March 11, 1983
To the Congress of the United States:
Two years ago when I took office, the U.S. economy was suffering from back-to-back years of double digit inflation; interest rates exceeded 20 percent. The Economic Recovery Program which we put in place -- slowing the rate of growth of Federal spending, reducing the Federal tax burden, eliminating unnecessary regulations, and supporting a stable and moderate growth in the money supply -- has cleared the way for recovery and laid the foundation for a period of sustained, noninflationary economic growth. Unfortunately, every economy which has successfully made this transition has experienced a period of increased unemployment. Because the 1981 - 82 recession, closely following the 1980 recession, was longer and deeper than anyone in or out of government had predicted, it sent the unemployment rate to painfully high levels.
In January over 11 million American men and women who were seeking work could not find jobs. Nearly 60 percent of the unemployed had lost their previous jobs and were either looking for new ones or waiting for recall by their previous employers. Nearly 2 million of the unemployed were teenagers most of whom were looking for their first job or struggling with the difficult transition from school to work. Unemployment is particularly painful to the long-term unemployed. About 40 percent of those now out of work have been unemployed for more than 14 weeks and nearly one-fourth have been unemployed for 6 months or longer.
Reducing unemployment without reigniting the fires of inflation is the most significant domestic challenge we face. In designing policies to reduce unemployment, we must first have a clear understanding of its dimensions and its underlying causes.
There are two primary types of unemployment: cyclical unemployment and structural unemployment. Cyclical unemployment results from downturns in business conditions. As the general level of business activity declines, employers reduce their demand for workers, and unemployment increases; as the economy picks up, cyclical unemployment automatically goes down. Structural unemployment, on the other hand, is largely unaffected by swings in business conditions. It can result from the continuous change in a dynamic economy where some industries are declining while others are expanding; from a mismatch of skills needed for available jobs versus the skills in the available work force; from barriers to labor market entry; and from increases in the proportion of the population looking for work. Thus, structural unemployment will remain a problem even after the economy has fully recovered.
The present period of economic stagnation began in January 1980 when the economy went into a brief recession. The recovery that followed later that year was anemic, especially in construction and in many of our basic manufacturing industries. By mid-1981, the short upturn in economic activity could not be maintained, and the economy entered the current recession.
In December 1979, before the present period of stagnation, 6.4 million people were unemployed. Today, 11.4 million Americans are out of work. The back-to-back recessions have caused most of the 5 million increase in unemployment since 1979.
A major part of our current unemployment problem is the result of economic stagnation. The single most effective long-term cure for much of our unemployment problem is to get the economy moving again. There is every reason to believe that we are now on the road to economic recovery. Construction activity, which has significantly contributed to past recoveries, has shown marked improvement in recent months. Industrial production is up for two months in succession. Automobile sales and new orders for manufacturing goods have also increased. Not least, the unemployment rate, normally a lagging indicator, has finally begun to moderate. The economic assumptions in my budget, which many have characterized as very cautious, project an increase of nearly 5 million additional jobs by the end of 1984. I am confident we can accomplish this without reigniting inflation.
Even after the economy has fully recovered, however, we will still face the challenge of structural unemployment. Government can play an important role in assisting three groups of structurally unemployed workers: the long-term unemployed, displaced workers, and youth.
We can help the long-term unemployed by providing needed financial assistance and offering new incentives to employers to hire and train them.
We can help our displaced workers obtain the training needed to make the transition from declining to growth industries.
And we can help our young people by removing impediments that prevent them from gaining the initial skills they need for a lifetime of productive work.
Only by moving forward on all these fronts can we successfully meet the challenge of structural unemployment. The Employment Act of 1983, which I am sending the Congress today, contains a balanced and comprehensive set of programs to help the long-term unemployed, displaced workers, and youth secure productive jobs in our economy.
Assisting the Long-Term Unemployed
extending federal supplemental compensation
Many of the long-term unemployed will continue to face economic hardship during the coming months. Last year I signed legislation to assist them during this difficult period. In my State of the Union Address, I said I would propose the extention and modification of the temporary Federal Supplemental Compensation (FSC) program, which is scheduled to terminate March 31, 1983.
The program I am proposing provides additional unemployment compensation until the end of the current fiscal year to aid those individuals who have exhausted their unemployment insurance benefits and who have demonstrated workforce attachment and have lost their jobs through no fault of their own.
Our proposed extension will also eliminate the unnecessary complexity in the current program while continuing to provide the longest benefit durations in those states with the most severe unemployment problems.
This FSC program should help those who most deserve assistance. Our proposal will ensure this by changing the workforce attachment requirement and excluding voluntary job quitters. This approach is both fair and fiscally responsible.
inducing more employment through job vouchers
While unemployment compensation reduces the hardship of being out of work, it does not help the unemployed to find work. We must adopt programs that will help the long-term unemployed secure jobs by providing incentives for businesses to hire them. Therefore, I propose supplementing the extension of FSC with a new job voucher to help the long-term unemployed obtain productive jobs. Under this new program, a worker eligible for FSC will be allowed to convert his or her unemployment benefits into vouchers that would entitle a new employer who hires the individual to receive a tax credit.
