Direct job creation policies in the aftermath of the great recession

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Direct job creation policies in the aftermath of
the great recession

• David Neumark

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Great Recession slowed job growth
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and led to dramatic increase in unemployment
rate
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Hiring credits and worker subsidies as tools of
job creation

• Two types of policies with the simplest and most
  direct impact on the number of workers employed
  in the state
• Subsidies to employers to hire workers (hiring
  credits)
• Intended to increase demand for labor, by
  lowering cost of workers
• Subsidies to individuals to enter the labor
  market (worker subsidies)
• Intended to increase supply of labor, by
  increasing return to work

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Other policies proposedless direct, uncertain,
and likely more expensive effects

• Federal ARRA
• State level tax reductions/exemptions, regulatory
  and tort reform, High Speed Rail, other
  infrastructure investment
• Indirect, change economic incentives, but dont
  directly target increases in employment
• E.g., subsidizing other business costs, such as
  capital investment, may increase employment, but
  lowering prices of other inputs could lead firms
  to substitute away from labor
• Policies that favor businesses generally should
  help them grow, but dont necessarily reduce cost
  of labor, so cost/job created may be very high
• Consistent with job creation costs of ARRA
  discussed later
• Policies favoring particular industries subject
  may reflect political power more than job
  creation potential

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Most hiring credits target specific workers

• Federal programs have tended to target the
  disadvantaged
• Recent HIRE Act an exceptiontargets unemployed
• States programs vary widely
• Many focus on recently unemployed
• Fewer focus on disadvantaged
• Californias current program New Jobs Credit
• Enacted 2009
• Targets small businesses generally
• Enterprise zones a little differentgeographically
  targeted

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Hiring credits
Hiring credit c, simplified
Credit reduces wage paid by firms, so they demand
more labor at any market wage
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Theory is simple, but reality is more complex

• Stigma effects
• Eligibility for credit sends negative signals to
  employers
• Large administrative costs
• Employer windfalls
• Pay for hiring that would have occurred anyway
• Need to create incentives for new hiring
• Always a problem with hiring credits
• Evidence suggests that for credits targeting the
  disadvantaged, these problems are serious, and
  generally make hiring credits ineffective

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Additional problems arise for enterprise zone
hiring credits

• Much effort devoted to activities other than
  direct job creation
• Retroactive claiming (in California) for hires up
  to four years ago
• Cross-vouchering (eliminated in 2006)
• Evidence points to no effects on employment in
  California
• Similar evidence for other areasbut not
  allconcurs

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Credits targeting the unemployed may work better

• Mid-1970s program a model (New Jobs Tax Credit)
• General, did not target disadvantaged workers
  (but created greater incentives to hire low-skill
  workers)
• Incentivized net job creation (firms had to grow
  by 2 or more)
• Temporary
• Evidence indicates NJTC may have created more
  than 500,000 jobs
• Evidence from national policy is less decisive
• 30 years ago, so risky to extrapolate

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EITC is primary example of worker subsidy

• Federal EITC provides incentives to enter the
  workforce
• Offers wage supplements based on family size
• Phases out as earnings increase
• Many states have own EITC as add-on to federal
  program
• California has proposed but never enacted its own
  EITC

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Worker subsidies
Worker subsidy e, simplified
Subsidy increases wage earned by workers, so they
supply more labor at any market wage
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EITC increases employment

• EITC boosts employment among single mothers
• 18-23 increase for low-skill single mothers
  after federal expansion
• State programs also show strong gains
• But work disincentives created by phase-out of
  EITC
• Small reduction in hours worked among other
  groups
• Overall employment increases strongly offset any
  hours reductions
• Effective at targeting low-income families

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Usual conclusion worker subsidies (EITC) more
effective

• Avoids stigma effects
• Low administrative costs
• Better targets poor and low-income families
• Evidence on positive employment effects is more
  compelling

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But key short-run policy recommendation is to use
hiring credits targeting the unemployed

• Evidence of ineffectiveness comes mainly from
  hiring credits for the disadvantaged
• In current context we would focus more on the
  unemployed generally, more like NJTC
• Focus on the unemployed would reduce stigma
  effects, and current threat of windfalls is low,
  so eligibility could be simple and administrative
  burden low
• Assuming that Great Recession is demand driven,
  increasing labor supply unlikely to increase
  employment, hiring credits maximally effective
• Usual distributional arguments weaker in present
  context

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Recession Hit Men Harder
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How to increasing short-run impact of hiring
credits

• Target broadly, to avoid substitution away from
  other workers (and stigma)
• Keep burden low by using simple rulelike rising
  employmentthat we can live with in current
  context
• Make credits short-term and temporary, to counter
  business cycle
• No reason to focus on small firms (like
  Californias NJC)
• Avoid retroactive credits, to induce new hiring
• Create incentives for growth in employmentnot
  hours (more important, and margin on which supply
  is more responsive)
• Dont expand eligibility, letting credit become
  general tax relief

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Hard to estimate costs of job creation via hiring
credits, but much cheaper than ARRA

• Windfall rate high, likely over 90
• Benefits are both direct (lower UI) and indirect
  (higher earnings through increased skills)
• Estimates of cost/job from hiring credits fairly
  high, 9,100-75,000
• At midpoint of range, about 1/7th of cost/job
  created via ARRA (CBO 1.4-3.6 million jobs at
  570 billion through Sept. 2010)
• 290,000 at midpoint, vs. 42,000 for hiring
  credits

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Limited scope of hiring credits at state level,
but keep focus on job creation

• Feasible state spending would have modest
  impact
• E.g., suppose California spend 1 billion
• Implication is about 24,000 more jobs (using cost
  midpoint), or unemployment lower by about .15
  percentage point
• Even low estimate of cost/job (9,100) would
  imply only 110,000 jobs, unemployment rate lower
  by 0.6 percentage point
• Federal government has far greater resources, and
  can borrow huge amounts
• ARRA, distributed by population, would represent
  68 billion of spending in California
• Still, state hiring credits likely more effective
  than menu of proposals put forth by legislators

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Basis for federal stimulus II?

• Focusing new federal stimulus on hiring credits
  only could give similar impact for much smaller
  price tag
• 50 billion would create 1.2 million jobs, vs.
  1.4-3.6 million estimate of job creation by ARRA
  (CBO)
• Might think policy could get bipartisan support,
  given focus on helping economy recover by
  reducing costs to businesses

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Different sized ideas

• Emphasize hiring credits for short-term response
  to Great Recession
• Target unemployed broadly, keep it simple, and
  focus on job growth
• Prepare better for future recessions
• Establish new federal hiring credit that kicks in
  when economy slows, fade out when economy
  recovers
• Avoids entanglement with politics, and budgetary
  difficulties that accompany recessions
• Acts as automatic stabilizer