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, on provision of which, 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 other portion of the proposed tax credit (which does create jobs), which would go directly 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

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