Now, if the demand for labor is steady, what would be the implications of an increased labor supply? Here, as the supply curve shifts, economic analysis would suggest that wages might fall somewhat, but the level of employment would increase. And guess what? Since the month after extended unemployment benefits expired, the number of employed workers has increased, the employment-to-population ratio has increased (59 percent in July versus 58.8 percent in February), and the civilian labor force has increased (to 156 million in July from 155.7 million in February). Average hourly earnings growth remains sluggish at only 0.2 percent per month over the last six months, but at least wages have risen modestly while employment gains have increased markedly.
The lesson here is that if you pay people not to work, you get less work. In fact, this is a universal problem. Record-breaking increases in recent years in food stamps, disability benefits, and various forms of welfare have reduced incentives to work and earn. But it's clear over the first half of the year that lower unemployment subsidies have generated higher employment, which helps explain why employment growth accelerated and the unemployment rate fell another half percentage point when overall GDP growth slowed to a near 1 percent pace.
Read More The job market really may be healing
Congressman Paul Ryan has the right idea to solve the wrong-way incentives generated by big government. He would block-grant all the transfer-assistance programs and send them back to the states. Importantly, Ryan wants to restore lower eligibility requirements and reduce benefit-assistance time limits. Plus, he would expand the earned-income tax credit to ease the transition from welfare to work without prohibitive increases in marginal tax rates.
Policymakers should listen to Ryan. And they should carefully observe what's been happening with lower government employment assistance and higher jobs growth.
As Neel Kashkari pointed out, many in our country just want to work. They just need a job, which is the greatest form of welfare. But for a change, let's get policies that actually increase the incentives to work and earn. The whole country will benefit.
—By Larry Kudlow and Robert Sinche
—Larry Kudlow is the economics editor of National Review Online. Robert Sinche is a long-time right-thinking Wall Street economist.