The job voucher program will have much broader coverage than existing employment tax credit programs, such as the targeted jobs tax credit. An employer will be able to use the voucher to offset state or Federal unemployment insurance taxes or Federal income tax liabilities. This new incentive to hire the long-term unemployed will extend to all private sector employers including nonprofit institutions. Of course, individual state unemployment trust funds will be reimbursed from Federal general revenues so as not to penalize the states. The employer hiring incentive would last for one year after March 31, 1983, six months beyond the termination date of FSC on October 1, 1983.
Extending FSC and establishing the job voucher program have the advantage that they can be enacted swiftly through Federal legislation. Unlike other elements of the unemployment insurance program, the states would not have to change their legislation. These proposals constitute a cost effective, fair, and efficient program to help those most in need and help them immediately.
enterprise zones to increase employment in distressed inner cities and rural towns
I have also proposed the creation of enterprise zones in inner cities and in rural towns. Through Federal, State, and local tax and regulatory relief, and strong neighborhood and local participation, enterprise zones will offer a significant economic incentive to businesses, large and small, looking for opportunities to expand or revitalize their operations. Several provisions in the proposed legislation provide direct benefits and incentives to employers to hire, train, and promote disadvantaged workers, and the long-term unemployed. The increase in economic activity in these zones will offer new job opportunities for individuals and stimulate a revival in distressed local economies.
Assisting Displaced Workers
Displaced workers are a second group suffering structural unemployment. Our economy is currently undergoing extensive changes due to international developments, technological advances, and environmental needs. Many of these changes will help increase our productivity and improve our standard of living. But they also mean that many workers must face significant adjustments as some plants close and individual production lines are idled. While we as a nation must revitalize our industrial base to meet the economic challenges of the 1980s and beyond, we must also vigorously pursue labor market policies which ensure that our experienced workforce has the skills to match the needs of our expanding industries. Sustained economic growth and a rising standard of living can only be fully realized if our labor force receives the necessary training and if it is sufficiently mobile geographically and occupationally.
The Congressional Budget Office estimates that about 15 percent of those currently unemployed are displaced workers, defined as people who have lost their jobs from either declining industries or declining occupations. Of those from declining industries, nearly half are from automobiles, fabricated metals, primary metals, and wearing apparel; more than 60 percent reside in the northeast and midwest. Of those displaced from declining occupations, three-quarters are semi-skilled operatives and laborers.
Achieving enhanced employment security for our experienced work force is a shared responsibility. No single level of government or single segment of society has exclusive responsibility. All have significant roles.
Our proposals to the Congress:
- Constitute a meaningful assistance policy for displaced workers;
- Are consistent with the principle of shared responsibility; and
- Utilize existing government institutions and service delivery mechanisms.
The Job Training Partnership Act
On October 13, 1982, I signed into law the Job Training Partnership Act (JTPA). Title III of the Act provides for a state administered training and placement assistance program for displaced workers.
The JTPA establishes a partnership among business, labor, and elected officials at the state and local levels. Through this partnership, the private sector, in cooperation with elected officials, will play a decisive role in planning and implementing programs to assure that training is responsive to the job needs of business and industry.
I am requesting an appropriation for Title III of the JTPA of $240 million for fiscal year 1984. This represents an almost ten-fold increase over fiscal year 1983 funding. When combined with non-Federal matching funds, this appropriation will support much needed training and placement assistance for 110,000 displaced workers.
using unemployment insurance for reemployment assistance
Since 1935, our unemployment insurance program has served the nation well in providing temporary financial assistance for unemployed workers. But, while income maintenance helps cushion the financial strain of unemployment, it does not directly assist people in finding jobs. I believe we can modify the Unemployment Insurance (UI) system to improve the occupational and geographic mobility of permanently displaced workers without violating the integrity and insurance nature of the system.
Recognizing the unique Federal-State structure of the system and that many different adjustment assistance policies may prove effective, the bill I am sending to the Congress would amend the Federal Unemployment Tax Act to allow states the flexibility to use up to 2 percent of state unemployment insurance tax revenues to pay for training, job search, and relocation assistance.
These two reemployment assistance programs can help our displaced working men and women acquire the skills they need to adjust to the changes in a dynamic economy.
Young people are a third group suffering from structural unemployment. Unemployment among youth constitutes over 30 percent of our overall unemployment. The rate among the 16 - 21 age group is an unacceptable 23 percent, over twice the national average, and among minority youth, the unemployment rate of 44 percent represents the single most important social labor market problem.
The consequences of youth unemployment are different from those of adult unemployment. Among adults, unemployment is primarily a matter of financial loss and temporary economic hardship. Most of our nation's youth, on the other hand, live in families in which they are the second or third breadwinner. Unemployment among the majority of youth, therefore, does not usually create severe financial hardship. In 1981, the annual income of families with unemployed youth averaged almost $25,000.
Prolonged periods of unemployment among many youths, however, often lead to serious long-term consequences. First, sustained unemployment can tempt some to channel their energies and ambitions into antisocial or criminal activities. Second, long-term unemployment undermines a young person's potential for success. Recent studies show that those who have prolonged unemployment during their formative years also have less stable employment and diminished earning capacity during their adult years.
