6. Implications for Policy

With the U.S. unemployment rate still very high, many are asking what might be done about it. It is not immediately clear what can be done in the short term. The Federal Reserve has lowered its policy rate as far as it can go. The economy is flush with liquidity. Many firms, however, remain reluctant to spend on investment and additional labor. For better or worse, political and fiscal constraints are holding back large expenditures on public works projects.

A key question, as far as policy is concerned, relates to why many firms appear reluctant to go "full speed ahead" in their investment and employment plans as the economy improves. This is where much of the disagreement lies. Some argue that private sector spending remains restrained by psychological factors—a simple lack of confidence. Others think that there are legitimate reasons for the apparent lack of confidence—including the policy uncertainty generated by the political machinations of the public sector. Where one falls between these two perspectives naturally influences one's view on what constitutes desirable policy.

On a brighter note, the U.S. economy is clearly in recovery mode, even if the recovery is not very robust. Real per capita GDP is growing, even if employment per capita is not. A growing GDP combined with zero employment growth necessarily means higher labor productivity (more output is being produced with the same amount of labor). Some people argue that higher productivity is responsible for the lack of hiring. But productivity has been rising for centuries, and with no obvious detriment to employment opportunities.

The recovery in GDP, however, has done little to diminish the belief among some that "more should be done" to help the labor market. It is easy to understand what motivates this sentiment. GDP is a measure of average income—it sheds no light on how this income is distributed across the population. Moreover, the incidence of unemployment is concentrated among the poor and less-educated. In short, there is a concern that the prosperity associated with the recovery will not be shared by all. Determining the best way to ensure shared prosperity without crippling the machine that creates it is always a challenge for policymakers—and it is likely to remain so in the foreseeable future.


Davis, Steven J.; Faberman, R. Jason; and Haltiwanger, John. "The Flow Approach to Labor Markets: New Data Sources and Micro-Macro Links," Journal of Economic Perspectives, Summer 2006, Vol. 20, No. 3, pp. 3-26.

Fallick, Bruce; and Fleischman, Charles A. "Employer-to-Employer Flows in the U.S. Labor Market: The Complete Picture of Gross Worker Flows," Finance and Economics Discussion Series No. 2004-34, Board of Governors of the Federal Reserve System, May 2004.