Economic Report of the President

Wage RigidityA number of studies show that wages and prices are much morerigid now than prior to World War II, and that rigidity has increasedwithin the post-War period. Increased wage rigidity is likely to raisethe economy's inflation threshold level of unemployment, since lessflexible wages increase the inevitable unemployment associated withthe sectoral shocks which buffet the economy.The reasons for this change are not well understood. A side effectof the provision of a "safety net" program is that employees maybecome more resistant to wage reductions, leading to increases inwage and price rigidity. To the extent that the two-earner family is aform of private "safety net" against the financial losses of unemployment,the recent growth in the number of two-earner families mayalso have contributed to increasing wage rigidity in the United Statesover time.Increasing Structural ChangeA final factor that may have contributed to a rising inflation thresholdunemployment rate is the increasing rapidity of structural changein the economy. This acceleration, which is in part caused by theeconomy's increasing sensitivity to events in the world economy, isevidenced by increasing dispersion across industries and localities inrates of unemployment. Because transfers of human and physical resourcesare costly and take time, increased unemployment is a concomitantof structural change.While the separate impacts of these factors—changing demographiccomposition, larger social insurance programs, increased wage rigidity,and increased structural change—are difficult to quantify, it isreasonable to conclude that together they may have significantly increasedthe inflation threshold unemployment rate. Expansionary macroeconomicpolicies are unlikely to reverse the effects of thesechanges.PUBLIC WORKS EMPLOYMENT PROGRAMSDirect provision of public works jobs by the government is a politicallypopular response to cyclical unemployment during recessions.Available evidence suggests, however, that public works programsadopted in past recessions proved counterproductive, and that the inherentcapability of public works programs to combat cyclical unemploymentis limited.The Timing of Public Works ExpendituresPublic employment programs that produce useful goods or servicesgenerally take time to plan and implement. Therefore, such programsoften have their greatest effects on public employment long39