Fire People for Fairness!

Adam Ozimek has a very interesting policy proposal at Forbes for dealing with long-term unemployment. He advocates that we cut the pay of low-wage workers in order to cause more of them to be fired and to quit (separations). This will not raise the employment level, but it will allow some of the long-term unemployed to cycle into the jobs.

Ozimek's interest in this policy is derivative of two things. First, he has a long-running obsession with minimum wage. You can tell it really eats him up that the literature cannot produce consistent findings of a disemployment effect and that reviews tend to find modest minimum wage increases have zero or near-zero effect on employment. Second, in an economy running below full employment for this long, all sorts of weird second-best policy ideas start to make some plausible sense. If we are going to run this thing below full employment, I suppose there is actually a fairness case to make that we should spread the trauma of unemployment around, not concentrate it on a select few.

The problem with Ozimek's proposal is that it does not go far enough. If we want to cause employment separations in order to cycle in the long-term unemployed, we are going to need to do more than take money away from low-wage workers. Not all the long-term unemployed are really suited for minimum wage work after all. Additionally, insofar as fairness is concerned, forcing only low-wage people out of jobs does not really spread the misery of being below full employment around well enough. If we are going to try to cycle people in and out of jobs to blow up long-term unemployment, we need to target the labor force more broadly.

So, in the spirit of Ozimek's proposal, I advocate that we pass a policy called Fire for Fairness (FFF). Under FFF, all employers will be required to lay off some specific percentage of their workforce each year (say 5%) until we reach a target unemployment rate (say 4.5%). They will have to conduct these layoffs at random. The firing firm will also be prevented from rehiring the people they have laid off for at least a year, but they can rehire other people for the jobs made open by the terminations. Some people will just get fired and then hired up elsewhere, but surely at least some of this churn (what Ozimek calls "labor market dynamism") will result in the long-term unemployed cycling in to the labor market.

This policy, because it targets all firms and jobs, will ideally open up all sorts of spots to cycle in the long-term unemployed at all skill and education levels. Moreover, because it gives every employee in the country a 1 in 20 chance of having their lives wrecked, it will put extra pressure on the legislature to undertake stimulus that will bring us back to full employment. Ozimek's policy will not have these same political impacts because law-makers do not care about low-wage workers, but they do care about higher-income workers. So you need to target the misery at high-income people as well.

This policy is also better than Ozimek's because it directly targets separations. Taking money from low-wage workers is a pretty indirect way to achieve separations, surely inferior to just forcing them.

Admittedly, both my and Ozimek's policies are pretty horrific. More sensibly, we should just stimulate the economy until it is back at full employment. But if we are going to undertake a strategy to cycle long-term unemployed people into scarce jobs by taking employed people out of them, my policy is more comprehensive, more direct, more fair, and will be more effective.