April 26, 2012
Labor Market Interventions and Learning from Other Countries
As documented in Box 1-2 in the IMF's latest World Economic Outlook, unemployment in the advanced economies remained persistently high. That brings to the fore how to best deal with adjusting the labor force so as to bring down structural unemployment (although obviously higher aggregate demand would help). In my view, there is the "are there no poorhouses?" approach (cut unemployment benefits, etc. and thus reduce the natural rate of unemployment). The other is to use evidence-based approaches to improve the labor force quality, and improve job matching, thereby decreasing structural unemployment. This alternative is discussed in a recent La Follette Policy Report, by Robert Haveman, Carolyn Heinrich, and Timothy Smeeding, entitled "Policy Responses to the Recent Poor Performance of the U.S. Labor Market":
[W]hile many EU nations have suffered the same or greater decline in gross domestic product (GDP) during the Great Recession than has the United States, some of them—especially Germany and Belgium—have been much more successful in maintaining employment. Many others have suffered the same younger under-skilled worker job loss as in the United States.
The most successful EU nations have employed an armada of programs during the recession, including government supported short-time work programs (e.g., job sharing), which led to reduced hours of work instead of layoffs. Also, “working time accounts” avoided overtime payments to workers whose total working hours were below average for the firm. Both strategies protect older, more advantaged workers, while encouraging jobs for the unemployed; both are untried in the United States.
Training, Retraining, and Job Search
Europeans also have strong programs for worker (re)training, coupled with job-search assistance, more commonly known as active labor market policies. The most well-known of these are the Danish “flex-security” labor market policies that combine flexible employment standards designed to make hiring and firing easier depending on production with effective retraining institutions and generous (but time-limited) income support programs. Other EU nations have maintained or expanded core job-search assistance and have provided more targeted re-employment services, including training opportunities, for the most hard-to-place unemployed.
U.S. employers, rather than the public sector, account for the lion’s share of spending on formal workplace training—including activities such as on-the-job training, customized training, work-based learning, and tuition assistance. Expenditures on these private-sector programs exceeded $109 billion in 2005 (at a time when the federal government was spending about $5 billion on workforce development programs). A drawback is that employer-based training efforts disproportionately go to better-educated and skilled workers and exclude unemployed people and low-skilled workers. The United States also spends far less on workforce development compared to many of its international counterparts: in 2005, U.S. labor market policy expenditures were approximately 0.4 percent of GDP, with countries such as Germany, the Netherlands, and Denmark outspending the United States by as much as 10 times.
The American Recovery and Reinvestment Act of 2009 allocated approximately $2 billion to expand the federal Workforce Investment Act (WIA) adult training activities to improve individual skill levels and job seekers’ employment prospects. Research suggests that the timing of extra public dollars for training could not be better, as the opportunity costs—or “lock-in” effects—of training are likely to be lower at a time when unemployment rates are high and employment opportunities are poor. The latest evaluation evidence also indicates that these extra dollars would best be directed toward programs serving disadvantaged adults. Such programs are more effective than the WIA and Trade Adjustment Assistance programs serving dislocated workers. A 2008 non-experimental evaluation of WIA programs found the average increment in earnings for adult women (associated with receipt of training) to be 26 percent of their average earnings, with the impact for adult men around 15 percent of average earnings. This same study found no evidence that WIA dislocated worker training programs produce benefits.
U.S. research that examines training outcomes over a longer follow-up period supports strategies that combine skills acquisition (particularly through customized community and technical college training programs) with job search efforts that encourage participants to be selective in job entry, with average increases in participant earnings on the order of 20-25 percent over five years. Further, while youth training programs have been much maligned as generating low returns, a recent review of the evidence points to some promising strategies that combine academic and work-oriented activities and promote more intensive youth engagement in these programs. The Career Academies program, for example, organizes youth into small, intensive learning communities that blend academic, career, and technical curricula. The program establishes partnerships with local employers to provide career awareness and work-based learning opportunities for at-risk students. An eight-year, experimental evaluation of Career Academies showed significant reductions in high school dropouts and higher monthly earnings, months worked, hours worked per week, and hourly wages for participants, compared to control youth.
Measures such as the New Jobs Tax Credit would alter the terms on which lower-skilled workers are hired. They would make hiring low-skilled workers a more profitable and attractive proposition by offsetting constraints on labor demand due to market rigidities and by countering trade and technological forces that curtail employment of less-skilled workers. The policies intend to increase the returns to employers from labor by less-skilled workers, and, in the process, lower business costs and increase output.
