unemployment
Policy Recommendation
1. Reserve PSE job slots (CETA Titles II, VI) for persons with work
experience who have exhausted their unemployment insurance entitlement.
2. Reserve CETA PSE job slots not filled for youths with long-term
unemployment.
3. Target more of the CETA Title I training funds to UI exhaustees.
Discussion
Although most unemployment is characterized by high turnover and
short spells of unemployment, some individuals are unemployed for a long
period of time. During the very high level of unemployment of 1975 about
1.2 million persons (1.3 percent of the labor force) were unemployed 26
weeks or longer, 687,000 persons (0.7 percent) reported unemployment lasting
at least 39 weeks, 157,000 (0.2 percent) reported 65 weeks or more and
79,000 (0.1 percent of the labor force) reported 99 weeks or more.
With the economic recovery there has been a sharp decline in long
duration unemployment. After reaching a peak of 3.3 percent in December
1975, the long duration unemployment rate (those unemployed 15 weeks or
longer as a percent of the labor force) has declined to 2.4 percent in
July. In the coming months there will be a continued economic recovery
and a continued gradual termination of very long duration unemployment
benefits under the Federal Supplemental Benefits program as state insured
unemployment rates decline. Both factors can be expected to lower the
extent of long duration unemployment as reported in the Current Population
Survey.
The nature and magnitude of any persisting long duration unemployment
problem as the economy continues to recover from the recent recession are
-7-
unclear. It is not likely to be skill specific, but it may be somewhat
regional if the automobile industry lags behind the rest of the economy.
Far more likely, however, it will not be concentrated on the basis of
occupation, industry or region, but may be experienced throughout the
country by individual older workers with few skills or obsolete skills,
and little incentive for retraining.
It is sometimes believed that public service employment is a useful
remedy for this long duration unemployment. However, based on the
characteristics of persons placed in CETA funded PSE job slots, it
would appear that the current program is not addressing the problem
of the long-term or hardcore unemployed. Rather, it appears that
state and local governments tend to select persons with favorable
employment characteristics -- they tend to be prime age, male, and at
least high school graduates (Table 1). In addition, they are not parti-
cularly handicapped in finding employment because of a physical disability,
criminal record or limited knowledge of English:
Only 13 percent were
receiving unemployment insurance benefits prior to starting PSE employment.
This suggests that if they had in fact been unemployed it was either
voluntary or of a very short duration. Thus, it appears that most of
the persons currently in CETA PSE job slots would not have substantial
difficulty finding private sector employment during the current economic
expansion.
One policy to aid unemployment compensation exhaustees would be to
limit PSE job slots to persons who had exhausted their entire entitlement,
1/ Persons whose public employment was created because of the PSE funding
need not be the same persons the prime sponsors report as being in PSE job slots.
2/ Of the CETA Titles II and VI participants from July 1975 to December
1975, 3 percent were physically handicapped, 3 percent were offenders and
4 percent had a limited English speaking ability.
-8-
Table 1.
Characteristics of Participants in CETA Titles II and VI and
the Unemployed, Fiscal Year 1975 (percent)
CETA
U.S.
Characteristics
Title II
Title VI
unemployed
Total
100.0
100.0
100.0
Sex:
Men
65.8
70.2
54.9
Women
34.2
29.8
45.1
Age:
Under 22 years
23.7
21.4
34.8
22 to 44 years
62.9
64.8
46.0
45 years and over
13.4
13.8
19.1
Education:
8 years and under
9.4
8.4
15.1
9 to 11 years
18.3
18.2
28.9
12 years and over
72.3
73.3
56.0
Race:
White
65.1
71.1
81.1
Black
21.8
22.9
American Indian
1.0
1.1
18.9
Other
12.1
4.9
Spanish speaking
16.1
12.9
6.5
Limited English-speaking ability
8.0
4.6
--
Veterans:
Special Vietnam era
11.3
12.5
7.5
Other
12.6
14.6
9.4
Source: Employment and Training Report of the President, 1976.
