For release: April 10, 2003

Labor Mobility Is Fundamental to U.S. Economic Growth: Says St. Louis Fed's Poole

EDWARDSVILLE, Ill. — An efficient labor market—getting the right workers into the right jobs and wrong workers out of the wrong jobs—has helped give the United States an edge over other industrialized nations' economies, said William Poole, president of the Federal Reserve Bank of St. Louis.

Poole's remarks were delivered as part of the third annual Rutman Lecture, sponsored by Southern Illinois University at Edwardsville.

Poole said that as important as education and capital are to productivity growth, "their potential contributions will not be fully realized without a well-functioning labor market," which, he added, "is crucial to ensuring that people are able to take advantage of their individual talents by finding employment that best suits them."

At the same time, Poole noted that when technological breakthroughs or other forces create new opportunities, or cause job losses, "a well-functioning labor market will ensure that labor is re-allocated to where it can be employed most productively."

Poole said that an important characteristic of a well-functioning labor market is labor mobility. Comparing the United States to other economically developed countries, he said that U.S. workers tend to move more freely between jobs, periods of unemployment are relatively shorter, and Americans tend to be more disposed to moving to another part of the country to find better opportunities. "This mobility," he said, "has been an important source of America's long-term economic success."

1. He cited four reasons why U.S. Workers enjoys a relatively short average duration of unemployment:
   (1) Countries with generous unemployment benefits that are allowed to run on indefinitely, coupled with little or no pressure to obtain another job, tend to have higher unemployment rates and longer unemployment spells.
   (2) Nations with more unionized labor forces, with little coordination between either unions or employers in wage bargaining, tend to have higher unemployment rates. "Unionization need not inherently restrict mobility, but in practice it often does," said Poole.
   (3) Unemployment rates tend to be higher in countries with high tax rates impinging on labor.
   (4) Unemployment rates are higher where educational standards at the bottom of the labor market are poor.

Although most people agree that government should provide a safety net for those who are unemployed, Poole said, "We must keep in mind that the level and structure of benefits can affect the incentive for the unemployed to seek out new jobs, while high minimum wage rates and high tax rates can reduce the demand for labor."

Poole also noted that some countries' efforts to impose rigid policies that discourage firms from laying off employees have, in fact, diminished employment security by discouraging the hiring of workers in the first place.

While he acknowledged that job creation in the current economic recovery has been nil, Poole said he remains optimistic about the future growth of the U.S. economy. "The institutions and practices in the U.S. labor market have not been weakened by the recession of 2001 and the slow recovery," he said. "All the fundamentals that drove economic growth in the past are in place today. In time, these fundamentals will overwhelm the present uncertainties that are holding the economy back."

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