The New Republic, February 24, 2010
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The latest unemployment statistics show a much worse story than had been previously accepted. The Obama Administration is now projecting that the unemployment rate will average 10 percent this year, 9 percent in 2011, and more than 8 percent in 2012. It is not projected to get back to a more normal rate until 2016.
The severity of the problem would easily justify another stimulus package as large or larger than the one passed last year. Instead, it looks like we are going to get a $15 billion jobs package based on a proposal from Senators Charles Schumer and Orrin Hatch. Not only is the Schumer-Hatch bill too small by a factor of 30 or 40, its design is so flawed that it may not lead to many new jobs at all.
The basic deal is that the bill will exempt employers from the 6.2 percent employer side of the payroll tax for any worker they hire in 2010, if the worker has not been working for at least 60 days. If the business keeps the worker on the payroll for a year, then they would get an additional $1,000 tax credit.
The most obvious problem with this proposal, and most other “new jobs” tax credits, is that it ignores the enormous churning in the U.S. labor market. Every month, roughly four million workers leave their jobs, half voluntarily and half because they’ve been laid off or fired. Employers in turn hire roughly 4 million workers to offset these lost jobs. This translates into the net job growth figure that we hear reported by the Labor Department every month (we lost 20,000 jobs on net in January), but all of the employers adding jobs would in principle be eligible for the Schumer-Hatch tax credit.
This means that we could be giving the tax credit for all of the 4 million hires that would have taken place anyway. The Schumer-Hatch bill does stipulate that the new hire can’t have worked for the last 60 days, but this is a very small limitation. Not only do the unemployed and underemployed qualify (new hires could have worked about 30 hours in this period), but new entrants to the labor market do as well. The vast majority of the beneficiaries of the credit will be businesses that would have hired workers even without the credit.
There is also an easy way to game the legislation. Employers can bring contracted workers, like custodial services and kitchen staff, onto their payroll and get a check from the government. This is just shuffling jobs, not creating new ones.
Finally, we know that employment does not change substantially in response to small changes in the price of labor. There has been extensive research on the impact of the minimum wage on employment, almost all of which finds that the 15-20 percent increase in the cost of labor that resulted from recent increases in the minimum wage have led to no measurable decline in employment. If a 15-20 percent increase in the cost of labor does not cause firms to cutback employment, then we can’t believe that the 6.2 percent decline in the cost of labor from the Schumer-Hatch bill will lead to any noticeable increase in employment.
There are alternatives that will create employment. Germany and the Netherlands have successfully used work sharing to keep unemployment from rising in this downturn, in spite of the fact that their downturns have been steeper than the one here. The basic logic is simple: Instead of paying out unemployment benefits to workers who have lost their jobs, the government divides up these benefits among workers putting in shorter hours. Under the German system a typical worker in the program may be working 20 percent fewer hours and taking home 4 percent less pay. This would likely mean a 4-day workweek. The savings on transportation and childcare would likely swamp the lost pay.
Congress is showing no such creativity. But faced with campaigning during a period of near double-digit unemployment, members are content to brag about passing a “bipartisan jobs bill.”