Tax Credits for More Jobs

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Dean Baker
Room for Debate, December 6, 2009

This article was one of several in response to the question "Should Public-Sector Jobs Come First?" on the New York Times' Room for Debate blog.

The debate about how to create jobs to reduce unemployment has become tangled in unfair criticisms of the stimulus bill. Clearly, it wasn’t big enough and it could have been structured to create jobs more directly. But the most common criticisms about it have been just plain silly.

Some have complained that stimulus money can’t accurately be tracked to individual jobs; but that is the way the economy works. If we had a tax cut that created jobs, does anyone think we could identify the specific jobs that were created? The same will be true of the vast majority of the jobs created by the stimulus.

The complaint that using the stimulus money to “save” jobs is less legitimate than using the money to “create” jobs is equally silly. Employers lay off two million workers every month. Reducing this number by 200,000 it has the same impact on the labor market as creating 200,000 additional jobs. Is there any reason to be upset that we have prevented layoffs, rather than generating new jobs while allowing the layoffs to take place?

The reality is that the jobs situation is a disaster story and likely to remain horrible for years to come. The Congressional Budget Office projects that the unemployment rate will still be over 7.0 percent in 2012. My colleague, John Schmitt, calculated the wage loss associated with this downturn at more than $1 trillion.

Two-thirds of this $1 trillion shortfall is yet to come, so we still have a very real jobs problem. The most cost-efficient route for generating jobs quickly is a tax credit for employers who reduce work hours, without cutting pay. The logic is simple. If employers reduce each worker’s hours by 5 percent, they will need 5 percent more workers. If we got employers of 50 million workers to cut hours by 5 percent, then it would create 2.5 million jobs.

This can be done very quickly and effectively. I have calculated the cost per job at just over $20,000, which means that two million jobs cost about the same as the escalation in Afghanistan.

We know this work-sharing system works — Germany has used work-sharing to keep its unemployment rate at 7.6 percent. This is the same rate as before the recession, even though its downturn was steeper than ours.

Some have argued that it is too late to follow the German model because the economy is no longer shedding jobs rapidly. This argument misunderstands the labor market. Every month 2 million workers lose their jobs. If work sharing reduces this figure by 10 percent then it has the same effect as creating 2.4 million new jobs by the end of the year.

There are already three bills in Congress that would promote work sharing. Senator Jack Reed and Representative Rosa DeLauro have proposed bills to expand existing state programs. Representative John Conyers is proposing a tax credit. There are other possible routes to create jobs, but ignoring 15 million jobless workers is not a serious option.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy. He also has a blog on the American Prospect, "Beat the Press," where he discusses the media's coverage of economic issues.