The Supply of Capital and Labor: A Case of Unequal Treatment

To support workers’ incomes in the wake of the pandemic in 2020, the US government extended regular unemployment benefits and also threw in an extra $600 per week.  This year, the aid to the unemployed continued with $300 of extra weekly benefits.  However, after a below- expectations net hiring in April, economists and politicians raised concerns that the extra and prolonged unemployment benefits may work as a disincentive to work.  As of now (June 2021) 25 states have heeded these concerns and have discontinued the extra benefits.

The concerns about the link between government support of workers and willingness to resume work is a debate about the supply of labor.  However, to limit the debate only to labor and ignore the supply of capital offers a narrow and incomplete view. 

In general, more is supplied the higher the price or payoff.  In the case of capital, whether it is invested in real business assets and operations or in financial assets, its supply depends on the magnitude of business profits or the returns (dividends or interest) of stocks, bonds and savings.  But its supply also depends on how its payoffs are taxed and how its deployment is regulated.  This is where politics and government policies enter.  Since the 1950s, there has been a dramatic drop in the corporate tax rates along with the adoption of various provisions that shield corporate income from taxes.  In addition, personal income from the appreciation of capital assets is being taxed at lower rates than labor income.  All this amounts to an extraordinary government support of capital on the premise that it stimulates its supply and in turn this helps the economy in terms of jobs and wages.

The empirical observation, however, shows that lavishing tax givebacks to capital does not necessarily lead to a better economy just as, conversely, tax increases do not kill economic growth.  Lower taxation of capital has instead contributed to the inordinate income and wealth inequality of the last quarter century.  The capital supply theory also ignores the importance of the other indispensable production factor, that of labor.  If labor is in short supply, capital alone is not sufficient to boost the economic output.  The present situation is arguably just that.  Businesses have jobs but not takers.

The labor supply also depends on its price, that is, wages.  Like capital, labor supply is affected by taxes, but also by other factors unique to labor.  Capital, real or financial, has no attitude or a family behind it and doesn’t catch a cold.  Labor instead has all that and more.  Work has to compete with leisure, taking care of children or elderly family members, and is affected by physical and mental wellness.  We value work for its wages but our willingness to work takes into consideration the cost of those other factors.  Lowering the total charges against labor income ought to push its supply up, just as lowering the charges against income from capital ought to boost its supply.

If that’s so, why don’t we treat labor and capital income the same way?  The present situation is forcing us now to consider this question with greater urgency.  So, let’s return to the initial question whether enhanced unemployment payments hold back workers from accepting jobs.  The accumulated evidence so far is inconclusive.  It is true though that there are workers who make in unemployment more than they would make working.  This is mostly true in service sectors, like restaurants, hospitality and retail, where wages are low.  Some would interpret this as proof that government subsidies undermine the incentive to work.  Others, however, would argue that wages in several sectors are so low that fail to match the subjective worth workers assign to their labor.  Their refusal to return to work is a way to signal their dissatisfaction.

There are also workers who could make more money if they returned to work but prefer to draw unemployment benefits.  What holds these workers back?  Several possibilities could matter here.  One is fear of getting Covid.  Another is expensive childcare for both preschoolers and school-age children who have not returned to school.  Or the fact that the pandemic has disproportionately sickened older people and the cost of outsourcing elderly care would offset any additional income from work.  Prospective workers are also utilizing their relative financial security, thanks to the enhanced unemployment benefits, to search for jobs that offer better scheduling, more paid-time-off for vacation or sickness, as well as other fringe benefits.  The present situation is a unique opportunity for American workers to reset the terms or at least signal their disapproval of the heretofore relationship between capital and labor.

And for good reason.  In all those factors that potentially support the supply of labor, like affordable childcare, pre-K education, parental leave, and paid-time-off, the US either lags other advanced economies or is near the bottom.  At the same time, the US is experiencing a declining labor force participation rate.* Since 1999, and except for Hispanic women, the labor force participation has fallen for White and Black men and women.  And the picture will get bleaker as the growth of the working-age Americans is projected to rise by only 0.4% annually till 1930.

The pandemic, in particular, has drawn attention to the number of women that dropped out of jobs to care for children and elderly relatives.  These reasons also keep women from returning to work at the same rates as men.  For American women, the labor force participation peaked just before 2000 and has been declining ever since for reasons still not fully understood.  In contrast, the female labor force participation in countries like, France, Germany, Denmark and the UK, has risen over the last ten years.  The lack of adequate support of families in the US also deprives American women of the privilege to have a free choice between staying home and going to work.  Their right to work should not be constrained by the high cost of caregiving.

Looking at how the economy and government have treated labor in the US, we see three developments that warrant attention and remedy.  First, since 1972 there has been a decoupling of wages from productivity that has kept incomes stagnate.  Second, while US governments have lavishly supported the supply of capital they have failed to do so for labor.  Third, the labor force participation rate has been declining for quite some time holding back  economic growth.

Just cutting unemployment benefits to force workers to take jobs is a very narrow-minded and unbalanced approach to solving the problem of labor supply in the US.

*The labor force participation rate is the percentage of the civilian noninstitutional population 16 years and older that is working or actively looking for work.