-9-
including Federal Supplemental Benefits. Since this would be a temporary
measure, not a permanent haven for the "unemployables," these jobs should
have a finite duration (e.g., one year or 18 months) The expectation
is that at the end of this period labor markets would be sufficiently
tight for all but the very hardcore unemployed to find a regular job.
Even if the replacement effect (i.e., using CETA funds for jobs that would
exist in any case) would be as large under a PSE program limited to exhaustees
as it is currently, limiting it to exhaustees would have a stronger net job
creating impact for the economy as the program would be biased in favor of
those with the greatest difficulty in finding regular employment. It would
also demonstrate Administration concern for the long-term unemployed.
Limiting the PSE job slots to unemployment compensation exhaustees
would, in effect, be a return to the President's original proposal in
October 1974 which was rejected by Congress. At that time, however, unemploy-
ment was rising sharply, the depth of the recession was uncertain, and state
and local government budgets were showing large deficits. Given the continued
expansion of job opportunities, and the improved situation for state and
local government budgets, more attention will focus on those with the
greatest difficulty finding work. As a result, these recommendations may
1/ To discourage persons with little work experience, and hence a very
short UI entitlement, from becoming unemployed SO as to join the PSE
program, there should be a minimum entitlement requirement. The program
could, for example, be limited to persons with at least ten weeks of entitle-
ment under the regular 26 week unemployment insurance program.
The maximum entitlement in FY 1977 will vary among the states from 39 to
65 weeks depending on whether FSB is operative in the state. If Special
Unemployment Assistance is still in effect, the maximum duration under this
program will remain 39 weeks. These different durations may raise equity
issues in a program limited to exhaustees.
-10-
receive a more sympathetic hearing, as is suggested by the Senate attempt
to limit the program extension to persons with at least 15 weeks of
unemployment.
There are presently 50,000 PSE slots under CETA Title II and 260,000
under Title VI.
Although the President has proposed a gradual reduction
in the size of the Title VI program, it appears that Congress will soon
pass an extension that will retain the 260,000 level.
One response to this Congressional action would be to propose limiting
eligibility in Titles II and VI to UI exhaustees, and adding funds only up
to the level of the present Title VI. This would add $0.7 billion to the
budget outlays in 1977 and $2.1 billion in 1978. If phased in as the
present Titles II and VI slots were vacated, and if the turnover were
complete by the end of 1977, 310,000 slots would become available for this
purpose. If it were limited to Title VI, 260,000 slots would be available.
It is important that this program not encourage workers to remain
on UI until they exhaust their beneifts and that the program not discourage
participants from searching for a regular job. For these reasons, the jobs
should have a finite life (e.g., a maximum of one year or 18 months) and offer
low wages
There are several different procedures for setting a maximum
wage, including a tie to the minimum wage, a fixed dollar amount, or a propor-
tion of prevailing wages in the CETA area. While the first two procedures
1/ Title II was intended to be a permanent program for areas with unemployment
rates over 6.5 percent, providing transitional public service employment as a
manpower development device. Title VI was the emergency program enacted in
place of the President's 1974 proposal, and was intended to be countercyclical
job creation. Locally, the programs are generally indistinguishable in terms
of who they employ and for what reasons.
2/ It should be noted, however, that with more restrictive eligibility
requirements, it will take longer to fill the job slots.
In the President's October 1974 proposal, the wage limit was $7,000.
Congress has shown little sympathy for limiting wage rates on PSE jobs below
$10,000, and the current average is about $7,800.
-11-
imply a uniform maximum wage across the country, the last implies a
maximum wage that is higher in higher wage areas. The implications of
alternative formulas warrant study.
