Bigger funding needed for big ideas for job creation

A project entitled “Big Ideas for Job Creation” recently released a policy brief on a wide range of job-creation proposals.  This project was managed by the Institute for Research on Labor and Employment at the University of California-Berkeley, and funded by the Annie E. Casey Foundation and the W.K. Kellogg Foundation.

The project ideas include job creation tax credits, subsidized jobs, direct job creation, various green jobs proposals, assistance to manufacturing, increased help for entrepreneurs, and increased work-sharing. I have championed many of these ideas, for example in this blog post.

The authors make the case for the higher cost-effectiveness of well-designed direct job creation programs over many current policies. For example, in a report done for this project, Elizabeth Lower-Basch of the Center for Law and Social Policy argues for the cost-effectiveness of subsidized job placements for the disadvantaged. The experience of such subsidized job placements, which were funded through September 30, 2010 under the Obama Administration’s fiscal stimulus, was generally quite positive. She argues that such subsidized job placements are likely to be far more cost-effective than the current Work Opportunity Tax Credit, which we use to encourage hiring the disadvantaged via the tax system.

As Ms. Lower-Basch argues, the key to the effectiveness of subsidized job placement programs, compared to hiring tax credits, is that such subsidized job placement programs have far more program control over which employers are subsidized and how they are subsidized. These programs are run in a discretionary fashion by the spending side of government, which allows the programs to be selective in how they approach employers. This enables these subsidized jobs programs to provide more assistance to smaller employers, who are more likely to respond to such subsidies. It also enables these programs to target employers who are more interested in hiring the disadvantaged, which avoids negative “stigma effects” that might occur from special tax credits for the disadvantaged.  In addition, this control enables these programs to minimize windfall gains for employers who would have hired the same individuals for the same jobs without any subsidies.

Although direct job creation programs can be more cost-effective than other approaches to creating jobs, such as the fiscal stimulus (see my argument on this in an Upjohn newsletter article), we still need to devote significant resources to these programs if we are to make a large difference to job availability in the American economy. The research suggests that once we adjust for the inevitable windfall gains and other inefficiencies in these direct job creation policies, that the net cost of job creation from these policies is on the order of $30,000 per job-year created. This is much better than the approximately $100,000 per job-year created of most conventional fiscal stimulus.  However, we still need to devote budgetary resources of an additional tens of billions of dollars per year to significantly change the current job situation.

For example, according to the latest estimates from the Hamilton Project of the Brookings Institution, the U.S. economy is still short about 12 million jobs of what would be needed to get to pre-recession employment conditions. A sizable “job gap” is likely to persist for at least the next five years, and probably longer. If we were to try to close one-quarter of this job gap through direct job creation programs (that is, create about 3 million jobs through direct job creation), we would need budgetary resources of about $90 billion per year (=3 million jobs times $30,000 cost per job).

Some of this extra $90 billion in budgetary costs would be recovered due to the increased tax revenue and reduced unemployment benefits and welfare benefits that would occur due to lower unemployment.  I have estimated that about 60% of these direct costs would be covered through these budget offsets. This reduces the net cost of a direct job creation program of 3 million jobs to less than $40 billion per year.

Is any of this politically feasible? Not right now. But who knows what will happen to political feasibility as long-term unemployment continues, year after year? Political feasibility might look quite different if we still have high unemployment in much of the U.S. in 2017.

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.
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