President Obama will unveil a new jobs plan shortly after Labor Day. Unofficial reports suggest it will include a combination of initiatives to increase hiring indirectly by stimulating aggregate demand, while simultaneously encouraging hiring with tax credits and training programs. These initiatives may include:
- An extension of federal funding for emergency unemployment benefits
- An extension of the payroll tax holiday, possibly expanded to include the employers' portion of Social Security taxes
- An extension of temporary businesses "expensing" of capital investments
- A new tax credit for businesses that increase the size of their workforce
- Infrastructure spending, perhaps including renovation of public schools
- A job-training program targeting the long-term unemployed, possibly modeled after a program in Georgia
- To pay for these short-run initiatives, the President may seek more long-term deficit reduction than called for under the recent debt ceiling deal
We estimate that extending through 2012 the employee payroll tax holiday, emergency unemployment benefits, and business expensing provisions would boost employment roughly 600,000 by the end of next year, with the effect quickly dissipating over the following two years. A temporary reduction in the employer payroll tax in 2012 may pull some employment forward from later years, as might a temporary tax credit for hiring, but we expect these effects to be negligible in such a weak economy. Infrastructure spending can make good economic sense in both the short-run and long-term, particularly at today's low interest rates, but takes time to ramp up and will be limited in scope by current political realities. Training programs could result in the faster re-employment of some workers, reducing structural unemployment. However, because none of these ideas address the main impediment to hiring-persistently insufficient final demand-our expectations for the success of a jobs bill are, well, not so great.
EXTENDING UNEMPLOYMENT BENEFITS
Roughly speaking, extending unemployment benefits through 2012 would cost $60 billion, boost real GDP growth 1/4 percentage point over the year, and raise employment 200,000 by the fourth quarter. Of course, these effects would reverse after 2012 following the expiration of the benefits. The hope, then, is that the economy gains enough momentum in 2012 to keep growing strongly in 2013 when the benefits expire. Otherwise, the issue of yet another extension of unemployment benefits surely will be re-visited.
Furthermore, there is a strong irony here. Recent research suggests that emergency unemployment benefits have increased the unemployment rate by raising the labor force and perhaps by reducing the intensity of job search. Our own estimate is that these benefits currently boost the labor force enough to raise the unemployment rate 0.6 percentage point. Hence, extending unemployment benefits for another year will raise GDP growth and employment modestly, but also prevent an even larger decline in the labor force and hence a decline in the unemployment rate.[1]
EXTENDING THE PAYROLL TAX HOLIDAY
Extending the current holiday on the employee share of Social Security taxes through 2012 would, roughly speaking, cost $120 billion, boost real GDP growth 1/2 percentage point over the year, and raise employment 400,000 by the fourth quarter, assuming (as we do) that employers don't use the holiday as an opportunity to limit raises and or bonuses. Expanding the holiday to include the employer share of Social Security taxes would double the cost but not the stimulus, unless employers passed their tax savings on to workers. In our modeling, a cut in the employer share of payroll taxes goes almost entirely into profits with little effect on either GDP or employment. Hence, we rate expanding the payroll tax holiday to include the employer share of Social Security taxes as an ineffective way to stimulate aggregate demand and hence to boost employment.
Some argue that reducing payroll taxes will encourage hiring independent of any impact on employment through aggregate demand. At full employment a permanent reduction in payroll taxes could coax forth additional labor supply while inducing a substitution of labor for capital (which, incidentally, would tend to reduce capital expenditures-an important component of aggregate demand). However, with employment constrained by a lack of aggregate demand, the principal effect on hiring of a temporary reduction in payroll taxes would be to convince employers to pull hiring forward from 2013 (or beyond) because the certain tax benefits of hiring in 2012 exceed the expected benefits of delaying the hire until 2013 or later. It is next to impossible to assess for how many employers this calculus favors hiring sooner than later. However, with the consensus forecast now showing little cyclical improvement in the economy over the coming year, and with little risk of a labor shortage anytime soon, we expect most employers to conclude that it remains a bad time to hire, even with the tax benefit.
A JOBS TAX CREDIT
The President reportedly is considering a tax credit based on the net change of a firm's workforce over a year. Such a credit would have to be carefully designed to prevent firms from "gaming" it. In addition, to have maximum immediate impact, the credit would have to be temporary. Ironically, if maintained long enough, such a credit would, by reducing the relative cost of hiring workers from a growing labor force, encourage firms to substitute labor for capital, thereby reducing labor productivity and hence real wages-probably not the intent! As a temporary measure a jobs tax credit could, like the payroll tax holiday just discussed, encourage firms to pull forward hiring forward from 2013 (or beyond) if the certain tax benefits of hiring now exceed the expected benefits of hiring later. Hence, we have the same guarded assessment of the jobs tax credit as we do of the payroll tax holiday.