It is difficult to estimate the number of persons who would be eligible
for and wish to accept these public service jobs. The Department of Labor
estimates that about 1.8 million persons will exhaust their entitlements
(FSB, SUA and EB in states in which FSB has triggered off) in 1977. If
the program excludes persons age 65 and over and excludes those whose
regular UI entitlement was very short (say less than ten weeks), the number of
participants may be reduced by 25 to 30 percent. Some of the exhaustees
would take a private sector job as these job opportunities continue to expand,
while others would drop out of the labor force because of family responsi-
bilities and school. Among those still unemployed or discouraged workers,
some proportion would prefer to remain unemployed rather than accept a low
wage PSE job. Our limited knowledge of the behavior of exhaustees does not
provide guidance as to the size of this proportion. If 70 percent would accept
the low wage PSE job, the number of UI exhaustees in 1977 eligible for and
interested in the program would be about 380,000. However, if only 50
percent would accept these jobs, the number would be about 270,000. At this
stage in our knowledge, these estimates are not firm.
The 1975 paper "Special Report to the Secretary of Labor on the
Characteristics of Exhaustees," indicates that about 75 to 80 percent of
FSB exhaustees were age 22 to 64. Some adults, particularly married women,
have short entitlements because of limited work experience.
2/ We lack adequate data on the experiences of recent exhaustees. One
study of exhaustees in 1971-72 suggests that two months after exhausting
benefits about 40 percent were still unemployed or were discouraged workers.
3/ This is obtained from the following assumptions: 1.8 million exhaustees,
of whom 75 percent are eligible, of whom 40 percent are still unemployed
or discouraged workers, of whom 70 percent would take the job.
-12-
PSE job slots that are not filled by UI exhaustees may be set aside for
out-of-school youths who, although eligible for at most only a short duration
of benefits because of an insufficient work history, have experienced a
long period of unemployment. There is, however, the concern that a dependency
relationship would develop. To reduce the dependency relationship these
jobs should be for a relatively short fixed term (e.g., up to six months),
used only once by a youth and pay no more than the Federal minimum wage. This
would be a small supplement to CETA Title I which provides job training,
including some work experience, for about 1 million youths, exclusive of the
summer youth program.
Another policy would be to target more of the CETA Title I
training funds, including some part of those used for work experience, to
the exhaustees of the unemployment compensation system. However, the
greater the number of constraints placed by the Federal Government on
state and local government prime sponsors, the further we have moved away
from the original intent of the CETA program to allow prime sponsors to
administer the program so as to satisfy what they perceive to be local
manpower requirements. Since we now have had some experience with the
CETA program, this may be an appropriate opportunity to reevaluate this
policy. Even if it is decided to stay with the original intent of the
CETA program, it would still be possible to provide financial incentives
to local prime sponsors to use more of their CETA resources for UI
exhaustees.
-13--
The FY 1977 budget includes $1.3 billion for Title I block grants, and
about $50 to $150 million could be available in combined Title I and III
discretionary funds. Within the current budget estimates the targeting could
be done in the following ways:
(a) Reverse current policy on the block grant approach for CETA and
seek legislation to:
establish in the statute a mandatory first preference for
exhaustees, or the use of mandatory percentage of the Title I
block grants for exhaustees; or
establish in the statute the right of the Secretary to set
preferences for who gets served and with how much.
(b) Reserve the Secretary's discretionary funds in whole or part for
providing training for UI exhaustees.
(c) Develop a procedure for using the discretionary funds to provide
incentives to Title I sponsors to use greater percentages of their block
grant funds to serve exhaustees.
-14-
Issue 2 -- Youth Unemployment
Policy Recommendations
1. Propose a youth differential in the minimum wage or exempting
the earnings of youths paid near the minimum wage from payroll taxes.
2. Establish an inter-agency group to work with the Department of
Labor for expanding experimentation with exemptions to the minimum wage within
the current FLSA framework.
3. Request that the Commission on Paperwork undertake a study. of the
impact of the paperwork burdens on the summer employment of youths, and consider
ameliorative policies.
Discussion
The Administration's policy response to the high youth unemployment
rate, beyond the general efforts to restore full employment has been manpower
programs, including the Job Corps (CETA Title IV), and summer employment programs
Our manpower training programs have typically addressed the problem
of poor training either on the job or in school that may ultimately lead to
low earnings. Particularly for youths, they also seek to temporarily reduce
unemployment during the period of training or work experience. Such programs,
however, are not necessarily designed to reduce unemployment permanently.
