Wanted: Cash for Hires

Picture 2It’s not often that the government of the United States has anything to learn from the government of Singapore, but when it comes to job creation the city has something to offer. The Jobs Credit initiative provides cash grants to employers on a certain percentage of monthly wages per employee. The result: unemployment remains among the lowest in the world at 3.3%, even though the wider Singapore economy has continued to contract. Obviously it’s much easier to do this in a single city and it may not transfer to America, but we seem to be fresh out of ideas that work when it comes to creating jobs.

Despite hundreds of billions of dollars in stimulus spending and lots of government programs, we’re now close to 10% unemployment, having lost 7.2 million jobs since the recession began. If the economy were creating 200,000 jobs a month it would still take three years just to get back to where we were. And that isn’t all. The economy needs an additional 100,000 jobs a month to keep up with population growth. If the job market returns to the rapid pace of the 1990s — adding 2.15 million private-sector jobs a year, double the 2001-2007 pace — the U.S. wouldn’t get back to a 5% unemployment rate until 2017.

So what’s holding things back?

Plenty. Most jobs come from the private sector, and that has been hit with a double whammy of first an increase in minimum wage, and second a lack of sales. The increase in minimum wage couldn’t have been worse timed. Whatever the merits of increasing minimum wage, it does nothing to increase employment. That change alone is directly responsible for increasing the unemployment rate for teens to 26% — the highest rate since 1948. Which reinforces the second problem: some $385 billion fewer was paid out in wages and salaries over the last 12 months. Small and medium businesses, which generate most of the jobs in the country, are the hardest hit. Sales have dropped, credit is still tight, and legislation like healthcare and cap-and-trade only adds to uncertainty over costs. Instead of a concerted focus on job creation, the administration and Congress keep coming up with asinine ideas like Cash for Clunkers.

The First Law of Motion

If there’s a bright spot here it’s that historically, the harder the fall, the faster the recovery. Call it the economic version of Newton’s law that every action has an equal and opposite reaction. Economic growth jumped following deep recessions in the past. Following the depression, when unemployment hit 25%, the economy grew at an almost 10% annual rate for four years. The unemployment rate dropped by 11%. Following the deep recession of 1981-82, the economy grew an average of 7.7% for six years. The Economic Cycle Research Institute, which has successfully predicted the start and end of the last three recessions, has an index on the U.S. economy, and points to a very strong recovery in the coming months. That’s good news, but jobs growth doesn’t always parallel economic recovery.

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A near immediate impact on the jobs picture could be achieved by following the Singapore example – a tax credit for businesses that create jobs. For such a program to work, the credit would have to offset the cost of creating jobs — basically equal to the payroll cost of new jobs created — and it would have to be around for a few years. That would light a fire under employers and nullify the effect of the two factors limiting job growth that I mentioned above.

What’s needed is action where it’s needed the most. Trouble is that the need to do something drastic for job creation doesn’t seem to be registering in Washington. Instead, on the heels of the Cash for Clunkers boondoggle we have Dollars for Dishwashers — a program to provide rebates for buying new energy efficient appliances. What’s next? Pennies for Potties, to put in new toilets?

Tell your representatives to call 65-6235-8577: the Prime Minister’s office in Singapore.

Raghav Singh, director of analytics at Korn Ferry Futurestep, has developed and launched multiple software products and held leadership positions at several major recruiting technology vendors. His career has included work as a consultant on enterprise HR systems and as a recruiting and HRIT leader at several Fortune 500 companies. Opinions expressed here are his own.

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12 Comments on “Wanted: Cash for Hires

  1. Raghav, both the tax credit theory and the impact of the minimum wage have been well studied and the consensus points to the opposite of your conclusions.

    On the min wage- the findings are that the number of wage earners at that wage is not high, that the market for those type of workers is relativly inelastic, and that the overall economic impact is not material. The Card and Krueger study is usually the one most often debated in this instance, but even the most anti-minimum wage economists now agree the impact is not massive either way.

    On the tax credit, it would be OK if the actual tax rate paid by corporations were not so far from the nominal tax rates they would pay without corporate welfare or a million exemptions. If they dont pay much tax now, it does no good to credit them for hires, and the cost of a very few hires will easily meet the entire tax liability in many cases, since wages in even professional roles don’t often exceed 60% of operating costs, in many cases being far lower (automakers pay around 12% of gross sales in wages).

    No, the only way to drive job growth is to drive the underlying economic activity AND to make sure to the extent possible that rewards are in line with production- when they become uncoupled (as they seem to be right now) you have a very wide gap between well-off and everyone else, and you have imbalances in areas of the economy.

