I’ve stayed out of politics this fall, but a comment on Obama‘s new economic proposals is a good teaching device.
He has proposed an income-tax credit of $3,000 for each new job above a company’s current employment level in the next two years.
We did something very similar in 1977, the New Jobs Tax Credit (N.J.T.C.), and it illustrates economics at work.
Unlike inefficient subsidies that provide funds for an activity that would have been undertaken anyway, this kind of marginal tax credit only subsidizes new activity. The benefit per dollar of credit is greater with this approach; it is more target-effective.
Indeed, a number of studies evaluating the old N.J.T.C. suggested it had substantial effects in stimulating employment.
Moreover, the jobs created especially benefited low-wage workers: not surprisingly, since the cap on the credit per worker made it a more attractive percentage subsidy for hiring lower-skilled, lower-wage workers.
Theoretical work suggests it is especially likely to be successful in an economy that is sliding further away from full employment, as we now are.
(Full disclosure: I was one of several who worked on this proposal in the mid-1970′s; like all the others, I take a lot of credit for it. The old saying “success has 100 fathers, failure is an orphan” is relevant here.)
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I’d love to see the data because I don’t believe it for a second. Being in business, I understand that the 3k isn’t an incentive. It’s like someone paying me a buck to buy a TV…what?
Seriously, it’s expensive to hire and train, do you really think that 3k is going to tip the ROI equation? So what we end up with here is money wasted. Run a NPV analysis and 3k isn’t going to tip many scales…I suppose, if your talking teenage employment, maybe the numbers do come out better, but is that where we need “economics in action?”
Lastly, nearly anything that came out of 1975-1980 should be viewed as suspect.
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Israel provides tax incentives for hiring immigrants. While that is part of their efforts to draw people, it also helps the economy; one side effect is not feather-bedding but an increase in a firm’s productive capacity.
I’m usually the devil’s advocate here on these blogs, and I hope no one takes it personally, but I can’t help but wonder…
There’s got to be some sort of inefficiency created by government interference in a non-failing market, such as overall employment. Employers, I would argue, are already making pretty efficient choices on who they decide to hire and who they don’t… If they need another employee on the job, they’ll analyse what the pay required for that employee will be countered with the expected or anticipated productivity. Basic idea.
With a marginal-employee wage subsidy (which is to my understanding essentially what this would be), now the employer can take into account that the cost to the business of another wage earner will be $3000 less, while productivity presumable will not change. Inevitably, this will result in new hires that were otherwise, within a $3000 range, not productive enough to be hired in the first place, compared to their wage or salary.
To me, this reeks of taxpayers paying parts of wages of less productive workers. Sure employment might go up, but if it’s not a result of natural employer incentives to hire more people, is that really a good thing? Taxes will be going up on all the wage earners that ARE productive enough (in their employers’s eyes) to have jobs, to pay the wages of people less productive.
Not sure I’m on board with this one… sorry Daniel.
Charles (comment 1):
Plenty of great things came out of 1975-1980, from The Clash to Star Wars, but thanks for clarifying that your comment was primarily based on your own personal biases.
Presumably incentives like this work by facilitating hires that companies wanted, but could not quite afford to make, narrowing the cost difference between domestic hiring and offshore alternatives and making full-time hiring more attractive versus part-time. All of these things, it seems, would specifically generate jobs and bolster the economy.
“There’s got to be some sort of inefficiency created by government interference in a non-failing market” from Bobby G. This has to be one of the great fallacies of modern thinking.
ALL participants in a market influence the market to their own ends, introducing inefficiencies. Each participant will only expose as much information about their position as they wish or are forced to.
You only have to look at the obvious example of mature industries that are ruled by a few large operators. The risk the operators face in trying innovation etc is higher than that of protecting their market.
Simply stating that any government intervention is going to create inefficiency has been proven false many times and is just hawked around by lobbyists of special interest groups.
The trick is to find intervention that forces the market to act efficiently (if it is not already) which is why I am not sure this particular example is good.
Charles: “I’d love to see the data because I don’t believe it for a second. Being in business, I understand that the 3k isn’t an incentive. It’s like someone paying me a buck to buy a TV…what?”
You’re denying the law of demand. As price increases, quantity demanded decreases. If the price of a TV decreases by one dollar, you may not purchase it, but a handful of people will.
The same is true with the tax credit. Imagine a firm that has $28k to hire an employee, but the employee demands $30k. Without the tax credit, the employee won’t receive the job. With the tax credit, however, the employed can offer $30k, and the cost to the employer is only $27k. The tax credit certainly won’t induce every business to hire new employees, but it will make it feasible for some businesses to hire more workers.
If it worked so well, why wasn’t it kept around? I’m not snarking, I’m asking.