The training programs may increase unemployment in the future if the training
is for a high unemployment occupation (e.g., construction) or if it encourages
a new round of job exploration after the training is completed.
Youths who appear to have the most severe learning disabilities or
problems of adaptation to the school or work environment tend to have
the most severe unemployment problem. The very characteristics that
result in failure in school and in the labor market are likely to
result in failure in specific government training programs. Thus far,
-15-
however, we lack adequate evaluations of the economic impact of the youth
training programs.
The Summer Youth Employment Program provides work experience (averaging
20 hours per week) for disadvantaged youths who cannot find private sector
employment. It is expected that about $560 million will be spent this summer
for almost 900,000 job slots at about the minimum wage for disadvantaged
youths age 14 to 21. Although the summer youth programs are well liked by
local governments, their net effect on teenage employment is not as large as
the number of program participants since an unknown proportion of the youths
would have found a private sector job if the program did not exist. It is
expected that as the economy improves, the number of slots in the Summer
Youth Employment Program will decrease.
There would be less need for Federal training and summer employment
programs for teenagers if it were not for the job limiting impact of the
Federal minimum wage. In the last decade, the Federal minimum wage for
jobs covered prior to 1966 has increased at about the same rate as the
adjusted average hourly earnings index. By itself, however, this would
tend to contract relative job opportunities for youths since with a growing
proportion of the labor force consisting of youths, one would expect a slower
rise in youth wages than in average wages.
More important, perhaps, has been
the dramatic expansion of coverage of the Federal minimum wage from 62 percent
of private nonsupervisory workers in 1961 to about 85 percent in 1976, with the
1/ This will tend to have a reverse effect in the 1980's as youths become a
smaller proportion of the labor force.
expansion primarily concentrated in the youth-intensive service and farm
worker sectors
On the basis of research studies, the CEA estimates that a youth
differential in the minimum wage of 10 percent (currently 23 cents) is
likely to increase teenage employment by about 2 percent, or by about
150,000 jobs. With the youth differential it would be easier for teenagers
to find jobs offering one-the-job training that would increase. future
earnings, thereby decreasing the need for federally subsidized training
programs. The effect on adults of the increase in teenage employment is
2/
unclear.
It may not be feasible to introduce a youth differential in the
minimum wage. The minimum wage is not only an economic issue, but also
a highly emotional and political issue. Many adult workers are concerned
with competition from youths who do not have family responsibilities.
Others believe that each job should provide earnings sufficient to support
a family. These concerns need to be addressed when considering a teenage
differential, or an alternative policy instrument with the same objective.
One means of achieving a favorable employment impact by lowering
the effective minimum cost of employing a worker without lowering the
minimum wage would be a reduction of employer paid social security taxes.
This could be accomplished by permitting an exemption of employer contri-
butions for teenagers earning near the minimum wage or through funding the
employer contribution out of general revenues. The latter would explicitly
introduce the far broader issue of general revenue financing of social security.
In recent years, there has been an increase in job specific minimum
wage exemptions authorized by the Department of Labor. The growth in
exemptions is small compared to the expansion in coverage. Most of the
exemptions are for students working in educational institutions.
2/ Although- studies have found a significant adverse effect of the minimum
wage on teenage employment, no net effects have been found for adults. However,
these studies have not examined the impact of a teenage differential.
-17-
The waiver of the employer contribution would be the equivalent of
a reduction in the minimum wage, and the CEA estimates that this would
expand teenage employment by about 90,000 jobs If the waiver were
limited to youths in the neighborhood of the minimum wage, based on the
hourly earnings of teenagers as reported in the May 1976 CPS, the loss in
payroll tax revenue would be about $250 million per year. The revenue
loss per job created would then be about $2,800 per year.