Prolonged unemployment among youth is partially due to a lack of initial labor market skills. The problem of skill deficiencies is exacerbated by a lack of career-oriented job opportunities. To combat the problem of skill deficiencies, the Administration worked with Congress to enact the landmark Job Training Partnership Act (JTPA) of 1982. Under the Act, in FY 1984, $724 million in resources are targeted at economically disadvantaged youth in need of training. These resources will provide young people with a fresh chance to develop fully their potential for a productive career.
As a second step toward improving the job skills of our nation's youth, the Administration worked with Congress to extend the Targeted Jobs Tax Credit (TJTC) Program. As part of the extension, the program was modified to target resources more tightly on economically disadvantaged youth. The tax credits provided by the program will encourage employers to aid in the process of developing the skills of many of our young people.
Enactment of enterprise zone legislation would be a third step in this process of improving employment opportunities for youth, particularly disadvantaged youth in our inner cities and rural areas. However, the problem of youth unemployment is too large and too severe for the Federal government alone to provide the sole remedy. The private sector must also help open up career-oriented job opportunities.
One of the most important causes of the lack of career-oriented jobs in which young people can start their careers is the minimum wage. When many young people first enter the labor market their job skills are well below those of older, experienced workers. In a free market, unhampered by government restrictions, young people could compensate for their relative lack of experience and skills by offering to work for a lower wage. Then, as they gain experience on the job, their growing skills would make them more valuable to employers and they would progress up the pay scale. The minimum wage destroys this opportunity: young people are prevented from offering their services at less than a government mandated wage. Faced with the prospect of hiring an unskilled youth at a wage in excess of the current value of his labor, many firms not surprisingly turn young people away. Unable to get an initial job, many young workers never learn the job skills that are needed to earn more than the minimum wage.
Evidence of the effects of the minimum wage is abundant. For nearly a century and a half, this nation experienced no significant youth unemployment problem. Then, just after the turn of the century, state legislatures began enacting minimum wage laws. At first, these mandated wages were not far from market wages and there was little impact. In 1938, however, the Federal government imposed a Federal minimum wage applicable to firms engaged in interstate commerce. Initially this meant that the Federal minimum wage was largely confined to manufacturing. The Federal minimum wage contributed to declining youth employment in manufacturing. But other industries such as retail trade and the service sector still provided an outlet for the energies of youth who wished to work.
During the 1960s and 1970s the minimum wage was increased and its coverage was expanded. At the same time, the youth unemployment problem continued to worsen, especially among minorities.
Youth Employment Opportunity Wage
To help those young people who want to work find jobs, I am proposing a youth employment opportunity wage for youngsters under the age of 22. This youth opportunity wage will be $2.50 per hour, 25 percent below the regular minimum wage of $3.35 per hour. Young people will not, of course, be forced to accept the lower wage, and many will receive more than $2.50 an hour. But all will have the opportunity to offer their services at $2.50 if lack of job skills or other factors make this appropriate.
I am not the first to propose a youth differential minimum wage; indeed, the government more than once has come close to implementing such a proposal. Each time it failed, however, due to concerns that adults would be displaced by younger workers. I am unconvinced by such arguments but I appreciate the concern behind them. Therefore, I am proposing that the youth employment opportunity wage only be effective during the summer -- specifically from May 1 to September 30. This is the period when the greatest number of youth are in the labor market and, therefore, the period in which this proposal will generate the most employment opportunities. By restricting the youth opportunity wage to the summer months, the jobs of older workers will be protected. An employer will not wish to disrupt his or her work force by attempting to use youth during the summer and adults the rest of the year.
To ensure that existing jobs are protected, the Employment Act of 1983 prohibits displacement of current workers by those hired at the youth employment opportunity wage. It also protects the wages of youth employed at the current minimum wage by prohibiting employers from reducing their rate of pay. Thus it expands youth employment opportunities, but not at the expense of older workers.
Some may try to use this proposed legislation as an opportunity to raise the level of the Federal minimum wage above the current $3.35 per hour. I will vigorously oppose any such attempt. Raising the level of the minimum wage would cause many adult workers to lose their jobs. At a time of 10.4 percent unemployment, it would simply create further job loss and more unemployment.
The Employment Act of 1983 is a balanced and realistic approach to addressing our economy's structural unemployment problem. It provides appropriate incentives for employers to hire the long-term unemployed. It provides needed financial assistance to men and women suffering from the hardship of prolonged joblessness, and provides Federal funds for a cooperative effort by industry, labor, and local officials in assisting displaced workers. It gives States the flexibility needed to further assist these workers, and supplements the major effort already underway to provide meaningful training to our disadvantaged youth by establishing a youth employment opportunity wage which will give all our youth a chance to get the work experience they need. Our enterprise zone legislation will stimulate new jobs in economically distressed areas. Together these proposals will provide the foundation for expanding job opportunities for our unemployed. I urge the Congress to enact this legislation promptly.
The White House,
March 11, 1983.