Oregon’s unemployment rate is among the highest in the country and is heading toward double digits. Eric Fruits notes in his recent Oregon Business column that Oregon is different, though. It’s different because it has what seems to be a permanently high unemployment rate. In more than half of the past 30 years–through good times and bad–Oregon has ranked in the top 10 states for unemployment. Even through much of the dot-com boom, Oregon’s unemployment was among the highest in the country.

What makes Oregon different so that it always has high unemployment?

As with most economics issues, there is no single answer.  In Oregon, several factors combine to produce the state’s long-run high unemployment.

1. Unemployment benefits. The Economic Policy Institute in Washington, D.C., ranks Oregon as one of the more “generous” states for unemployment benefits. On one hand, unemployment benefits help to put food on the table. But overly generous benefits allow job seekers more leeway to hold out for higher wages than they would otherwise, thereby slowing their return to work.
2. Taxes and regulations. Taxes and regulations raise costs to firms offering employment. Rigidity in employment laws adds to a firm’s costs of growing its workforce. In addition, employer-provided health insurance in Oregon is expensive because of regulations mandating that insurers cover specific conditions, procedures or treatments. Such mandates raise the costs of adding and retaining employees.
3. Minimum wage. A binding minimum wage creates a surplus of unskilled labor. At $8.40 an hour, Oregon has one of the highest minimum wages in the country. This has the effect of decreasing the amount of labor demanded by Oregon businesses and increasing the amount of labor supplied by Oregon workers. On the upside, owners can be choosy about who they hire. But, this puts the unskilled in a Catch-22: Their inexperience makes them unemployable at the high minimum wage so they cannot get experience to justify the wage.
4. Migration. If people are moving to the state faster than jobs are being created, higher unemployment results. Oregon has a well-deserved reputation for livability. As a result, people from outside of Oregon are attracted to the state and people who are here already are hesitant to leave: Some people would rather be unemployed in Oregon than find work out of state.

Is there a solution?

On the public spending side, many Oregonians are hopeful that an injection of state and federal infrastructure spending will pull people off the unemployment line and onto construction crews. However, by the time projects are funded, requests for bids are issued, contractors are in place and workers are hired, we may already be six months into a recovery.

On the private side, investments by businesses produce the gains in productivity that fuel future production and consumption. Broad-based investment tax credits and similar investment incentives are not as alluring as large-scale spending programs and showpiece infrastructure projects. On the other hand, much of the blame for the current recession has been placed on the credit crunch and the resulting decline in private investment. Broad-based investment incentives would mitigate some of the crunch and encourage firms to begin spending and hiring again.

A panel of economics experts surveyed by the U.S. Government Accountability Office concluded that estimates of the costs of climate change programs is more useful to policy makers than estimates of the potential benefits.  This is because policy costs would occur immediately, but the benefits–if any–would occur decades in the future.

In the past year, a variety of studies by organizations supportive of aggressive climate change policies have attempted to calculate the additional annual expenditures in renewable energy generation and energy efficiency necessary to meet greenhouse gas reduction goals.

One problem: No one knows how much spending is needed

And the guesses are all over the place.

In the past year, four separate studies came up with a wide range of cost estimates for climate policies. Most recently, a report issued by the World Economic Forum in Davos, Switzerland summarizes three studies. The Forum says between $150 billion and $313 billion in additional spending is needed each year between now and 2030 too reduce carbon emissions to levels deemed sustainable by the Intergovernmental Panel on Climate Change (IPCC).

Earlier this month McKinsey & Company said the additional costs would range begin at $475 billion a year and rise to $1.2 trillion a year through 2030, with an average additional cost of $846 billion a year.

A range as big as the Dutch economy

No wonder policy makers are confused. The additional costs across four studies range from $150 billion a year to $846 billion a year.  That is a $696 billion range.  That is a swing that is bigger than the economy of the Netherlands ($650 billion). It is impossible to design effective policies when the cost estimates have a margin of error that is as big as the 20th largest economy in world.

Citations:

Dinkel, J., Enkvist, P.-A., Nauclér, T., and Pestiaux, J. (2009). Pathways to a low-carbon economy: Version 2 of the global greenhouse gas abatement cost curve. McKinsey & Company.

Liebreich, M., Greenwood, C., von Bismarck, M., and Gurung, A. (2009). Green investing: Towards a clean energy infrastructure. World Economic Forum and New Energy Finance.

United States Government Accountability Office (2008). Climate change: Expert opinion on the economics of policy options to address climate change. GAO-08-605.