Social security taxes are only one of several non-wage costs of
employment that are imposed by governments at various levels. Frequently,
the paperwork burden and administrative cost of adding someone to the payroll
are substantial in relation to earnings, particularly for low wage and
part-time workers. In addition to social security taxes, adding someone
to the payroll involves determination and paperwork with respect to Federal
and state income tax withholding, unemployment insurance, workmen's compen-
sation, Federal and state child labor laws, work permits, safety regulations,
etc. No clear estimates appear to have been made of such costs in relation
to part-time and summer employment of youths. They appear to be signi-
ficant particularly for small firms that cannot afford automated data
systems or personnel departments. It would be useful to have a task force
to identify these costs, estimate their impact and analyze the feasibility
of streamlining or eliminating some of these burdens. In particular, it
would be useful for the Commission on Paperwork to undertake a specific
1/ This is based on the 5.85 percent social security tax rate paid by
the employer and an estimated elasticity of 0.2.
2/ This is based on the following assumptions: For the 2.5 million teenagers
reported as earning between $2.00 and $2.50 per hour, the average wage is $2.30
per hour, they work 1,000 hours per year, the tax rate is 5.85 percent and 75
percent are in covered employment.
-18-
study of the paperwork burdens attendant to employing youths part-time
or during the summer.
Another approach may be to expand Department of Labor exemptions
from the minimum wage (i.e., reductions in the applicable minimum wages)
for part-time or full-time workers with low levels of productivity, such
as youths and the disabled. This would circumvent the adverse effects of
the minimum wage without an explicit violation of the minimum wage principle
and without linking this issue to others, such as social security policy.
Under current legislation the Department of Labor issued 802,000 exemptions
in FY 1976 of which 614,000 were for students employed part-time in their
educational institutions.
Although the Fair Labor Standards Act would permit an expansion of
exemptions through changes in regulations, the economic and political
impacts of such changes need to be examined. It may be useful to establish
an inter-agency group to work with the Department of Labor for an expansion
of experimentation with exemptions within the existing FLSA framework.
Although black teenagers have a higher incidence and a longer duration
of unemployment than white teenagers, the racial difference narrows drama-
tically as the youths age a few years. Black youths tend to have fewer
skills and earn lower wages than white youths. Job Corps-type training
programs, summer employment programs, and a reduction in the effective
minimum cost of employing youths may be particularly important instruments
in providing black teenagers with job and training opportunities currently,
and in providing the foundation for greater wages and employment security
1/
in the future.
In the absence of economic impact evaluations of the youth oriented
training programs, it is not clear if program redesigns could result in more
permanent benefits.
-19-
Issue 3 -- Unemployment Compensation System
Policy Recommendations
1. Require states to increase the extent of experience rating of firms
in the unemployment compensation tax.
2. Treat unemployment compensation benefits as if they were labor
market earnings in the Federal income tax and for the determination of
social security benefits for retirees receiving both benefits.
Discussion
One major source of unemployment is the temporary layoff. About
one-half of unemployed job losers (or about one-quarter of all of the
unemployed) are on a temporary layoff. Persons on a temporary layoff are
automatically counted as unemployed in the Current Population Survey (CPS)
regardless of whether they search for work. Most do not search for other
employment because they expect to return to their previous job, and they
receive unemployment compensation in the interim. The incidence of temporary
layoffs is greater, and the duration of the layoff when it occurs is longer,
because of the incentives built into the unemployment compensation system.
The benefits under the regular state program are financed by taxes
on the base wages of workers (currently, generally the first $4,200 of
earnings). However, the system has very weak experience rating and in
some instances, no experience rating at all.
That is, for most
Some states have no experience rating, that is, all employers pay the
same tax rate (e.g., Washington, Hawaii, District of Columbia). For states
with experience rating, the bands are typically quite narrow, from 1.5 to
3.3 percent of taxable wages. Some states, however, have wider bands.
For example, the bands in Michigan are from 0.8 to 6.6 percent.
There is apparently more experience rating in the workmen's compensation
system in which large firms, whether self-insured or not, are fully experience
rated. The greater experience rating may arise because in most states private
firms provide the insurance, and the states generally allow large firms to
self-insure. Self-insurance is not a feasible alternative in the unemployment
compensation system since a worker may be entitled to benefits on the basis
of work experience with several employers.
