DIRECT JOB CREATION
POLICIES IN THE AFTERMATH
OF THE GREAT RECESSION
David Neumark
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
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
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
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
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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
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
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
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Hiring credit = c, simplified
Wage (w)
S(w)
D’(w(1−c))
D(w)
Employment (E(w))
Credit reduces wage paid by firms, so they demand
more labor at any market wage
Theory is simple, but reality is more
complex
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
Stigma effects

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Large administrative costs
Employer windfalls

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
Eligibility for credit sends negative signals to employers
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
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
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
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
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
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
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
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Worker subsidy = e, simplified
Wage (w)
S(w)
S’’(w(1+e))
D(w)
Employment (E(w))
Subsidy increases wage earned by workers, so they
supply more labor at any market wage
EITC increases employment
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
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

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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
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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
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
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

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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
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How to increasing short-run impact of
hiring credits
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
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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
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
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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
Limited scope of hiring credits at state
level, but keep focus on job creation
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
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“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?
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
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

Different sized ideas
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
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”
