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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You’re taking credit for a portion of the economic policies of the Carter Administration? Cool!
Basic micro tells us that this distorts capital & labor substitutions (as you know), toward a less efficient equilibrium. I have no doubt that it will achieve its desired result of more employment, but there are a number of other policies that achieve that result with a similar cost to economic growth and efficiency.
A tax on new capital should induce the same sort of substitition by making new labor relatively more attractive. This should be particularly true for many low wage jobs where labor and capital are more easily substitutable.
Governments around the world have shown that employment is a policy area where they can successfully intervene (e.g. the Soviets had full employment), but often at the high cost of economic growth and productive efficiency.
I love Obama but I didn’t really understand this proposal. Could I hire somebody in December and get the tax credit and then fire them after a month or so so that they had cost me less than the $3000? Could I not tweak things around to give somebody a different job title and get the credit? Is it truly likely to increase well-paying jobs with benefits? I can’t see how it would do that.
How much has the potential cost of terminating an employee changed since the 70′s? This is, to some extent, a function of unionization. However, one wonders how factors such as the emergence and growth of private discrimination and harassment legal actions have impacted employers, whether or not unionized.
As a small business owner, I can’t see how 3K would do a lot to encourage me to hire additional employees I didn’t plan to hire anyway. What it would make me do is bring things in-house, such as janitorial, which won’t create new jobs but rather shift jobs around.
Mark – mostly I was thinking of economics and Carter…I love the Clash – but I keep a keen eye on them…lol
Kevin – not denying anything. I can create a wiff that supports this as well. But it’s not that way in the “real” world. Picture a board meeting where folks are focused on Margin – do you think anyone is going to seriously consider 3k of credit as an incentive? Not in my business. I recall my econometrics prof warning us about this..all the fancy models and ideas, but when you get out there, it’s like driving a stick shift. Indeed he was correct.
But again – if unemployment in the lower skilled jobs is the goal, maybe they do. I doubt it though. And if they do it might be to the detriment of the business. Think about that one. How could it be to the detriment to have one additional employee and an extra 3k? It can.
But the best thing is I’d bet the same people that support this probably want to raise minimum wage!
This proposal reeks of manipulation. As Deepa suggested, what’s to stop an employer from hiring a person, obtaining the credit, and then firing them? Employers will figure out all sorts of ways around to game this. What about converting a full-time position into two part-time positions?
This is just another way for everyone else to subsidize less productive workers. At the very least, taxpayers will foot the bill. And potentially, consumers could face higher prices and current workers could see their wages decrease.
If higher employment is the goal, how about lowering or eliminating the minimum wage? This also reduces the marginal cost of hiring a worker while having the added benefit of lowering inefficiency.
I work at a small business and I can see how this might help encourage the business i’m at to hire more employees rather than try to find ways around hiring. Right now we send some data oversees every day where a team works on compiling it, a job that could easily be handed over to a part-timer or two here in the office. Likewise, we’ve been dividing more responsibilities among fewer employees as the company tries to expand without actually growing… I would think even a minor credit would encourage the budget-makers to consider creating a few more jobs rather than overburdening the current workforce.
I also work part time in retail, where they can hire as many people as they want and only have to give very few hours (I’ve worked there maybe 200 hours all year, although that will pick up some at the holidays to ).
I’m no economist but I do see how this incentive could be part of a plan that encouraged keeping jobs in the US rather than sending them overseas, however I guess as long as there are enough business people who believe quarter-based profit earnings are more important than creating a lasting infrastructure I guess all the good ideas in the world aren’t going to change their minds. They still want golden parachutes as they crash the plane into the ground, after all.