-20-
firms an increase in layoffs (and hence unemployment insurance
benefits for its workers) will have no effect or a very small effect on
the firm's unemployment insurance taxes, largely because tax rates are
set within very narrow bands. In addition, unemployment benefits are
exempt from both Federal income and payroll taxes and are not treated as
earnings in the social security test for persons who are "retired" and are
receiving both benefits.
These factors provide an incentive for firms to have more frequent
layoffs, each of a longer duration, rather than keeping workers on the
firm's payroll during slack periods. These provisions also benefit the
firm's workers as they can receive higher wages when they are employed and
tax-free unemployment benefits when the are on a layoff. This, in effect,
subsidizes firms with high layoff experiences due to seasonal, cyclical
or random events at the expense of firms with stable employment. It
thereby increases the magnitude of measured unemployment consistent
with noninflationary full employment by artificially reducing the cost
of unemployment to workers and employers.
If firms were required to pay higher UI taxes if they used temporary
layoffs more frequently, there would be a greater incentive to retain workers
on the payroll during periods of slack work. If workers had to pay taxes
on their unemployment compensation benefits, the net monetary gain from
being unemployed compared to working would be reduced, and workers would have
an incentive to discourage the use of temporary layoffs. It would also reduce
the incentive of retirees and others to become and remain unemployed.
1/ The Treasury Department estimated that in FY 1974 the revenue loss from
not treating any unemployment compensation benefits as taxable income in
the Federal income tax was $1.05 billion, under an implicit marginal tax
rate on unemployment benefits of 18 percent. About 40 percent of the loss
in revenues was from families earning $15,000 or more (AGI) in 1974. The
estimated tax loss is $3.0 billion for FY 1976 and $2.4 billion for FY 1977.
-21-
By itself, full experience rating would not mean an increase in taxes
on average. It would, however, mean an increase in taxes for firms whose
workers are subject to relatively high levels of unemployment, and lower
taxes for firms with better unemployment records. To the extent that the
movement to full experience rating lowers unemployment insurance claims,
payroll taxes could be reduced.
The unemployment insurance system was developed during the depression
when payroll taxes were small, and the income of nearly all payroll workers
was below the exemption level of the Federal income tax. In that environment
the Treasury Department regulation (1938) exempting unemployment compensation
benefits from taxation was a reasonable administrative convenience. Currently,
however, the tax exemption creates inefficiencies in the incentive for greater
unemployment. It also creates inequities since for two persons with the same
weekly wage the benefits replace a greater proportion of lost wages for the
person from the higher income (higher marginal tax bracket) family.
If benefits were taxed as earnings, and benefit levels were unchanged,
after-tax benefits would decline for recipients in families with a non-zero
marginal Federal income tax rate. The decline would be larger the higher
the recipient's family income. Under present legislation, there is no
Federal standard for unemployment compensation benefits. However, one
1/ This situation often arises when a secondary wage earner in a multi-
worker family goes on unemployment insurance.
-22-
would expect that at least some state governments would raise the benefit
levels to "offset" the tax effect. Several different formulas could be
used. For example, benefits could be increased by the extent of the marginal
Federal income tax rate applicable to the average recipient from a low-income
family, or alternatively, the rate applicable to the average recipient.
The latter would, of course, imply a larger increase in pre-tax benefits
and a larger increase in the tax rate. To the extent that average after-tax
benefits decline, the perverse incentive effects in the unemployment insurance
system are reduced.
The Administration should encourage the forthcoming National Commission
on Unemployment Compensation to study intensively the issues of experience
rating and the taxation of benefits.
1/ This rate may be zero, depending on the definition of "low income. "
-23-
Issue 4 -- Reducing Barriers to Occupational and Geographic Mobility
Policy Recommendation
1. Establish a task force to examine:
(a) The extent to which Federal and state occupational licensing
laws and other regulations can be modified to provide a more
efficient utilization of labor resources.
(b) The effect on employment of Federal efforts to reduce
discrimination in the public and private sectors of the
economy.
(c) Federal programs that are intended to facilitate geographic
and job mobility.
