Cost-effective short-term job creation policies

The U.S. economy is clearly in need of short-term job creation policies. The economy is short at least 12 million jobs, compared to what would be required to match pre-recession employment-to-population ratios. Unless something dramatic changes, these slack labor market conditions will continue for many years.

Many policy wonks are proposing a variety of fiscal stimulus measures, including proposals for a renewed payroll tax credit, a continued extension of unemployment benefits for the long-term unemployed, increased infrastructure spending, expanded assistance to state and local governments, and refinancing and debt relief for homeowners.

As I argued in a previous post, conventional fiscal stimulus proposals to boost demand for goods and services should include early childhood programs. Deficit-financed increases in spending for early childhood programs can create jobs at a cost of around $100,000 per job created, which is similar to other labor-intensive public spending. Tax-financed increases in spending for early childhood programs can create jobs at a cost of $175,000 per job created, which is a high cost if the only benefits were job creation, but is reasonable considering the other benefits of early childhood programs.

However, to really meet the large job creation needs of the U.S. economy will require the inclusion of job creation policies that are more cost-effective than conventional fiscal stimulus. Conventional fiscal stimulus proposals typically cost at least $100,000 per job-year created. At $100,000 per job created, and with the need for 12 million additional jobs, fully meeting the job need through fiscal stimulus would cost $1.2 trillion in fiscal stimulus. Even meeting one-third to one-half of the job creation need would require very large budgets for fiscal stimulus. In additional to questions of political feasibility, there are issues of whether fiscal stimulus proposals of that magnitude could actually be implemented in a timely manner.

As I argued in a newsletter article for the Upjohn Institute, more cost-effective job creation policies would explicitly target and incentive job creation by employers. These more cost-effective “targeted” job creation policies include:

(1)    A job creation tax credit that would provide refundable tax credits to employers that increase their net employment;

(2)    A work  sharing program that would provide payments to subsidize employers and workers for sharing reduced work rather than laying off employees;

(3)    A modernized form of the WPA, under which local job training agencies would provide small businesses and small non-profit organizations with generous wage subsidies for hiring the long-term unemployed for newly created jobs.

As I discuss in the newsletter article and in other research, the evidence suggests that these “targeted” job creation policies can create jobs at a gross cost of $30,000 per job created, and at a net cost (after considering the impact of job creation in generating tax revenue and reducing needed spending on unemployment benefits and social welfare benefits) of $12,000 per job created.  Targeted policies are more cost-effective in creating jobs because they encourage more labor-intensive production, provide greater help to more labor-intensive employers, and incentivize job creation with partial subsidies rather than paying for 100% of the job creation.

Although these job creation policies cannot be immediately implemented at some arbitrarily large scale, I believe it would be possible to implement these job creation proposals at a scale that would result in about 5 million additional jobs as of 1 year after implementation.  The gross costs would be about $150 billion annually, and the net costs about $60 billion annually.

There are press reports that the Obama Administration may propose a job creation package that will include some targeted job creation programs. However, in evaluating targeted job creation programs, the devil is in the details. Some designs are more likely to be cost effective than others. For example, in the past I have argued that hiring tax credits for the long-term unemployed are unlikely to be effective.

An ideal job creation package would combine targeted job creation proposals with the other fiscal stimulus proposals. Although job creation is one purpose of a fiscal stimulus package, there also are other goals, such as helping hard-pressed consumers and helping preserve state and local public services. The two types of proposals complement each other: fiscal stimulus boosts demand for goods and services, and targeted job creation policies encourage employers to increase jobs to fulfill that increased demand.

If the lack of jobs is a key economic and social need for the U.S., then policies that directly target job creation as a goal should be part of the policy mix.

About timbartik

Tim Bartik is a senior economist at the Upjohn Institute for Employment Research, a non-profit and non-partisan research organization in Kalamazoo, Michigan. His research specializes in state and local economic development policies and local labor markets.
This entry was posted in Business incentives, Early childhood programs, Economic development, Timing of benefits. Bookmark the permalink.

1 Response to Cost-effective short-term job creation policies

  1. Pingback: Job creation policies: Minnesota’s MEED program vs. Georgia Works | investinginkids

Comments are closed.