In early 2012, a $140 billion bill extending emergency jobless benefits (and a temporary cut to payroll taxes) was passed and signed. Several parts of that bill work toward modernizing the current unemployment insurance system. Now, states can use some of their UI money to encourage unemployed workers back into the work force, including wage subsidies to firms for taking on and retraining jobless workers. The bill also requires states to confirm that persons receiving long-term benefits are engaged in job searches, giving states a window into counseling unemployed workers or providing other job search services. Provisions in the bill also enable and encourage “work sharing” programs designed to reduce layoffs. While these are relatively small steps, they do reflect several of our suggestions and indicate a recognition that the problems with our current UI system need to be addressed; if expanded significantly, they could lead the nation into a new framework for attaining increased work and earnings.
On a related note, the La Follette School of Public Affairs is presenting a symposium on "The Wisconsin Idea at 100: Making the Link to Policy" at the Tripp Commons, Memorial Union, starting at noon today. Topics include "Family Support and Poverty," "Financial Policy," and "Wisconsin as Laboratory."
Posted by Menzie Chinn at April 26, 2012 07:40 AMdigg this | reddit
The New Jobs Tax Credit is the most bizarre idea to come along since I have been alive - and that is a long time!
Let's say that you decide to hire someone to cut your lawn. The kid down the street will do it for $20. The government comes along and says they will give you $5 for every new kid you hire to cut your lawn. Would you really go out and hire another kid for $20 so that you had two kids doing what one can do, and pay $40 to get $5 from the government?
Is it a requirement for someone on the left to remove their brains to belong to the club?
Posted by: Ricardo at April 26, 2012 08:21 AM
Ricardo: Gee, as crazy a tax credit for investment...Would you like to present some actual data on behavioral responses. The point of the post is to use actual empirics -- rather than prejudices.
Posted by: Menzie Chinn at April 26, 2012 09:16 AM
If you know that $20 kid, by all means send him along. In our neck of the woods, even the illegal Mexicans are above $40.
Posted by: Steven Kopits at April 26, 2012 09:58 AM
Germany may have some unique cultural and educational advantages over the rest of Europe and the U.S., especially in the area of vocational education. This video and link to a post regarding U.S. education mindset sheds some light.
Posted by: Bruce Hall at April 26, 2012 10:33 AM
I served on an advisory board for a local high school, which suffered from large drop out rates, gangs, and the like. We tried to establish a program where the students could get job experience and training with businesses in San Diego and neighboring cities. Several of us recruited businesses which would participate. We hit a huge snag. The stuents do not have cars. The public transit system poorly served the particular area of this school. A local shuttle company volunteered to help. The School District shut the program down because letting the shuttle company provide free rides to the students violated the collective bargaining agreement with the school bus drivers.
All of the remedies you recommend are currently legal in the vast majority of states. They are just so darn hard to implement from a standing start. If a manufacturer cut the hours of its current employees in order to hire and train new employees it would make the local evening news as an unfair labor practice. [It isn't an NLRA unfair practice, but that employer would be treated like WalMart]. And, it is very expensive. What is a concientious businessperson to do?
Posted by: JLR at April 26, 2012 11:52 AM
Would you like to present some actual data on behavioral responses.
No. Just as I would not care to present actual data on behavioral responses to a flat earth.
Posted by: Ricardo at April 26, 2012 12:59 PM
I told you I was old!
I also cut my own grass so the government can give the $5 to Slug.
Posted by: Ricardo at April 26, 2012 01:04 PM
My quibble here is with the implied way that unemployment is only being decomposed into two parts: structural and cyclical. It's better to think of three components of unemployment: structural, cyclical and frictional. Some of the things that are being suggested as structural tools would really fit better under the category of solutions to frictional unemployment. For example, job referral agencies, better public transportation allowing low income folks to expand their job search radius, relocation assistance, etc. And those are always a good idea irrespective of the economic climate. But some of the ideas to improve structural unemployment during a recession seem kind of dodgey to me. Increasing current worker productivity is great during an economic expansion, but maybe not so great during a slump. If aggregate demand has stalled and productivity growth allows businesses to keep output level or growing without hiring new workers, that's not good over the long run. Sadly, those are the kinds of things that too many governors...and especially Tea Party darling governors, tend to promote as economic development.
Cheap student loans are a good idea during a recession because they kill two birds with one stone. Not only do they keep workers out of the workforce when the opportunity cost of going to school is very low, but they also improve future productivity after the economy recovers.
JLR I'm not sure that the empirical data would support your claim that unions are standing in the way of work sharing arrangements. First, offhand I cannot think of any country with weak or nonexistent labor unions that also has work sharing arrangements. All of the countries that do have robust work sharing agreements are also countries with strong labor unions. And there's probably a good reason for that, which leads to my second point. Workers without unions tend to have an "everyone for himself or herself" attitude, which employers like because it's easier to squeeze out the last drop of blood. I don't think that describes the kind of workforce that is likely to come together into work sharing agreements all the while singing the Internationale, even if May Day is next week.