Discussion
One means of expanding productive job opportunities is to reduce
barriers to job mobility that result in a less efficient utilization of
labor resources. This would tend to lower frictional and structural
unemployment. Some barriers to job mobility are warranted. For example,
there clearly need to be some restrictions on who can be a physician.
Other barriers to job mobility are clearly inefficient and are either
anachronisms or are intended to maintain artifically high wages for
persons in the "protected" sector.
Although occupational licensing had been largely a state function, the
increased Federal intervention in the workplace (OSHA), training subsidies (CETA,
health practitioners), and subsidies to industries (maritime, railroads,
-24-
health care reimbursement) have increased the Federal interest and role in
this area. And, the government clearly has an important role to play in
reducing discrimination in training and employment, that is, on the use
of criteria not related to productivity. The purpose of the task force
would be to identify areas where Federal or state legislation and
regulations can be modified to generate a more efficient allocation
of labor resources.
The task force would also examine the effectiveness of current
Federal programs, both regular and experimental, that are intended to
facilitate geographic mobility or job mobility within a geographic area.
These include the Employment Service, the computer job matching program,
trade adjustment assistance and migration assistance.
EYES ONLY
MINUTES OF THE
ECONOMIC POLICY BOARD
EXECUTIVE COMMITTEE MEETING
August 31, 1976
Attendees: Messrs. Seidman, Lynn, Richardson, Rogers, MacAvoy,
Malkiel, Gorog, Parsky, Darman, Katz, Penner, Porter,
Hormats, Perritt, McDowell, Leach, Rosenblatt, Kamens,
Butler, Spaulding
1. Report of Commodities Policy Coordinating Committee
The Executive Committee reviewed the report of the Commodities
Policy Coordinating Committee on the International Resources Bank
and the Common Fund.
The discussion of the Common Fund focused on the economic impact
of the Fund on developing countries and on the United States; the
current U.S. position on the Fund; the schedule of dates when the
Fund will be considered, including the request for written comments
on the Fund to UNCTAD by September 30, 1976, a preliminary meet-
ing in late November 1976, and negotiations on the Fund in March 1977;
the three basic options developed by the CPCC; and technical consid-
erations with respect to the timing of U.S. statements on the Fund
The discussion of the International Resources Bank focused on the
narrative description of the International Resources Bank and a set
of questions and answers for policy guidance on the IRB to Adminis-
tration officials.
Decisions
Executive Committee members were requested to provide Mr.
Seidman's office with their comments and recommendations on the
Common Fund options paper no later than September 7, 1976.
The comments and recommendations should include both the depart-
mental or agency position with respect to the alternatives outlined
in the options paper as well as the departmental or agency view
with respect to the issue of timing.
EYES ONLY
2
The Executive Committee approved the CPCC recommendation
that the United States not submit written comments to UNCTAD
on the Common Fund proposal by the September 30 deadline.
The Executive Committee approved the description of the Inter-
National Resources Bank and the set of Q&As to be used as policy
guidance for Administration spokesmen. The Executive Com-
mittee also agreed that the description of the International
Resources Bank would not include: (1) giving the IRB authority
to act as a residual guarantor against commercial risk for any
obligations in a trilateral contract which is part of an IRB spon-
sored project; (2) giving the IRB authority to raise funds for
specific projects by issuing bonds in its own name; and (3) giving
the IRB authority to provide supplemental buffer stock financing.
2. U.S. Performance on Multilateral Aid
The Executive Committee reviewed a memorandum, prepared by
the Department of State, on "U.S. Multilateral Aid Giving Per-
formance. 11 The discussion focused on the U.S. performance
with respect to fulfilling announced commitments to specific multi-
lateral aid institutions, the overall performance of the U.S. vis-a-
vis other developed countries in providing official development
assistance, and the relationship of the U.S. aid performance and
our position on the Common Fund and other objectives of the LDC
Decision
The Executive Committee requested Treasury to prepare a paper
outlining the substantive decisions and schedule for decisions
relating to U.S. commitments to multilateral aid institutions in
order to develop an Administration position prior to the annual
World Bank/IMF meetings the first week in October.
EYES ONLY
RBP