What Types of Employment Policies Should be Discussed at the Jobs Forum?

Last Updated Dec 2, 2009 3:13 PM EST

Unemployment currently stands at 10.2 percent, and the outlook for employment is poor unless labor markets are given some type of boost. To explore the opportunities to provide the needed boost, the administration is holding a jobs forum to talk about "every possible avenue for job creation."

What are those avenues for job creation? The federal government has two main policy tools at its disposal -- government spending on goods and services and changes in taxes. This distinction is used to categorize the potential avenues for policy discussed below. In addition, the government can also hire labor directly, and that is included as a separate category.

Let's start with tax cuts, tax credits, and other changes that do not involve the direct purchase of goods and services, or the direct purchase of labor, by the government.

Tax incentives that encourage private sector job creation
Tax incentives can be separated into those that impact consumers and those that impact producers.

Tax incentives directed at consumers include measures such as a payroll tax cut, cash for clunkers, incentives to purchase homes, a sales tax cut, a tax rebate, and so on.

These policies can increase employment, but the effect is indirect. The idea is that the tax incentive will increase the demand for goods and services and increase profits, and the increase in profits will, in turn, lead to the firm to hire more workers.

The problem with these policies is that much can go wrong along the way. For example, the tax cut may be saved instead of spent, the extra profits may be used for some other purpose than hiring new workers, and the policy may be relatively slow to unfold. Thus, this is neither the most direct nor the most immediate way to stimulate employment.

Tax incentives directed at producers include tax cuts on business profits, tax incentives that encourage work sharing rather than layoffs or that encourage firms to hire new workers, accelerated depreciation, tax cuts or credits that encourage investment, and so on.

The success of these programs varies in a predictable fashion. The policies that are indirect such as tax cuts on profits or tax cuts/credits/rebates to encourage new capital purchases are the most uncertain, slowest, and least effective while more direct policies such as tax cuts to encourage hiring fare much better. One policy in particular, work sharing, has worked very well for Germany and other countries, but unfortunately these policies are best at preserving existing jobs as the economy spirals into a recession, they aren't so good are at stimulating new employment. So it's probably too late for these types of polices to have a large effect at this point in the business cycle. But even though the worst may be over, job losses are still occurring and a work sharing policy could help. It's worth a try.

Transfers to state and local governments
The decline in tax revenue flowing to state and local governments due to the recession along with the legal requirement to balance the budget that these governments face has placed state and local budgets under considerable pressure. If nothing is done to relieve this pressure â€" and there is little that state and local governments can do by themselves â€" a decline in public sector employment is the inevitable outcome.

Transfers from the federal government to the state and local levels can help to make up the revenue shortfalls and preserve jobs, and policies along these lines in the recently enacted stimulus package appear to have helped quite a bit. But the transfers weren't big enough to stem all job losses, and if state and local governments do not get more federal aid, hundreds of thousands more jobs could be lost. Thus, this is a prime candidate for a jobs (preserving) policy.

Government spending on goods and services
The previous polices involve tax changes or transfers of money of one sort or another. Another possibility is the direct purchase of goods and services by the government. These purchases can be categorized according to whether they are government consumption or government investment (e.g. spending on a government sponsored fireworks show is an example of government consumption since there is no long run benefit beyond the memories, while spending the same amount of money on fire hydrants, roads, etc. would be an investment since the benefits would persist; note, however, that both types of spending would increase employment, but it might be possible to put the fireworks show into place much faster).

Government investment, particularly investment in infrastructure, was a major component of the stimulus package. These policies, which are aimed at stimulating the economy in the short-run output and increasing economic growth over the longer run, can increase employment, but as we have seen with the stimulus package, infrastructure projects can be slow to implement. In addition, because these polices often involve expenditures on materials and equipment as part of the construction project, the cost per job is high.

Government consumption has effects similar to spending on non-durables by consumers, and government spending of this type can increase the demand for goods and services and hence increase employment. But as with the tax cuts that increase demand described above, these effects are indirect and uncertain, and take time to be fully realized.

Government spending on labor services
Government spending on labor services occur when the government hires labor directly to accomplish some task, e.g. to inspect food service establishments. The government does this all the time, of course, but unlike tax cuts or government spending, the purchase of labor services is not generally used as a stabilization tool. The reason is that such policies are considered make work by many people, but there are plenty of worthwhile projects in local communities that would benefit from having labor applied to them, and many of the so-called make work projects of the New Deal are still with us today. In general, these are considered last resort types of polices and the last major federal attempt at this was the WPA program during the Great Depression.

Given the poor state of the labor market, the uncertain and apparently meager effects of the tax cuts that were part of the stimulus package, the insufficiency of the first round of government spending, and the time it would take for other polices such as more infrastructure spending to be put into place, direct employment creation policies through government purchase of labor services are worth taking seriously. With the exception of aid to state and local governments, this may be one of the quickest, most direct, and cheapest ways of creating jobs (an Economic Policy Institute proposal estimates that a public jobs program creating one million jobs would cost $40 billion per year over a three year time period).

What will happen?
It is not clear at this point how committed the administration is to expending the political capital it would take actually to implement such a plan, we will have to wait and see if this is all for show or if the forum leads to actual policy change. In addition, it is noteworthy that the original title of this meeting was the Forum on Jobs and Economic Growth which suggests that growth remains an important objective for the administration and will shape whatever job creation policies, if any, the administration chooses to support.

We may get some change in employment policy as a result of the forum, but I don't expect any large policy initiatives, certainly nothing like what is needed to make a large dent in the employment problem.

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