Ricardo Your $5 will help pay my salary so Steve Kopits can keep his oil flowing through the Gulf so that oil can go into your big gas guzzling retiree RV motor home. See, one big happy family each doing their part.
Posted by: 2slugbaits at April 26, 2012 02:57 PM
All that matters to us Democrats is that we "crucify" the gas/oil industry....... because this will make the economy better off. We can pour more taxpayer money down the green energy rathole. The DEMOCRAT WAR on the middle class continues.......
Posted by: Jack at April 26, 2012 03:42 PM
Is there any evidence for the New Jobs Tax Credit from the USA? Europe? Canada? The US program strikes me as too young to provide any kind of informative evidence. I see the evaluations and analysis but not 'evidence'. Especially of the kind that should interest us such as the return on public dollars spent. Instead of training people, for example, it could be cost effective to simply give them a smaller amount of cash. In theory, net output is what should interest us.
Make-work tax credits and subsidies have been used to funnel public money to the agricultural sector or to summer students here in Canada. I always thought of them as public gifts to materially comfortable people, and not much more. Given the propensity of the agricultural sector to overproduce, does that constitute evidence of a successful program?
Does Germany have a UI system? Some countries such as Norway do not have UI.
If I understand correctly, poor educational outcomes for minority groups--blacks and Hispanics--in the USA is a growing and looming problem. I'm not seeing anything in the above that addresses that thorny issue. Mind you I don't have any silver bullets in my holster either. First world material ambitions and third world education attainment, skills and productivity levels all make for a nasty mix.
Speaking of evidence-based ideas, we know that non-unionized auto assembly shops have accomplished lower unit labour costs relative to their unionized counterparts. There's a solution to high structural unemployment, reduce the power of unions. Admittedly that solution is likely partial at best but if empirical evidence is sought after, why not? So says this former union organizer.
Perhaps it is time to eliminate illegal immigration? That is if folks are really serious about creating job opportunities for American workers with modest skills. Credibly setting about to eliminate illegal immigration would create a lot of work too.
And then how about that policy economist favourite of a guaranteed annual income? It has yet to be tried but if it provides incentives for folks to at least do some work, then a GAI holds promise.
Posted by: westslope at April 26, 2012 04:48 PM
Westslope: Please click through the link I provided, and then read Box 5 in the referenced CBO document.
Posted by: Menzie Chinn at April 26, 2012 05:04 PM
Much appreciated Menzie. I see the program was used in the late 1970s. I stand corrected. If I may copy and paste a couple of lines.
Assessments of the program’s impact are inconclusive. ...
A report by the Depart- ments of Labor and the Treasury later argued that the two studies could not determine whether the New Jobs Tax Credit increased aggregate employment, because it is impossible to observe what hiring would have been without the credit.
The empirical evidence from the the mid-1970s New Jobs Tax Credit strikes me as ambiguous at best. But isn't that often the case in economic policy assessments?
Further reducing payroll taxes might help. That is a common battle cry among economists and policy wonks in Canada. It is common because payroll taxes appear to carry very little political penalty. (For evidence, see the private polls conducted by the former Liberal government.) In that regard, Canada's Employment Insurance program is believed to have all kinds of perverse effects such as reinforcing high structural unemployment rates but the political will to revamp it beyond window-dressing is simply not there.
Posted by: westslope at April 26, 2012 06:15 PM
You mised it. To get the $5 you have to hire a kid. If you hire my kid rather than Steven's kid your net income will go down by $15. This is why the whole thing is absurd. Menzie seems to think that statisticallly it can be shown that some people are stupid enough to spend $20 to gain $5 and that somehow justifies stupid.
Posted by: Ricardo at April 27, 2012 05:07 AM
Back when I would regularly read OECD publications, they put out material on job training that said the main effect was refreshing skills for people who had been out of the work force for a while. Read that as women raising children. It seemed the other effects tended toward noise. I have an open mind on this but I think job training is a relatively wasteful thing compared to incentives to hire; one finding in these old OECD things was that employers valued their own training more than that received elsewhere.
Posted by: jonathan at April 27, 2012 09:20 AM
Thank you, Ricardo. Every little bit helps.
Posted by: Steven Kopits at April 27, 2012 09:46 AM
Slug: I was not union bashing. I did not say, nor intentionally imply, that unions stood in the way. I am bashing the local school district. They killed the program because of the conflict with the collective bargaining agreement. They did not even approach the union to obtain a narrow waiver. And, we were forbidden from so doing.
