March 18 2010
Vetting the Hiring Subsidy
Bishop analyzes bill approved by Senate
The hiring subsidy bill expected to become law in a matter of days will not spur the windfall of jobs some might expect, says Professor John H. Bishop, who co-authored a study which underpinned some of the proposals which competed for congressional attention.
The approved bill exempts employers from the 6.2 percent payroll tax on earnings through 2010 of workers hired after being unemployed for at least 60 days. For every one of those workers who completes a full year on the job, a business also receives a $1,000 tax credit.
In an interview, Professor John Bishop explains why he thinks the legislation – expected by some to produce $15 billion in tax breaks for businesses – will not prove a job creation engine.
What's wrong with this bill?
"It subsidizes filling vacant positions with unemployed people, rather than rewarding a business for increasing its scale. It doesn't incentivize creating jobs. It's a very inefficient way of stimulating the economy. Most of the companies which are going to get the subsidy will be replacing someone who left a job or was fired.
How many new hires this year will qualify businesses for the subsidy?
"One out of 10 -- five million workers out of the 50 million hired annually.
What types of businesses would benefit the most from this bill?
"It is particularly good for high-turnover businesses such as restaurants, some of which replace half of their workers every year. It will also help companies with cash flow problems by reducing the cost of an additional worker. But, will they take the government tax credit as extra profit, use it to pay down debt or to expand total employment?"
The bill stipulates new hires must not have worked more than 40 hours in the past two months. How will business owners react to that requirement?
"They don't like it when government tries to influence who they hire. Both employers and job applicants believe the only "just" basis for choosing one person over another is skills and expected job performance. Bringing in other considerations goes against long-standing norms. Most resumes and job applications do not reveal whether an applicant worked in the last two months. Employers and applicants would find the verification process—signing an affidavit swearing that they have not worked for the past two months—rather embarrassing.
What job creation mechanism would have worked better?
"A much more effective way to increase aggregate employment is to reward firms that increase their 2010 payroll and employment levels above 2009 levels and leave the selection of who to hire to the firm. That is what the president proposed. The Jobs and Wages Tax Cut proposal would have added 1.49 million jobs to the economy by the end of 2010, about eight times the number I expect this bill to generate."
Could you be underestimating the bill's potential?
"I hope so. I hope it creates lots of jobs and substantially reduces unemployment, but I'm not expecting that to happen."
More information about Bishop’s job creation research can be seen at http://www.ilr.cornell.edu/news/jobCreationTaxCredit.html.