The New York Times, November 19, 2009, Thursday

The New York Times

November 19, 2009, Thursday

The New York Times

The Case for a Job-Creation Tax Credit
By JOHN H. BISHOP

John H. Bishop, a professor at Cornell University’s Industrial and Labor Relations School, was co-author of a recent proposal on temporary job-creation tax credit published by the Economic Policy Institute.

Last week, President Obama announced that he was convening a jobs summit meeting, where policy makers would discuss how to reduce the country’s high unemployment rate. One idea that has received attention lately — and which I heartily support — is a job-creation tax credit, which would make it cheaper for employers to hire new workers.
John H. Bishop

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.

Here’s how the credit could work, at least according to the proposal I wrote with Timothy Bartik at the Upjohn Institute: 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.

Based on Daniel Hamermesh’s thorough review of econometric research on labor demand, Dr. Bartik and I have estimated that this temporary credit would increase employment by 2.8 million by the end of 2010. We also estimate that it would cost the federal government less than $6,000 per full-time equivalent job.

Assuming these numbers are right, they make the policy an extremely cheap, efficient way to bolster the job market, especially relative to some other proposals, like public works projects.

The credit accomplishes so much so quickly because it enables the private sector to figure out which jobs make sense for the long run. Crucial decisions about whom to hire and for what kind of work are not made directly by the government. Rather, they are radically decentralized to the 6.5 million employers who would still pay 85 percent of the cost of taking on a new worker; who select, train and supervise the new hires; and whose vision defines the purpose of their firm’s expansion.

A similar two-year temporary credit – called the New Jobs Tax Credit — was established early in 1977, and studies have found it successful.

Firms that increased employment by 2 percent or more in 1977 and 1978 received a New Jobs Tax Credit of about $7,000 (in inflation-adjusted terms) for each additional worker they employed. It took awhile for employers to learn about the credit, but by 1978, most knew of it and one-third were receiving it.

From January 1977 to January 1979, employment rose 11.1 percent, a record-breaking pace for peacetime. Unemployment rates fell nearly 2 percentage points. The chart below plots changes in the employment-population ratio — the share of the working-age population that has a job — from 1969 to the present. Notice the recovery stalling out in 1976, the acceleration of growth during 1977-78, when the credit was operating, and the abrupt slowdown in the growth after its expiration.
John Bishop

One particularly impressive part of the policy’s track record is that employment did not collapse when the tax credit ended. For 15 months unemployment remained stable, and the employment-population ratio stayed at its up-to-then record level.

The implication of these trends is that eventually, firms were going to start expanding and hiring new workers. The tax credit probably induced some of these employers to expand a little earlier than they otherwise would have, ushering in a faster jobs recovery.

What does the success of the tax credit in 1977-78 imply about the likely impact of a new credit now?

The current pool of underutilized labor and capital is huge, much larger than it was 33 years ago, so we expect the proposed credit for 2010-11 to have a much larger impact on employment.

Now, some might argue that a 15 percent discount on a new hire won’t be enough to encourage employers to take on more workers, because companies might still feel demand for their goods and services is too weak to justify expansion.

Where will the demand come from for the products and services the extra workers produce?

We expect demand to come from a few sources: 1) spending by new employees; 2) extra spending by growing firms; 3) abroad; 4) lowered prices causing more real demand; and 5) investments made now rather than later.

Here’s how the process would look:

1. Some firms expand.
2. The new hires spend much of their earnings.
3. We expect roughly two-thirds of employers will grow enough to earn a job-creation rebate. These rebates will improve cash flow and stimulate demand for raw materials and the supplies used to make finished products. Labor-intensive expansions will require less borrowed capital, so banks will be more willing to help with financing.
4. The credit lowers the cost of having American workers provide a service or make a product. American firms will therefore be more competitive as exporters and domestic suppliers.
5. The temporary 15 percent reduction in the marginal costs of labor at so many companies will temporarily reduce prices and improve the quality of services provided. Both of these responses increase the demand for real output — and the workers who produce it.

Temporary tax credits for job creation make it cheaper for companies to invest in labor-intensive expansion. It’s like putting workers on sale for two years. And the policy imparts a very motivating message to companies: don’t wait until after the economy comes roaring back. Hire now the talented people you could not attract in 2007. Get a jump on your competition.

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