How Not to Create Jobs
In my latest Forbes column I look at some misguided ideas for creating jobs that are making the rounds. BB
Although economists are generally in agreement that the recession ended last summer, they also foresee a considerable period of high unemployment well into the future. This has led policymakers to look for new ways of creating jobs that go beyond the macroeconomic measures that were enacted a year ago. Unfortunately, some of these ideas aren't too good.
Rep. Dennis Kucinich, D-Ohio, has proposed lowering the age to qualify for early Social Security benefits to 60 from age 62 for the first 1 million people who apply. He assumes that all the people who would take advantage of this opportunity are currently employed. Thus, according to him, the proposal would automatically lead to the opening up of 1 million job vacancies.
This is not a new idea. As historian William Graebner has documented, the Social Security program itself was partly conceived in order to encourage older workers to leave the labor force so as to create employment opportunities for younger workers. That's why those receiving Social Security benefits were long prohibited from earning more than a token amount of wage income. However, there is no evidence that encouraging retirement or penalizing work by the elderly ever had more than a trivial effect on creating job vacancies. (See this study by the Social Security Administration and this study by the International Monetary Fund.)
Indeed, the inadequacy of early retirement benefits has actually increased the labor force participation rate among older workers, according to an Urban Institute report. Those retiring at age 62 this year will receive monthly Social Security benefits 25% lower than those retiring at age 66. To be actuarially fair, the benefits for those retiring at age 60, as Congressman Kucinich proposes, would have to be even lower, thus making it very unlikely that his plan would induce much in the way of additional retirement among employed older workers. The only ones that would be attracted to it are those that are unemployed, which necessarily means that no vacancies would be created.
Another bad idea making the rounds is work sharing. If the economy is not going to create enough jobs, some people argue, then maybe we need to divvy up the jobs we have more broadly. Reducing the standard workweek by 10% from 40 hours to 36 hours, so the thinking goes, would force employers to hire 10% more workers. Indeed, a British group is actually promoting the idea of a 21-hour workweek.
Economists often refer to this as the "lump of labor fallacy." It rests on the idea that there is a fixed amount of work to do that can simply be spread among a greater or lesser number of workers. The problem is that the amount of income being produced would still be the same. While some unemployed workers would gain jobs and income, current full-time workers would become underemployed and see a reduction in their incomes. It's hard to see how this benefits the economy as a whole.
Consequently, whenever work sharing has been mandated--several countries in Europe have done so--governments have insisted that weekly wages be unchanged. In other words, a worker would continue to receive pay for 40 hours of work even though he was only allowed to work 36 hours.
In such cases it is clear that that the government has simply forced hourly wage rates up by 10%, which is why Franklin Roosevelt opposed a bill that passed the Senate in April 1933 that would have reduced the standard workweek to 30 hours. He thought it made more sense to establish a national minimum wage instead, which became a key element of the National Industrial Recovery Act that was enacted in June 1933. (The current minimum wage dates from legislation enacted in 1938 after the Supreme Court struck down the NIRA.)
Unfortunately, as we know from logic and experience, when the government raises the cost of employment the result is fewer jobs. We even have recent evidence proving this fact. As University of Chicago economist Casey Mulligan notes, when the minimum wage was increased to $7.25 per hour from $6.55 in July 2009, there was an immediate falloff in the number of part-time jobs that were created. (In an earlier column I discussed the economics of the minimum wage in more detail.)
Obviously, raising the cost of labor is not going to create jobs, especially in an economy where there is still downward pressure on prices, which means that real wages are rising even if nominal wages aren't. This has led some policymakers to suggest a tax credit for employers for each new job created.
An employment tax credit for new jobs is also not a new idea. One was enacted during the Carter administration, revised by the Reagan administration and ultimately abolished by the George W. Bush administration. In practice it turned out to be very difficult to figure out what a new job was or prevent employers from gaming the system--firing a worker one day, rehiring him the next and claiming that a new job was created. Another problem was that many businesses, such as new startups, had no tax liability against which to apply the credit. Businesses also found the paperwork involved with claiming the credit to be more trouble than it was worth. Finally, a lot of tax credits ended up being claimed by businesses that just happened to be expanding employment for reasons unrelated to the credit. In effect, they were rewarded for something they would have done anyway.
Various studies by the Labor Department, the Government Accountability Office and academic economists found that the targeted jobs tax credit was not an effective job-creation measure. Economist Gary Burtless of the Brookings Institution believes that it is probably impossible to design a jobs tax credit that can overcome the obstacles inherent in the nature of such a program.
That hasn't stopped people from trying to figure out some way of using the tax code to spur hiring. The latest idea is to give employers a temporary credit against their share of the payroll tax. The Congressional Budget Office has examined this proposal and found that the cost in terms of lost revenue per job created would be very high because businesses could respond not by hiring new workers but by reducing prices for their output, increasing after-tax profits or simply rewarding existing workers.
The payroll tax credit also suffers from all the same problems that made the targeted jobs tax credit ineffective. Economist Timothy Bartik of the Upjohn Institute notes that the more efforts are made to target the credit only to net new jobs, the more complicated it becomes and therefore the less attractive to employers. Dartmouth economist Andrew Samwick points out that if the federal government was capable of administering a program this intricate then there would have been more of an impact from the stimulus measures already enacted.
