Please pass the tax credit, it's our only hope!
The September jobs report was a perfect reminder that the labor front continues to get worse before it gets better. And with no drivers for job growth on the horizon, the government may look to take matters into its own hands.
NYT reports the government may reward companies in the form of tax credits for creating new jobs. It’s an idea that hasn’t been tried since the 1970s, but it’s increasingly gaining support – especially as the unemployment rate approaches the double-digit rate. The goal is to help jobless folks find work as well as encourage small-business development.
The Times has the details:
One version of the approach, to be unveiled next week by the Economic Policy Institute, a labor-oriented research organization, would give employers a two-year tax credit if they increased the size of their work force or added significant hours of work (for example, making a part-time worker full time). Employers would receive a credit worth twice the first-year payroll tax for each new hire, amounting to several thousand dollars, depending on the new worker’s salary.
“It’s beautiful if it can be timed at a dire moment like this, when unemployment is way too high and appears to be going somewhat higher,” said Mr. Phelps, an economics professor at Columbia, lamenting that the president dropped it from the $787 billion stimulus plan approved in February. “But it’s a pity that this wasn’t done a year ago.”
The Times says the proposal has some bipartisan appeal , which is definitely much-needed as its hard to find a sector of the economy that will fuel job growth in the near future.
The Atlanta Fed’s macroblog looks at the notion of a small business-fueled employment recovery and concludes the prospects aren’t promising. Since 1992 when employment levels have been expanding, firms of less than 50 employees have made up nearly 1/3 of the nation’s employment growth. And during 2001 recession, these firms made up only 9% of job losses.
In the current recession, however, those same small businesses have made up 45% of nation’s job losses. The length and severity of this downturn, combined with credit drying up, has severely hampered small businesses, meaning “the post-recession employment boost these firms typically provide may be less robust than in previous recoveries,” macroblog says.
With the unemployment rate at 9.8% and inching higher by the month, several economists are in favor of the tax-credit proposal, including Nobel laureate Edmund Phelps, Harvard’s Dani Rodrik and former labor secretary Robert Reich, the Times says.
Of course not everyone’s a fan. Critics say the proposal could actually reduce job opportunities if it isn’t passed immediately, the Times says. Knowing the proposal could pass sometime in the near future could force employers to think twice about currently hiring anyone before the tax credit officially becomes a law. And the more time it sits on the table, the longer employers may wait to start hiring again.
Others simply disagree with the principals behind the proposal. Granting tax credits to increase jobs is an idea that looks good on the surface, but “the devil is in the details,” Harvard economist Greg Mankiw writes on his blog. “The more one studies those details, the less attractive the proposal looks.”
This idea generally gets tossed around when the economy tailspins into recession. But reducing the payroll tax rather than creating a tax credit for new hiring would be a simpler and far more effective fiscal stimulus, Mankiw argues.
“The attempt to try to identify marginal jobs in order to give them a better tax treatment than existing jobs creates a range of unintended consequences,” he says.
