Jobs, Jobs, Jobs, Jobs!

by Jérémie Cohen-Setton on 22nd November 2009

What’s at stake: Now that they've finished their health-care bill, US House leaders are turning their attention to the soaring unemployment rate. House leaders have asked key committee chairmen to offer up proposals that would be compiled into a single larger piece of legislation, with a goal of bringing a "jobs bill" to a House vote before the Christmas break. President Obama also announced that he will convene a jobs summit at the White House next month. In its latest economic outlook released on Thursday, the OECD warned that unemployment is set to continue to rise well into 2010 and to fall only modestly the following year from a peak of over 9 per cent.

Daniel Gross says that the job market will rebound sooner than you think. One reason to hope is the latest data on productivity which, in the third quarter, rose at a 9.5 percent annual rate. Just as investors and businesspeople don't believe things could ever go wrong at the peak of the boom, they have difficulty imagining things can get better at the trough of the bust. And so they respond to rising demand not by hiring new employees but by coaxing existing employees to work harder. But just as hamsters can run only so fast on their treadmills, there are limits to productivity growth. And companies won't have any choice but to hire should the economy expand in the fourth quarter at the same 3.5 percent annual rate it did in the third quarter.

Antonio Fatas says that although 9.5% is a very large number, we have seen similar patterns before, for example in the 1981Q3. Six or seven quarters after the recession had started; productivity was growing at rates which are very similar to what we are seeing now. There is, however, a big difference between the two: in the 1981Q3 recession, we saw GDP growth rates close to 10% (quarter to quarter) seven quarters after the recession started.

Paul Krugman says that it’s time to try something different. And the experience of other countries suggests that it’s time for a policy that explicitly and directly targets job creation. The usual objection to European-style employment policies (see a good example here by Gary Becker) is that they’re bad for long-run growth as they prevent the reallocation of workers from declining to expanding industries. But right now, workers who lose their jobs aren’t moving to the jobs of the future; they’re entering the ranks of the unemployed and staying there. Long-term unemployment is already at its highest levels since the 1930s, and it’s still on the rise. We therefore need policies that address the job issue more directly by subsidizing jobs and promoting work-sharing.

John Bishop of the Economic Policy Institute makes the case for a Job-Creation Tax Credit. The federal government has not tried this kind of policy since the 1970s. But the record of that policy gives hope that a temporary tax credit could help solve our unemployment problems today as they estimate that this temporary credit would increase employment by 2.8 million by the end of 2010 and would only cost the federal government $6,000 per full-time equivalent job. Here’s how the credit could work, at least according to the proposal Bishop wrote: Employers would have to expand their payrolls on net to qualify for the credit, in order to prevent companies from simply firing and rehiring people. They would then receive a 15 percent rebate on any increase in their 2010 wage bill over their 2009 level. Firms would also receive a 10 percent rebate for the increase of their 2011 wage bill over the 2009 wage bill.

Alan Blinder says that the more he dwells on these things, the better direct public-service employment sounds. There are three major ways for firms to exaggerate the number of new jobs created in order to receive the tax credit. One is to fire Peter and hire Paul. This problem can be fixed by awarding the tax credit only for net increases in headcount above, say, last year's base. A second gimmick is replacing one full-time worker by two half-time workers. That loophole can be plugged by applying the tax credit to total payroll costs, rather than to headcount. Making these fixes will however render the tax credit irrelevant to many firms that cut back their employment sharply during the recession. And what about new firms, which have no "last-year's base"? But if we allow new firms to claim the credit, clever people will create new firms in droves.

*Bruegel Economic Blogs Review is an information service that surveys external blogs. It does not survey Bruegel’s own publications, nor does it include comments by Bruegel authors.

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