    My suggestion would be to kill the deduction on interest expense and add one for interest income (to encourage savings and careful use of debt), to return to high marginal rates for very high income earners (eases the deficit, does not impact job creation very much, and is not as unfair as it sounds because nobody makes a gazillion dollars without a lot of public spending going on somewhere to create the conditions to make that scratch)

    Beyond all that, we need a moral re-center about pissing money away on stupid shit (to use appropriate language) from McMansions to overpaid sports and media stars, to stuff up and down the spectrum.

    A return to a more egalitarian society is the only way to keep a free-market system from running all the money to one corner of the table. Maybe a military draft would help….. in any case, thats where the core problems really are…..moral, cultural, political….

  2. Raghav, this is a great idea and one that got a lot of support from GMU economists Bryan Caplan and Arnold Kling, here among others:

    http://econlog.econlib.org/archives/2009/01/smart_stimulus.html

    Martin, the idea here is a cut to the payroll tax, you know, that 7.65% or so that all of us employers get to pay on our gross payroll. It’s not like WOTC or some other feel-good program that would only affect a few percent of companies.

    If the gov’t said “no payroll tax this year,” it would put cash back in every employer’s pocket, (importantly) including those who are losing money and paying no corporate income tax.

    Another thing about this approach that is great is that it pushes the money out into the system nearly instantly. The point of stimulus, if it has any point at all, is to offset the drop in spending that is happening today. But the current stimulus bill spend most of its money in 2011 and 2012, because it all goes to projects that can take years to bring online. Of course, the way things are going, we may still need stimulus then, so maybe our leaders will tell us it was their brilliant plan all along.

  3. Colin Government cannot really “create” any jobs. It can raise taxes and shift private sector jobs to government jobs (often a malinvestment), and it can bring production and consumption forward (cash for clunkers) but real jobs are only created by additions to the value chain.

    State JCTC (job creation tax credit) programs have generally been found to draw jobs from other states and non-effective without being refundable to zero or low-liability taxpayers in the 26 or so states that offer them. A federal program would likely not be effective unless it drew job creation investment from international markets.

    Now a global minimum wage and environmental/socal spending index tied to international trade rules could in fact help America out of this jam, since we are among the hardest working and most productive workers in the world…..

    Level the playing field globally and we could be looking pretty good….

  4. Raghav,
    As usual, love your stuff. Now that the Olympic Committee turned down Obama, and the Iran thing is dealt with (albeit a nice delay so the ‘Big A(yatolla)’ can spruce up the place) he has to tackle Afghanistan, then Health Care (again), then another (the 4th?) Stimulus Package to try to do what #3 didn’t (keep unemployment below 8%). 1st will be the extention of 1st time home buying $8k credits past November.
    No immigration reform or Cap n Trade this year, with U 6 including the underemployed and those who quit looking at 17% or 25 Million – Yikes! Taxing the rich, and most small and large businesses and job creation happens here, could insure a Double Dip, along with the drop in Commercial Loans (due to banks using gov’t loans to spiff up their capital standing) and the drop in M2 in recent months.

  5. A global minimum wage? Perish the thought. Then again, it would create a lot of jobs at the massive bureaucracy created to administer it. It could be called the Global Unemployment Management (GUM) program – since it would gum up economies everywhere.

  6. Raghav, I love your controversial articles. Great piece and I have to agree with it. Well written, great research.

  7. Raghav, lucky for us, there is already such a massive bureaucracy controlling 95% of world trade- the WTO.

    http://en.wikipedia.org/wiki/World_Trade_Organization

    Economies everywhere are kind of gummed up as it is. One way or another, on a global basis, we have to do better at ensuring a basic standard of living for the creators of everything we buy- across economies- or the price of human life can go below zero….

    Trading with virtual slave states and pretending that those are free market transactions (because there are short term profits) eventually causes problems at home in lots of ways…is that a suprise ?

  8. Martin, on another note, although I almost totally disagree with most of your points, I just want to thank you for providing educated discourse. Your comments really add to the depth of the issue and article. These are the types of discussions which create the synergy needed to solve these problems.

  9. Thanks for the good word Robert. The irony is that my politics are mostly in-line with the old Barry Goldwater school, which today is dirty hippie think…..

  10. Wow, they don’t read like Mr. Conservative. Didn’t Goldwater have that add with the nuclear explosion, really riled people up, was great. Scared folks big time …

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