The Covid-19 pandemic will leave the US economy with a deeply scarred labor market. More than 20 million jobs have been lost during the crisis, and only half have been regained. Not surprisingly, job losses have hit disadvantaged and less educated workers especially hard.
This aggravates a pre-existing trend. Long before the pandemic, the US labour market was becoming increasingly polarised. Good, middle-class jobs had been disappearing for decades, owing to automation, deindustrialisation, global competition, and the advent of the "gig economy."
To restore the health of America's economy, society, and polity, President-elect Joe Biden's administration must answer a straightforward question: "Where will the good jobs come from?"
Good jobs require specific skills and can be created only by productive firms. Creating good jobs in ample quantities therefore requires addressing both the supply and the demand sides of the problem.
On the supply side, workers must be equipped with the hard and soft skills that productive firms require. On the demand side, there must be a large enough segment of smaller and medium-size firms that are both productive and able to expand employment. The last few decades are proof that markets alone will not solve the problem. Governments at all levels must be actively involved. The good news is that we have accumulated considerable evidence about the type of programs that actually work.
On the skill-building front, so-called "sectoral training programs" have been especially successful. These programs go beyond traditional training: they are tightly coordinated with employers and provide skills customized to the needs of specific industries, such as health care or information technology. Workers enrolled in the programs receive a variety of "wrap-around" services, ranging from childcare to job placement, in addition to training and certification.
The best known of these programs is Project QUEST in San Antonio, Texas, which has been in operation since the 1990s. There are many others that operate on the same model, such as Per Scholas in the Bronx, New York, and JVS in Boston. Such sectoral training programs have been shown to increase disadvantaged workers' earnings by more than 20.0 per cent on average at a relatively low cost.
Likewise, we have considerable experience on the demand side to guide us. Tax incentives and open-ended investment subsidies can attract firms to lagging regions, but they are not particularly effective. They are expensive and often waste public resources on projects that would have been realised anyway.
What works much better, as Tim Bartik of the Upjohn Institute has shown, is to provide customized business or infrastructure services - such as management and technology advice, a skilled workforce, or local land development - to local firms. Tailored to the needs of specific firms, assistance of this kind can help them become more productive and expand employment capacity by overcoming the particular constraints they face. These programs require building relationships between local firms and prospective investors who understand their needs, as well as a capacity to respond quickly and effectively.
So much for the good news. The bad news is that these successful worker and firm-centred initiatives currently operate at very small scale. Sectoral training programs are typically operated by community groups or non-governmental agencies, and limited funding, as well as a lack of interest from state and federal agencies, prevents them from being scaled up. As a result, the workers they serve number in the thousands instead of the millions that need to be reached.
Similarly, customised business service programs are severely underfunded. Bartik estimates that firms receive $47 billion annually in state and federal tax incentives for investment. By contrast, total annual spending on customized training and manufacturing extension services, which is far more effective in terms of job creation, amounts to only around $1 billion.
A second problem is that programs that are centred on workers and firms are often not well coordinated. Even though sectoral training programs are built around a "dual-customer" approach that serves employers as well as employees, their ability to influence firms' employment policies - including technology adoption and human-resources practices - remains limited. And firm-centred policies can overlook local employment needs if they focus too much on other objectives, such as innovation through new technologies and export competitiveness.
Effective programs to create good jobs are tailored to specific communities' needs and must be driven by local leadership. But the federal government can also play a major role. It can underwrite a massive boost in funding for such programs and encourage states and localities to engage in more experimentation along the lines of successful programs elsewhere. There is thus a huge opportunity here for the Biden administration.
Biden has promised to raise the federal minimum wage and to encourage greater unionization. Beyond these important measures, his plans rely heavily on tax incentives. Under his proposals, companies that increase employment in the United States would get tax credits, while those that invest abroad and boost imports would face tax penalties. He also intends to increase federal spending on goods made domestically and boost spending on government research and development.
These tax incentive, procurement, and innovation plans are expected to cost several hundred billion dollars. A significant increase in locally developed and managed programs to create good jobs would be a pittance in comparison. The Biden administration should go further, by building on such programs' demonstrated successes and making them the cornerstone of his strategy to rebuild America.
Dani Rodrik is Professor of International Political Economy at Harvard University's John F. Kennedy School of Government, is the author of 'Straight Talk on Trade: Ideas for a Sane World Economy.'
Copyright: Project Syndicate, 2020.
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