we suffer mass hidden unemployment

America can significantly gear up its economy in only one way: by offering work to the under- and unemployed portion of its adult population that is healthy and not institutionalized (i.e., not in school, the military or prison). This non-working segment of the population is surprisingly large –- much larger than the 6 million Americans officially labeled as "unemployed" by the Bureau of Labor Statistics (BLS) See: Current Employment Situation Summary.

Recent BLS data on employment show good job gains and the official unemployment rate below 4% -- a rate that economists consider "full employment".  Yet this is not the full picture. 

People who are not “actively looking for work” are not counted as unemployed. We still have a large backlog of people who aren't counted because they've given up. This is reflected in the labor force participation rate which is hovering around 63 percent. (This number has hardly changed in the past 15 months and is the lowest in decades.) All of this underscores the need for policies that promote new job creation.

At least 150,000 new jobs per month are needed just to accomodate new entrants to the job market (mostly young people graduating from school). And the further bad news is that the U.S. labor force participation rate, the percent of the working age population that is actually working is among the lowest labor force participation rates in decades.  This important number is a bad sign for a nation that needs greater job creation.

There are actually more than 60 million adult Americans who are not working. Many of them are happily retired or caring for their familes. But many millions are unable to find work, discouraged and have given up. Many of them have been pushed out or defined out of the labor pool — seniors and young retirees, minorities, immigrants, the disabled, many of the young, and those who are ill-equipped to compete in today’s job environment.

While allowing these many millions of people to work would produce a dramatic increase in the flow of goods and services, it would have the additional benefit of saving both families and governments much of the dependency payments they now make to support those not working. It would also sharply reduce the host of destructive social dysfunction costs — ranging from crime to de-motivated students to avoidable illnesses — that America suffers by denying jobs to so many. Lowering these costs would also make it possible for America to strengthen her fraying safety nets and make good on social insurance promises — especially since fewer people would still need help.

The key is to get the nation to look at its economic situation, especially employment and taxation, in a fresh light.

Payroll Taxes and Unemployment

It’s time to reconsider our dangerous and growing dependence on payroll taxes. By any measure, our system of social insurance is one of the biggest success stories of all time. Perhaps the greatest anti-poverty program ever, it has provided economic security, retirement income and health care benefits to over 100 million Americans. Unfortunately, our whole system of social insurance—Social Security, Medicare, and unemployment insurance, and disability and survivor benefits—is financed, for the most part, by payroll taxes that discourage employers from hiring and some workers from working while also reducing incomes for those at the lower ends of the pay scale. As more "baby boomers" retire, in five, ten or fifteen years, when we desperately need more jobs and workers to help pay for Social Security and Medicare, Congress could be forced into prescribing exactly the wrong medicine: more job-killing payroll taxes.

Payroll taxes do more damage than any other tax -- to the economy and income distribution. Payroll taxes have grown from 1 percent to almost 40 percent of federal revenues, a gigantic accidental national increase in the price of hiring people.

Reducing U.S. Reliance on Payroll Taxes: The Key to Faster Growth

America has one giant unused resource, its unemployed — both the "official" and "hidden" non-working Americans who want to work. There are tens of millions of capable Americans who might seek employment if the job market was better, but who, believing that is impossible, do not look and therefore do not count as “unemployed”. They include many older Americans, women, young people, people with disabilities, minorities -- chronically underemployed groups. Much of this lost opportunity is the result of ever-rising payroll taxes forcing up the cost of hiring.

The key to change is lowering the price of labor relative to that of the only other basic inputs in the economy — natural resources such as materials, energy and land. Taxing pollution is another attractive option. Eliminating the payroll tax alone could produce millions of new jobs. That would (1) profoundly enrich the lives and health of those who get the jobs; (2) power a sharp increase in the production of goods and services; (3) cut today's enormous public and private costs of supporting so many dependents; and (4) sharply reduce the costs of many social dysfunctions – ranging from crime/violence/drugs to unmotivated students -- caused by today’s massive true unemployment.

By thus both enlarging the tax base and also reducing both dependency and social dysfunction costs, cutting payroll taxes in turn makes further significant tax cuts and/or new public investments possible. Because its base is so broad, moreover, cutting payroll taxes or sending out payroll tax rebate checks gives a solid boost to the economy.