Thursday, December 10, 2009

Jobs creation policies as fiscal stimulus

Rising unemployment across developed economies has shifted the primary focus of fiscal stimulus measures from propping up aggregate demand to more specifically sustaining and creating old and new jobs respectively. Some of the European economies, most notably Germany, have already in place policies that specifically address the problem of unemployment, and pressure is mounting elsewhere to embrace the same.

With employment being a lagging indicator to growth, it is clear that the unemployment rate will continue to rise, albeit slowly, even if the economy starts growing and it is expected to be years before the unemployment rate returns to normal.

Economists like Paul Krugman have been calling for specifically job creation programs instead of waiting for the fiscal stimulus to trickle down to create jobs. Instead of economic output growth focussed policies, they advocate direct employment growth creation policies.

The United States, with 16 million out of work and more than double that under-employed, is experiencing its worst jobs crisis since the Great Depression, with six times as many people seeking work as there are job openings, and the average duration of unemployment (the time the average job-seeker has spent looking for work) is the highest level since the 1930s at more than six months. This situation is exacerbated by the disconcerting trend over the current decade which has experienced a virtual stagnation in private sector job creation.

The Economic Policy Institute has come up with a five point American Jobs Plan (pdf here) - streghtening safety net, fiscal transfers to state and local governemnts, investments in transportation and schools, public service jobs, and job creation and tax credit - that would create at least 4.6 million jobs in one year.

Mark Thoma sums up the various fiscal stimulus measures with unemployment reduction priority

1. Tax incentives that impact consumers (payroll tax cut, cash for clunkers, incentives to purchase homes, a sales tax cut, a tax rebate etc) and those that impact producers (tax cuts on business profits, tax incentives that encourage work sharing rather than layoffs or that encourage firms to hire new workers, accelerated depreciation, job creation tax credits, tax cuts or credits that encourage investment etc).

The effect of tax incentives for both consumers and producers on employment is indirect, and hence could fail, especially if the tax cuts are saved and the profits are not re-invested. Work sharing programs (where employers reduce their workers’ weekly hours and pay, often by 20-40% and then government makes up some of the lost wages, usually half) like in Germany are best at preserving existing jobs than at stimulating new employment.

2. Transfers to state and local governments who are faced with strains to their budgets due to declining revenues and increasing welfare burdens. In the absence of alternative source of raising money to tide over the crisis, declines in public sector employment is inevitable.

3. Government spending on goods and services - either consumption or capital investments. Though both increase employment, while consumption spending is easier to get off the blocks, investment spending, especially in infrastructure, delivers greater bang for the buck in so far as it creates some asset. As a specific job creation policy instrument, investment spending is not cost-effective and also slow to implement.

4. Government spending on labor services is the most direct way to create jobs. The New Deal’s Works Progress Administration (WPA) offered relatively low-paying (but much better than nothing) public-service employment during the depths of the Great Depression. They mostly involve work in the local community and hence are easier to implement, and disparaged as "make-work" policy and used only as a last resort. Along with aid to state and local governments, this may be one of the quickest, most direct, and cheapest ways of creating jobs - the Economic Policy Institute proposal estimates that a public jobs program could create one million jobs at a cost of $40 billion per year over a three year time period.

See also this debate about the utlity of specific job creation programs.

Update 1
President Obama's job creation strategy (about $70 bn drawn in from TARP) contains three main elements - tax incentives that encourage small businesses to hire more workers, more spending on infrastructure and other large projects, and rebates for consumers who invest in energy saving improvements for their homes (the so-called 'cash for caulkers' program). Mark Thoma and Robert Reich find it inadequate and more a case of political window dressing than substantial. Their biggest disappointment is over the silence on assistance to state and local governments which are groaning under a $350 billion hole this year and next, and unable to run up deficits they are wildly cutting spending, cutting jobs, cutting contracts, and raising taxes and fees.

Update 2
President Obama has proposed job creation tax credits as part of the direct attack on the growing unemployment problem. Various versions of the tax credits, including payroll tax holidays, have gained circulation in the recent weeks. The Economic Policy Institute has proposed a tax credit (a credit of 15% of expanded payroll costs in 2010 and 10% in 2011) for new job creation over the next two years, which is expected to create almost 3 million jobs in 2010 and over 2 million in 2011. See this summary of such proposals.

Update 3 (10/3/2010)
Mark Thoma has this nicely written moral arguement in favor of financing job creation policies, especially those involving univerally beneficial public goods like infrastructure assets, during economic downturns.

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