CEPR - Center for Economic and Policy Research

Schumer-Hatch: Money for Nothing

Dean Baker
TPM Café, February 12, 2010

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It's great that the Senate is prepared to do something to help create jobs. Unfortunately, its most likely course of action, the Schumer-Hatch tax credit will probably create almost no jobs.

The basic deal with Schumer-Hatch is provide a tax credit equal to the 6.2 percent employer side of the Social Security tax. This credit would last for the rest of 2010. If the employee is kept on the payroll for a year, then the employer gets an additional $1,000. Only workers who have been unemployed for at least 60 days are eligible for the credit.

There are two basic problems with the credit. First, there are more than 4 million workers hired every month already. A firm could get the credit for any hires among these 4 million who has been unemployed for 60 days, even if they would have hired the person anyhow. This is a lot of money for nothing.

The second problem is that the credit is far too small to provide any significant incentive to hiring. We know from a vast body of research on the minimum wage that employment is not responsive to moderate changes in the cost of the labor. This is why a a 15-20 percent increase in the minimum wage does not lead to any measurable impact on employment.

If a 15-20 percent rise in the cost of labor does not reduce employment, then no one can believe that a 6.2 percent decline in the cost of labor (only for the rest of 2010) would increase employment. In other words, there is little reason to believe that the Schumer-Hatch tax credit would create any noticeable number of jobs. It truly is money for nothing.

We can boost jobs with the right tax credits. Germany and the Netherlands have managed to keep their unemployment rate from rising in this downturn by promoting work-sharing. They give firms tax credits to keep workers employed at shorter hours rather than laying them off. In Germany and the Netherlands workers are experiencing this downturn as longer vacations and shorter workweeks.

We could do that here if we weren't determined to waste money. (Work-sharing is even good for the environment -- if we could ever get the environmentalists to think about the environment.) Anyhow, for now it looks we have to throw out money in the garbage with Schumer-Hatch. Where are the deficit hawks when we need them?

Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.