Job creation policies that deliver bang for the buck

Paul Krugman draws attention to the CBO report (pdf here) that examines the job creation potentials of various fiscal stimulus spending measures.

In an earlier report, the CBO had defined three key criteria for judging policy options for spurring economic growth and increasing employment - timing (providing help when it is needed most); cost-effectiveness (providing the most growth and employment per dollar cost to the federal budget); and consistency with long-term fiscal objectives (preventing the short-term deficit increase due to stimulative policy from adding excessively to federal debt in the long run).

CBO examined the effects on output and on employment of a number of policies. The effect of a policy on employment is measured by the cumulative effect on years of full-time-equivalent employment for each dollar of total budgetary cost (a year of full-time-equivalent employment is 40 hours of employment per week for one year). By focusing on full-time equivalents, the calculations include increases in hours among people in part-time employment and possibly some overtime for full-time employees.

To account for uncertainty, the analysis includes both a 'low' estimate and a 'high' estimate for the effect of each policy. For the range of policy options considered, the figure below shows the range of low to high estimates of the cumulative effects on employment in 2010 and 2011, when CBO expects that the economy will still be in the early stages of the recovery.



Increased aid to the unemployed, reducing employers payroll taxes so as to incentivize them to hire, additional social security payments, and aid to states are among those delivering the biggest bang for the stimulus buck in generating employment.

Update 1
Alan Blinder proposes implmenting both the two main options specifically aimed at job creation - direct public-service employment and a new-jobs tax credit. He feels that if most of the new public-service positions are low-wage jobs, and if the tax credit is designed well, the per-job costs of these policies are comparable at $30,000 to $40,000. He recommends doing both, targeting roughly a million new jobs with each program, at a budgetary cost of perhaps $70 billion.

Update 2 (24/02/10)

The US Senate approved a $15 billion plan to spur job creation that would give employers a temporary exemption from payroll taxes for hiring people who had previously been out of work for at least 60 days.



Update 3 (17/3/2010)
Casey Mulligan has this analysis of the trade-off between moral hazard of continuing unemployment benefits and the need to continue benefits so as to stimulate aggregate demand in a recession.

This study finds that longer-term Unemployment Insurance (UI) entitlement leads to longer unemployment duration and indicate that the adverse effect of longer entitlement changes relatively little in response to variation in demand conditions.

Update 4 (20/6/2010)

List of policy options to create employment for the growing army of long-term unemployed - offer bonuses for long-term unemployed persons who find work; offer bolstered work-search help for the long-term unemployed; expand retraining programs and increase outreach; expand relocation allowances; encourage self-employment; expand work-sharing programs; and provide generous tax incentives for employers to hire the long-term unemployed.