“Economic research of the past 20 years clearly shows that there is no connection between raising the minimum wage and the level of employment,” says Dr. Jason Furman, an economic adviser to President Barack Obama. Furman will participate in the “Globes” 2014 Israel Business Conference, where he will present his global economic forecast for 2015 at the opening plenary on Sunday, December 7.
In an interview with “Globes” ahead of his arrival in Israel, Furman presents the most worrying issue on the global economic agenda, explaining how the lack of a relationship between raising the minimum wage and the level of employment has been proven.
Minister of Finance Yair Lapid invited Histadrut (General Federation of Labor in Israel) chairman Avi Nissenkorn and Manufacturers Association of Israel chairman Zvika Oren to a meeting on Monday to discuss an attempt to settle the general labor dispute that the Histadrut has called and to promote subjects on the labor market agenda, beginning with raising the minimum wage.
“A global economy snapshot comprises countries in different economic shape,” says Furman. “In the US, all key indicators point to growth, with an emphasis on jobs figures and other labor market indicators, such as the rate of job creation. The US is currently growing faster than two years ago. The American economy is also undergoing some positive structural changes, such as reducing household debt. At the same time, we see Japan and the eurozone are in a place where growth has stalled. The latest data indicate a recession in the case of Japan and growth in inventory (an indicator of a slowdown - A.B.) in the case of Germany.
“Globes”: In your opinion, what is the most worrying thing in the global economy?
Furman: “If there is a common problem to the different economies, at least in the developed world, it is the weakness in aggregate demand. Weak demand is a big problem in the immediate, short, and even in the medium term. In the longer term, the main concern is on the supply side, and I mean the steady drop in the rate of productivity in the developed countries. This problem is especially relevant in the US, the UK, and Israel, countries with economic growth, falling unemployment, and relative stable inflation, but productivity is unable to maintain its growth rate. This is a very deep problem, because productivity growth is the main way that economies grow.”
In your opinion, how is it possible to deal with the problem of productivity?
“Innovation is one of the main ways to achieve productivity growth, and Israel is one of the most innovative countries. Innovation is very important, especially now in areas such as energy and healthcare, which currently accounts for a sixth of the American economy.”
US technology innovation in energy has effects that are strongly felt at gas stations in Israel. The price of oil has plummeted 25% in the past few weeks, after new oil production technologies made it possible for the American economy to produce oil in quantities not seen in thirty years.
In your opinion, is the US about to become an oil exporter and break the power of OPEC?
“Energy is a very important part of the American economy. Obviously, something has happened in the oil market, because until a few years ago, a scenario such as the events in Syria and Iraq would have definitely resulted in a sharp rise in the price of oil, and the fact that we are seeing a drop in the price is due to the increased oil production in the US - an increase equal to Iraq’s oil production. In macroeconomic terms, the drop in US oil imports has greater significance than the possibility of oil exports. At the moment, the US has halved its oil imports and we are much less dependant on international markets.”
Furman’s appointment as chairman of the Council of Economic Advisers (CEA) at the White House in May 2013 was the closing of a circle for him. In 1996, he was hired as the personal aide of then-CEA chairman, the famous economist Joseph Stiglitz, who has a Keynesian outlook. “Stiglitz strongly influenced my thinking,” Furman told “Globes”.
Furman was born in New York in 1970. His father was a successful real estate developer and his mother was a children’s psychologist. In 2004, he held his first political position, when he participated in an election campaign (John Kerry’s failed presidential bid), and in 2008, he joined Barack Obama’s campaign, resulting in the two men’s relationship. In his present post, Furman provides economic forecasts that are used as a basis for the US federal budget, and he is responsible for the president’s annual economic report. One of the main subjects Furman is trying to push is to raise the minimum wage in the federal administration. The prestigious job is also considered a good springboard to the job of chairman of the Federal Reserve; his predecessors as CEA chairman were former Fed chairmen Alan Greenspan and Ben Bernanke.
Do not live in poverty
The minimum wage is one of the subjects in which Furman is involved and on which he has an interesting position. Back in 2007, in a position paper published with another researcher, he called for raising the US minimum wage to $7.25 per hour, “An amount that guarantees that a family of four with one breadwinner will not live in poverty.” He now thinks that there is room to raise the minimum wage to $10.10 an hour, an amount that equals almost NIS 40 in Israel at the current exchange rate. “In real terms, the current minimum wage is far less than it was 45 years ago,” says Furman. “That is why we want to raise it, both at the federal and at the state level,”
What is your opinion about the argument that raising the minimum wage will cause unemployment, especially among the young?
“Economic literature of the past 20 years shows that there is no link between the two. This conclusion is partly based on comparative studies over time between neighboring economies that have very similar characteristics. Raising the minimum wage is, in my opinion, one of the ways to deal with the great challenge of inequality.”
What is your opinion about theories, such as those of French economist Thomas Piketty, who claims that income inequality has returned to the peak levels of the early 20th century?
“There is no doubt that income inequality has greatly widened recently, and that the US leads in it. We know about the transition from income from labor to income from capital, and we are busy tackling the reasons for this. In this context, it is important to note that solutions do not necessarily come from the same place from where the causes of the problem originate. For example, if we’re talking about the effects of technological innovations on the labor market, the solution does not come from the world of technology, but from the world of education. If we’re talking about the effects of globalization, the solution comes from wage agreements. I believe that, in the end, it is possible to slow the growth in inequality, but several steps need to be taken to do this, such as a more progressive tax regime. A very successful solution is tax breaks for childless employees; we’d like to expand this.
What is your opinion about the Nordic model?
“It is possible to learn different things from different countries. The US has experience in correctly exploiting tax breaks as tools to influence. Scandinavian countries are much better in participation in the workforce and preventing unemployment. Israel is very good in R&D.”
The Fed is talking about interest rate hikes in 2015. In your opinion, how will this affect the Fed's activities?
“In principle, we do not comment on the Fed’s activity. However, I would personally like to thank Israel for returning Stanley Fischer to us as Vice Chairman of the Federal Reserve.”
Published by Globes [online], Israel business news - www.globes-online.com - on November 25, 2014
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