EXTENDING EXPENSING
Special expensing provisions for businesses are slated to expire at the end of this year. Extending these provisions would lower the cost of capital, stimulate investment spending and hence aggregate demand and employment, but also induce a largely offsetting substitution away from labor towards capital. The net effect is a relatively small boost to employment. We estimate that extending the expensing provisions through 2012 would boost real GDP growth by about 0.1 percentage point, with a change in employment that, by the end of next year, is lost in the rounding.
INFRASTRUCTURE SPENDING
Reports suggest that the President may propose spending tens of billions of dollars to renovate the nation's public schools. Whatever the project, infrastructure spending certainly stimulates aggregate demand and employment, and also has a relatively high short-run multiplier. Furthermore, especially at the current cost of federal debt, there surely are infrastructure projects with a positive net return to society in the long run. However, as we think was learned following the enactment of the 2009 stimulus bill, there are fewer "shovel-ready" projects than once argued. Given delays arising from environmental issues and local battles over eminent domain, as well as lengthy construction timetables, the spend-out schedules for new infrastructure programs can span the better part of a decade.
For example, suppose Congress appropriates for public construction $50 billion - a lot in today's partisan political climate, and more than appropriated under the 2009 stimulus bill. Spend-out schedules shown by the Congressional Budget Office for infrastructure spending suggest that in the first full year following the appropriation of funds, perhaps no more than 15% of the total (or $7.5 billion) would actually be spent. Assuming a multiplier of 2, this would raise real GDP by less than 0.1% at the end of one year. Through a typical Okun's law, this would raise employment by roughly 75,000. The peak employment effect would occur in the second and third years, but would still reach only about 125,000. This is just one month's growth of employment, even in today's weak economy.
If public works projects are worthwhile as long-run investments, now is certainly an opportune time to start them. However, infrastructure spending cannot jump-start near-term hiring unless ramped up at a pace and on a scale that, outside of wartime, would be unprecedented. Some economists, like Princeton's Paul Krugman, advocate exactly this policy, but in today's political climate it simply won't happen.
JOB TRAINING PROGRAM
Press reports also suggest that the President's plan will target the long-term unemployed, and he has lauded a program in Georgia, called Georgia Works, under which participating companies, at no cost to themselves, train workers for eight weeks at the end of which companies can offer trainees jobs or not. During the training, workers can receive unemployment benefits as well as a modest stipend to cover transportation and other out-of-pocket expenses. Since 2003, about 1/4 of participating workers eventually were hired by the companies that trained them, and 60% quickly found gainful employment somewhere.
Long stints of unemployment erode workers' skills, earnings, and morale, so a program that improves the match of skills supplied and demanded in labor markets seems appealing. It could help reduce structural unemployment. Still, it is unrealistic to think that Georgia Works could be quickly replicated nationwide; it certainly would be expensive to fund and administer. There also are legitimate concerns regarding design and effectiveness. Any such program must prevent firms from repeatedly exploiting what amounts to free labor. Labor economists have not studied Georgia Works sufficiently to know whether participating workers would have found jobs anyway. With unemployment currently so high, a ready supply of qualified job applicants might undermine the perceived value to employers of the free training. Furthermore, training does not address the issue of insufficient final demand. The take-up rate on such a program could be disappointingly low if, in this weak economy, firms aren't looking to hire even a well-trained worker.
LINKING SHORT RUN AND LONG RUN
The President would be correct to link short-term stimulus with credible long-run deficit reduction. Without the latter, the former cannot be enacted. And, financial markets (not to mention S&P!) could react badly to the cost of a short-term jobs bill not matched by a convincing willingness to pay for it later. The more near-term stimulus the President requests, the more long-term deficit reduction he must seek and, hence, the more likely the long-term deficit reduction must include tax hikes opposed by Republicans and entitlement cuts opposed by Democrats. Therefore, a dilemma for the President is that the more stimulus he requests the greater the chance of a political deadlock that precludes any jobs bill at all.
SUMMING UP
Temporarily extending the current payroll tax holiday, emergency unemployment benefit, and business tax breaks will temporarily boost GDP and hence employment, albeit modestly. For temporary training programs and hiring incentives to have much impact now, firms must be confident that when the temporary programs and incentives expire, economic conditions will validate the decision to hire earlier rather than later. In today's economy, there's certainly no guarantee this will occur. For infrastructure spending to make a big dent in the unemployment rate, it would have to be done rapidly and on a scale that is impossible in today's political climate. In sum, and disappointing as it may be to unemployed Americans, there simply are limits to what a jobs bill can achieve today.
[1] See Macroeconomic Advisers' Macro Focus, "Allowing Extended UI Benefits to Expire in 2012 Could Lower NAIRU by 2/3 of a Percentage Point & Other Effects on Unemployment and the Labor Force" (Forthcoming). Our current forecast, which assumes unemployment benefits are not extended, incorporates a related decline in the unemployment rate over 2012. This explain why our forecast shows declining unemployment even in the face of very sluggish GDP growth.
This is from a commentary that was published on August 24, 2011.
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