1. Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States 1 Robert Chirinko (University of Illinois at Chicago, CESifo) Daniel Wilson (Federal Reserve Bank of San Francisco) May 11-12, 2012 Tor Vergata, Sapienza, and Urbino Conference on “Beyond the Short Run: Growth, Market Imperfections and Macroeconomic Disequilibrium”

2. Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States Motivation Important and timely policy issue... With U.S. unemployment stuck above 8%, much discussion about policies targeted at job creation Job creation tax credits (JCTC) in recent laws: Hiring Incentives to Restore Employment (HIRE, 2010), American Jobs Act (proposed) includes a $4,000 JCTC 2

3. Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States Motivation Little empirical evidence about effectiveness Rarely tried at U.S. federal level Carter “New Jobs Tax Credit” in 1977-78 2010 small-business credit for hiring unemployed European experiences? JCTCs have proliferated among states over past 20 years –there have been 24 state JCTC “experiments” (17 currently in place) 3

4. Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States

5. Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States 5 States that have or have had a JCTC

6. Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States Motivation In this paper, we collect data on, and analyze effects of, these state “experiments” 6

7. Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States Preview of Results Average employment effect on impact is small...and largely due to intertemporal substitution in states with implementation lag But small effect is due to –small effective credit rates, –modest elasticities of L w.r.t. the JCTC (0.35) Obama’s proposal would lower unemployment rate by 0.1 percentage points

8. Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States Data -- Collection Identify all states with a (broad) JCTC For each state JCTC –Track down original legislation enacting credit –Identify date it was signed into law –Identify date upon which new hires qualify for credit. –Measure statutory credit value (dollar value or percent of wage) when possible (17 states) Merge dates with monthly state panel data on private nonfarm employment from January 1990 to August 2009

9. Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States Data -- Background Job Creation Tax Credits: Credit against corporate income tax Credit frequently refundable or carried forward Firms usually required to maintain added jobs for extended period of time Rolling Base: Credit value proportional to increase in employment over “base level” (usually last month’s or last year’s level)

10. Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States Two sets of JCTC states – “regimes”: 1.Immediate Qualifying Date < Signing Date –Retroactively or concurrently 2.Delayed Signing Date < Qualifying Date –Implementation lags exist before net job gains qualify –“Ashenfelter Dips” in Labor and “Fiscal Foresight” in Macroeconomics Data -- Background

11. Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States Change in notation 1. Immediate = Retroactive + Concurrent 2. Delayed = Implementation Data -- Background

12. Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States

13. Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States JCTC Adoption Exogeneity 13 Theory

14. Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States Inventory accumulation model Firms choose labor (output) each period to minimize costs Firms must also make a sales decision Inventory accumulation is the residual Labor costs depend on JCTC rate and thus varies over three intervals Some Theoretical Guidance INTERVALS “BEFORE “AT” Period between signing and qualifying dates First period at which credit is both known and in effect – i.e., later of signing and qualifying dates “AFTER”Periods after the “AT” period.

15. Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States Some Theoretical Guidance Implications: Rolling Base JCTC and inventory accumulation make labor (L) choice a dynamic decision: –Choose L * to equate the marginal product of labor (MPL) to user cost of labor (UCL) and incremental inventory holding costs across all periods –The response of L vary by Regime (Delayed or Immediate) Interval (Before, At, After)

16. Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States

17. Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States

18. Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States Some Theoretical Guidance -- UCL Dynamic Profits = (F[L 1 ] – wL 1 ) / (1+r) + (F[L 2 ] – wL 2 + JCTC*w*(L 2 - L 1 )) / (1+r) 2 + (F[L 3 ] – wL 3 + JCTC*w*(L 3 - L 2 )) / (1+r) 3 + ………………….

19. Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States Some Theoretical Guidance -- UCL FOC L 1 : F’[L 1 ] = UCL 1 = w * (1+JCTC/(1+r)) (increases UCL) FOC L 2 : F’[L 2 ] = UCL 2 = w * (1- JCTC+JCTC/(1+r)) = w * (1- JCTC* (r/(1+r)) (decreases UCL)

20. Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States Empirical Predictions REGIME Delayed Immediate INTERVAL Before - N/A At ++ + After-Early + or - + or - After-Late 0 or - 0 or + Total + +

21. Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States Empirical Work -- Specification 21 Event Study Model:

22. Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States Empirical Work -- Specification 22 Event Study Model:

23. Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States Empirical Work -- Specification REGIME Delayed Immediate INTERVAL Before γ BEFORE At γ AT δ AT After-Early γ AFTER-EARLY δ AFTER-EARLY After-Late γ AFTER-LATE δ AFTER-LATE Total Sum of γ’s Sum of δ’s

24. Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States Empirical Work -- Preliminaries Logit Regression: Prob[Adopt JCTC : No prior JCTC] NOT Related to employment growth Employment data (monthly) has a unit root

25. Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States Empirical Work -- Preliminaries 25 Logit regression with state fixed effects Dep Variable: Prob[JCTC Signing | not having JCTC] (1)(2) Employment growth over prior 12 months0.066 (0.083) Employment growth over prior 12 months, relative to neighboring states -0.119 (0.114) Fraction of neighboring states with JCTC as of 12 months prior 0.0410.037 (0.021)(0.018) Republican governor and/or legislature (1=both, 0.5=split, 0=neither) -0.002-0.003 (0.006)(0.005) Capital Taxes (User cost of capital)-0.636-0.528 (0.021)[0.021]

26. Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States Empirical Work -- Preliminaries 26 Properties of L i,t (monthly data) Unit root test  ΔL i,t / L i,t-1

27. Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States Empirical Work -- Baseline Results coefficient, (standard error), [p-value]

28. Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States Empirical Predictions REGIME Delayed Immediate INTERVAL Before - N/A At ++ + After-Early + or - + or - After-Late 0 or - 0 or + Total + +

29. Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States Empirical Work – Other Results Replace JCTC = tax credit rate with JCTC = indicator variable Multiply JCTC by % Eligible Firms (≈94%) Divide data by JCTC characteristics (refund) Econ development vs. countercyclical –If former, then our estimates upper bound because of tax competition –Residuals from model (unexplained employment growth) for bordering states regressed on JCTC –Negative effect expected.

30. Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States Policy Implications -- Obama’s Proposal $4,000 for long-term unemployed Average wage is $40,000 10% reduction in wage in one year Effective JCTC = 0.10 * (r / (1+r)) * Eligibility = 0.06 Labor Growth = 0.06 * 0.35 = 0.02  280,000 jobs  ↓ unemployment rate by 0.1 % points

31. Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States Conclusions Average employment effect on impact is small...and largely due to intertemporal substitution in states with implementation lag (compare Delayed and Immediate regimes) But small effect is due to –small effective credit rates, (r / (1+r)) –modest elasticities of L w.r.t. the JCTC (0.35)

32. Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States Conclusions Obama’s proposal would lower unemployment rate by 0.1 percentage points This study is NOT paid for by Mitt Romney’s presidential campaign Does have broader implications about the use of tax incentives.

33. Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States Thank You

34. Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States

35. Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States

36. Chirinko & Wilson Job Creation Tax Credits and Job Growth: Evidence from U.S. States Empirical Work -- Preliminaries 36 Logit regression with state fixed effects Dep Variable: Prob[JCTC Signing | not having JCTC] (1)(2) Employment growth over prior 12 months0.066 (0.083) Employment growth over prior 12 months, relative to neighboring states -0.119 (0.114) Fraction of neighboring states with JCTC as of 12 months prior 0.0410.037 (0.021)(0.018) Republican governor and/or legislature (1=both, 0.5=split, 0=neither) -0.002-0.003 (0.006)(0.005) Capital Taxes (User cost of capital)-0.636-0.528 (0.021)[0.021]