[Peace-discuss] Obama's anti-jobs program

[C. G. Estabrook]

[More reason for a federal jobs program. Anyone who wants one should be able to 
have a government-provided job at a living wage.  Co-ordinating the work into 
useful projects would have to be done on the federal not state level.  --CGE]

	President Obama's Tax Credit for Cutting Jobs

The country is currently suffering through the worst downturn since the Great 
Depression, with 15 million people unemployed. That might seem a strange time to 
introduce a tax credit that would give companies an incentive to hire fewer 
workers, but that is apparently what President Obama proposes, according to the 
NYT, although it fails to call this fact to readers' attention.

At any point when a business needs more labor, it faces the choice of whether to 
work the existing work force longer hours or whether to hire additional workers. 
There are reasons why any given company may go one or the other direction. From 
the standpoint of maximizing employment, it is obviously desirable to have 
companies opt to hire more workers.

The difference between longer hours and more workers can be dramatic. If 
employers opted to have their existing work force employed on average for 1 
percent more hours, this would fill the same demand for labor as hiring 1.4 
million workers. Countries like Germany and the Netherlands have managed to keep 
their unemployment rate from rising in this downturn by encouraging companies to 
have workers employed for fewer hours. (The unemployment rate in the Netherlands 
is under 4.0 percent.)

This should lead people to ask why President Obama is proposing a tax credit 
that rewards employers for having workers put in longer hours, as described in 
this NYT article. It is possible that it will not have much effect because the 
incentives are not that large, but it is still perverse policy to discourage job 
creation in the middle of a severe recession. The NYT should have asked an 
economist to comment on this job destruction tax credit.

It would also have been worth getting some economists to comment on the proposed 
tax credit for hiring new workers. This credit can be easily gamed, for example 
if a company brings contracted labor onto its payroll. (It is common for 
companies to contract out custodial work, lawn care and other jobs.) This may 
have some positive effect on the quality of these jobs, but it does not lead to 
the creation of new jobs.

There is also a large body of research, most of it connected with increasing the 
minimum wage, that shows that the demand for labor is not very responsive to 
moderate changes in the cost of labor. See for example, "Time-Series Minimum 
Wage Studies: A Meta- Analysis," by Princeton University Professor Alan Krueger 
(with David Card), who is currently the chief economist in President Obama's 
Treasury Department. See also "Making Work Pay: The Impact of the 1996-97 
Minimum Wage Increase " by Jared Bernstein (with John Schmitt), the chief 
economist for Vice President Joe Biden.

If increasing the cost of labor 15-20 percent by raising the minimum wage 
doesn't lead to measurable job loss then it is implausible reducing the cost of 
labor by 15-20 percent will lead to a measurable increase in the demand for 
labor. It would have useful to include the views of an economist who could 
discuss the probability of success of this tax credit.

--Dean Baker

Posted by Dean Baker on January 30, 2010 10:30 AM | Permalink | Share

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