DIRECT JOB CREATION POLICIES IN THE AFTERMATH OF THE GREAT RECESSION David Neumark

Great Recession slowed job growth… 2

… and led to dramatic increase in unemployment rate 3

Hiring credits and worker subsidies as tools of job creation 4  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

Other policies proposed—less direct, uncertain, and likely more expensive effects 5  Federal ARRA  State level tax reductions/exemptions, regulatory and tort reform, High Speed Rail, other infrastructure investment  “Indirect,” change economic incentives, but don’t 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 don’t 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

Most hiring credits target specific workers 6  Federal programs have tended to target the disadvantaged  Recent HIRE Act an exception—targets unemployed  States programs vary widely  Many focus on recently unemployed  Fewer focus on disadvantaged  California’s current program: New Jobs Credit  Enacted 2009  Targets small businesses generally  Enterprise zones a little different—geographically targeted

Hiring credits 7 Wage (w) Employment (E(w)) D(w) S(w) D’(w(1−c)) Hiring credit = c, simplified Credit reduces wage paid by firms, so they demand more labor at any market wage

Theory is simple, but reality is more complex 8  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

Additional problems arise for enterprise zone hiring credits 9  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 areas—but not all—concurs

Credits targeting the unemployed may work better 10  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

EITC is primary example of worker subsidy 11  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

Worker subsidies 12 Worker subsidy = e, simplified Wage (w) Employment (E(w)) D(w) S(w) S’’(w(1+e)) Subsidy increases wage earned by workers, so they supply more labor at any market wage

EITC increases employment 13  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

Usual conclusion: worker subsidies (EITC) more effective 14  Avoids stigma effects  Low administrative costs  Better targets poor and low-income families  Evidence on positive employment effects is more compelling

But key short-run policy recommendation is to use hiring credits targeting the unemployed 15  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

Recession Hit Men Harder 16

How to increasing short-run impact of hiring credits 17  Target broadly, to avoid substitution away from other workers (and stigma)  Keep burden low by using simple rule—like rising employment— that 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 California’s NJC)  Avoid retroactive credits, to induce new hiring  Create incentives for growth in employment not hours (more important, and margin on which supply is more responsive)  Don’t expand eligibility, letting credit become general tax relief

Hard to estimate costs of job creation via hiring credits, but much cheaper than ARRA 18  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 1/7 th of cost/job created via ARRA (CBO: million jobs at $570 billion through Sept. 2010)  $290,000 at midpoint, vs. $42,000 for hiring credits

Limited scope of hiring credits at state level, but keep focus on job creation 19  “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

Basis for federal stimulus II? 20  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 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

Different sized ideas 21  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”