Perhaps more importantly, under current economic conditions, any reduction in the cost of labor is unlikely to have much impact on employment because the fundamental economic problem is a lack of demand for business output. As Bill Rys of the National Federation of Independent Business recently put it, "At the end of the day, if you don't have work for the employee to do, there is really no reason to bring an employee in. It's a heavy cost to carry around if you're not generating any income."
In the end the best way of creating jobs is to grow the economy by increasing the demand for goods and services. When the real gross domestic product is rising steadily, employers will have to hire more workers to increase production. As economist Mark Zandi recently put it, "Historically, changes in employment and unemployment closely follow changes in GDP."
This doesn't mean we should necessarily reject targeted measures to increase employment, it just means that we are going to have to find better ways of doing so than the ones I have described.
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Some clarifications on the details of jobs tax credits
Mr. Bartlett: I think a more balanced appraisal of the research evidence indicates that a well-designed job creation tax credit could play an important role now in boosting employment. A couple of points on your post:
1. There are a number of straightforward design features that significantly reduce the problems you outline. For example, if the credit is based on job creation since a base period, then an employer cannot claim the credit by firing some employees and hiring others. Furthermore, if the credit is a refundable credit paid quarterly as part of the normal employer process of paying payroll taxes to the federal government, then the credit does not depend on the business having corporate income tax liability, and the credit is not that complicated to claim. These are features of both President Obama's proposal and of the proposal that I wrote up with John Bishop for the Economic Policy Institute. http://www.epi.org/publications/entry/bp248/
2. The research evidence on the New Jobs Tax Credit is much more positive than is indicated in this post. There are a number of studies that suggest that the NJTC was a cost-effective way of creating jobs. These studies are reviewed in my EPI paper with Bishop.
3. CBO's opinion of a job creation tax credit is more favorable than is suggested by this post, despite the limitations of such a credit that CBO notes. For example, in CBO's January 2010 report on alternative policies to increase employment in 2010 and 2011, a tax credit tied to net payroll expansions by employers was ranked as one of the most cost-effective policies to create jobs. http://www.cbo.gov/ftpdocs/108xx/doc10803/01-14-Employment.pdf
4. I appreciate your link to my more recent comment posted by EPI on the Schumer-Hatch proposal. The piece is titled "Not All Job Creation Tax Credits Are Created Equal", and the main point, as the title suggests, is that the details of program design matter a great deal to program effectiveness. It is not basing a payroll tax credit on net new jobs or payroll at an employer that makes such credits complicated. This can be calculated relatively easily using information already reported by employers to the IRS. What makes the Schumer-Hatch proposal more complicated is that it not only requires an employer to do hiring, but to hire particular workers who have been unemployed more than a certain number of days. The past experience with the Targeted Jobs Tax Credit (which was quite distinct from the New Jobs Tax Credit) suggest that such "targeted" job creation tax credits usually have very low take-up rates and do not alter employers' hiring decisions much.
5. There are several mechanisms by which a Job Creation Tax Credit could increase demand for goods and services. First, by encouraging employers to increase the labor to output ratio, a JCTC would increase labor income, which will tend to increase consumption demand. Second, by lowering labor costs, a JCTC will tend to restrain output prices, which will help boost domestic demand and export demand. This issue is discussed in more detail in my EPI paper with Bishop.
Response
I still not quite persuaded, but if Congress is going to do something then a well-designed tax credit might be prefereable to the alternatives. My inclination is to think that we've done enough stimulus and we just need to wait for it to work.
How not to create Jobs
The government has Increased the penalty for hiring workers with the latest increases in Unemployment Insurance and in the duration of a persons ability to collect.
For example in PA our rate is close to 10% for the first $8800 earned. Not only does this penalize taking a chance on a worker, but if they dont work out they cost you for 2 years! This is further compounded by the very liberal UC people who rarely (since Rendell became governer) rule in the company's favor.
Bottom line - you are better off paying overtime or contracting out excess work.
The feds could pay our UC or reduce either the duration we are charged (to 6 months). Its even worse now that under mini-cobra we have to pay health care (65%).
Bottom line -- between the feds and the state of Pennsylvania they are dis incentivising hiring!
Lump of labor fallacy canard
Bruce,
The "lump-of-labor fallacy" you cite is a canard. Please see my 2007 paper, "Why Economists Dislike a Lump of Labor." I challenge you to a debate on this claim that work sharing won't create jobs. But to make it a "battle of the policy wonk titans" I'm proposing Dean Baker as your opponent. PLEASE, PLEASE let's do it! It would be great policy-wonk theater and bring needed attention to the issue.
lump redux
By the way, the URL for an abstract and download link for my article is http://tinyurl.com/lumpoflabor
Bruce: what do you think of
Bruce: what do you think of simply expanding the existing Work Opportunity Tax Credit? Would you oppose diverting the same amount we are currently paying in extended unemployment benefits toward a (capped) wage subsidy of those who have been unemployed for 26 or more weeks? This would expire at the same time extended unemployment benefits are withdrawn.
Response
The fundamental economic problem is a lack of demand for goods and services. Tax policy is generally ineffective in stimulating demand.