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Liberal Economists Criticize Schumer-Hatch Tax Credit

time clock by House of Sims (flickr)

time clock by House of Sims (flickr)

If we do see a jobs bill from the Senate, the main component (accounting for 87% of the spending at this point) would be the Schumer-Hatch job creation tax credit. This would give businesses a break on their half of payroll taxes (6.2% of salary) for every worker they hire in 2010 who has been unemployed at least 60 days. It would also offer incentives – $1000, I believe – for every year the employee remains with the company beyond 2010. The projected cost is $13 billion dollars.

Some liberal economists have actually supported a job creation tax credit. One is the labor-backed Economic Policy Institute. However, they are not warming to Schumer-Hatch. Here’s Timothy Bartik of EPI:

Awarding credits for hires can be very expensive. Over a one-year period, the number of hires, as a percentage of total private employment, is over 40% even during a recession. To pay for hires that would have occurred anyway will be expensive and won’t necessarily increase total private-sector employment. The Schumer-Hatch design tries to avoid some of these large costs in several ways. First, credits are limited to hiring the unemployed, apply only to the rest of 2010, and are only worth 6.2% of the new hire’s payroll costs. The retention bonus is of modest size and is delayed. While these limits control costs, they also hamper the credit’s benefits.

Limiting the credit to hiring someone unemployed at least 60 days makes the credit less attractive to employers. Not only does the credit become more complicated to claim (which reduces its effectiveness), But it restricts the employer’s hiring to a more limited pool of workers.

Past experiences (for example, with the Targeted Jobs Tax Credit, the Work Opportunities Tax Credit, and the Welfare-to-Work Tax Credit) suggest that tax credits to encourage employers to hire disadvantaged workers usually elicit little employer interest, and have little effect upon employer behavior. Employers are happy to claim such credits if they happen to meet the credit’s rules, but they are reluctant to change their behavior in response to such targeted tax credits.

EPI estimates that this credit would create no more than 200,000 jobs in 2010. At a price tag of $13 billion, that comes out to about $65,000 per job created. There are more efficient options out there.

Dean Baker of the Center for Economic and Policy Research (CEPR) calls it money for nothing:

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.

Baker’s design of a tax credit to create jobs would promote work-sharing, which would pay companies to keep employees at shorter hours, encouraging additional hiring to make up the workload. This credit is working in Germany and the Netherlands.

Another option, promoted by Marshall Auerback of the Roosevelt Institute, would be direct job creation through a job guarantee program.

The U.S. government can proceed directly to zero unemployment by offering a universal job guarantee available to anybody through the thick and thin of the business cycle. Furthermore, by fixing the wage paid under this job-guarantee program at a level that does not disrupt existing labor markets (a wage level close to the existing minimum wage, for example), price stability can be largely achieved. Other benefits could be provided, including vacation and sick leave, contributions to Social Security, and, most important, health-care benefits, providing scope for a bottom-up reform of the current patchwork health-care system […]

The job-guarantee program would in effect create a “buffer stock” of “shovel ready” labor, which could be employed by the private sector, as private-sector output improves in line with an improving economy. Additionally, the program would allow for the elimination of many existing government welfare payments for anyone not specifically targeted for exemption and would command greater political legitimacy, as society places a high value on work as the means through which individuals earn a livelihood. Minimum-wage legislation would no longer be needed as it would be established via the job-guarantee program. Labor would welcome the safety net of a guaranteed job, and business would recognize the benefit of a pool of available labor it could draw from at some spread to the government wage paid to job-guarantee employees.

Of course, that wouldn’t be bipartisan. So there’s that.

CommunityThe Bullpen

Liberal Economists Criticize Schumer-Hatch Tax Credit

If we do see a jobs bill from the Senate, the main component (accounting for 87% of the spending at this point) would be the Schumer-Hatch job creation tax credit. This would give businesses a break on their half of payroll taxes (6.2% of salary) for every worker they hire in 2010 who has been unemployed at least 60 days. It would also offer incentives – $1000, I believe – for every year the employee remains with the company beyond 2010. The projected cost is $13 billion dollars.

Some liberal economists have actually supported a job creation tax credit. One is the labor-backed Economic Policy Institute. However, they are not warming to Schumer-Hatch. Here’s Timothy Bartik of EPI:

Awarding credits for hires can be very expensive. Over a one-year period, the number of hires, as a percentage of total private employment, is over 40% even during a recession. To pay for hires that would have occurred anyway will be expensive and won’t necessarily increase total private-sector employment. The Schumer-Hatch design tries to avoid some of these large costs in several ways. First, credits are limited to hiring the unemployed, apply only to the rest of 2010, and are only worth 6.2% of the new hire’s payroll costs. The retention bonus is of modest size and is delayed. While these limits control costs, they also hamper the credit’s benefits.

Limiting the credit to hiring someone unemployed at least 60 days makes the credit less attractive to employers. Not only does the credit become more complicated to claim (which reduces its effectiveness), But it restricts the employer’s hiring to a more limited pool of workers.

Past experiences (for example, with the Targeted Jobs Tax Credit, the Work Opportunities Tax Credit, and the Welfare-to-Work Tax Credit) suggest that tax credits to encourage employers to hire disadvantaged workers usually elicit little employer interest, and have little effect upon employer behavior. Employers are happy to claim such credits if they happen to meet the credit’s rules, but they are reluctant to change their behavior in response to such targeted tax credits.

EPI estimates that this credit would create no more than 200,000 jobs in 2010. At a price tag of $13 billion, that comes out to about $65,000 per job created. There are more efficient options out there.

Dean Baker of the Center for Economic and Policy Research (CEPR) calls it money for nothing.

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.

Baker’s design of a tax credit to create jobs would promote work-sharing, which would pay companies to keep employees at shorter hours, encouraging additional hiring to make up the workload. This credit is working in Germany and the Netherlands.

Another option, promoted by Marshall Auerback of the Roosevelt Institute, would be direct job creation through a job guarantee program.

The U.S. government can proceed directly to zero unemployment by offering a universal job guarantee available to anybody through the thick and thin of the business cycle. Furthermore, by fixing the wage paid under this job-guarantee program at a level that does not disrupt existing labor markets (a wage level close to the existing minimum wage, for example), price stability can be largely achieved. Other benefits could be provided, including vacation and sick leave, contributions to Social Security, and, most important, health-care benefits, providing scope for a bottom-up reform of the current patchwork health-care system […]

The job-guarantee program would in effect create a “buffer stock” of “shovel ready” labor, which could be employed by the private sector, as private-sector output improves in line with an improving economy. Additionally, the program would allow for the elimination of many existing government welfare payments for anyone not specifically targeted for exemption and would command greater political legitimacy, as society places a high value on work as the means through which individuals earn a livelihood. Minimum-wage legislation would no longer be needed as it would be established via the job-guarantee program. Labor would welcome the safety net of a guaranteed job, and business would recognize the benefit of a pool of available labor it could draw from at some spread to the government wage paid to job-guarantee employees.

Of course, that wouldn’t be bipartisan. So there’s that.

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