Posted by: JLR at April 27, 2012 11:51 AM
As usual, you win the prize for the stupidest comment on the thread. If you knew anything about economics or public policy, you would know that jobs tax credits are available to businesses (not neighbors). And they have the potential to affect the profit-maximizing calculus of businesses by reducing firms' marginal cost of labor. Whether or not they are effective is an empirical question, not resolvable by reference to irrelevant analogies of neighbors hiring each others kids to mow the lawn.
Posted by: MarkOhio at April 28, 2012 06:44 AM
My problem is that I have never been an academic - except for giving presentations in various college finance classes on successful business practices. You see I have problems understanding the academic mindset because I have always dealt with practical problems like hiring people to actually do a job and giving a return to businesses. I did help a friend incorporate a non-profit, but even there we could never figure out how to spend $20 to gain $5 and come out ahead.
Posted by: Ricardo at April 30, 2012 05:39 AM
I'm having trouble understanding how you could possibly succeed in business with such a poor understanding of how finances work. I've been partner in a small business, and also done financial analysis and accounting for large businesses. Of course, you could have simply been trying to provide a deceptive straw man in order to help your argument.
Let's replace your lawnmowing kids with a real business example:
You have a strawberry farm, and hire the neighborhood kids to pick. You pay them $20 an hour, but it takes a month of training before they can pick quickly and carefully enough to be worth the wage, so you take a loss averaging $3 an hour during that period. Furthermore, some of them are simply unwilling or incapable of coming up to speed, so they're a dead loss the whole time.
With a government subsidy of $5, you can afford to hire them during the training period. Furthermore, you can afford to hire some of the ones that don't work quite as efficiently.
Without the subsidy, you have to be careful expanding your production, since a large increase in hires could put a big strain on your margin of profit for that year. With the subsidy, you are free to expand, since the losses from greatly expanding training have disappeared.
That is how a Jobs Tax Credit works, in real business.
Posted by: Daulnay at April 30, 2012 08:51 AM
Ricardo asked "What is the empirical evidence that NJTC increased employment?"
In 1977 and 1978 The New Jobs Tax Credit offered firms a 50% tax credit for increases (of at least 2% over the prior year) of their Federal Unemployment Tax base. The maximum claim any single firm could makes was $100,000 so the stimulus to adding employees was focused primarily on small and medium sized firms. The NJTC lowered the marginal cost of adding low wage and part-time staff by roughly 40%. The employer’s deduction for wages was reduced by the amount of the credit.
Four studies of the impact of the 1977-78 NJTC have been published (NFIB 1978, AER, May 1979 pp. 124-130 & 173-179 and an article in Studies in Labor Markets edited by Sherwin Rosen). Two employer surveys found that more than half of employers were aware of NJTC by summer 1978. Perloff and Wachter’s analysis of a special Census Bureau survey found that firms that were aware of the credit grew 3% faster than other firms. Bishop’s monthly time series models of construction and retail employment found a statistically significant acceleration in employment growth in 1977/8 as knowledge of the credit spread.
Figure 1 plots changes in the employment-population ratio from 1969 to the present. Notice the recovery from the 1974 recession stalling out in 1976 (when private payrolls grew only 3.4%), and then the acceleration of growth during 1977-78 when the credit was in operation. From January 1977 to January 1979 employment rose 11.1 percent, a record breaking pace for peace time. Unemployment rates fell nearly two percentage points.
Industries eligible for subsidy grew more rapidly during 1977 and 1978 than uncovered industries (eg. government and private colleges). Growth in 1977-78 was particularly rapid in industries with many small firms: 18 percent in construction, 10.9 percent in retail trade, 10.8 percent in professional and business services and 11.2 percent in physicians offices. Industries dominated by large firms grew more slowly—eg. 6.6 percent for utilities and 8 percent for manufacturing.
The most persuasive evidence of NJTC’s impact is the very abrupt slowdown in employment growth immediately after NJTC is terminated in January 1980. The three point increase in the E/P ratio from January 1977 to January 1979 ends abruptly when NJTC expires. The growth of private employment slows to 1.6% from January 1979 to January 1980. For 15 months unemployment remained stable and the employment-population ratio stayed at its up-to-then record level. Apparently, the temporary character of the employment subsidy induced some employers to expand in 1977-78 rather than later..
By the third quarter of 1980, the unemployment rate had returned to its 1976 level of 7.7 percent. Was this due in part to an unwinding of the NJTC’s employment stimulus? Possibly, but we will never know because the American economy experienced two huge shocks—a doubling of oil prices (after the February 1979 Iranian Revolution) and the Federal Reserve’s adoption of a tight monetary policy on October 1979—that would defeat any effort to tease out the effect of a NJTC phase out.
Posted by: John Bishop at April 30, 2012 10:28 PM